Earnings Transcript for QUOT - Q1 Fiscal Year 2022

Operator: Good afternoon, and thank you for attending today's Quotient's First Quarter 2022 Earnings Call. My name is Sam, and I will be the operator for today's call. [Operator Instructions] At this time, I'd now like to turn the call over to our host, Marla Sims, Vice President of Investor Relations. Marla, you may proceed.

Marla Sims: Thank you, operator. Good afternoon, and welcome to our first quarter 2022 earnings call. With me on the call today are our CEO, Steven Boal, our incoming CEO, Matt Krepsik, our Interim CFO, John Kellerman, and our incoming CFO, Yuneeb Khan. The company's stockholder letter has been posted 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, including the guidance we will be providing for our second quarter and full year 2022. These 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 results to differ materially from those contained in the forward-looking statements. These forward-looking statements and the related risks and uncertainties are set forth in the earnings presentation slides located in our Investor Relations site. Additional information about factors that could potentially impact our financial results can be found in our stockholders' letter issued today and the risk factors identified in our annual report on Form 10-K filed with the SEC on March 1, 2022, as amended by Form 10-K/A amendment number one filed with the SEC on April 29, 2022, and in 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 operating expenses, gross margins and net loss financial measures discussed today are on a non-GAAP basis, each having been adjusted for the corresponding GAAP measure 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. Further, I would like to remind you that the company, its directors and certain of its executive officers are participants in the solicitation of proxies from the company's stockholders in connection with the company's 2022 Annual Meeting. The company intends to file definitive proxy materials for the meeting in due course. Stockholders of the company are strongly encouraged to read the company's definitive proxy statement, the accompanying proxy card and all of the documents filed with the SEC carefully and in their entirety as they contain important information. Information regarding the identity of the company's participants and their direct or indirect interest by security holdings or otherwise, will be set forth in definitive proxy statement and other materials filed by the company with the SEC, which can be found for free through the company's website in the section Investors or through the SEC's website at www.sec.gov. We will not comment on the proxy contest with Engaged Capital on this call. With that, I will now turn it over to Steven. Steven?

Steven Boal: Thank you, Marla. Hello, everyone, and welcome to our Q1 2022 earnings call. This will be my last time leading Quotient's earnings calls as we execute on an orderly leadership transition to Matt Krepsik, who, as you know, will become Quotient's CEO by year-end. I am confident that the company and its shareholders will be in good hands going forward. I will talk a bit more about Matt, his accomplishments at Quotient to date and the impressive team he has already started assembling in a few minutes. Let me first start by briefly discussing a few highlights about last quarter and where we are positioned as a business. We are off to a good start in 2022, meeting or exceeding our guidance targets in revenue, non-GAAP gross profit and adjusted EBITDA. In Q1, we delivered $78 million in revenue and $32 million in non-GAAP gross profit, both at the high end of our initial guidance and negative $7 million in adjusted EBITDA. As previously indicated, we have now renegotiated the majority of our remaining contracts such that going forward, we do not expect to call out any material changes to our gross-to-net accounting adjustments, which negatively impact revenue but have no impact on gross profit or adjusted EBITDA. I am proud of the progress we have made in our transformation and our incredible team unwavering dedication, focus on execution and commitment to client service. While there is more work to be done, we believe we have laid a strong foundation, and I couldn't be more excited for Quotient's future. It is from this position of strength that Matt Krepsik will be taking the reins as CEO. Matt's appointment as CEO is the result of a nearly year-long deliberate succession planning process led by our Board of Directors. Matt is an ad tech and marketing veteran and since joining Quotient over a year ago as Chief Analytics Officer and more recently Chief Technology Officer, he has been instrumental in shaping Quotient's strategy, defining our product road map, extending our partnership network and recruiting senior level talent who will drive the company forward from here. Matt came to Quotient from Nielsen Holdings, where he served for more than 15 years in various executive roles. At Nielsen, Matt led attribution, media planning and activation products, most recently as Senior Vice President and General Manager of Outcomes Products. Matt's other positions at Nielsen included Global Head of Analytics Products, Executive Director of Analytics Asia Pacific, Middle East and Africa and Vice President, Analytics North America. He also had an integral role in Nielsen's strategic review process, which culminated in the sale of its NielsenIQ business to Advent International for $2.7 billion. Matt is the right person to lead Quotient, and I am confident this will continue to be a smooth transition. I'm also looking forward to Yuneeb Khan joining us as our new CFO. Yuneeb brings over 25 years of global ad tech, finance and strategic operating experience to the role and will be an important partner to Matt and the leadership team as Quotient enters the next stage of company's growth. Yuneeb joins Quotient from NielsonIQ, where he held several executive level positions. NielsenIQ is formerly Nielsen's global consumer business and a world-leading marketing intelligence enterprise. During his 12-year tenure with Nielsen, he served in a variety of financial planning, commercial and product strategy and business development roles, including President of the Global Consumer Insights business from 2020 to present, Chief Financial Officer of Nielsen Global Connect, now NielsenIQ and Chief Financial Officer of Nielsen Global Operations and Technology. I have the utmost faith in Matt and his team to execute on Quotient's strategy to achieve sustainable, profitable growth and drive shareholder value creation. And now I'll turn it over to Yuneeb to say a few words before handing it over to Matt to take us through Quotient's go-forward growth strategy. Yuneeb?

Yuneeb Khan: Thank you, Steven, and good afternoon, everyone. I could not be more excited to be joining Quotient. But before then, I wanted to take this opportunity to introduce myself to you all. I have spent over 25 years in financial leadership roles, serving in a variety of financial planning, commercial and product strategy and business development positions throughout my career. In particular, my ad tech and CPG industry expertise will lend itself well to the transformation currently underway at Quotient, where I expect to be able to add a lot of value. Quotient is a dynamic company with a strong product portfolio and valuable partner platforms. After evaluating all the work that the team has done over the past two years to transform the business, I felt this was the perfect time to join. I am eager to roll up my sleeves alongside Matt and the leadership team and take advantage of the many opportunities that lie ahead. I look forward to meeting you all in person over the coming months. And with that, I will now turn the call over to Matt.

Matt Krepsik: Thank you, Yuneeb. It's an honor to be here today as Quotient's next CEO. Before I get started, I'd like to take a moment and acknowledge Steven's contributions as Founder and CEO of this great company. During his tenure, Quotient has begun to mature from a transactional services business to a scalable promotions network and retail media platform designed to generate repeatable business and reoccurring revenue. Over the last three years since he rejoined Quotient as CEO, Steven has led a transformation, which, in our view, positions us well for the future. What attracted me to join Quotient a year ago and what excites me even more as the incoming CEO is our ability to connect our promotions and media platforms to amplify ROI for advertisers. We believe it's where one of our biggest opportunities lie and it's where we're headed. Over the past few years, the path to purchase has become more complex. What I mean by that is shoppers have more places they can buy and are walking the aisles less frequently. They're also being very deliberate in their shopping trips, making promotion discovery more difficult. We aim to reach shoppers everywhere. We have been very intentional in solving these challenges. We partnered with our clients to better understand how we can deliver even better experiences for them and meet the evolving needs of their consumers. As a result, we've identified opportunities to leverage the strength of our technology platforms and reach of our networks to make it easier for brands to reach consumers and shoppers to utilize promotions. We believe we will capture these opportunities by winning in three key growth areas

John Kellerman: And good afternoon, everyone. My remarks will be focused on our financial highlights. I encourage you all to read the full financial results in our stockholder letter posted on the Investor Relations page on our website. We are off to a good start in GAAP gross profit and adjusted EBITDA. Revenue was $78.5 million, down 32% year-over-year, but towards the top end of our original guidance of $69 million to $79 million. Q1 reflected the loss of Albertsons from February 26 on and included a $13 million adjustment related to moving from gross-to-net revenue recognition as a result of the changes we made to commercial terms and operations. Excluding Albertsons and the gross to net revenue recognition adjustment from both the current and prior year quarters, revenues declined 15% year-over-year. Promotions represented 64% of total revenue in media, 36% versus 60% and 40%, respectively, in Q1 2021. Promotion revenue decreased 28% year-over-year. Excluding Albertsons and gross-to-net revenue adjustments, promotions revenues declined 16% due to difficult prior year compares compounded by the impact of supply chain challenges in the current year, as well as being negatively impacted by our exit from the specialty retail business. More specifically, last year, Q1 saw a stronger-than-expected performance as CPGs that has held back spending in the first half of 2020 due to COVID, spent those funds towards the end of 2020 and into 2021. By contrast, this year, supply chain issues led CPGs to pull back on national promotion campaigns as inventories remain tight, resulting in less need for promotions to move product. Media revenue declined 38% in Q1 or 14% excluding Albertsons and gross-to-net revenue adjustments. Similar to promotions, media was also negatively impacted by supply chain issues. GAAP gross margin was 37.4%, down 20 basis points. Gross margin was negatively impacted by our planned exit from the high-margin specialty retail business and negative mix due to a lower share of high-margin national promotions revenue resulting from the previously noted difficult compares and supply chain issues. This was partially offset by lower amortization of intangibles and our gross-to-net revenue accounting adjustments. Non-GAAP gross profit was $32.2 million, at the top end of our original guidance of $28 million to $32 million. Gross margin was 41.1%, down 260 basis points compared to 43.7% in Q1 last year. This decrease was primarily due to negative operating leverage on lower revenues and our planned exit from the high-margin specialty retail business and negative mix on lower national promotions, partially offset by the impact of implementing gross-to-net revenue recognition. Over the course of the quarter, we were able to renegotiate the majority of our remaining contracts such that going forward, we do not expect to call out any new material changes to our gross-to-net estimates. Q1 non-GAAP operating expenses were $41.2 million, down $4.3 million from the prior year and down $5.3 million sequentially. The year-over-year decline was primarily due to headcount reductions, the removal of marketing costs related to our specialty business, which we exited and an increase in capitalized R&D. Adjusted EBITDA was a negative $7.1 million versus a positive $6.8 million in the prior year and in range with our original guidance of a negative $4 million to a negative $8 million. The decline in adjusted EBITDA was due to lower gross profit, partially offset by lower operating expenses. We expect our non-GAAP gross margins to continue to improve throughout the year as we see the benefit from the implementation of gross-to-net revenue recognition being recognized starting in Q2, but more importantly, we expect to see positive margin mix from growth in high-margin national promotions and operating leverage and scale benefits from the expansion of our promotions network, adoption of our retail media platform and careful expense management. We also believe that gross margin improvement combined with careful OpEx management should lead to adjusted EBITDA improvements as the year progresses. Turning to cash. We are reaffirming our full year operating cash flow guidance. However, in Q1, we used more cash than expected. We had an operating cash flow usage of $25.6 million in the quarter, below our guidance of a negative $3 million to positive $3 million, primarily due to working capital fluctuations. This results in slower-than-expected build in deferred revenue bookings primarily associated with duration-based promotions, mostly due to supply chain constraints faced by CPGs in Q1, in addition to the timing of collections and payables. Importantly, our receivables are healthy and our pipeline remains strong in the back half of the year. We ended the first quarter with $202.6 million in cash and cash equivalents, down $34.8 million from year-end, primarily due to a $25 million earnout payment to Ubimo and the second and final $8 million upfront payment to a customer that will be amortized against future revenue. Both of these items were in line with our expectations. Now, turning to the outlook. For the second quarter of 2022, we expect revenue to be in the range of $68 million to $76 million, non-GAAP gross margin to be in the range of $35 million to $39 million, adjusted EBITDA to be in the range of a negative $2 million to positive $2 million and operating cash flow to be in the range of $7 million to $12 million. For the full year 2022, we are reiterating our previous guidance for revenue to be in the range of $330 million to $345 million, non-GAAP gross margin to be in the range of $180 million to $190 million, adjusted EBITDA to be in the range of $35 million to $45 million and operating cash flow to be in the range of $15 million to $25 million. We estimate weighted average basic shares outstanding for 2022 to be approximately $95.9 million, slightly below our prior estimate of $96.3 million. And with that, we will now take your questions. Operator?

Operator: [Operator Instructions] We will now take our question from Chad Bennett of Craig-Hallum. Chad, your line is open.

Chad Bennett: So maybe a quick one just on the cash again. So your cash went down by $35 million sequentially. You cited a couple of items. You actually benefited from -- I mean, receivables came way down, like $60 million. And the items you mentioned, were they unknown items when you gave the cash flow guidance for the quarter or cash burn guidance for the quarter?

Matt Krepsik: Chad, yes, we certainly had a slow rate than expected kind of build on our deferred revenue from our duration programs. We had certain programs kind of move out a little bit further, just due to some pressures on supply chains that some of our brands had. And then just some timing issues towards the end there on some payables and receivables.

Chad Bennett: You benefited from receivables though, is that right?

Matt Krepsik: We did. We had a benefit from receivables, but we expected to have some more come in and just had some movement there on timing.

Chad Bennett: Okay. And so -- and then on the media kind of pro forma, I didn't catch that year-over-year. Could you cite that again the revenue?

Matt Krepsik: The revenue on year-over-year?

Chad Bennett: Yes, I think that impacts --. Yes.

Matt Krepsik: Yes, just one minute here.

John Kellerman: Yes. So media declined 38% in the first quarter.

Chad Bennett: So the -- so I'm just trying to understand better on kind of the kind of pro forma ex gross-to-net, next Albertsons growth rates. I mean, the supply chain issues have been there for a long time. If anything else, they've probably improved. I mean, I don't think ad spend has been -- our promo spend has been down 20% and 30% year-over-year, if you look at comps. Is there something else we're missing?

Matt Krepsik: Yes. The other thing I'd say, too, is we have strong a strong kind of Q1 last year. So as you think about that was early into the -- like I said early into the like I should -- early in the pandemic we saw a lot of brands pull back spending. And then towards the end of that time period in Q4 and Q1, we saw a lot of budget flush come through. So we had a really strong kind of Q1 last year. And so, one thing that we're seeing this year is just some tough comps in terms of the year-over-year comparison once we kind of pull out the apps kind of change.

Chad Bennett: Okay. And then maybe one last one for Matthew. Matthew, just in laying out kind of the areas of focus for the platform and simplifying retail buying and measurement and so forth. Kind of where are we today? And how much more work do we have to do to kind of develop that platform to where you talk about it today? And effectively, as you kind of talk to customers more and more now that you're kind of in the CEO role or more acting CEO role, I mean, what is their take on your platform rather than running media via Albertsons retail media network or Walmart or Target or whatever? I'm just trying to get a sense of the value you really add there and kind of how they talk to you about it?

Matt Krepsik: Yes. So I would say it's -- over the past few months, I've just been spending a lot of time out in the field talking to a lot of our customers and our clients. And we all look at retail media as a tremendous opportunity as we think about the evolution of the media landscape, we see a move towards more deterministic verified audiences, and retail media presents that opportunity in spades. It's a fantastic kind of channel. However, the biggest challenge they all see when we sit down and chat with them is like, "Hey, we love the promise and potential of retail media." We want to spend more dollars in this space, but we're starting to face this challenge of we can buy across one, two, three different seats, but we can't continue to buy across four or 5, 6, 7, 8, 9, 10, 11, 12 different individual retail media networks. And so, the big demand we ask from our clients has been, "Hey, can you simplify this?" You guys really sit at the intersection of a lot of these retailers. You have a lot of really good experience managing a network, and we love where you're going from a technology standpoint and a platform and the ability to kind of execute that campaign across the networks, right? So that's where we've launched our multi-touch attribution capability to kind of provide that performance metric. We're rolling out our creative building capabilities to simplify that process. So brands can build thousands of ads that are localized and personalized and relevant for each retailer. So there's a lot of momentum there in this space. And just really excited about kind of getting the platform in the hands of more users and partnering with our brands as they start to make this transition and transformation for retail media and commerce.

Operator: At this time, I'd like to turn the call back over to the management team for any closing remarks.

Matt Krepsik: Thank you, operator, and thank you to everyone who listened in and participated on today's call. We delivered a solid quarter, achieving the high end of our range for revenue and gross profit and within range for adjusted EBITDA. We are pleased with the progress we're making to transform our company and capitalize on the significant opportunities ahead. I'm excited to lead the company forward at this important time and look forward to continuing to execute on our three key pillars of growth to build out our national promotions network, leverage our retail media platform and capitalize on the combination of promotions and media. And we expect to deliver enhanced value for our advertisers, our partners, consumers and our shareholders. Thank you again for joining, and we look forward to speaking with many of you over the coming days and the upcoming investor conferences.

Operator: That concludes the Quotient's first quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.