Quotient Technology Inc

F:CU7

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. Thank you for attending the Quotient Technology's First Quarter Earnings Call. My name is Matt, and I'll be your moderator for today's call. [Operator Instructions]

I would now like to turn the conference over to our host, [indiscernible]. Please go ahead.

[Unidentified Company Representative]

Thank you, operator. Good afternoon, and welcome to our first quarter 2023 earnings call. With me on the call today are the company's CEO, Matt Krepsik; and Yuneeb Khan, our CFO and COO. 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 second 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 on 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 our annual report on Form 10-K filed with the SEC on March 16, 2023, as amended by our 10-K/A filed with the SEC on April 28, 2023, 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 for 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.

[Matthew Krepsik, Chief Executive Officer]

Good afternoon, and thank you for joining us on Quotient's First Quarter 2023 Earnings Call. Joining me on today's call is our CFO and COO, Yuneeb Khan. Our first quarter results were in line with guidance ranges given across all metrics, including revenue, gross margin, adjusted EBITDA and operating cash flow.

In particular, I'm pleased with the strong momentum we demonstrated on profitability in the first quarter with positive adjusted EBITDA of $1.8 million versus a loss of $7 million in the prior year comparable period. First quarter results are reflective of the early stages of our transformation as we have shifted our business model from being a managed services agency to a technology-based solution designed to provide greater value to brands and retailers.

This transition, as we have communicated in prior quarters, is intended to deliver a superior margin profile and scale quotient relative to our legacy model. On the top line, promotions continued to deliver growth with our network performance becoming stronger.

We saw our savings deliver grow by 22%, again, outpacing overall retail sales and promotions growth of 7.9% as reported by NielsenIQ, demonstrating our ability to capture share and expand our addressable market. In Q1, we saw the underlying fundamentals of our network and platform continue to strengthen with activators on our network up 15% year-over-year and redemption is up 14%.

We believe that each of these internal key performance metrics demonstrate the positive momentum for our network as we grow the reach of our audience, and we deliver results for brands. This, in our view, is creating a virtuous cycle with new brands, bringing new content onto the platform and engaging new consumers delivering more savings and driving results.

Looking forward, the strength of these internal indicators underlies our outlook for the rest of the year and are reflected in our guidance for Q2, where we begin to show top line growth. From a macro perspective, we are seeing brands face pressure on volume as we begin to lap their price increases from last year as price sensitivity is creating headwinds for our consumers.

As a result, we are seeing growth in content on our platform, given our ability to programmatically deliver offers to consumers, increasing performance and reducing waste and promotion spend for brands. Content growth is reflective of our transition to a technology platform and our programmatic capabilities where we can now more easily support new content for smaller brands, regional players and new consumer purchase occasions.

During the quarter, we also expanded coverage of our network to include the adult beverage category. If you recall, this expansion is one of our key strategic growth initiatives for the promotion business, driving revenues at higher margins. In our view, this expansion to a category that is incremental for consumers and complementary for our network and retail partners enables us to expand our addressable market and increase the monetization of our existing network.

While we are still in the early innings of our business model transformation, I am pleased with the work our new Chief Revenue Officer, Allison Metcalfe, has done to refine our go-to-market strategy with a focus on winning net new business.

In Q1, we brought 92 net new brands onto our promotions network and our pipeline growth is ahead of our historical norms with particular strength in the promotions business.

Turning to our media business. As you may recall, we have been executing a strategic pivot for this business with the in-housing of retail media and our transition from an agency managed media model to an ad tech self-service product. We have successfully transitioned the cost burden on Managed Media business in 2022, with Q1 reflecting the new ad tech model for our media products as we become a technology partner for our retailers and a buying platform for brands.

As we take this step forward for our media business, we are introducing gross billings this quarter as a leading indicator and key performance metric that is intended to provide transparency for our investors and demonstrate the utilization and solid momentum for the pivot of our media business to an ad tech product.

Gross billings is an internal operational metric that provides a view on the utilization of our platform, our ability to capture share of the addressable market and ultimately, our ability to convert that strength into revenue.

Turning to Digital Out-of-Home. We saw our gross billings double in Q1 2023 over the same period a year ago, demonstrating the strength of our product as well as showing the potential for what we believe is one of our core long-term growth drivers for Quotient.

The Digital Out-of-Home market is expected to grow at 15% through 2025 according to eMarketer. This growth is driven by 2 trends: first, the digitization of the traditional out-of-home placements and secondarily, the digitization of the physical store.

In-store audiences for retailers are 1.5x larger than their digital audiences, and 90% of CPG transactions are still made in store. With access to over 500,000 screens, of which over 200,000 are in or around the physical retail store. Our Digital Out-of-Home product is quickly becoming, in our view, the digital in-store product. We offer an industry-recognized demand side platform that enables advertisers to programmatically reach consumers on digital screens wherever they are and wherever they shop.

Quotient's self-service platform is designed for the unique opportunities of out-of-home location-based advertising that enables brands to reach consumers on the move during their path to purchase. As a testament to our capabilities, our Digital Out-of-Home business received nominations for Digiday 2023 media buying and planning awards.

We were named a finalist in the best digital out-of-home campaign category, which recognized our successful campaign with the clothing retailer H&M USA, as well as the best multichannel experience and the best digital media campaign categories for our summer snacking campaign with Mondelez.

This campaign was recognized for the power of taking an omnichannel strategy using multiple channels, including social, mobile display and digital out-of-home to deliver a cohesive message to consumers across multiple touch points.

Turning to the retail ad network. In the quarter, we shared initial campaign results from our retail ad network with our CPG pilot partners. These initial results were well received and speak to what we believe is the promise of simplifying the buying of retail media. This innovation is delivering on CPG expectations for performance while solving key pain points of supporting all retail media businesses.

Looking to our future. As I mentioned briefly on our last call, in the coming years, we have a goal to return the business to a low to mid-teens growth rate, 60% plus gross margins and 20% plus EBITDA margin. We believe, based on our current trajectory, we have a line of sight to achieving these targets by 2025.

On the top line, we expect to achieve this growth rate through steady organic growth in our promotions product family and scaling up our strategic growth initiatives within our other product families, such as Digital Out-of-Home and Shopmium.

On the promotion side, with the programmatic capabilities of our platform, we believe that we can more easily support new content for smaller brands, regional players and new consumer purchase occasions as well as new adjacent categories.

Within Digital Out-of-Home and Shopmium, we are expanding the reach of our product offerings as we seek to capitalize on a growing TAM in these product areas. I spoke to some of the tailwinds we are experiencing in Digital Out-of-Home a moment ago.

For Shopmium, we continue to build on the success of our European Shopmium app with the launch of Shopmium in the United States, growing our direct-to-consumer content by 23% in Q1 2023 versus the prior year. And we continue to be excited about the monetization opportunities given early reads on user engagement levels in the app.

On the profitability side, the work we did in 2022 to reduce our operating cost structure has provided, in our view, a path to a 60% gross margin and a 20% EBITDA margin by 2025. Achieving these targets will be dependent upon growth on our higher-margin revenue initiatives and leveraging the fixed cost base.

In conclusion, while Q1 results were within our expectations, our leading internal indicators are showing green shoots across the business from the strengthening of our promotions network to the 92 net new brands and the increased gross billings through our Digital Out-of-Home, DSP.

The hard work of transitioning to a technology provider is progressing and our financial fundamentals continue to strengthen. We are focused on driving organic growth while simultaneously expanding margins.

With that, I will now turn the call over to Yuneeb to review financials and guidance.

[Yuneeb Khan, Chief Financial Officer]

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.

Our Q1 results demonstrate the work we started last year to strengthen the financial fundamentals of the company and our continued focus on improving our financial processes. In particular, I'm proud that we achieved positive adjusted EBITDA in first quarter of this year versus the loss posted in first quarter of last year.

A testament to our focus on profitability, cost discipline and efficiency. Combined with our solid cash and liquidity position, we believe we are well positioned to continue funding our transformation and fueling our growth. Our first quarter revenue was $59.3 million, within our guidance range of $55 million to $65 million.

This compares to $61.5 million of revenue reported in first quarter of 2022, excluding the impacts of the winding down of our relationship with a large partner and our shift to net revenue recognition. These excluded items contributed $17 million of the $78.5 million of revenue that we reported in Q1 of last year. Promotions represented 80% of revenue in Q1. We -- as Matt mentioned, our promotions business continued to demonstrate strength, while media was impacted by a decline in managed services due to in-housing and our strategic shift away from low-margin managed services media products.

Non-GAAP gross profit of $29.9 million resulted in a non-GAAP gross margin of 50% compared to 41% in Q1 of last year. Gross margin improvement was primarily driven by the adoption of net revenue recognition, a shift towards higher-margin products and cost reduction actions including efficiency-driven improvements to our operations and delivery functions.

Our Q1 non-GAAP operating expenses were $31.4 million versus $41.2 million in Q1 of last year. Year-over-year decline in spending was primarily due to previously announced cost reduction actions as well as our disciplined OpEx management. Non-GAAP adjusted EBITDA in Q1 was $1.8 million, within our guidance range of $1 million to $5 million and versus a loss of $7 million in the prior year.

Turning to cash. Our operating cash usage for the quarter was $6.6 million, within our guidance range of a cash usage of $5 million to $10 million and improving by $19 million than first quarter of last year. The cash usage in 1Q is reflective of normal seasonality of certain cash outflows that happened in the beginning of the year as well as timing of certain known nonrecurring payments.

We ended the quarter with $44 million of cash and with our unused and available asset-based revolving credit facility. We believe we are well capitalized to meet all our cash needs. We continue to strengthen our cash management processes, leading to greater visibility into elements of our cash cycle and helping drive further optimization of our working capital.

Turning to second quarter. I'm excited about the strong commercial momentum that we are witnessing across our promotions as well as our Digital Out-of-Home products, as Matt has pointed out. Our 2Q revenue guidance reflects this momentum and is supported by a pipeline that is trending ahead of seasonal norms. Further, we continue to see meaningful improvement in adjusted EBITDA driven by our focus on growing higher-margin products and our proven cost performance. We believe it is important to emphasize that our revenue guidance for 2Q is also signaling an expected return to growth for our company, excluding the impact of a certain prior period revenue recognition item that we previously disclosed during 2Q of last year.

For the second quarter, we anticipate revenue to be in the range of $67 million to $72 million, non-GAAP gross profit to be in the range of $34 million to $38 million, adjusted EBITDA in the range of $3 million to $6 million and operating cash flow in the range of $0 million to $5 million. For full year 2023, we are maintaining our guidance. 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 98.8 million.

In closing, I'm very proud of our company's transformation journey so far and very excited about the positive momentum that is building up and in my view, we are laying solid groundwork towards achieving our long-term financial growth of revenue growth in the mid-teens gross margin north of 60% and EBITDA margin north of 20%.

We would now like to take your questions. Operator, can you please open up the line for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Steve Frankel with Rosenblatt Securities.

[Steven Frankel, Rosenblatt Securities]

Can we start with the Digital Out-of-Home business and this buildup of billings -- maybe give us an idea of how important this business is to revenue in 2023 and how it ramps from there?

[Matthew Krepsik, Chief Executive Officer]

Steve, thanks for the question. So Digital Out-of-Home, it's certainly been a -- it's been a growing part of our business, a growing part of our media business. It does represent a true ad tech take rate. When we look at the business here through the -- I think, through Q1, it does represent a, I would say, a good 50% of our media revenue. And we expect that to continue to kind of build throughout the year.

[Steven Frankel, Rosenblatt Securities]

Okay. Great. And then on gross margins. I was anticipating that maybe we would see higher gross margins this year, not quite to that 60% target, but making some good progress this year and your guidance seems to imply that there isn't as much lift. What's the dynamic there?

[Yuneeb Khan, Chief Financial Officer]

Yes. Steve. It's Yuneeb here. So first of all, the -- as we've said in the past, the product portfolio is pretty healthy. The portfolio that we have right now carries pretty nice direct margins. The gross margin that you see right now is 50%. It's substantially higher versus where we were last time in the first quarter of 2022.

The difference between what you saw in the fourth quarter versus what you're seeing in the first quarter is primarily related to the top line, the revenue number. Our revenue is $11 million short versus fourth quarter, which is normal seasonality that we have in the business. Underneath this, are products which are pretty healthy when it comes to gross margin. High 70%, 80%, and that is the reason why the gross profit declined and you have less growth -- less fixed cost of goods sold absorption in the first quarter. It's normal seasonality. It's in line with our expectations, it's within our guidance, and this is something that we see kind of like leveling off as we progress through the year. Already, you see the gross margin for second quarter to be trending higher than the first quarter. And as the revenue grows, we will see that gross margin percentage become better and better through the year. Like I said before, it's as per expectations, our guide for second quarter and total year reflects that.

[Steven Frankel, Rosenblatt Securities]

And then because there are a bunch of impacts, it's kind of hard to model. So maybe give us an idea of where non-GAAP OpEx should be in Q2 and through the rest of the year.

[Yuneeb Khan, Chief Financial Officer]

Yes. So non-GAAP OpEx should be in line with what you're seeing in the first quarter, slightly better. We expect in the second quarter because in the first quarter, you have some comp catch-ups and a little bit of like incremental sales and marketing expense. So it will be in the same [zip code] of what you're seeing like in the first quarter..

[Steven Frankel, Rosenblatt Securities]

And what about the back half of the year? Is it flat lines? Or is there room for taking more cost out of the model in the back half of the year?

[Yuneeb Khan, Chief Financial Officer]

There is always room to take off costs. Like OpEx monitoring is something that we have actually demonstrated in the last year as well, that's front and center of our financial management apparatus and strategy. So we'll continue that drill. But for modeling purposes, for now, we'll -- I'll encourage you to like keep it as straight line with like maybe a different revenue trajectory.

[Steven Frankel, Rosenblatt Securities]

Okay. And then last question, Matt, on Shopmium, where does that business have to scale to before you start sharing some metrics with us?

[Matthew Krepsik, Chief Executive Officer]

Yes. I would say it's less about the scale of the business, Steve, it's more about us getting comfortable with those internal metrics and making sure we have proper benchmarks that both allow us to model it as well as to allow to share that metric out for you guys and model it as well. So I expect as we move through the year, we'll continue to kind of look at that, the growth of the overall reach of that business and start to look at the right metrics that we will start sharing externally.

[Operator]

The next question is from the line of Chad Bennett with Craig-Hallum.

[Chad Bennett, Craig-Hallum]

So just want to verify the mix in the quarter. Did you indicate promo was 80% of the mix in the quarter?

[Matthew Krepsik, Chief Executive Officer]

Chad, that is correct. Yes. In the quarter, [promo way] is 80% of the mix.

[Chad Bennett, Craig-Hallum]

Okay. And then just in terms of how we should think about that for the remainder of the year from a mix standpoint? I mean it seems like promo certainly did better than at least we thought in the quarter, but maybe media was a little bit lighter than what we thought. Kind of just kind of expectations for mix for the rest of the year? And maybe secondarily, what do you expect from the media business from this kind of run rate in Q1?

[Matthew Krepsik, Chief Executive Officer]

Yes, it's a good question. It's something that we're kind of keeping a keen eye on. When we think about the shift we made in the media business towards an ad tech model, we expect that to build throughout the year. We know the second half typically is a much stronger billings period for us, and I can see that in some of the historical data we provided. And so we expect that to probably as we have progressed through the year, media will certainly move up on mix. And then promo, it's been very strong in Q1. We certainly see some strength in Q2, just looking at the savings delivered we had out there in Q1. So I would say gradually, we'll see some probably faster growth rates with media off this baseline. But I think that mix will progressively become more balanced as we move to the back half of the year. I think we'll still probably be in that, that range of 70-30. But I would say still early innings to see where that -- how that evolves.

[Chad Bennett, Craig-Hallum]

Do you think just on the promo side, Matt, from everything you're seeing and just kind of the macro data points on CPG to kind of price elasticities and kind of annualizing on price increases and volume decreases and so forth. I mean, we typically look at that business kind of seasonally throughout the year. It seems like this year, I hate to say you're fearful to say it could be different. But that almost -- you'll -- regardless of traditional seasonality that promo biz should kind of improved sequentially every quarter throughout the year. I don't know that anybody has visibility in the fourth quarter, but just wondering how you think about the seasonality of that business relative to "normal years."

[Matthew Krepsik, Chief Executive Officer]

Yes. I mean the way we're thinking about our guide for the year at this moment is we're still kind of taking into account traditional seasonal patterns. That being said, you are correct to point out that there are some positive tailwinds out there in the macro environment for us, right? Inflation levels remain elevated, which means we're seeing a lot more consumer engagement and demand for our offers, which is why we see our savings deliver grow. We see CPGs facing a lot of pressure on volume. And so certainly seeing some positive tailwinds there as they look to kind of leverage more of a digital promotion, which can be targeted and programmatic to help them move volume and move units more efficiently and more effectively.

So it does give us -- as we look forward, certainly some green shoots towards where we see this business in this year could become a unique year for us. But I would say we're still early in the year on that one. We see certainly strong momentum in quarter 2 for our promo bookings. And we're -- we continue to kind of track that into Q3. We're certainly way ahead of the curve to kind of predict and see where Q4 would land. But I think it's certainly something that's on the table. And I certainly would say the macro and industry tailwinds are in our favor right now.

[Chad Bennett, Craig-Hallum]

And then just kind of more broadly, Matt, just on how you view the platform today, the promotion platform or network. If we do see a comeback in trade incentives and spend from CPGs, just kind of where Quotient is positioned from a market share standpoint to capture that spend versus historical time periods.

[Matthew Krepsik, Chief Executive Officer]

Yes. It's a good question. I would say our network today, as we shifted to that network model, the publishing partners we added last year, we have more reach today of consumers than we ever have as a company and as a platform. And we think that gives us a unique opportunity to continue to help brands deliver savings to the American consumer, across all possible touch points, whether that's through their retail royalty app, whether it's through one of our publishing partners, whether that's through their favorite shopping list app, we've really become very agnostic and shifted our network to truly be a promotional ad server, allowing us to deliver savings to consumers, across multiple touch points and however they shop. I think that gives us a very strong position to continue to help brands move volume and help consumers save.

[Operator]

There are no additional questions waiting at this time. I will now turn the conference back to Matt Krepsik for closing remarks.

[Matthew Krepsik, Chief Executive Officer]

Thank you all for joining us today on our Q1 results. We look forward to continuing to update you on our progress in the near future. Thank you.

[Operator]

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.