Q1 2024 Cardlytics Inc Earnings Call

Participants

Nicholas Lynton; Chief Legal and Privacy Officer; Cardlytics Inc

Karim Temsamani; Chief Executive Officer; Cardlytics Inc

Alexis Desieno; Chief Financial Officer, Principal Accounting Officer; Cardlytics Inc

Kyle Peterson; Analyst; Needham & Company Inc.

Jason Kreyer; Analyst; Craig Hallum

Jacob Stephen; Analyst; Lake Street Capita Markets, LLC

Presentation

Operator

Good day and thank you for standing by, and welcome to the Cardlytics Earnings Conference Call. (Operator Instructions) Once again, please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Nick.

Nicholas Lynton

Listen, good evening, and welcome to the Cardlytics First Quarter 2024 financial results. Before we begin, let me remind everyone that today's discussion will contain forward looking statements based on our current assumptions, expectations and beliefs, including expectations regarding our future financial performance and results, including for the second quarter of 2024, our capital structure and various product initiatives and improvements. For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion, please refer to the Risk Factors section of the Company's 10 Q for the quarter ended March 31st, 2024, which has been filed with the SEC. Also during this call, we will discuss non-GAAP measures of our performance. Gaap financial reconciliations and supplemental financial information are provided in the press release issued today and the eight K that has been filed with the SEC, which you can find on the Investor Relations section of the Cardlytics website. Today's call is available via webcast, and a replay will also be available on our website.
Joining us on the call today is Cardlytics, CEO cream, Tim Somani, and CFO, Alexis DCNS. Following their prepared remarks, we'll open the call to your questions.
With that said, let me turn the call over to Karim.

Karim Temsamani

Good evening, and thank you for joining our Q1 2020 for earnings call. On our last earnings call, I highlighted the progress we made in 2023 and early 2024, we rebalanced our cost structure, resolve the SROs dispute invested in our tech and products, renegotiated partner agreements and signed a new bank partner. We also discussed how we could now fully focus on execution and growth as well as addressing our capital needs. Since the call, we made significant steps to remove the capital concerns around the Company. We raised $50 million in cash and repurchased the majority of outstanding 2020 convertible notes at prices below par and issued new convertible notes not due until 2029, coupled with our positive adjusted EBITDA results for full year 2023 and now also in Q1 2024. We believe we have fully addressed our balance sheet issues, ensuring our bank partners and advertisers have confidence to work with us in the long term. As we have completed these transactions and find ourselves on a path to sustained profitability, we are starting a new period for Cardlytics. We have slowly rebuilt the foundation of the business over the past 18 months, so we can now turn to our longer-term growth prospects. I am confident we have the technology products and the team to make significant growth a reality. While the full transition will take some more time and there will be some noise along the way we are making the necessary progress to ensure we finish 2024 with even stronger momentum.
Our first quarter performance has us off to a good start to 2024, excluding Entertainment, which we saw at the end of 2023. Billings grew 12% over the first quarter of 2023, indicating strong interest from advertisers, redemptions, which as we said last earnings call, we view as our NovaStar were also up significantly more redemptions.
I mean, more people are engaging with our program more frequently, which provides the best outcome for banks, their customers and advertisers. And importantly, adjusted contribution grew 27% over the first quarter of 2023. When excluding entertainment, adjusted contribution is an important metric that reflects our business performance as it is the money we keep from our billings after paying our customer rewards and bank revenue share. Additionally, driven by the strong top line performance, we finished the quarter with $0.2 million of adjusted EBITDA. This is the first time in our history that we have been positive in the first quarter, which is a seasonally lower billings quarter. Alexis will provide further details on all these financial metrics later in the call.
We believe this momentum will continue in the second quarter, but bigger picture, we have much higher growth ambitions for the business and believe we can achieve sustained higher growth rates longer term, let me explain first, the macro environment.
We benefit from market tailwinds as cookie-less identity resolution becomes essential for any business and card-linked offers become table stakes for our partners as opposed to cookies. We use purchase data to provide precise targeting insights and measurement for businesses looking to reach new customers better understand the existing UNKNOWN customers and increase frequency from their loyal customers. It's also clear that rewards are increasingly vital to our banking partners with continued regulatory pressure on traditional card benefit programs, and that loyalty is more important than ever for retailers who look to retain customers in the face of rising costs.
Second, our investments intake and sales. Our recent upgrades and progress with our decisioning engine or AD. have laid the groundwork for ongoing innovation at a more agile pace than ever before. For example, we are currently building a dynamic marketplace, which will allow us to provide flexible campaign durations, need campaign optimizations, more timely reporting and dynamic pricing based on offer activations.
These improvements are critical to delighting advertisers and better aligning our U.S. business to the engagement centric pricing model that is driving our growth internationally.
We are not only investing in our tech, but have also started to reinvest in our agency team and our account management teams to better support more advertising clients. Investors will see bumpiness in our short-term expense numbers, but we are confident that we are making the right investments to exit 2024 with strong momentum.
Third, redemptions and engagement. We continue to make technology upgrades across our network.
We're seeing ongoing signs of progress towards the North Star of driving redemptions and engagement.
While we still have a long way to go in achieving aspirations, the trends we discussed in Q4 remained consistent in Q1 as we saw a 30 percentage point difference in redemptions between customers of banks on 80 versus customers of banks, not on ADT. We are putting the right offers in front of the right users faster. And these offers are driving larger basket sizes and incremental purchases. As the results, we are consuming budgets more quickly and delivering more value within a campaign including more rewards to consumers. While we are not currently billing for all these added value due to campaign budget, it signals the capacity and potential for adjusted contribution growth in the future improving offer quality and increasing consumer redemptions is a trend we expect to continue, which will significantly increase the scale of outcomes we will deliver to our clients.
And pardon me for scale. Scale is crucial to competing for bigger budgets in advertising, and we are growing our network, including by actively working towards onboarding our new US large bank partners. Marketers are investing in the few platforms that deliver the most meaningful and measurable outcomes and growing our network and shows clients benefit from the reach they need to scale their campaigns.
Relatedly, we are seeing strong growth potential pharma, our global investments as our international business grew over 50% year on year in Q1. We believe that we will keep similar growth levels for the next several quarters, especially as we look to increase our presence internationally fifth bridge by leveraging its unique and exclusive identity resolution capabilities. Rich is on a path to establishing itself as the new series in a cookie-less advertising world, our logical growth path to increasing our total addressable market means continuing to enhance our customer data platform product and pushing into new solution areas such as retail media, which is already responsible for 29% of digital ad spend. In the U.S., we launched Ripple, our retail media and data network to further establish our presence in the retail media market and deliver growth. And we have line of sight to onboarding a hundred million individual shopper profiles by year end. This would make Ripple one of the largest retail media networks in the country to further expand our retail media network solution. We are also working to allow brands to use the repo technology to export and access targeted audience segments, which will allow them to target customers through integrations with major DSPs such as the Trade Desk and live rent.
On the retail media network front, we've recently launched initial test campaigns with Nuix markets where Danone and craft targeting specific audiences using breaches data on individual shopping preference at the skew level and the report technology, the initial campaigns showed better performance on most indicators of campaign performance against benchmark averages. Success prompted these brands to launch a second round of campaigns with plans to expand to more reach for retailers in the future. This demonstrates the strong performance and demand for our audiences and segmentation with that capital needs addressed through our $50 million raise in new convertible notes, not due until 2029, we are focused on higher growth rates. Our Q1 results and projected Q2 results continue to give us confidence. We have strong tailwinds behind us, and we have scale that allows us to provide the best breadth and depth of offers for banks and measurable outcomes for advertisers. We are rapidly innovating our platform with major developments underway, including the dynamic marketplace. We are beginning to drive deeper engagement and are starting to see the results of our changes. We are also making the right short-term investments to drive longer-term growth and exit 2024 with strong momentum in our bridge business is continuing to show signs of progress, especially given our progress with Ripple, which sets us to be one of the largest retail media networks in the country. It is an exciting new period for Calnetix.
Now I'll hand it over to Alexis to discuss our financial results.

Alexis Desieno

Thank you, Karim. We are pleased with our financial results for the first quarter, driven by strength in redemptions, which indicates that our product initiatives are working as well as the material improvement to our balance sheet. For the first quarter, we performed in line with our guidance and delivered the third consecutive quarter of positive adjusted EBITDA, and we saw meaningful acceleration in billings from Q4 given Q1 is a seasonally weak quarter for the Company. This result is a testament to the work we have done to reengineer our cost base.
Now turning to our first quarter results My comments will be year-over-year comparisons for the first quarter, excluding Entertainment, which we sold in December 2023, unless stated otherwise. In Q1, billings reached 105.2 million, a 12% increase on a category basis. We continue to see strength in travel and everyday spend. The restaurant category also grew once again this quarter after rebuilding our sales team. More than half of our growth came from our top accounts spending more with us winning back key accounts and reducing churn. Our North Star redemptions, which drives consumer incentives on our income statement were up 20% to 37.6 million revenue, which is billings net of consumer incentives, but before partner share was 67.6 million up 8%. As we continued to refine 80, we are getting more effective at driving redemptions, and we believe redemptions should be seen as a leading indicator of demand in the short term, we may see outsized rewards as engagement accelerates beyond top-line growth due to our targeting and ranking improvements. We feel good about this dynamic, especially given adjusted contribution was $37.1 million, up 27%. Margin increased from 47% to 55% as a percentage of revenue and 31% to 35% as a percentage of billings, we are keeping more of every dollar we bill. Even while redemptions are accelerating about half of the operating leverage we are seeing is driven by our partner share renegotiations, which annualize in June with the rest driven by mix shift between banks, we believe adjusted contribution is a better long-term indicator for our business rather than GAAP revenue Turning briefly to segment results. U.s. revenue increased 6%. The UK continued to show very strong double digit growth at 56%, partially due to our auto-enrolment program with Lloyds as we mentioned, auto-enrollment means customers no longer have to opt into our offers program, which has allowed our UK sales team to sell and deliver larger budget. We expect to see very strong double-digit growth in the UK in Q2 as a result of auto-enrolment new leadership and our newest UK bank partner, Mondo, which is now live. Notably, our UK business is primarily on a cost per redemption pricing model. And we believe the US business will begin to see the benefits of shifting to similar models, which we plan to do later this year, albeit on a larger base brand revenue grew 1% due to the expansion of existing contracts and offset by the loss of a single existing customer. The redemption and partnership dynamics we've discussed do not impact bridge. So revenue is the key metric we use to assess the performance of this business. In Q1, we invested in foundational elements, including product design engineering architecture and go-to-market resourcing. We continue to grow the profiles in our database, and we are actively onboarding top regional grocers with a line of sight to 100 million profiles we believe we have the scale to be relevant to CPG customers. Adjusted EBITDA was 0.2 million. And as Karim said, the first time in the Company's history for adjusted EBITDA to be positive in the first quarter. Business Operating expenses came in lower than expected at 36.8 million. However, operating expenses should normalize in the mid to low 40s, given the investments we are making in our technology product and sales organizations in support of key growth initiatives.
Operating cash flow was negative 17.6 million. The first quarter is always seasonally low from a cash flow standpoint due to annual bonus payments, interest payments and timing of accounts receivable.
Last quarter we introduced a new metric free cash flow in Q1, free cash flow was negative 22.4 million. However, we expect free cash flow to be positive in the second half of 2024.
On the balance sheet we ended Q1 with 97.8 million in cash and cash equivalents, and we had 29.5 million of unused available borrowings under our line of credit as a reminder, we paid $20 million at the end of January as part of our settlement with SRS., which was offset by cash received from the $50 million equity offering in March, we also repaid the 30 million drawn on our line of credit in April. In addition, we repurchased $184 million of our outstanding 2020 convertible notes at prices below par value, partially via the issuance of $172.5 million of new convertible notes now due in 2029 through these transactions and the repayment of the line of credit, we have reduced the amount of debt that would have been considered current as of September 2024 to 46 million from $260 million. Absent other capital transactions. The convertible transaction settled on April first and will be reported in our Q2 financials.
Lastly, MAUs were $168.5 million and RPU was $0.4 for the first quarter, an increase of 7% and a decrease of 2% respectively. The increase in MAUs was driven primarily by net new MAUs, and the decrease of RP was driven by 20% increase in redemptions.
Turning to our Q2 outlook for Q2, we expect billings between 115 and $126 million, revenue between 73 and 81 million, adjusted contribution between 40 and $45 million. Adjusted EBITDA between negative 3 million and positive 1 million. Our billings guidance represents 7% to 17% growth, excluding the sale of entertainment, I'd like to provide some additional color on what we are seeing in the top line. Billings continues to be driven by success in the everyday spend and travel categories, and our larger clients are spending more with us. We are focusing on getting new brands onto the platform and winning back lapsed brands. With these brands, we are seeing pilot programs convert into larger budgets based on strong campaign performance. We are expecting another quarter of elevated redemptions as we continue to see the benefits of improved targeting and ranking adjusted contribution is expecting 19% growth, excluding entertainment, at the midpoint of our guidance as previously stated, we expect operating expenses to increase to the mid 40s, excluding stock-based compensation due to the investments we are making in our technology product and sales teams and in support of key growth initiatives like dynamic marketplace and bridge. We continue to expect double digit billings growth for the full year 2024 and to be operating cash flow positive on a full-year basis with both accelerating as we enter 2025, we are focused on our North Star redemptions, and we expect to continue to drive consumer engagement, top line growth and full year positive adjusted EBITDA.
Now I'll turn it back to the operator for Quest and here at this time, we will conduct a question and answer session.

Question and Answer Session

Operator

(Operator Instructions) Kyle Peterson, Needham.

Kyle Peterson

Hey, good afternoon, guys. Thanks for taking the questions. I wanted to start off, I guess on some of the billings trends you guys saw throughout the quarter. I guess just given the timing of I guess you're now reporting towards the end of the first quarter was a little surprised you guys be a little closer to the low end of the guidance. So do you guys have any any like larger, whether it was slight cancellations or delays or anything you saw in the last two weeks of March?

Alexis Desieno

Yes. Thanks for the question on. Look, we're still growing 12% on the top line and our adjusted contribution was 27%. So this is pretty good performance on a historically weak quarter and a pretty good acceleration from Q4, which was less than 5% growth but to answer your question more specifically on, yes, we're making a lot of changes to our network and our tech all at the same time and some of our partners are also making changes to their UX, which you're probably seeing on not all leading to higher engagement, which is why I say that rewards are really a leading indicator of demand on and So as Chris said in his remarks, we're consuming budgets more quickly, which is driving those higher redemptions. But in some cases, we can't bill for all of that demand yet and then we also had a few campaigns that didn't come through. So again, we're happy with the adjusted contribution growth of 27% and adjusted EBITDA still being positive, even more we're paying out more rewards than we expected.

Kyle Peterson

Okay. That's helpful. And then I guess just a follow-up on some of the moving pieces with the higher redemption rates. Is the one key to consumer incentives kind of as a percentage of billings. Is that a good proxy to use going forward? Or as redemption rates increase, should we expect that that percentage should continue to go up. Just trying to get some senses that kind of what the mix and redemption rates is going to be on the P&L in the near term?

Alexis Desieno

Yes, at least for Q2 were 17 to be similar. As you can see from the guidance ranges. Continuing to focus on our North Star redemptions is really the main focus right now and those tech initiatives are really paying off. So we continue to convert accounts to our new pricing models and excited to of this increased engagement that is higher than we've typically seen. And then the other portion of that is from the renegotiation of certain contracts, which will annualize in June. So you'll continue to see similar margins, but the growth rate may not be quite as high as we annualize that and that starts in Q3, obviously.

Kyle Peterson

Okay. So Paul, I'll hop back in queue. Thank you.

Operator

Jason Kreyer, Craig-Hallum.

Jason Kreyer

Thank you. And I just wanted to focus a little bit more on the of the redemptions that we're talking about historically if we look at the model, the proportion of incentives has been in a pretty tight band that moved out of that band in this quarter. And you're optimistic that redemptions is a positive leading indicator. I'm just I'm curious at how that number moves so much in the quarter and if we need to rethink the ratio of redemption versus billings going forward, and yes, a similar answer to prior.

Alexis Desieno

I think for Q2, at least I would consider similar model of redemptions on billings as a percentage. So this is really a testament to the product changes we're making on 80 E. better targeting and optimization of our ranking capabilities. And so as you know, people are making changes to the US in terms of our bank partners on the widget moving us if this is really driving higher engagement, it's all good for on the future, but it may take a while for us to get those budgets on to match the engagement that we're seeing. Okay.

Jason Kreyer

And if you're consuming budgets at a more rapid pace, I think you've talked about that a couple of times. It would seem that if you're driving successful campaign performance, you're still delivering on those campaigns at a more rapid pace. It would seem a pretty easy argument to go back to those marketers and be able to fill budgets after those campaigns and more quickly, am I wrong to think that?

Alexis Desieno

No, we agree on. Obviously the Q1 we had low transparency into this, but we now are understanding how our models are working better on. I think we're investing in our sales team significantly more to trying to capture more of these budgets and focus more on selling and less on account management. So we are investing in the sales team and also an agency to capture more budgets as we're opening up more engagement for our brands and general cream. I don't know if you have anything you want to add.

Karim Temsamani

No. I mean, this is a good question, Jason. And clearly, it's a very positive thing that we're driving more engagement in the program, which is driving more redemptions. It's obviously good for our bank partners. It's good towards advertisers. There's a timing difference here with regards to our teams being able to go back and get the budgets in the timeframes that we're talking about. But longer term, it's very healthy for the program.

Jason Kreyer

And on the surface, it kind of seems like you're driving more redemptions, but you're driving more redemptions at a greater cost to the model. That's the part of this that I'm kind of struggling with. And I'm struggling to gain an understanding of that just a near term issue? Or is it a longer-term evolution?

Karim Temsamani

No, I think it's very clearly a longer-term evolution. And I would say and we have been signaling this for a very long period of time. From the first call since I joined 18 months ago, we basically said that it was really important for us to drive further engagement in the program. Again, engagements rates were low and that growing engagement is positive for our bank partners and that it's much more aligned with what they want much more aligned with providing consumers with the benefits they should have for the program. It's better aligned with driving additional budget for advertisers. What needs to come with it is us continuing to negotiate rev share agreements with our banking partners to ensure that and the gains that they're getting from people consuming more and therefore, spending more on the cards is a net benefit for us as well. So I think longer term, you would see that as we continue to grow billings, are we going to hopefully continue to drive a lot more redemptions but we should keep more in adjusted contribution. So you're going to see some differences in the economics of the business as a whole. But we think that we can manage that in a very healthy manner going forward.

Jason Kreyer

Okay. Thanks for taking the questions.

Operator

Jacob Stephen, Lake Street Capital Markets.

Jacob Stephen

Hey, guys. Thanks for taking my question. Maybe for Jim, if you could just kind of help us think about where you're investing in kind of the agency side of the business, it's not directly related to headcount or maybe just kind of help us think about some of those investments.

Karim Temsamani

Yes, as Alex has mentioned in the call, and thanks for the question as AXIS I mentioned in the call earlier, there's several areas in which we invest in the business, as I mentioned as well in my remarks, we are investing in our tech and product teams to ensure that we continue to innovate and providing the right products to our banks and to advertisers about what we have also identified that there's several areas in terms of our sales teams in which we needed to reinvest. We talked about in the last quarter about our investments in the restaurant and retail sectors. And at present we continue to invest in our account management team so that we can service our clients better, but also service more customers. And one area which we had not invested for a while was agency team. And we think that our agencies can be a big driver for growth for us in future where we can get many more accounts. So it was the headcount investment here that you're talking about. But we definitely want to want to be able to, again, more more budgets by the agencies in the future.

Jacob Stephen

Okay. That's helpful. And then maybe just kind of talk about the self-serve platform. How far along are we in kind of the development of that platform? Is that ready to go? Or is there still some work to be done there.

Karim Temsamani

Can you be more specific?

Jacob Stephen

Are you talking about what we mentioned last quarter, which was an automated dashboard or some of the longer-term plans for self-serve platform for advertisers to book, and it's looking more more at the longer term, kind of in a tech enablement and the self-serve side, which caters more to an agency.

Karim Temsamani

Yes. So I mean, I'll cover both just in case the first one, the automated dashboard side, which I think is really important to surface insights to our customers, which will be also very important for our agency customers well will essentially have about 10% of our customers having access to automated insights by the end of Q2, and we plan a full rollout by the end of the year itself. So self-serve overall, with regards to the ability to book budgets without intervention from team will take longer. That's part of the reason why we're also investing in account management acquisition is obviously on our roadmap longer-term, but but probably not something that we'll get to this year.

Jacob Stephen

Okay, got it. Maybe just switching over to bridge last quarter. I think we talked about a large new restaurant customer joining the platform. It sounds like you might have had some customer churn, but what can we kind of expect a growth rate here in 2024.

Karim Temsamani

And so just to be clear, the large restaurant customer we mentioned last time was on Cardlytics, not with regard to bridge with regards to bridge. Obviously, we are reinvesting in the product. We feel very confident that and we have a long-term asset Enbridge. However, we have to rebuild a lot of the technology that was there from a bridge perspective. And importantly, as we've discussed over the last several quarters, are we investing in repo, which is our retail media network as well to provide not only the ability to get the insights that our customers want, but also have the ability to target customers across the broader landscape. And so we're making we're making the investments now and I don't want to give you some growth rates with regards to report. We don't report specifically on this. We don't give guidance specifically on this, but I can be very confident that we're playing in a very large market there, an area that's really expanding, but we have the right foundational elements with regards to the engineering infrastructure, we have the go-to-market resourcing now we've onboarded a number of regional grocers that give us line of sight to 100 million profiles by the end of the year and therefore that we have the scale to drive significant growth. But I'll give you a split specific number on the growth rates we expect.

Jacob Stephen

Okay, understood. Thanks.

Operator

I'm showing no further questions at this time. I would now like to turn it back, Karim for closing remarks.

Karim Temsamani

Thank you very much, and thank you, everyone, for joining us today. We look forward to discussing our second quarter results on the next earnings call.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.