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Edited Transcript of QUOT.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·24 min read

Q3 2020 Quotient Technology Inc Earnings Call Mountain View Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Quotient Technology Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christine Marchuska * Pamela J. Strayer Quotient Technology Inc. - CFO & Treasurer * Steven Robert Boal Quotient Technology Inc. - Founder, Executive Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Chad Michael Bennett Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Samuel Paul Nielsen Oppenheimer & Co. Inc., Research Division - Associate * Steven Bruce Frankel Colliers Securities LLC, Research Division - Senior VP & Director of Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to Quotient's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would like to -- and will be available for replay from the Investor Relations section of Quotient's website following the call. At this time, I'll turn the conference call over to Christine Marchuska, Director of Investor Relations. Ma'am, you may now begin. -------------------------------------------------------------------------------- Christine Marchuska, [2] -------------------------------------------------------------------------------- Great. Thank you, operator. Hello, everyone, and welcome to our third quarter 2020 earnings call. On the call with me today are our CEO, Steven Boal; Pam Strayer, our CFO; and Scott Raskin, our President. The company's stockholder letter was posted almost an hour ago on the IR section of our corporate website, investors.quotient.com, alongside our press release and earnings presentation. Before we begin, please note that during this call, you will hear forward-looking statements. These forward-looking statements include projections for our fourth quarter and full year 2020, our ability to manage our business and liquidity and to capture marketing dollars during and after the global pandemic, expansion of our retail partnerships, launch of our National Rebates platform, CPGs and retailers' shift to digital, growth in e-commerce and retail performance media, the effectiveness of our cost-control measures 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, in 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 performance as a result to differ materially. Additional information about factors that could potentially impact our financial results can be found in our stockholder letter issued today, and risk factors are identified in our annual report on Form 10-Q filed with the SEC on August 5, 2020, 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 revenue, 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 section of the stockholders' letter issued today and in the earnings presentation slides posted on the company's website. With that, I will now turn it over to Steven. -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Christine. Hello, everyone, and welcome to our Q3 2020 Earnings Call. This was a historical quarter for our company as we delivered record-setting revenue of $121.1 million, up 5% year-over-year and up 45% over last quarter on a GAAP basis. We also delivered on our bottom line with an adjusted EBITDA margin of 15.4%, the highest margin in almost 2 years. Throughout the third quarter, we saw a sequential monthly increase in revenues as store inventory levels normalized and merchandising efforts between retailers and brands returned. CPGs began to spend more in the second half of the year on promotions, brand advertising and shopper marketing Additionally, the success of our business transformation over the last year is positioning us well to capitalize on more growth opportunities. We've been listening to our employees, customers, partners and stockholders regarding what we can do better as a company. As a result, we've enhanced our sales processes, focused on innovating and evolving our platforms and launched great new products. Brands, retailers and consumers are recognizing our core value proposition. CPGs are benefiting from our proprietary analytics and closed-loop measurement, resulting in solid ROIs for their marketing spend. New retailers are joining our platform, and shoppers are being presented with targeted, curated offers at every stop along their purchase journey. With a strategic focus on new and expanding retailer partnerships, our network continues to grow. Retailers have an immediate need for digital strategies to drive sales, increase brand loyalty and engagement and better compete in a highly fragmented retail landscape. With Quotient's broad network and collaborative approach, retailers can garner a greater share of CPG digital spend in their business in a highly engaging way for consumers. I'm pleased to announce that the 2 retailers we signed last quarter, HyVee and Rite Aid, have both gone live with our solutions. HyVee launched Retailer iQ, Quotient's digital coupon platform. With this platform, HyVee is able to deliver incremental sales and rewards directly to consumers at a time when stretching every dollar is needed more than ever. Rite Aid launched its Rite Aid Performance Media powered by Quotient. This new solution enables advertisers to execute targeted digital media campaigns to Rite Aid customers, driving in-store and online conversion and maximizing sales results for both brands and Rite Aid. We also look forward to HyVee going live on our retail performance media, or RPM, offering soon. We're significantly scaling up our self-service sponsored product search platform with Ahold Delhaize USA and Peapod Digital Labs launching the solution in the third quarter. This platform gives CPGs digital, e-commerce and search teams always-on access to initiate, track and optimize campaigns and directly manage and optimize placement with near real-time measurement tools. CPGs can now work across each of Ahold's local banners to optimize search ads for customers whenever, wherever and however they choose to shop. We recently announced that we expanded inventory for our digital out-of-home offering, which now includes over 35,000 screens in over 20 retailers available in-store that can be accessed directly through Quotient's programmatic digital media buying and planning solutions. Using a near real-time data approach, our digital out-of-home offering allows brands to measure campaign effectiveness, make quick changes as needed and dynamically connect with consumers using digital display channels in ways that were not possible before. Expanding our distribution in digital out-of-home to in-store, brand advertisers now have the ability to influence consumers right at the point of purchase. Since Q1, we have seen an increase in demand for our digital out-of-home product, which has more than doubled even amid lower traffic patterns under pandemic-related quarantines, and we expect our pipeline for this solution to continue to grow. Our National Rebates platform launched last week is designed to make it easier for any consumer to engage with brands and take advantage of savings at any retailer that provides an itemized receipt. If you were a user of our Coupons.com mobile app, you recently saw that app go through a significant transformation. Early consumer feedback has been fantastic, yet another example of Quotient's position as an industry innovator. This solution also now allows brands to execute their promotions in one place with consistent data and measurement. And we are already seeing strong interest for this offering from brands. In addition to the highlights I've discussed, there are several other market growth drivers that also support the accelerating shift to digital. One area that continues to see rapid growth in e-commerce or online grocery channel. In Q3, the number of redemptions from our e-commerce channel increased 220% over Q2 of 2020 as strength in online grocery sales continued. We see shoppers moving towards a mixed mode of shopping where they combine in-store with online purchasing. In-store purchasing allows shoppers to optimize for choice and still enjoy tactile product discovery, while e-commerce drives efficiency and convenience. Quotient enables retailers and CPGs to engage with shoppers through all channels with consistent, targeted media and promotional messaging. Retailers focused on digital-first strategies, and prioritizing retail media is another prominent growth driver for us. Quotient's retail performance media gives retailers an advantage in the market by providing them with a powerful digital platform, offering high-performing, targeted marketing solutions that result in increased sales and incremental revenues to the retailer without the cost and time of building out their own platform. In addition, we provide industry expertise such as our experienced sales force and data and analytics teams to help drive results that are beneficial for both brands, retailers and consumers. And lastly, the shift from off-line paper coupons to digital continues to be a large growth opportunity as we begin to see more brands adopt strategies and road maps for exiting the freestanding inserts. One major retailer in the drug space recently noted publicly that their digital redemptions are up 80% over last year and that they now have suspended their print circulars, opting to publish online circulars going forward. Additionally, digital coupons remain one of the most effective and cost-efficient ways for CPGs to spend marketing dollars to drive sales. As shown in the examples I've discussed, we believe we are well positioned to take advantage of the market trends that favor digital promotions and marketing. Innovation, market leadership and reliable ROIs on marketing spend continue to be key pillars of our strategy as we move along our journey to boost our visibility in the market, manage costs appropriately, improve internal processes, invest in our culture and, most importantly, deliver for our brands, retailers and shoppers during a time when they need it most. As I reflect on the past year, I'm thrilled that we now have a solid strategy and operational platform in place that will allow us to help shape the future of retail as the industry continues to shift to digital. As we begin the fourth quarter, our bookings are strong and our public commentary from many of our CPG customers points to increased spending for the rest of this year and into next year. However, the pandemic is still a global challenge, and parts of our country are experiencing spikes with the potential for increased closures. It is difficult to predict how these will play out and what effects they may have. As a result of these uncertainties, we have adjusted our guidance to reflect growth of 30% in the second half of 2020 as compared to the first half of this year. As noted last quarter, under our new leadership team, we're committed to providing more transparency to the investment community. And in light of the ongoing pandemic, we believe this outlook is appropriate. And with that, I will now turn the call over to Pam. -------------------------------------------------------------------------------- Pamela J. Strayer, Quotient Technology Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Steven, and good afternoon, everyone. I'll keep my remarks brief and encourage you all to read the full prepared financial results in our stockholder letter posted on our website. We recorded record revenue results of $121.1 million, an increase of 5% over Q3 2019 and an increase of 45% over Q2 2020. In Q3, we exited a portion of our media business that contributed approximately $10 million in revenue in the prior year quarter. This was the same business that went through a delivery and accounting change from gross to net in Q2 2020. Given the small contribution post the conversion and consistent with what you heard from Steven early in his return to Quotient that we won't be investing in nonstrategic businesses, we decided to exit this business entirely. This change, along with our past acquisition of Ubimo completed in Q4 2019, make year-over-year growth comparisons difficult to calculate. For simplification purposes for the investment community, we're providing the following. With the exclusion of the benefit of the Ubimo acquisition as well as exiting a portion of the media business, our year-over-year total revenue growth would be 11.6% overall for the quarter. Media revenue in Q3 was 48% of total revenue and increased 11.3% year-over-year, primarily driven by our programmatic display and social display solutions. Sponsored product search and digital out-of-home, although still floor offerings in our portfolio of solutions, also continued to contribute growth in the third quarter with sponsored search more than doubling from the prior year and digital out-of-home revenues roughly doubling from Q1 2020. Promotions revenue in Q3 was 52% of total revenue and increased 1% year-over-year, primarily driven by specialty retail and digital paperless, which grew 4% and 1%, respectively. This was slightly offset by digital print, which was down 1% year-over-year. On a trailing 12-month basis, revenue from our 21 to 40 cohort grew 8%, offset by a revenue decline of 2% in our top 20 cohort from the prior year, and overall growth was flat year-over-year across all 3 customer cohorts. We believe spending by several of our customers in the top 20 cohort remains flat to down over the prior year, primarily due to supply chain concerns lingering from the impact of the pandemic. GAAP gross margin for Q3 was 39.2%, a 60 basis point improvement over the same quarter last year. Non-GAAP gross margin in the quarter was 46.2%, a 260 basis point improvement over last year. Gross margins primarily benefited from product mix and the Ubimo acquisition, partly offset by an increase in fixed costs due to increases in headcount. We delivered $18.7 million of adjusted EBITDA in the third quarter of 2020 at the high end of our range, driven by increased revenues and a continued focus on maintaining low operating expenses. Looking at cash. We continue to focus on maintaining a strong balance sheet, delivering higher-than-expected cash flow from operations in the third quarter of $5.2 million. This was primarily driven by strong collections and lower payments on accounts payable. We ended the third quarter with approximately $209.9 million in cash and cash equivalents, down about $2 million from the prior quarter. Now turning to guidance. As Steven noted, we see continued strong bookings pipeline moving into the end of the year. However, the pandemic still remains a challenge globally with uncertainties around another round of closures as certain parts of our country are experiencing spikes. Therefore, we have chosen to revise our guidance. We now expect revenue for the full year of 2020 to be in the range of $418 million to $428 million, over 30% growth in the back half of the year versus the first half. For the fourth quarter of 2020, we expect revenue to be in the range of $115 million to $125 million or 1% growth over Q4 last year at the midpoint. Revenue mix between promotions and media for the year is harder to predict, given the macro trends between these 2 businesses. We are currently seeing a strong mix towards media bookings and pipeline for Q4 as retailers and CPGs are working collaboratively to spend marketing dollars on RPM. We remain focused on improving non-GAAP gross margin rates over time. However, slower growth and more uncertainty in promotions revenue has slowed our expectations on progress against this goal. Longer term, our gross margin rates will benefit from several initiatives we're working on, including a higher mix of self-service offerings as well as the growth in revenue from national budgets that are larger and more profitable than the shopper budgets, which have driven much of our growth over the past year. We will discuss this in more detail at our Investor Day on November 19. For the fourth quarter of 2020, we expect non-GAAP operating expenses to be approximately $42 million to $44 million. Adjusted EBITDA is expected to be in the range of $10 million to $15 million for Q4. And for the full year 2020, adjusted EBITDA is expected to be in the range of $38 million to $43 million. We expect positive cash flow in Q4 due to the tailwind from a strong adjusted EBITDA result in Q3. The weighted average diluted shares outstanding, we expect approximately 92 million for 2020. In summary, Q3 was a strong quarter as CPGs began to spend more promotions, brand advertising and shopper marketing. Despite the factors outside our control regarding the global pandemic, we believe that we are well positioned to take advantage of market trends that favor digital promotions and marketing. We look forward to discussing more with you in 2 weeks at our Investor Day, including our continued path to profitable and sustainable growth with the presentation of our long-term financial model. And with that, I'll turn the call over to questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question today comes from Steve Frankel from Colliers. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [2] -------------------------------------------------------------------------------- In your letter, you talked about inability to deliver on some demand. I wonder if you might give us a little more insight into that and why that business, in effect, doesn't carry over into Q4 and maybe cushion some of the headwinds you're seeing in Q4. -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [3] -------------------------------------------------------------------------------- Sure. Steve, it's Steven. Thanks for asking the question. So quite simply, we had booked in an additional $9 million to $10 million of promotions revenue that we expected to deliver in Q3. Coming out of COVID, our algorithms weren't optimally tuned to deliver it. So as you know, and we've talked about this before, the way we deliver promotions is pretty complicated. There's a lot of learning and model training and targeting and optimization. And so coming out of COVID, we obviously had some work to do on our models. So we've ham-tuned those, and we've seen some immediate impacts from that. So we expect that we've solved that on a go-forward basis. But that would have added $9 million to $10 million of additional promo revenue into Q3. As far as Q4 is concerned, any thoughts that we would see that occur in Q4 is factored into our guidance, given the rise of virus and some of the out-of-stock situations we're starting to see in the northeast. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [4] -------------------------------------------------------------------------------- Okay. And any more insight into the decline of the FSI? What are your customers telling you about their use of it in '21? And have you seen any of those dollars come into your forecast for '21? -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [5] -------------------------------------------------------------------------------- So we haven't forecasted '21 yet. At our Investor Day coming up, we plan to roll out our long-term model. But what I can tell you is that the conversations are continuing to speed. Our CPG customers are acutely aware of the decline of that vehicle and the want from retail to shift more of their dollars to digital. So yes, stay tuned for a couple of weeks on that, but all signs are pretty positive there. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [6] -------------------------------------------------------------------------------- Okay. And then going at it one other angle. So in the last couple of calls, you called out 4 or 5 things that could accelerate the business in 2021. Are you less optimistic about the ability to accelerate revenue growth because of the COVID spike or some other changes in the business? -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [7] -------------------------------------------------------------------------------- No, not at all. All of those factors that we talked about are still top of mind. We talked about retailer engagement and pushing for fixed percentages of spend moving over to digital. We've talked about decline of the FSI. We've talked about additional retailers coming onboard, which you've just seen us do. We've talked about stepping into noncore verticals, which we expect to be able to announce in the near future. So no, I would say all of the tailwinds that we've been talking about are there. Again, just to reiterate, the Q3 from a margin and also revenue perspective would look different if we had gone through the $9 million to $10 million of promotions bookings that we had on our books. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [8] -------------------------------------------------------------------------------- Right. And then one last one for Pam. So you called out the business you gave up in Q3, but maybe help us adjust the new Q4 guidance for that as well. How material was that business in your prior Q4 plan? -------------------------------------------------------------------------------- Pamela J. Strayer, Quotient Technology Inc. - CFO & Treasurer [9] -------------------------------------------------------------------------------- Yes. Sure. That was the part of the business that changed from gross to net revenue accounting. And as a result of that change, we were booking only about $1 million in revenue on a net basis. So it was an immaterial part of our business, and it was somewhat a distraction. It wasn't a unique offering in the market and was leading to some operating inefficiencies. So we made the decision to exit that business and refocus our attention on more strategic parts of the business. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from Chad Bennett from Craig-Hallum. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11] -------------------------------------------------------------------------------- Great. Let me just follow up on that last question asked, Pam, just trying to connect the dots here. So you indicated in your prepared remarks, it was about a $10 million hit. Was that annually for the quarter? And so if this was the business that went from gross to net that you guys indicated was a $33 million impact starting the year, I guess are we talking about the same things? Or is this something incrementally different? -------------------------------------------------------------------------------- Pamela J. Strayer, Quotient Technology Inc. - CFO & Treasurer [12] -------------------------------------------------------------------------------- Yes. No, we're talking about the same things. So the $10 million reference is to roughly what we booked on a gross basis in Q3 2019. The $33 million number you referenced was the full year 2020 impact. But keep in mind, the gross-to-net change happened in Q2 than in Q1. So we booked another roughly $10 million in Q1. And so it was roughly $10 million per quarter business with the run rate. So $33 million impact of the gross to net starting in Q2 2020. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13] -------------------------------------------------------------------------------- Okay. That's very helpful. So I'm just trying to -- so no real change there. You're just trying to point it out from a -- you didn't exit any incremental media business this quarter, I guess, is to sum it up. That's fair to say. -------------------------------------------------------------------------------- Pamela J. Strayer, Quotient Technology Inc. - CFO & Treasurer [14] -------------------------------------------------------------------------------- Right. That's fair to say. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15] -------------------------------------------------------------------------------- Okay. So you're just trying to give it a comparison year-to-year from an organic and backing out, use them. Okay. I understand. -------------------------------------------------------------------------------- Pamela J. Strayer, Quotient Technology Inc. - CFO & Treasurer [16] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17] -------------------------------------------------------------------------------- I'm trying to connect or trying to get a sense of, if business improved sequentially month-to-month throughout the quarter, in July, couldn't have been that great; august, probably was a lot -- fair amount better; and September was a lot better. I mean your run rate exiting the quarter had to be a lot better than starting the quarter, and you indicated bookings for October were very strong. How would revenues be flat sequentially? -------------------------------------------------------------------------------- Pamela J. Strayer, Quotient Technology Inc. - CFO & Treasurer [18] -------------------------------------------------------------------------------- Yes. So in setting guidance for Q4, so consistent with what we've said in the past, demand has picked up in the second half significantly from what it was in the first half, and our bookings pipeline is strong. But we do see uncertainties yet from the global pandemic. And so we want to remain cautious with our outlook, put something out there that we could achieve. Bookings and pipeline that we're seeing are weighted heavily towards media, and that's been pretty consistent with what we've seen since the pandemic hit, right? Promotion spend is the first to be impacted. And several of our largest CPG customers are still concerned about supply chains and haven't really returned to pre-pandemic spending. So the softness in the numbers are really around promo. While we could end up having a strong quarter in promo, the pandemic is leading us to be a bit more conservative on the guide. And I'm sure you've seen many other companies kind of report good results in the third quarter with some cautious optimism in the fourth quarter. So that's what we've chosen to do here. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19] -------------------------------------------------------------------------------- Okay. And just on a net basis or just overall, did you lose any RPM partners recently? -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [20] -------------------------------------------------------------------------------- Well, yes. So one very small, the smallest of our partners, one small retailer came off our platform. They're experimenting with another solution right now, and it was not a material or meaningful contributor to our economics. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Samuel Nielsen from Oppenheimer. -------------------------------------------------------------------------------- Samuel Paul Nielsen, Oppenheimer & Co. Inc., Research Division - Associate [22] -------------------------------------------------------------------------------- Yes. This is Sam on for Jed Kelly. Do you guys have any update on the 7-Eleven partnership and how that's going and maybe how some of the other partnerships are trending? -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [23] -------------------------------------------------------------------------------- Sure. So what I'll tell you is that we don't talk specifically about what the partners are developing or rolling out. But what I can tell you is we're very happy with the 7-Eleven relationship, and that continues to strengthen as we would have expected and the others as well. You also saw that we've announced both HyVee and Rite Aid have gone live on our platform now. And so not only are the existing relationships continuing to grow like Ahold Delhaize with the addition of sponsored search, but adding new retailers as well. So there's nothing that isn't exciting for us on the retail front right now. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- (Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks. -------------------------------------------------------------------------------- Steven Robert Boal, Quotient Technology Inc. - Founder, Executive Chairman & CEO [25] -------------------------------------------------------------------------------- Thank you, operator, and thank you all for joining us today. We're obviously still in the early stages of a large and growing opportunity in front of us and look forward to sharing more with you at our upcoming virtual Investor Day in 2 weeks on Thursday, November 19. We hope you'll be able to participate. In closing, we look forward to the future and are excited to finally see the vision we created taking hold as the acceleration of the shift to digital is here. Thank you, again, everyone. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.