Reklaim Ltd

XTSX:MYID

Earnings Call Transcript 2022-Q4

[Neil Sweeney, executive]

Okay. So let's get started here. I think the intention for today is -- hopefully, for most of you, if you're familiar with what we're doing at Reklaim, don't need to deep dive specifically at wonder formulas, what we're trying to do, et cetera, as you likely know the whole plan, specifically for -- Reklaim's really about trying to provide consumers with transparency and optionality around their data.We think this is a huge opportunity. There's over 7 billion consumers in the world. This is a $500 billion opportunity. So we're going to go through specifically the last quarter of Q4 in 2022. This presentation will be primarily focused on a little bit more detail specifically around the financials. So we'll spend probably the first 10 to 15 minutes specifically around that. We'll give some direction as to what we think the plan is going to be going into Q1. Obviously, I can only give so much of that information. And then we'll finish that off -- specifically – We're talking specifically around some of the changes in and around privacy.I would encourage everybody here to read the MD&A that we released with our Q4 numbers because we did spend a lot of time outlining a lot of the changes that have happened specifically with privacy.Before we start, just again, one last check on making sure everything is good from a technical point of view? I'm assuming the answer is yes.

[Unknown Executive]

All good. Yes. No issues.

[Neil Sweeney, executive]

Okay. So some of these slides we'll just quickly spin through, but again, Reklaim has now been around for about 3 or 4 years. The mission of Reklaim is to provide every consumer on the planet with access to their data and give them the option to decide what they would like to do with their data. Whether that manifests in the form of compensation or some other value, that's up to the individual.From a capital structure kind of point of view, there's 35% ownership in this company. It's very tightly held. There's about 92 million shares outstanding. The debts have come down considerably over the last 3 months as we've converted a big portion of that. And if you've been following the stock over the last week or 2, there's been some good movement in the stock as I think people are starting to realize and understand our path towards trying to move increasingly more towards profitability.The 3 revenue verticals that we have here at Reklaim, the best way to capture these would be first and foremost around brands and agencies. So these are brands such as Bayer, Microsoft -- Amtrak, Microsoft and others.These brands either work with us directly or they employ an advertising agency who works with us on their behalf. These individual brands are buying our Reklaim compliant data to inform the media that they are putting in market, whether that's media that they're using in social or media that they're using specifically in programmatic.We also combine that data that we actually have at Reklaim with premium inventory from publishers to allow some of our clients to go end-to-end on the privacy deal. I think what we've seen over the last 12 months is that this is a vertical that continues to scale and increase, and this vertical probably represents about 70% to 75% of revenue.The remaining 25% to 30% really comes from those individual companies who typically already have data, but lack a consumer interface from which to maintain compliance and/or consent. Those companies come to Reklaim, provide their data to Reklaim in turn, it gets matched against the Reklaim database, and we are able to augment that data with things such as age, gender, consent and others.We think that this is an interesting business because the majority of data companies in the world today are what we refer to as being headless. These headless companies don't have a way to connect directly with the consumer. And if you don't have a way to directly to connect with the consumer, how do you manage compliance. In short, we think that you actually need a partner like Reklaim to do that.The last vertical here is platforms, which is a bit of a supplement to really the brands and agencies. Platforms really act as the shopping centers or the grocery stores from where you actually buy data. Reklaim data is probably -- sits currently now in about 15 of the largest data platforms in the world. So if you wanted an analogy, think of Trader Joe's, Loblaws, Costco, Walmart and et cetera. The more product you have on shelf, the more opportunity you actually have to sell more data.We are on more shelves with more product really than ever before, which gives us an opportunity to allow our individual clients to buy that directly or we can push our clients to those stores to buy our data directly.And so, companies that we work with, specifically on a platform point of view, some of the obvious ones, Google, The Trade Desk, Lotame, LiveRamp, TransUnion. These are all companies that you can access Reklaim data from.Just digging in a little bit more over the individual financials. So I think what you can see here is that we've had consistent growth over the last 8 quarters. I'm going to get a little bit more into where this growth has come from.As you can see, the total continues to grow. How we're actually driving that revenue, whether it's coming directly from a brand, it's coming from a data, it's coming from data partners, it's coming from a platform. If you combine the brand and the platform data together, you can see that, that represents the majority of the revenue. That's the 70% that I was making before.So over the last 8 quarters, brands and agencies up 265%, platforms up over 600%. Data is actually down 21%, and you might be wondering why. I think that just has more to do with actually the time to market. For us, the data deals take longer to actually transact. And so for us, we focused a little bit more on platforms, brands and agencies, one, because the margin seems to have been better, and then the time to close is shorter.So in short, we go where the money is. So if there's a longer sales cycle on the data side, we've been scarping that a little bit to chase the money that is actually transacting at a faster rate, which I think everybody would agree is the best allocation of time.From a platform perspective, again, you can actually see that the number of platforms that we work with continue to increase. Again, using that same analogy, we're trying to put our data in more and more places where data is actually purchased. The more places our data resides, the more revenue we can actually generate.So whether we're driving a brand to a platform to buy our data or these platforms themselves are exposing our data to their individual clients, I think you can see some pretty healthy growth here amongst the actual platform ecosystem.Going back to 2021, which seems like a long time ago, it's pretty much been a vertical rise here as it relates to the revenue growth, and we don't really expect that to slow down anytime soon.I won't spend too much time on this slide because again, we've already discussed it. Again, these are companies that are specifically looking to augment data, companies that we do work with. A good example of this would be Nielsen. Nielsen uses our data to supplement their TV panel.I think the most important piece to take from this is that the majority of data companies that are operating in this $500 billion market today really don't have a way to manage kind of consumer consent and compliance. And so we believe that every headless data company or data company that lacks the UI, is going to have to find a partner like Reklaim in order to remain compliant. So hopefully, the sales cycle, this becomes less -- has less friction in it going forward, but we think that there's no shortage of opportunity specifically around this vertical.So just kind of quickly coming back to the Q4 and the top line metrics. So we'll just spin through these quite quickly. The growth is there. So year-over-year growth of 136% to $2.3 million from $1 million in 2021. So 100-plus percent growth year-over-year.I think the nice thing is that this top line revenue represents a new high for the company. We expect this to continue again in 2023.For Q4 2022 revenue increased to over $700,000 from $450,000 over Q4 2021. Important again to understand is that there is some seasonality in our business, meaning that Q4 is the most -- is the highest quarter for us, whereas Q1 tends to be the lowest. So if you want a high watermark, always look at Q4. So the fact that during the busiest time of year, you're still being able to grow your business by over 50% year-over-year is a good indication.The Q4 2022 revenue increased to $718,000 from $606,000 a 19% increase over Q3 in 2022. So again, sequential growth from Q1 to Q2 to Q3 to Q4, reset in Q1 in 2023, and you can expect a laddering up quarter-over-quarter here in '23 as well.I think this is the piece that I'm probably the happiest about, and everybody asks me, about the top line. And I tell everybody just follow the margin. The margin is the path to profitability.If you look at our gross margins, we've improved 87% to basically minus 6% for the year ending 2022 compared to a negative 44% in '21. You might be like why are you celebrating that number? Well, primarily because building technology is hard and it's expensive. So you can't hold and house millions of pieces of data and compute on millions of pieces of data with no infrastructure. You have to have infrastructure. It costs money.And so, what we've done in the first number of years here is we built this infrastructure to allow us to scale infinitely. And so now what we've been doing over the course of '22 is we've been stripping that cost out.So while the end of the year finishes at minus 6%, I think if you actually look at the margin in Q4, we finished Q4 in 2022 a plus 26% gross margin, which is up from 16% gross margin in Q3. So there's a radical improvement here happening quarter-over-quarter. And I think you'll be pleasantly surprised as to where the quarter is actually going to land in Q1 in 2023.So on top of this, while you're stripping out costs, growing margin, growing top line, your reoccurring revenue is holding steady at plus 80%. So it's in at 86% compared to 73%. So we're getting more clients with more money, returning them at a higher rate and increasing the margin while stripping the cost out.So I think these are all good indications of where the individual company is going. The illustrations here on the right-hand side, comparing Q4 to Q4, you can see the transformation in the company. You can see the transformation in the gross margin. Again -- I would expect that to continue again into 2023.So, at a glance, 2022, $2.36 million and top line, it's up 136%. $4.48 million operating expenses, down from -- down 26% from 2021. I would say that the operating expenses were very much kind of front-loaded in 2022. I think we've got a much better handle on that moving forward. And then the gross margin, while it's not necessarily where we want it to be, it's up 87% from 2021, and it's up from 16% in Q3 to 26% in Q4. So it's got the right path. So I would just stick with that.Just again, a couple of quick slides here specifically on the revenues. So you can see how it's actually growing. The $719,000 in Q4 '22, that's the highest revenue quarter to date. The platform revenue is currently making up about 70% of our revenue and growing considerably very fast, about 145%. Again, this comes back to that notion of, part of the reason why we're focusing on that is because it transacts faster, that's obviously manifesting in the higher growth rate.Identity revenue is making up 31% of the total revenue. It still also grew 118%. But I think we've been putting a little bit more time specifically on the brands, agencies and platforms. So year-over-year comparison, $456,000 to $719,000, a 58% growth.This is an important piece to understand, kind of the story around how we've been able to get our costs in line, and specifically around where that individual gross margin is going.If you go back to March '22, this is really kind of where the high watermark of costs were and where we really just -- you can see very visually here where we made a decision to dramatically change the cost structure of the business. Between March and August of '22, there's almost a vertical decline in virtually every single cost that we had in this business.This is starting to now streamline out as you get into the back quarter of last year and into the first quarter of this year. But this is the reason why we believe that we can continue to actually improve gross margins and work our way increasingly towards profitability.Cost of services here. Pretty much across the board there was an increase in cost of services, but the revenue is outstripping that increase in cost of services in a lot of these cases. One thing that I think is really important to understand here is that, we had 1 particular vendor who was a significant contributor to these cost of services. As you look at Q1 all the way through Q4, they're represented here specifically in the blue component of these arrows. So if you look at Q4 where you've had cost of services of $529,000, of that $529,000, 47% of it was represented by 1 vendor.Why is that important? That vendor is no longer working with us. So that 47% of cost to services will all fall to the bottom line in Q1. So again, when you're looking at quarter-over-quarter, this is why we believe that from a gross margin perspective and a path to profitability, this is something that we've been working on, on eradicating and eliminating.If you have an ability to eliminate a vendor that is providing 47% of your cost of services in a quarter, that's a good thing for the overall business and the financial health of the business.Gross margin, again, I'm sort of belaboring the point here a little bit, but I think what I wanted to show here specifically is the path. So again, what you can really see here is the CapEx associated to really building the infrastructure of this business, which really happened in kind of Q1. That's where there's a lot of technology, there's a lot of architecture, there's a lot of development.And then what you can see over the subsequent quarters is the streamlining of that expense and the focus on the revenue growth. And so, what we're really doing right now is taking advantage of really all the building that we've done in the first couple of years of this company, and we're really standing to kind of benefit from that in the quarters ahead.Year-over-year operating expenses, you can see all this sort of specifically in the financials. But again, pretty much -- salary is pretty much flat year-over-year, R&D down 12%. Salaries, consulting and the sales side down 40%, marketing down 54%. That's a pretty considerable change, moving from [ $ 1.8 million ] down to [ $834,000 ] over the course of 1 year. Again, part of our whole philosophy of actually really driving towards profitability.So just to summarize here specifically on the reasons to invest -- and I'll get into a little bit of this specifically around kind of the privacy landscape and the industry in general.But Q4 gross margin is currently at 26% and expected to continue to grow in 2023. The revenue growth of 100% year-over-year from Fortune 500 clients that are returning at a 90% ratio.Cash flow neutral. We are expecting to actually have a profit in 2023. Where that manifests and in what quarter, open to debate. The sooner, obviously, we can pull that forward, the better.Insiders own 35% of this company. But I would say a couple of things to keep in mind here is, when we started this company, we really bet on this idea that the data world was changing and that is actually a $500 billion global data industry that is really under pressure from OEMs like Apple and Google, from privacy legislators in countries around the world, ranging from Europe to Canada to the United States.There is no situation where the data world is going to continue the way it is today. And if you just look at the U.S. privacy landscape, I'll get into this in the next couple of slides.But you have -- California and Virginia now are in effect. They are actually in their enforcement period where they're enforcing the changes, specifically in privacy. This year, you're also going to have Connecticut, Colorado and Utah come on board. These 5 states represent approximately 100 million people in the United States.Why that's important is because as privacy states -- as states continue to change laws around privacy, it will have an impact and effect on the technology and the platforms that you as a consumer use every day, which in turn heightens your awareness of what is happening with your data, which in turn brings more consumer awareness to options like Reklaim where you can control your data and it brings more access and visibility to Reklaim for companies that are scrambling to find new sources of data that have been cut off from them because of some of these individual privacy changes.So I think just kind of quickly, when you start to think about Q1 and what sort of the philosophy is for Q1, I think -- what I tell everybody is, Q1 from a revenue point of view is never usually as high as it is in Q4. Again, there tends to be -- Q1 is the lowest quarter of the year, followed by Q2, followed by Q3,followed by Q4.But I would say, we feel pretty confident that the operational and profitability story of Q1 is going to be better than that of kind of Q4 and that we don't see really any change in demand from a sales perspective.So while we can continue to grow demand, while at the same time stripping out costs and improving the gross margin, we think that we are tracking incredibly well towards this profitability.So I would say it's going to be more of the same in Q1. That Q1 number should probably be out in the next 3 to 4 weeks. So I would keep an eye on that, but expect more of the same.So just maybe a couple of quick things that I wanted to address sort of specifically around -- what's happening around privacy. I think -- without boring everybody about like state-level privacy regimes, I think what's most important to understand here is that there is a wave of privacy impacting the entire U.S. And so, there is no federal law in the United States as it relates specifically to privacy.You have every individual state with their own belief system as it relates to privacy. But slowly, but surely, what's happening is there's a green wave coming across the United States, starting in the West Coast with California and moving across.Those states that I mentioned before, California, Utah, Colorado, Virginia, et cetera, those green states that you can see here have already passed their individual privacy policies. Some like California and Virginia are in their enforcement period. Others will be in the enforcement period specifically in 2023.But all these other variations of colors just mean that these are other states that are looking at changing their privacy law. And as more and more states change the privacy law, it puts pressure on those that haven't changed their privacy laws to do so.So this is increasingly moving either to an inflection point where all states are actually piggybacking on what others have done or you're going to move to a federally-driven privacy initiative, which the more that, that happens, the more opportunity it really is here sort of specifically for Reklaim.The one other kind of comment that I'd say is that you look at states like Montana. Obviously, that is small, but I'll come back to like some of the changes that even they are making. They are dramatically accelerating some of the changes specifically in the market.So just quickly, 2 companies that -- obviously that you need to obviously keep an eye on. What I've often said is that privacy really is a relay race. So the changes that state level and -- federal and state level and individual countries make as it relates to privacy, directly impact the platforms that are operating in those countries.There's been a lot of discussion around Google getting rid of what's referred to as the third-party cookie. The third-party cookie is a code that allows individuals who own websites to target and track individuals in order to serve them ads. The reality is that if the European government didn't implement their privacy change, there would be no conversations specifically around cookie deprecation.Similarly, if there is no GDPR, which is the European privacy change, you wouldn't be seeing Apple leaning into privacy that -- the way they are. The reason that these companies are making these changes is a consequence of the regulation that is happening in the market. So as more regulation happens in the market downstream, it impacts the product development of companies like Apple and Google.The important thing to understand about these companies is these 2 companies are responsible for supplying the majority of data that is actually in the market today, leaking from your various devices, which is being used by various different platforms to track you. That's over.So both of these platforms for various different reasons are becoming completely walled gardens. So a walled garden collects data and does not leak data from it. Apple is one of the biggest companies in the world. It does not differentiate like it once did on elegant design and processing power. It is identifying and differentiating specifically on privacy.So if you look at any of the advertisements around Apple, their whole position is, you should buy Apple because we're better and we're safer than what's currently available in the market. And then I'd say whenever one of the biggest companies in the world starts to rally around a theme like privacy, you should probably take notice.Similarly, Google has been making some changes because historically, Google has been the biggest supplier of data to the ecosystem. Google has been supplying data to companies who have used that data to create competing products to ultimately compete against Google. What Google is realizing is that if they cut off that data become a walled garden, and actually they could do so underneath the guides of privacy, meaning you can continue to use Google products, but everything has to happen specifically in Google.The downstream impact associated to doing that is the 1.8 billion websites that rely on data coming from Google and/or the platforms that have historically relied on supply or data coming into their ecosystem. So think about companies like the Trade Desk, AcuityAds, Viant media, et cetera. These companies all rely on a subset of their data coming from these third-parties. You can pretty much assume that, that data is now going to go to 0. So if you would like to monetize things in the future, you're going to have to go to the island of Google to do so.So I think what's happening is that there's this handoff between increased regulation of governments manifesting in products. When those changes happen in products, you as a consumer see them. Many of you will have an Apple iPhone, many of you will have seen the modal window that pops up when you open an application that asks you, are you open to allowing application A to track you on other sites? 90% of consumers say no. That's an important thing.The first reason is that historically, they never asked you for that data, they just used it. But now because again of these changes, you as a consumer are getting heightened awareness around how your data is being used and consumers don't like that.So I think going into the rest of this year as more privacy -- as more changes happen specifically around privacy law and as more changes manifest specifically in the products that you use, you as a consumer, you as an investor, will increasingly see more and more of this, which will in turn get more attention in the new cycle and more attention from people like class action attorneys and with the government.And we're starting to see this now increasingly more. The most recent being here in TikTok. So this story around TikTok is all around data. It's all around privacy. What I've said before is that, I'm of the opinion that TikTok will probably be banned in the United States. I don't necessarily think that they're necessarily doing things different than a whole bunch of other people, but there's a reason that Facebook doesn't operate in China because China does not want Facebook taking information on individual consumers. The same thing is going to happen here in the United States.And so in -- with -- as it relates to TikTok, why I think this is important is, we've seen a movement to actually ban this. We've banned this specifically from government offices, but this past week, the state of Montana banned it entirely. Now that doesn't represent a huge base, but the fines for individuals for using TikTok in Montana are $10,000 per consumer.So this notion around consumer rights and data is still in the early innings, but this transformation, which we bet on 3 years ago is more right, more sound than it was 3 years ago.Okay. So with that in mind, I'm going to stop sharing. I'm going to open it up to some questions that some of you might have. So if you have some questions, feel free to raise your hand, and I'll try to figure out how to let you in here.

[Unknown Executive]

I believe they can just unmute themselves if they want to ask a question.

[Unknown Analyst]

Hi, Neil, it's [ Brian Hoffman ]. You had entered into an arrangement with Snowflake back in the beginning of the year. Is there an update on how that's working out so far? And are you expecting that to expand?

[Neil Sweeney, executive]

I mean, it's working. I mean, I don't think it's contributing very much to the overall revenue. I think Snowflake and a number of these companies are entering the space which is referred to as kind of clean rooms. I think what we found with Snowflake is that there -- it's still in the exploratory stage with a lot of individual companies. I mean we technically can work with Snowflake, but a lot of the companies that -- are on the other side of the equation.So again, think of a brand, the amount of time, money and effort associated to them, to get set up with Snowflake is not trivial. So we feel cautiously optimistic about any of the clean rooms, whether that's InfoSum, a Snowflake or others. But we still think that, that's not really transacting kind of where it needs to be, at least in the short term.Any other questions anybody? Otherwise, we can probably let you bounce.Okay. Well, I'll let everybody go here. A copy of this recording will be on our site, including the most updated Investor Relations presentation. I would encourage anybody here to -- if you're not currently using the Reklaim application, please give it a go. You'll be able to obviously see how things are progressing. And again, keep an eye out for the Q1 number, which should be out in the next 3 to 4 weeks. Thanks, everyone.