Earnings Transcript for QUOT - Q4 Fiscal Year 2022

Operator: Hello and welcome to the Quotient Q4 2022 Earnings Call. My name is Elliot and I’ll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Drew Haroldson, the floor is yours. Please go ahead.

Drew Haroldson: Thank you operator. Good afternoon and welcome to our fourth quarter and fiscal year 2022 earnings call. With me on the call today are the company's CEO, Matt Krepsik; and Yuneeb Khan, our CFO. The company's press release and earnings presentation have been posted to the IR section of the company's corporate website, investors.quotient.com. Before we begin, please note that during this call you will hear forward-looking statements, including the guidance we will be providing for the company's first quarter and full year. These forward-looking statements are based on information available to and the good faith beliefs of the company's 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 the company's Investor Relations website. Additional information about factors that could potentially impact the company's financial results can be found in the risk factors identified in our filings with the Securities and Exchange Commission including on our annual report on Form 10-K filed with the SEC on March 1, 2022 and as amended by our 10-K/A filed with the SEC on April 29, 2022. Our quarterly reports on Form 10-Q filed with the SEC on May 5, 2022, August 9, 2022 and November 9, 2022 and future filings and reports by us. 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, gross profit and net income/adjusted EBITDA financial measures discussed today are on a non-GAAP basis each having been adjusted from the corresponding GAAP measure to exclude certain expenses. A reconciliation of GAAP and non-GAAP measures can be found in the financial results section of the press release and earnings presentation that we put out today on the company's website. With that, let me turn the call over to Matt.

Matt Krepsik: Good afternoon and thank you for joining us today for Quotient's fourth quarter and full year 2022 earnings call. Joining me on today's call is our CFO, Yuneeb Khan. 2022 was a transformational year for Quotient as we took the necessary steps to simplify our product strategy, realign our cost base and solidify our capital structure bringing it in line with our business needs. The fourth quarter was a challenging one across the digital marketing sector as the industry saw a pullback in advertising spend, impacting the media part of our business and putting pressure on revenue for the quarter. However, our promotions business was resilient and continued to grow sequentially. Despite these industry headwinds, we believe the steps we took enabled us to establish a more robust operating model as evidenced by our ability to deliver sequential improvement in non-GAAP gross margin of 58% and sequential improvement in non-GAAP adjusted EBITDA of $13 million, generating positive operating cash flow of $6.2 million and delivering net income for the first time since 2017. Our results in Q4 and full year 2022 speak to the transformation journey that we started in Q2 of 2022 and the strength and durability of the new Quotient. As Yuneeb and I have discussed on our prior earnings calls, our primary focus has been to build a stable and durable foundation that puts Quotient in a position to deliver profitable growth in the coming years. Over the course of 2022, in our opinion, we have made the company stronger. First, we have focused our product and go-to-market around our key strengths, our network, our first and second-party data and our technology that together comprise our programmatic platform. This shift has allowed us to adapt our business model from being a full-service agency to a technology-based solution, designed to provide greater value to brands and retailers, as well as deliver a superior margin profile for Quotient. Second, our shift in focus towards being a technology provider as well as our efforts to simplify our technology and integrate acquisitions has enabled us to materially lower our cost structure. Over the course of 2022, we established plans to reduce our operating cost by approximately $50 million, which has allowed us to improve our margins and reinvest in our growth initiatives for 2023, which Yuneeb and I will discuss. Third, we made it our priority to improve our capital structure by retiring our $200 million convert with $55 million of debt and a $50million credit facility. We believe our new capital structure provides enough liquidity to operate the business and strengthens our balance sheet for the opportunity in front of us. We have built a new management team and brought in new talent across the organization. I am pleased with our execution to transform our operating model and position our company to deliver consistent earnings and profitable growth. With this foundation in place, we believe, we are well positioned for future growth, both organic and through a series of defined initiatives, a few of which I will highlight today. In Q4 of 2022, we delivered a total of $2.8 billion of savings to consumers due to the reach of our network and the power of our programmatic platform. With overall retail sales on promotions growing by 2.9% in Q4 2022 versus the same period the prior year as reported by NielsenIQ, we saw our savings deliver grow by 13% over the same time period. We believe, this represents a strong signal on the shift towards programmatic digital promotions and our ability to continue to capture share of the overall promotions TAM. In the quarter, we also started to see a shift in the market that is favorable to our promotions business, with the backdrop of improving supply chains and consumers facing pressure from an inflation rate that averaged 8% in 2022, our promotions business again grew sequentially quarter-over-quarter. Looking forward, we believe these trends will continue to put pressure on price-conscious consumers. In addition, the reported growth of private label ahead of National brands will continue to place further pressure on brands to maintain market share and move volume. Volume growth will be important for both retailers and brands in 2023, and we expect this will lead to increased levels of promotional activity across the CPG and retail industry. We are closely monitoring these trends, and we believe that these shifts could yield a positive environment to drive profitable organic growth for our promotions business. Focusing on our promotions business, we were able to grow the reach and scale of our network by 7% in 2022, through the addition of new partners and end points, which enabled us to reach more activators. Throughout 2023, we expect to continue our -- to grow digital promotions network as retailers recognize the value of our programmatic platform capabilities and the ability to guarantee time on the network. This ability is critical for our retail partners to plan and schedule merchandising events aligned with the digital promotions. More importantly, we believe this enables digital promotions to continue to capture share of the larger $200 billion-plus CPG promotion spend. In addition, we are also focused on adding more content to our network. Historically, we have worked with the largest brands and products with the widest distribution and now with the programmatic capabilities of our platform, we can more easily support new content for smaller brands, regional players and new consumer purchase occasions as well as new categories that require additional verification for digital offers. We need to expand our relationships with brands and agencies, as we bring our new exciting capabilities to market. As we announced in January Allison Metcalfe has joined the team as our Chief Revenue Officer. In this role, Allison will be focused on driving net new growth, as we look to engage more brands and more agencies across our product capabilities and bring more content onto our promotions network. We plan to continue to innovate our promotions product capabilities and we believe the enhancements we are making to our platform will generate more content for our retail partners, more engagement for our publisher partners, move units for our brands and deliver more savings to the consumer, which is ultimately what drives our revenues. In addition to our organic growth, we are also investing in strategic growth initiatives built around our existing platform. We are able to make these investments today due to the structural changes we made to our business over the past year bringing our costs in line with our objectives. Digital Out-of-Home and Shopmium are expansions of strong products. With a growing TAM where our legacy cost model did not provide the funds to drive a properly scaled go-to-market effort. The launch of our retail ad network comes from the dialogue we've been having with our retail partners and brands over the past year, as they see a need for an easy button across the countless stand-alone networks in the market today. Starting with Shopmium, we believe our direct-to-consumer product is an important extension of our promotions business, as it provides incremental reach for our network and allows Quotient to establish a first-party data relationship with shoppers. Building on the success of our European Shopmium app in late October we launched Shopmium in the United States, early signals have been strong with Shopmium driving a more engaged user acquired at a lower cost than we anticipated. The user engagement has exceeded our expectations. We have also seen favorable demographics with over 75% of the Shopmium user base being in the key age demographic of 18 to 54. The engagement levels and the age demographics has created greater monetization opportunities for Quotient faster and more efficiently than our prelaunch estimates. Our next initiative is digital at a home where the market is expected to grow at 15% through 2025. With access to over 500,000 screens and over 150 million mobile devices, our digital out-of-home product is a powerful industry-recognized demand side platform that allows for planning and targeting to programmatically reach consumers on digital screens wherever they are and wherever they shop. As part of our strategy to grow our digital auto home business in Q4 of 2022, we announced a partnership with Hivestack, a leading global independent, programmatic, digital out-of-home, supply side platform. Hivestack extensive access to global supply, provides our agency partners and brands, with access to more digital screens, as we plan to expand to international markets in 2023. In addition to the opportunity of working directly with brands and agencies, as the demand side platform, we are also seeing the opportunity to work with retailers, as a technology partner for their retail media businesses. Our digital of the home location-based demand side platform, has the ability to extend audience reach for a retailer, and create access to inventory and consumers in and around their stores. Over the past quarter, we signed up two retailers to this capability, and we believe we have the opportunity to sign more deals over the course of the year, as we evolve our role in retail media, as a technology platform and partner. In December, we also announced the launch of our retail ad network, to tackle the fragmentation across the ecosystem. The Quotient network aggregates individual in-house retail media networks, to enable advertisers to target, manage, execute and measure campaigns across multiple retailers, through one central transparent platform with scale. In addition, our retail ad network, has a unique solution to combine media campaigns with promotions and deliver a call to action to drive sales. We have seen positive reception both from brands, facing challenges presented by the fragmented landscape of retail media networks, and from retailers looking to compete with the scale of the largest networks. In our view, all the work we've done in 2022, has set a strong foundation for the business moving forward, with organic and new growth potential for our products. As part of this journey, we are bringing on board new talent and expanding our senior leadership team, to help drive execution. In addition to hiring Allison, as our Chief Revenue Officer, to focus on brands and agencies, we felt it was also critical to elevate the strategic importance, of our incredible retail partners by creating a Chief Retail Officer role at Quotient. As we announced today. Jeff Williams, will be joining the Quotient leadership team as our Chief Retail Officer, with his decades of experience in CPG retail. His role will focus on strengthening our strategic relationships with our retail clients, and growing our retail client base across the product portfolio. Finally, we have spent a lot of our effort this past year, building a robust operating model that has created operational leverage for the company. And enable us, to invest in our growth initiatives. In addition to Yuneeb’ duties as CFO, he will also be taking on the role of Chief Operating Officer and will continue to focus on improving the operational efficiencies of the company, improving our margins and cash generation. Over the course of 2022, we have done the work to simplify our product strategy, and align our cost base and capital structure to meet our business objectives. We believe our fourth quarter shows early results from these efforts, as we demonstrated measurable improvement across all profitability metrics. As we move into 2023, we look to build on top of our new foundation, leveraging the organic growth and emerging tailwinds in the promotions market and our strategic growth initiatives that we believe position the company to grow our top line and continue to deliver profitability at a faster rate. I'd like to now turn the call over to Yuneeb to review our financial results and guidance.

Yuneeb Khan: Thank you, Matt, and good afternoon, everyone. My remarks today will be focused on our financial highlights and I encourage everyone to visit our Investor Relations page for all the relevant documents, including our GAAP to non-GAAP reconciliation. Before I provide you details on our fourth quarter financial performance and outlook for 2023, I want to reemphasize our focus on improving the financial fundamentals of our company that has created, what we believe, is a healthy balance sheet and a responsible P&L. For example, we have established our new non-dilutive capital structure, progressively improved our gross margins, streamlined our cost base and improved our EBITDA profile. We believe that this has created a strong financial foundation that we will build on in 2023 and beyond, leveraging our core strengths and through the growth initiatives discussed earlier by Matt. Turning to our financial results. Our Q4 results are a reflection of the solid financial foundation that Matt and I mentioned earlier. Despite a challenging commercial environment, we were able to improve our profitability and cash flow and show sequential improvement in our gross margins, EBITDA and operating cash flows. Our fourth quarter revenue was $70.7 million, softer than our expectations, as industry-wide declines in advertising continued throughout the quarter. Our promotions revenue represented 66% of revenue in Q4. As Matt mentioned, our promotions business continued to demonstrate strength, growing roughly 5% sequentially. Media declined 7% sequentially. Non-GAAP gross profit of $41 million resulted in a non-GAAP gross margin of 58%, compared to 39% in 2021 and 52% in Q3. Gross margin expansion was positively impacted by increase in visibility through adoption of net revenue recognition, a shift towards higher-margin products and cost reduction actions, including rationalization of operations and delivery functions. Our Q4 non-GAAP operating expenses were $30.5 million, versus $46.5 million in 2021 and $28.9 million in Q3. Year-over-year decline in spending was primarily due to previously announced cost actions we have taken, as well as our disciplined OpEx management. Non-GAAP adjusted EBITDA in Q4 was $13 million, within our guidance range of $13 million to $18 million, 1% higher than Q4 of 2021 and growing by $3 million versus Q3. During 4Q, we have also achieved positive GAAP net income and positive EPS in the quarter for the first time since 2017, which is another example of the improving health of our P&L and the profitability of our company. As Matt mentioned, our business has gone through a meaningful transformation, from a managed service and outsource agency to a higher-margin provider of data-driven software and technology, through the scale and innovation of our platform. Our Q4 non-GAAP gross margin and adjusted EBITDA performance is a reflection of this transformation and a proof point of our continued focus on building what we believe is a durable P&L, with healthy revenues that turn into sustainable profits that convert into cash. Turning to cash. Our operating cash flow for the quarter was $6.2 million, within our guidance range of $6 million to $11 million. Operating cash flow grew 150% compared to 2021 and 100% versus Q3, driven by our strong focus on working capital management. As discussed earlier, we successfully repaid our $200 million convertible notes in full in December 2022, and replaced it with what we believe is a robust capital structure consisting of a four-year $55 million term loan a $50 million asset-based revolving credit facility and an optimized cash balance. We believe that our capital structure combined with our ability to generate positive operating cash flows put us in a strong position to continue investing in our transformation and meeting all our working capital needs. Before turning to 2023 guidance, we believe it's important to remind you of the two elements of our business which were part of our Q1 2022 revenues but are no longer part of our operations, specifically the winding down of our relationship with a large partner and our shift to net revenue recognition. In Q1 of 2022, those two factors contributed $17 million of the reported $78.5 million of revenue. Excluding those factors, revenue would have been $61.5 million for Q1 of 2022 and $271 million for the full year 2022. These factors did not impact our revenues for the balance of 2022. For full year 2023, we expect revenue to be in the range of $275 million to $305 million, non-GAAP gross profit in the range of $145 million to $165 million, adjusted EBITDA in the range of $32 million to $45 million and operating cash flow to be in the range of $10 million to $25 million. We estimate weighted average basic shares outstanding to be approximately $99.2 million. For the first quarter of 2023, we expect revenue to be in the range of $55 million to $65 million, non-GAAP gross profit in the range of $30 million to $35 million, adjusted EBITDA in the range of $1 million to $5 million and operating cash usage to be in the range of $5 million to $10 million. Our Q1 guidance reflects normal seasonality in revenue and expenses as well as timing of certain cash outflows. Our 2023 and first quarter guidance reflects organic growth and promotions and the impact of macro headwinds in media. As Matt mentioned, we will continue to invest in our transformation journey. And as part of that transformation, we plan on launching strategic initiatives that we believe will further unlock the growth potential of our digital promotions and media assets and lay a foundation for accelerated growth in digital auto home and shopping products. In closing, we are looking forward to an exciting 2023. We are expecting a meaningful expansion in gross margin, EBITDA and operating cash flow as our initiatives scale and we continue our rigor around disciplined OpEx and cash management. And our 2022 cost action roll through into 2023.

Matt Krepsik: Thanks, Yuneeb in. In summary, we are confident in the strong foundation that we've established, which we believe positions us well as a more stable and durable business. We believe our strengthened operational and financial position along with our differentiated products will enable us to successfully scale and grow over the long-term. With that we'll now turn the call over to the operator to begin the Q&A session.

Operator: Thank you. [Operator Instructions] Our first question today comes from Chad Bennett from Craig-Hallum. Your line is open.

Chad Bennett: Great. Thanks for taking my questions. So, just Matt or Yuneeb just on the guide for the year, the revenue guide, I appreciate the color on kind of the one-time items last year between the major customer partner and the gross to net change of $17 million. But just in looking and the full year guide, I think you said organic growth on the promo business. What are your thoughts on the media business? And what have you kind of baked in in terms of the current spend environment and expectations there? Are you assuming that it worsens, or how does that business trend as far as you can tell today?

Matt Krepsik: Yes, hey Chad, thanks for the question. So, you're right, on the promo business we're -- I'll tackle it kind of -- I'll tackle your question on both sides. On the promo business we're still looking at it just based upon what we've seen to-date. So, we're not forecasting any sort of major kind of tailwinds or industry shifts there on promo. On the media business, we've taken the same approach, which is -- we saw a slowdown in Q4. We think that's going to continue into 2023. So, we're being cautious with that business. Now, we are making some investments especially as we transition the media business to a more of a technology and take rate platform. And so, we're kind of excited about that transition, but we're looking at that transition in the marketplace that we expect to be kind of modest from a media standpoint.

Chad Bennett: Got it. And then on the gross margin side, it appears that you're kind of forecasting gross margins to roughly stay in line on a percentage basis with where you exited the year. Is -- first is that correct? And then what's the potential upside to gross margins as we get through the year?

Matt Krepsik: Yes, it's a good question. As we look at 2023, we feel like the work we did in 2022 has given us a strong foundation. We know our North Star for this to business is getting to a -- over the next few years getting to a 60%-plus gross margin 20%-plus percent EBITDA margin and a double-digit kind of growth rate. As we look at 2023, it's really about setting that foundation for our gross margins. As we drive more volume on the platform that volume growth will certainly kind of flow through on the gross margin side and the EBITDA side.

Chad Bennett: Okay. And then just on the EBITDA side, I think we've restructured or rationalized saved $50 million in costs over the last six months or six-plus months in the business. We've been positive EBITDA the last quarters with some of that impact helping us. Are we reinvesting any of those savings into the business this year? And I guess to be blunt, why wouldn't we be producing $50 million plus of EBITDA this year?

Yuneeb Khan: Yes, it's a good question. So, I mean a couple of things as we think about the EBITDA going into 2023. One we are reinvesting some of those dollars back into some of our initiatives and businesses that we just haven't had a chance to invest in before. Like I mentioned on the call or previously, we are looking to kind of grow our digital out-of-home business internationally. So, we're looking to kind of take that to a few new markets. We're continuing to invest in Shopmium as we continue to kind of grow that out. We're excited about some of the capital investment as we kind of grow out our retail ad network. So we want to make sure we can continue to invest in the business into some of our growth initiatives long-term because we think that's important for our business. And then we do know we have some cost increase just as it relates to kind of salaries and wages in the marketplace today. So some of that money we're actually kind of spending back on the business as well.

Chad Bennett: Got it. All right. I appreciate the color. Thanks.

Matt Krepsik: Thanks, Chad. Really appreciate it. Thank you.

Operator: [Operator Instructions]We now turn to Steven Frankel from Rosenblatt. Your line is open.

Steven Frankel: Hi. Good afternoon. So you mentioned some possible new retail categories that you might explore? Maybe give us any color on what that looks like? And are those something that could help accelerate growth in the near term? Are these long-term investments?

Yuneeb Khan: Yes, Steve, good to chat. So as we think about some of our category expansions one of the ones that we're looking at very simply, I think, we announced our bringing total line and more onto the network. And we certainly look at adding into the beval categories an area where we've historically -- the company has had some strengths. And so we're looking at expanding our footprint as we bring more age gating onto the network and onto the platform more consistently. And so that's an area we're pretty excited about. We got some history there in our past and we feel good about that. We also see the ability to probably more mid and long-term extended to more adjacent categories. But I would say the category expansion that we're talking about today those are all very near in and we certainly think can provide some positive tailwinds for the business here in 2023 and certainly set us up to have some stronger growth over the next kind of few years?

Steven Frankel: Okay. And shifting to the balance sheet that you have done a good job of restructuring, but I look at nearly 120 days in DSOs. It's still down from where they are but kind of what's a reasonable target what -- where should they be?

Matt Krepsik: Yes, I'll let Yuneeb, kind of, answer that question.

Yuneeb Khan: Yes. So thank you for the question, Steve. As you know that we have put a lot of focus and rigor behind our working capital management specifically in the area of account receivables. The health of the account receivables have improved quite significantly. The balance that you see right now the past due above 90 days is almost insignificant. As far the DSO is concerned the collection efforts are like they continue or we continue to like to improve our processes on that side. We are targeting another like say one to five days of improvement on DSO that we believe could be like an opportunity that is out there given the type of the customer base that we have. That has been our focus since the beginning of like the second half of last year and we'll continue to like you know, put time and energy on that.

Steven Frankel: Okay. And I appreciate the color on an apples-to-apples comparison for Q1. Are there any more gross to net changes that are coming in 2023 that we ought to be aware of?

Matt Krepsik: So we plan to kind of run the business consistently as we've been reporting the past few quarters, Steve. So for us it's really kind of starting a very clean slate continuing going to focus on our path, and our journey ahead, we're going to drive some of the growth initiatives and the potential that the company has. So we feel like we've gone through a lot of hard effort in 2022 to transform the business, restructure our capital kind of take a significant amount of cost out, and we feel like we're in a very good position that we believe to kind of continue to take that step forward, and look towards some of our growth potential initiatives out there.

Steven Frankel: Okay. Maybe more crack at media business. Obviously it's not a growth vehicle, but are we talking kind of mid-single-digit declines from here on a year-over-year basis, or worse than that?

Yuneeb Khan: No, I think that's probably a fair expectation from a year-over-year standpoint. We certainly believe that 2022 was the year of retail media in-housing. We've also as a company transition our business model to more of a technology DSP and platform business. We know as we build that footprint and we continue to grow that portion of the media business in 2023, does take time to build, but that's really where we're excited to kind of turn the page and kind of start to write that chapter on our version of Retail Media 3.0 and really the future of our media business at Quotient.

Steven Frankel: Okay. And are you seeing any competitive pressure in retail media from the Criteo or Magnite or the other traditional ad tech players trying to get deeper into your space and to go after the dollars that were traditionally Quotient?

Yuneeb Khan: Yeah. I would certainly say retail media is an interesting category or say a dollar for a lot of ad tech players to kind of go after. If I think about players like a Magnite or a Criteo their strength has always been on the supply side of the ecosystem. They certainly can be potentially strong partners for us kind of moving forward. I mentioned, the partnership we did with Hivestack on the digital auto home side, they certainly bring kind of incremental screens for us and reach that we can kind of bring to retail media on our demand side platform. I would think about our role in retail media is very clearly on the demand side of the ecosystem, that's where we have unique or have the ability to provide differentiated capabilities for our planning our campaign management, our creative building and our audience building. That's really our role in retail media. And so I think there certainly is a lot more interest and focus in the industry in that space in that category. And we certainly see over the long term, we expect to see retail media continue to grow and we continue to expect to be a strong part of that ecosystem. But we certainly are not going to be an agency player. Our role will be as a technology platform and partner in that space.

Steven Frankel: Okay. Great. Thank you.

Yuneeb Khan: Thanks Steve.

Operator: This concludes our Q&A. I'll now hand back to Matt Krepsik, CEO for any closing remarks.

Matt Krepsik: Thank you. And we want to thank you all again for joining us today. And we look forward to continuing to update us update – update you all on our progress, as we continue in the near future. Thank you very much.

Operator: Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.