Coupons.com Inc. (NASDAQ:COUP)
Q2 2014 Earnings Conference Call
August 6, 2014 5:00 p.m. ET
Steven Boal – President & Chief Executive Officer
Mir Aamir – Chief Financial Officer & Chief Operating Officer
Paul Sloan – Vice President, Corporate Communications
Brian Peak – RBC Capital Markets
Nat Schindler -- Bank of America Merrill Lynch
Heath Terry – Goldman Sachs
Ladies and gentlemen, thank you for standing by. My name is Jay and I will be your conference operator today. Welcome to the Coupons Inc. second quarter 2014 financial results conference call. During the call all participants will be in a listen only mode. After the presentation we will conduct a question and answer session. (Operator Instructions) Please note that this call is being recorded today, Wednesday August 6, 2014 at 5:00 ET.
I would now like to turn the meeting over to your host for today’s call Paul Sloan, Vice President, Corporate Communications. Please go ahead.
Hello, and welcome to our second quarter 2014 earnings call. Please note that slides to accompany the remarks on today’s call are available on the IR section of our website. And I urge everyone to take a moment to download them, along with our financial results press release. On the call and here with me today are Steven Boal, our Founder, President and CEO; and Mir Aamir, CFO and COO.
Before we begin, please note that during this call you will hear forward-looking statements. These forward-looking statements include our projections regarding future financial performance, our expectations regarding financial benefits from Retailer iQ and our expectations to successfully leverage our investment in operating expenses and grow our business, including a discussion about our acquisition of Eckim. Forward-looking statements are based on information available to and the good faith beliefs of our management team as of the time of this call and are subject to risks and certainties that could cause actual performance or results to differ material from those expressed. Additional information about the factors that could potentially impact our financial results can be found in today’s press release and in the risk factors identified in our quarterly report on form 10-Q filed with the SEC on May 8. 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 with the exception of revenues, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain expenses.
Now I will turn the call over to Steven for a summary of our business in the quarter.
Thank you, Paul and thank you everyone for joining us this afternoon. As you can see from our results, we’ve had a great second quarter, highlighted by year over year revenue growth of 32% which was at the high end of our guidance. Adjusted EBITDA grew over 36 times out of Q2 last year and was over 20% higher than the top end of our range, reflecting the margin leverage we are experiencing as we continue to scale our business. These results reflect the continued efforts by CPGs and retailers to shift promotion and media spend from traditional offline vehicles to Coupons.com’s digital platform.
This quarter we saw continued momentum with Retailer iQ, our retail point of sale digital couponing platform. Today I’m happy to announce that since our last earnings call, we’ve signed an additional three retailers on to the platform. Two these are top tem grocery retailers, bringing out total to nine retailers that have signed up. Together, these nine retailers have annual sales of almost $200 billion. Some of the recent signs are scheduled for implementation in early 2015 as we begin to fill our pipeline for additional Retailer iQ rollouts into next year.
We also announced today that we acquired Eckim. Eckim brings nearly 10 years of performance marketing leadership and over 60 top retailer relationships to Coupons.com. I want to welcome the Eckim team and look forward to applying their skills and technology across our entire suite of products. Our card link offer platform CardLink iQ continued to scale as we completed the Yub acquisition integration and saw the number of offers triple while bringing on great brands such as Petsmart, Gap, and Lord & Taylor to name a few.
The growth in our media business continued to accelerate as we saw more integrated programs whereby both CPGs and retailers linked their promotional campaign to media, including video and mobile. These integrated programs run both on and off our owned and operated properties and amplify the programs ROI. As a remainder for more than 40 years CPGs and retailers have used couponing to drive sales and traffic to their businesses. To give you an idea of just how big this industry is, in 2013 CPG distributed a total of 315 billion coupons in the United States alone. 99% of those coupons were distributed in paper form, mainly through the Sunday newspaper.
However, as shoppers spend more time online and with their mobile devices, the efficiency of this legacy method of coupon distribution is in rapid decline, exacerbated by the continued drop in newspaper circulation. It’s not surprising that redemption rates of paper coupons have decreased 60% over the past 13 years. CPGs and retailers must find new ways to reach the right consumers. Additionally, CPGs have the costly challenge of distributing promotions to each and every retailer that sell their product. Coupons.com is helping to lead CPGs, retailers and shoppers through this digital transformation. Our digital promotion platform connects over 700 CPGs, 2,000 brands and retailers representing over 58,000 store locations in the U.S. Our scale and range of products enable CPGs and retailers to connect with each other to run campaigns in a seamless, cost effective and high ROI manner.
For example, traditionally a CPG would run a promotion through each retailer it does business with, one at a time. Coupons.com makes this process much simpler. That same CPG can use our digital platform to distribute a promotion through its entire retailer network at once, lowering their operational overhead. Our digital platform extends to consumers through our web and mobile channels as well as mobile applications and websites of our CPGs, retailers and approximately 30,000 third party publishers. Consumers can easily find promotions for their favorite products in the stores and either print them, or save them digitally for use in store without the need to print.
With a network of this size, we are able to collect vast amounts of data, which give CPGs and retailers the ability to target consumers with highly relevant promotions at the time that they’re making purchase decisions, commonly referred to as ‘the zero moment of truth.’ Not only are CPGs gaining efficiencies, but they can reach far more consumers with targeted promotion in a way that offline coupon distribution cannot.
A great example is Retailer iQ, which integrates into retailers’ point-of-sale system and use as real-time and historical purchase data, purchase intent information, and integrated shopping lists to enable CPGs and retailers to distributed targeted coupons and product recommendation. Last week, Dollar General announced that they had completed the successful rollout of their DG Digital Coupons program at more than 11,300 stores. Our technology allows Dollar General and other retailers to deliver personalized digital coupons that become more and more relevant over time. Shoppers simply select the offers on their mobile phone around a desktop computer and add them to their account to be redeemed at checkout.
Our targeted approach enables retailers to drive more consumer traffic into stores, while allowing CPGs to become much more efficient in their promotional campaign. While we only reason we rolled out Retailer iQ, our scale is growing fast. We are on track to implement a total of six retailers by the end of this year, at which point we will be able to reach the majority of U.S households through Retailer iQ.
In summary, we’ve had a strong Q2, and we’re more excited than ever about the business. With hundreds of billions of dollars spent by CPGs and retailers, and as the shift to digital couponing continues, we have a large and growing opportunity ahead of us.
I'll now turn the call over to Mir who will walk you through the financial details.
Thank you, Steven, and welcome everyone. I will first review our financial results and key metrics for the second quarter, and then provide financial guidance for the third quarter and full year 2014.
We had a strong second quarter with topline and bottom line growth. Total revenue for second quarter was $51.7 million, up 32% year-over-year, which was at the higher end of our guidance for the quarter. Adjusted EBITDA for Q2 was $3.7 million, beating guidance by more than 20%. We saw strong growth across all areas of our business, driven by the continued shift to our digital couponing platform by CPGs, retailers and consumers.
Revenues from digital promotions increased 24% over last year. Revenues from media and advertising increased 64% from a year ago, primarily due to a higher number of digital promotion campaigns with integrated media, including video and mobile as Steven just highlighted. Together, these underscore the strength of our platform. We believe that the capability of our propriety technology to deliver targeted digital coupons, along with related advertising, gives us a competitive advantage as we continue to drive the shift to digital.
Total digital promotion transactions in the second quarter were $384 million, up from $315 million in the same period a year ago. As you look at transactions sequentially, I'd like to remind you that we typically see a softer Q2 and Q3 due to summer seasonality with coupon activity. Additionally, as we mentioned on our first quarter earnings call,.Q1 of this year benefited from one time end of quarter budget deployment by several CPGs.
Now moving down the P&L, as expected, we continue to see operating leverage this quarter. Operating expense in Q2 of this year was $37.5 million, compared to $28.8 million in Q2 last year. Excluding stock-based compensation, operating expense was $31.3 million or 61% of revenue in the quarter. This is a significant improvement over Q2 last year when operating expense, excluding stock based compensation was 71% of revenue.
As a reminder, the operating leverage we are seeing is the result of our significant investment in the prior three years in technology, network operations engineering and sales capabilities to drive and support our revenue growth in 2014 and future years. A significant position of this investment was to build our Retailer iQ platform, which as Steven mentioned, is now live at several retailers. As revenues begin ramping, we expect to see continued leveraging the model as most of the investments and implementation expenses will have been realized prior to us generating meaningful revenue from Retailer iQ.
Adjusted EBITDA in Q2 2014 was $3.7 million, above the top end of our guidance. This represents significant EBITDA growth over Q2 of last year when adjusted EBITDA was approximately $100,000.
Net loss for the quarter was $6.9 million. Excluding stock based compensation, net loss was $236,000, an improvement of 87% from the same period last year.
Net cash generated from operating activities was $5.2 million in the second quarter of 2014, compared to $1.4 million in the same period last year.
As of June 30 2014, we had $222 million in cash and cash equivalents.
Now I’d like to review briefly review our financial guidance for the full year and third quarter 2014. Consistent with the guidance we gave out at our first quarter earnings call, we expect revenues for the full year 2014 to be between $217 million and $223 million and adjusted EBITDA to be between $12 million and $17 million.
For the third quarter, we expect revenues to be $52 million and $54 million, and adjusted EBITDA to be between $2 million and $3 million. Please note that our guidance as of today for quarter three and fully year 2014 does not reflect the Eckim acquisition as we just closed the deal, and have begun the integration process. However, we expect the Eckim acquisition to be revenue and profit accretive.
As we mentioned on our Q1 earnings call, a key factor incorporated in our EBITDA guidance is incremental expenses for Retailer iQ. We will continue to incur support and infrastructure expenses for the full platform before meaningful revenues are realized from Retailer iQ. Although we have begun to realize initial revenues, we expect such revenues to begin ramping in the back half of Q4 as retailers begin marketing the platform to their shoppers and as we implement additional retailers.
To close, we continue to be pleased with the momentum we see in our business. Our platform enables CPGs and retailers to easily take advantage of the shift to digital couponing and drive sales volume and shopper loyalty at a higher ROI. We strongly believe that our ability to grow our topline business, especially through our new Retailer iQ platform, and our continued operating leverage, position us well for future growth and towards achieving our long term financial objective.
We will now open up the call for questions. Operator?
(Operator instructions). And our first question comes from Mark Mahaney with RBC Capital Markets. Your line is open.
Brian Peak – RBC Capital Markets
Hi it’s Brian Peak on for Mark. Just a couple of questions for you guys. Gross margin a little lower than expected and I was wondering if you could discuss some distribution fee trends that you’ve seen within the quarter, potentially if that was part of the lower gross margin, if that’s flexed at all, any other things that contributed to that possibly? And then also I understand it's early, but then any color around the adoption of Receipt iQ maybe with Walgreens customers now that it's been live for some time this year. Thank you.
So Brian, let me tackle the gross margin question first. So consistent with our prior quarter discussions, the gross margin was lower in quarter two primarily because of the Retailer iQ infrastructure and support expenses like we talked about that come on and came on in quarter two at the full level for the platform even before meaningful revenues have been realized from the platform which are expected in Q4, back half of Q4. Regarding your question on distribution fees, yes. Like we’re -- consistent with our forecast in our prior discussions, distribution fee as a percent of revenue will go up this year and that is one factor that will pressure gross margin down a little bit. That of course in the quarter two and in future quarters is and will be offset by the operating leverage that we see – continue to see on the fixed piece of cost of goods sold, cost of revenue. So that’s an offset there, but the big impact in terms of driving our gross margin rate lower in quarter two was the Retailer iQ supporting infrastructure expenses and it was all as planned and as forecast and as built into our guidance for you.
On your second question regarding Retailer iQ adoption rate, so while we’ve said publicly and they have as well at both Walgreens and Dollar General are up and running, we really can’t comment specifically about individual retailers or given that there are two that have announced specific adoption rates. But what we can say clearly is that we’re absolutely meeting our expectations internally. We’ve got – our expectations are being met both from a technology perspective and also from the volume and consumer adoption perspective. So we’re continuing to see volumes grow across both those platforms.
Your next question comes from Nat Schindler with Bank of America Merrill Lynch. Your line is open.
Nat Schindler -- Bank of America Merrill Lynch
Thanks for taking my questions. And want to just to see if you guys could help me a little on understanding the seasonality of the business on the transaction side. The data we have going back doesn’t really paint much of a picture because there were differences that happened in different quarters as you go backwards. And obviously your comps were quite a bit harder this quarter, so explaining the deceleration. But why would you see a sequential decline in 2Q over 1Q in number of transactions? What is the behavior that occurs that’s different in those months that leads to pure tied coupons being out there? And then on the second question, how well do number of campaigns correlate with number of coupons distributed? So if I look on your site and see a number of campaigns and see that it's grown by 10%, is that going to correlate with the number of transactions you do or is it largely irrelevant?
Okay. Let me take the first question on the sequential and the seasonality. So there are two factors like you explained. If you look at our sequential quarter one and quarter two trends this year, there are two factors. One big factor is seasonality. Summer is typically a slow season for coupons, especially grocery coupons. And it also reflects by the way based on grocery sales itself. The consumer behavior or the grocery shopping behavior is different school is out, vacation starts and so on. So that’s typically the case and now we’re feeling it more obviously because we’re at scale. You see that more. Last year, as you saw we were still on a smaller base growing. So we were growing through seasonality.
So that’s sort of the seasonal implication of this, but one of the factor that figured into our quarter one to quarter two trends this yeah, if you recall on our quarter one earnings call, we talked about how in quarter one, our transaction trends were better than what we had forecasted and one of the biggest factors there was this quarter end budget deployment by CPGs that was unanticipated. So, and we’ve talked about how every now and then we could see something like that. Now that we’re at scale, we have the ability to be able to deploy a large number of coupons and enable CPGs who want volume at the very end of the quarter to drive their volume. So we saw that in quarter one and that increased our quarter one transaction sort of in an unseasonably high if I may. So that was the second factor that explains this sequential trend between quarter one and quarter two.
And Nat, on the number of campaigns versus number of coupons distributed to try and figure out transaction volume and things like that, unfortunately the number of campaigns isn’t correlated to the number of coupons distributed for a variety of reason. Certainly number one, geography comes into play. So when you look at the display at Coupons.com, both our owned and operated and our non-owned and operated properties, the coupons that you see displayed there are going to differ widely by geography. That’s number one. Number two, the display and the positioning and offering is also highly customizing now given all the data that we are collecting. And so you may see something that’s very different than somebody sees. And then the depth of offer, the depth of coupons, the number of coupons that are ordered per coupon you see, varies greatly as well. And oftentimes coupons will come on midmonth or the beginning of the month and then come off when they hit potentially a limit in a month and then show up again the next month because there’s an overall campaign limit. There are a variety of factors that would make it very difficult I think to just look at the number of campaigns on the screen and try and divine out how many coupons are being distributed.
Nat Schindler -- Bank of America Merrill Lynch
Make sense. Just one follow up on the seasonality effect. Taking out everything and I know that there was an unusual event in Q1 that upped the number towards end. But if you had to think about how you would break down a year in number of transactions, how would you split that amongst the quarters in its percentage basis.?
Sure. Let me give you the overall trend and the year how it flows and then that can be translated into some number here. But quarter one is stronger than quarter two. Quarter two, especially the back half of quarter two as you approach the summer is softer. Quarter three, first half of quarter three is softer because it’s summer and then the last month of quarter three starts to pick up because of back to school. And then grocery shopping behavior comes -- really back to school is a big event in the grocery world because of the preparation, coming back into the routine of the family and so on and so forth, cooking at home and so on, school lunches and so on. Then back to school then translates into the holiday season which is typically a very strong season and you start to see much higher couponing activity in quarter four. You can look at it as being quarter four being the biggest quarter followed by quarter one, back half of quarter three and then quarter two, at least the back half of quarter two being the weakest.
Nat Schindler -- Bank of America Merrill Lynch
Okay, and on a very final point, average promotional revenue per transaction has been rather volatile. But how do you see that? Is this a stabilized level at this point?
So I’m just curios, average? if you take just the promotion dollars divide by transaction, it’s pretty consistent and flat.
Nat Schindler -- Bank of America Merrill Lynch
On a year over year basis, but not necessarily on a quarter over quarter. Does it change with the seasonality as well?
No, it shouldn’t change with seasonality. The factors driving average promotion for revenue that we’ve talked about is and it varies very, very little is, like we’ve mentioned earlier some CPGs have rate cards, some CPGs have volume discounts. The mix in the quarter makes a difference, but for the most part has been pretty flat.
The next question comes from Heath Terry with Goldman Sachs. Your line is open.
Heath Terry – Goldman Sachs
Steve, there seems to have been a development in the relationship with Safeway during the quarter with them coming off of the Coupons.com app, or at least that’s what it seems from a user perspective. Is that a function of the Albertsons deal or is there something else going on there, any color that you can provide to the degree that there is any financial impact would be helpful. And then also Mir, I know if in response to Nat’s question you touched on some of the factors around revenue per transaction. But with revenue growing faster than transactions as much as it did this quarter, can you give us a little more clarity in terms of what specifically drove that in the quarter? And finally if you can give us, especially now that you are doing more load to card digital transactions, if you could give us a sense in what you are seeing in terms of revenue per transaction on digital versus print and the trends within each of those?
Sure. So why don’t I take the first one. No, there have been no changes to the relationship that we have with our major retailers. We can’t comment specifically on what Safeway’s marketing objectives are. We have a good relationship, a healthy relationship with most of the top retailers and over the past several years we haven’t lost a retailer or we haven’t lost any revenue associated with retailer. And so I think if you channel check carefully you’ll find that marketing objectives and changes may be leading you to draw a conclusion that probably isn’t the case.
And Heath, on your second question regarding revenue from transaction being higher than transaction growth, so if we look at promotion revenues which is what’s relevant for transactions, in quarter one we had promotion revenues growing at a slightly higher rate than transaction growth year over year, same as the case in quarter two, a couple of hundred basis points higher from a growth standpoint. That is not -- and we mentioned this at our quarter one earnings call, does not represent a trend of us raising rates or necessarily doing something in the pricing that is a major trend as of yet. What it is simply, it’s actually very close. If you do the math it actually counts down to the third decimal point. What it is basically is the mix like I mentioned, different CPGs, we have different relationships from a volume discount and volumes versus rate card and so on standpoint. Depending on the quarter and the mix of that and how it tweaks, that could tweak that. But for the most part, revenue per promotion transaction we would consider flat and we would recommend you model it that way.
There are no further questions at this time. I’ll turn the call back to management for closing comments.
Thank you and thank you everybody for joining us this afternoon. We appreciate your questions and your interest in our business. If you have any further questions we encourage you to reach out directly to ask through our corporate website. Thanks again and have a great day.
This concludes today’s conference call. You may now disconnect.
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