Earnings Call: Q3 2019

Nov 12, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Cardlytics, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to Chief Legal and Privacy Officer, Kirk Summers. Good evening, and welcome to Cardlytics' 3rd quarter 2019 financial results call. Before we begin, let me remind everyone that today's discussion will contain forward looking statements based on our current assumptions, expectations and beliefs, including Q4 and full year 2019 financial guidance, expectations on adjusted EBITDA for 2019 2020, the anticipated impact of our key priorities on driving growth, the timing of the rollout of Wells Fargo and its anticipated impact on our financial institution monthly active users or MAUs and the number of card swipes in the United States expectations regarding adding additional marketers and marketer spend in 2020 the impact of investments on driving revenue in nascent industry verticals, the evolution of our platform to reach more advertisers and provide a better bank customer experience and our expectations regarding 2021 average revenue per user or ARPU levels. For a discussion of the specific risk factors could cause our actual results to differ materially from today's discussion, please refer to the Risk Factors section of the company's 10 Q for the quarter ended September 30, 2019 that we plan to file later today and in subsequent periodic reports that we have filed with the Securities and Exchange Commission. Also during this call, we will discuss non GAAP measures of our performance. GAAP financial reconciliations and supplemental financial information are provided in the press release issued today and the 8 ks that will be filed with the SEC. Today's call is available via webcast and a replay will be available for 2 weeks. You can find all the information I've just described on the Investor Relations section of Cardlytics' website. Please note that a supplemental presentation to our Q3 results has also been posted to our Investor Relations website. Joining us on the call today are Cardlytics leadership team, including CEO and Co Founder, Scott Grimes COO and Co Founder, Lynn Loebi and CFO, David Evans. Following their prepared remarks, we'll open the call to your questions. With that, let me turn the call over to Scott Grimes, Cardlytics' CEO and Co Founder. Scott? Thanks, Kirk. Thank you to everyone for joining us in our Q3 2019 earnings conference call. We're pleased to announce that we delivered strong 3rd quarter results, which exceeded all key metrics from the guidance on our Q2 earnings call. Here are some highlights. Total billings for the Q3 were $82,800,000 an increase of 70% year over year. Total revenue, which is equal to billings net of consumer incentives, was 56 point $4,000,000 up 63%. Adjusted contribution was $24,700,000 growing 46% year over year, and we generated adjusted EBITDA of positive $3,000,000 As a result of our strong Q3 and year to date results, we are raising our full year 2019 guidance, which David will discuss in more detail later in the call. In the Q3, we continue to grow the reach of our platform. We increased our quarterly average FI MAUs to $128,300,000 a 7% increase from the 2nd quarter and 116% from Q3 2018. We also remain on target to start the launch of Wells Fargo later this month. Similar to other national bank launches, we expect the bank to roll out across customer portfolios and digital channels in a phased approach. Based on our current view of launch timing, we expect to exit the year with 130,000,000 to 140,000,000 FI MAUs. As the Wells Fargo launch nears completion in the first half of next year, FI MAUs will surpass 150,000,000 which we believe will roughly equate to 1 out of every 2 card swipes in the U. S. This represents significant scale and puts us on par with the other major advertising platforms in the U. S. Linda and I are proud of our team's hard work and dedication to making the Wells launch possible and for an incredibly strong quarter. We continue to make progress in all of our key priorities in the Q3, which Lynn will now discuss with you in more detail before handling the call to David to discuss our results and guidance. Lynn? Thanks, Scott. Before discussing the progress making on key priorities, I'd like to give you a little bit more detail on the Wells Fargo launch. We are progressing well towards an initial phased launch later this month. This includes links on Wells Fargo mobile and online sites for a portion of their customers to drive them to our Bank launch. Once complete, we expect Wells Fargo to have a robust user experience across all channels, mobile, online and e mail. Now I would like to discuss our key long term priorities to drive future success. 1st is to increase the number of marketers we count as Cardlytics clients and to increase the amount those marketers spend on our platform. We're pleased to say we continue to expect increased logos and spend for 20 20 as marketers fully understand the impact we could have on their business. 2nd, to continue to bring our capabilities to new verticals, including our more nascent verticals of e commerce, travel and entertainment, grocery and premium 3rd, to continue evolving the Cardlytics platform by making a multiyear investment to move to a more highly automated platform that can reduce buying friction, be extended to 3rd parties and support richer media. Feedback from our FI partners has been very positive and they're excited about the richer content and user experience to SNAIL. And finally, to continue to demonstrate operating leverage in our business from the investments we've already made in our infrastructure, technology and workforce to support over 200,000,000 FI MAUs. We expect to finish the year out strong as we keep these objectives in mind. With that, I will turn it over to David. Thanks, Lynn. As Scott mentioned, we delivered very strong Q3 results that exceeded our expectations, and we are therefore raising our full year 2019 guidance based on our strong results and the momentum in our business. We are tracking very well to the plan that we have been communicating to investors over the last several quarters. I'll begin by commenting on our Q3 and we'll then discuss our Q4 full year 2019 financial outlook. Total billings, which is the gross amount billed to marketers inclusive of the consumer incentive for the Q3 increased 70% year over year to $82,800,000 Total revenue for the 3rd quarter was $56,400,000 representing 63% year over year growth. Total U. S. Revenue increased 65% year over year and U. K. Revenue increased 47% year over year. Adjusted contribution profit was $24,700,000 in the Q3 of 2019, up 46% year over year and up 53% if you exclude an $800,000 benefit from the Lloyd's contract in Q3 2018. Adjusted EBITDA was positive $3,000,000 in the Q3 of 2019. This is compared to a loss of $1,700,000 in the Q3 of 2018. We are pleased with our adjusted EBITDA results in Q3, which is reflective of the operating leverage which we anticipated coming through our business model in the second half of this year. While we continue to expect to see the benefits from the fixed cost business on our profitability moving forward, we believe it's also important to highlight that we will continue to make strategic investments across our business to capture the significant growth opportunities we see for Cardlytics in the market today. As a result, our adjusted EBITDA will likely experience some fluctuation from quarter to quarter in the future. Average FI MAUs grew 116% from $59,300,000 in the Q3 of 2018 to $128,300,000 in Q3 2019, primarily reflecting the launch of Chase. Looking to 2020, we expect additional FI MAU growth from the phased launch of Wells Fargo in addition to continued growth in FI MAUs through the natural maturation of the network, our ongoing efforts with FI partners and digital adoption. Our Q3 2019 ARPU was $0.44 down approximately 24% from $0.58 in the Q3 of 2018, but up 10% from $0.40 in the Q2 of 2019. As expected, our year over year ARPU decline primarily reflects the impact of rapid growth in our average FI MAUs. We expect this dynamic to play out for the near term and continue with the growth in our FIMAUs that will come from the Wells Fargo rollout. Moving to our balance sheet and the impacts from the follow on offering completed in September. On September 13, we successfully completed and closed the follow on offering in which we sold 1,900,000 shares and selling stockholders sold 1,200,000 shares, which resulted in approximately $61,000,000 net proceeds to the company after deducting underwriting discounts and commissions and expenses. We believe this capital raise provides increased strategic and financial flexibility to execute on our long term strategic goals. We also received $19,200,000 in proceeds from the exercise of options and warrants to purchase shares of common stock in the Q3. With that, we ended the quarter with $95,200,000 in cash, $246,000 in restricted cash on the balance sheet compared to $32,500,000 in cash and $10,300,000 in restricted cash at the end of Q2 2019. We also ended the quarter with effectively 0 debt outstanding. In the Q3, we eliminated the balance of our 2018 term loan using the $10,000,000 of restricted cash on our balance sheet securing the loan. In addition, we used the cash on hand to pay down the $26,700,000 outstanding on our $40,000,000 AR facility, which remains fully available for us to borrow against. As a result, our total cash plus available dollars to us in our credit facility as of September 30, 2019 was approximately $135,000,000 We ended the quarter with 25,700,000 shares outstanding and quarter to date weighted shares outstanding for the quarter of 23,600,000 compared to 22,800,000 outstanding at the end of the second quarter. The difference in common shares outstanding relative to the June 30, 2019 number reflects the increase of 1,900,000 of primary shares issued in the follow on and 1,000,000 shares from the exercise of warrants and options made during the quarter. Now turning to guidance. For the Q4, we expect billings to grow 17% to 25% year over year to between $82,000,000 $88,000,000 We expect GAAP revenue to be between $55,000,000 $59,000,000 and we expect adjusted contribution profit for the 4th quarter to be between $23,500,000 $25,500,000 representing 15% to 23% revenue growth and 6% to 15% adjusted contribution growth year over year. Finally, we expect adjusted EBITDA for the Q4 to be between $1,000,000 $2,000,000 For full year 2019, we are raising our guidance. We expect billings growth of 36% to 38% to be between $297,000,000 $303,000,000 We currently expect GAAP revenue to be between $196,000,000 $200,000,000 and adjusted contribution for 2019 to be between $87,500,000 $89,500,000 representing 30% to 33 percent revenue growth and 26% to 29% adjusted contribution growth for 2019. We also expect adjusted EBITDA for full year 2019 to be between $1,000,000 Overall, we are pleased with our strong Q3 and year to date 2019 results. We continue to see good momentum in our business driven by increasing demand for our platform and strong execution against our key growth strategies, including our efforts to expand advertising budgets with existing marketers and drive deeper penetration into new verticals. With that, I'll hand it back to Scott for his closing remarks before we open the call to your questions. Scott? Thanks, David. Q3 was a strong quarter. We remain excited about our opportunities for growth and believe we can continue building on our strong momentum. Linda and I are proud of our team's ability to generate consistent solid results. We remain exactly on track to deliver against our key 2019 priorities, which set us up well for success in 2020 beyond. With that, I'll open up the call for your questions. Thank you. Thank you. And our first question comes from the line of Youssef Squali with SunTrust. Hi, guys. Congrats on the strong quarter. Two quick questions for me. On Wells, can you remind us again how many debit and credit card holders they have? How many do you think can you penetrate over the next, say, 12 months? And maybe, Lynn, you can speak to the more automated buy in model that you spoke to. I think this is a work in progress. Maybe you can just tell us where you are in that evolution. Thank you. Good afternoon, Youssef. This is Scott. I hope you're doing well. In terms of the specific account numbers with Wells or for any of the banks, we don't speak to their accounts, but they do publicly disclose them. Wells is certainly one of the largest debit card issuers in the country and they also have a significant credit card portfolio. In terms of how much is debt do we penetrate over time, similar to our other national bank launches, we expect to be live with the overwhelming majority of all their customers. And Youssef, in terms of automating the platform, I think we have stated some goals around Phase 1 of the platform automation is to find a partner or 2 who can start to test what we've automated with us that will likely be either a performance agency or maybe some other type of large advertiser partner. And our goal is to try and get that done sometime in 2020 in terms of a testing partner or 2. Okay. Thank you. Thank you. Our next question comes from the line of Chris Shutler with William Blair. Hey guys, good afternoon. I wanted to gauge your thoughts on the amount and quality of the marketing content that you have on the platform today. I know obviously you're playing catch up with the rapid expansion of the MAUs. But how do you plan to make the offers more targeted over time? This is Lynn. I think that is a big part of the platform automation that we're doing is to try and use more machine learning to make the offers more targeted and relevant. You are right. If we get an offer from like a large food retailer, it tends to go to a lot of people because everybody eats, but that doesn't necessarily mean it's a well targeted offer. So, a lot of the automation that we're bringing to the platform is going to enable targeting that, quite frankly, an individual human can't do. And you're also correct, because we are playing a little bit of catch up on the ARPU side given the significant MAU scale, we have a lot of new logos that are in the system. We're quite pleased with those, but they're not spending at scale yet. So you don't have the variety of content that we would ultimately hope for. So I think those are both fair questions and critique and something we're very, very aware of and a big part of what we're very focused on as a team. Okay. Thanks, Glenn. And our next question comes from the line of Doug Anmuth with JPMorgan. Thanks for taking the questions. I have 2. First, just on the 4Q guide, can you just help us understand some of the factors that go into the growth rate there for 4Q relative to what you did in 3Q? I know it's a tougher comp, but if you could help us understand the decel better there. And then second, just going back to the more automated platform, can you kind of outline the magnitude of investment that might be required here? And also what time frame that could play out? Thanks. Sure. Doug, this is David. As it relates to the 4Q guide, obviously, we raised for the year a couple of dynamics here that were at play. Number 1, we did consume more budget or pull budget into Q3 just given the success we were having with the platform. The good news is that we were able to find some additional budget dollars for the Q4, which therein allowed us to raise the guidance for the year. You point out fairly that Q4 last year is a pretty tough comp to go against and therefore that's why you've got the growth rate that you do. But nonetheless, we're super excited about this past Q3. If you go back and look over the past few quarters that Q2, Q3 sequential growth number for this go around is pretty impressive when you consider the prior year. So I hope that helps answer the question. The investment in automation. Yes. So investment in automation, certainly, this is something that we are continuing to evaluate, as Lynn talked about. Obviously, we'll set aside some investment dollars in both OpEx and CapEx for next year to make prudent investments that should accelerate kind of our time to market on that front. Doug, in terms of the time line, we see this as a series of rollouts in both 2020 2021 to get us from what I would describe what we do today as a white glove managed service, where we have really smart analysts thinking about how we target and manage our campaigns and doing that across hundreds of advertisers. The journey we're on in automation is to go have a fully automated service that instead of serving 100, it's serving 1,000 of advertisers. And we'll get there through a series of releases that build that capabilities out across our value chain. Yes. And I think we would reiterate what we've talked about in the past, which is a profitable adjusted EBITDA for 2020 and that should still allow for continued investment with the things we're trying to do around automation. Got it. Thank you, Bill. Thank you. Our next question comes from the line of Aaron Kessler with Raymond James. Yes. Hi, guys. A couple of questions. Maybe just on the newer verticals, if you can update us there, maybe some of the traction as well as maybe traction with some of the larger advertisers. I think you've talked about starting to see some better traction with some of the larger advertisers given your increased MAU size. And then finally, I believe BofA has updated their mobile app recently. Just maybe thoughts if you're seeing some maybe higher click through rates, etcetera, and engagement on their mobile app? Thank you. Yes, this is Lynn. So, in terms of advertisers, the growth that you've seen in 2019 is primarily from advertisers who've been on the platform prior to the Chase and Wells Fargo launch simply growing their budgets. Now they're not all growing their budgets as quickly as we grew the MAUs, but most of the material growth that you're seeing is coming from existing advertisers spending quite a bit more. We are very pleased with the number of new logos that have entered the channel, but for the most part, those new logos are not responsible for the growth that you're seeing in Q2 to Q3 to Q4. However, we do think we are well positioned for those new logos to be a material part of the growth in the back half of twenty twenty one. And we've talked about the verticals that those new logos are in. So we're feeling good about the concentrated focus and dedicated hiring that we put against those verticals. And again, the hiring is people with expertise, deep expertise in those different industries. In terms of BofA, yes, they did update their mobile app. We're pleased with the engagement. Banks are constantly updating their mobile app. And generally speaking, we have continued to maintain an elevated position and are pleased with the real estate that banks are dedicating to this program. Great. Thank you, Wes. Thank you. Our next question comes from the line of Tim Willi with Wells Fargo. Hey, thanks and good afternoon. A couple of questions here. First, if you could just sort of walk through maybe thinking back over the last couple of quarters, where the positive surprises have been and where maybe you're still learning and sort of tweaking the business plan or the strategies? Obviously, there's been a lot of successes as demonstrated by the results. So I just want to get your thoughts around the upside drivers, but then sort of where there might still be some levers that haven't quite kicked in and if you could share that. Yes. Tim, this is Scott. I think the first thing I would say is, so when we went public a couple of years ago, we kind of had a plan for how this company unfolds over between now and 2023. And at the highest level, I'd tell you, we're still really tracking against that plan that we laid out a couple of years ago, and we feel good about it. We're tracking against ramping up and consolidating the banking market and we're really seeing the results of that. I think places that we were a little more cautious about early in the year that we're feeling better and better about now was, first of all, the ability to scale advertising budgets as we've grown MAUs. Lynn spoke to that. That's really been the driver of growth this year. When we think about driving growth in 2020, we, of course, want to continue to grow budgets with existing advertisers, but we want the new verticals to kick in. We're seeing great adoption in new verticals and budget expansion. So I think it's fair to say that we feel good about our momentum there. And then the automation, we believe, is really important to 2021 beyond. And we're really happy with the progress our team is making on that journey. So I would say less around surprises and more as we continue to execute against the plan, we feel more confident in the plan. Great. And then I had 2 follow ups. I guess, the first one is, obviously, you get a lot of data and more and more data sort of every minute of every day given the way the business runs. And just sort of curious your thoughts, whether it's intermediate term, longer term, near term about finding other ways to monetize that data and that perspective that you have, especially once you have wells up and running along with BofA, JPMorgan and obviously lots of other banks. And surely there are other people, other institutions that would love to have the insights. It would seem like you could monetize that beyond what you're doing and I'm sure that you have to update, I think there's privacy issues and firewalls and you got to figure out how to do it with your bank partners. But just any thoughts you have there and then I have one last follow-up. Yes. Tim, let me touch on this, but Lynn, you may want to dive in. But our focus is very much, we have created a walled garden with scale similar to the other very large walled gardens out there. We've just now achieved this customer scale. So the full focus of the company is now scaling the financial scale of the walled garden based on the kind of massive customer reach. So all the stuff we do with our data, all the analytics we do with our data is to grow the number of advertisers we serve and expand what they do with us. And we don't spend any time thinking about other things we could do. We maybe do other things over time potentially. That's not our focus today. And you touched on some of the super important, Tim. The great thing about our business model is the way that we handle the really sensitive data that we do it without PII, no data ever leaves Cardlytics, and that's sort of very central to the tenants around how we run this company. Great. And my last one was, as you've built out the capabilities in terms of your bank partners, the verticals that you're calling on for the content, the automation, etcetera. How does that change your thoughts, I guess, and timelines around M and A? And maybe what partners are sort of indicating they would like to see with things you're discovering as you sort of think through those strategies with those large partners? Does it prompt M and A discussions about maybe it's as we've gotten larger, you know, more sophisticated that we need to spend a bit more time thinking about acquiring capabilities? Or do you feel like organically you can address whatever the partners are sort of thinking about? It's a great question, Tim. If you sort of step back my prior comment that our focus is solely around scaling our walled garden and making it go from serving hundreds of advertisers to 1,000 in an increasingly targeted and relevant way. The obvious question as part of that is when you do think about build versus buy. And we have a great corp dev team that's always out there in the market thinking about that, but also thinking about M and A in the context of the way we run our business versus the broader digital media ecosystem. So we think about it. We spend a lot of time thinking about it. I would say we don't, in any way feel compelled to rush ourselves unless we see something that really creates a lot of value for the company and for our shareholders. Thank you. Our next question comes from the line of Andy Herrager with KeyBanc. Your line is now open. So a couple of things. 1, the growth in the U. K, I assume that's an acceleration. We haven't heard that number before, but just wondering if there's a renewed effort there or new FI wins there or anything specific driving that? Yes. I think this is David. I think we're still seeing great performance out of the UK. We still see opportunity to continue to grow MAUs. We still see opportunity to continue to grow advertisers. So we're making appropriate investments around that business because we still see a lot of opportunity there. Scott, I don't know if you'd add anything to that. I agree with that. We're really proud of our U. K. Team. We are definitely studying the changes going on in Open Banking in the U. K, in Europe more broadly or globally. And as that unfolds in the market, we will see if it creates additional opportunities. Not a lot to speak of at this point, however. Okay. And then a couple of people have tried to ask this, I think, but I wonder if you could give us any clarification on 2020 EBITDA understanding there's a lot of moving parts right now and I understand that you could move around quarter to quarter. But just how are you thinking about sort of incremental profitability into next year as a whole? And how much you want to let the revenue growth that you want to let flow through? Yes. I mean, it's a fair question. Obviously, we'll be ready with formal guidance at the next call. But just a couple of data points, as we mentioned at the outset, we are starting to see nice data points around a business that's benefiting from a fixed cost business. So just to put it in perspective, I don't think I think delivery went down year over year. And these are the people who are involved with running the campaigns and you're seeing that leverage just as one example. So as it relates to positive EBITDA for 2020, I still think I'm of the mindset that that's certainly well within our sites. I think a large part of what we're going to try to figure out here hopefully sooner than later, is that if we find ways to accelerate our go to market around automation, we're going to want to make those investments. Obviously, that will impact the degree to which we see positive EBITDA in 2020. But nonetheless, we do see again, we are seeing nice data points around a fixed cost business. We are seeing a trajectory that makes us feel good about profitability on the EBITDA line item in 2020, but we're also trying to make sure that we've got the dry powder to make the investments necessary to accelerate go to market. Thank you. Thank you. I am showing no further questions at this time. I will now turn the call back over to CEO, Scott Grimes, for any further remarks. Well, first of all, everyone, thank you for joining the call today. I said it earlier, but Linda and I are just really proud of the quarter the team delivered and also are really excited that the Wells launch is now underway and that we are continuing that journey to build a walled garden on scale with the other leading platforms out there that have some incredibly unique capabilities in terms of finding the most valuable customers, driving them into our advertisers and measuring the return on the ad spend to the penny. So, we are very much focused on our mission and feeling great about how we're executing against it. So thanks everyone and have a great evening. Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.