Quotient Technology Inc. (NYSE:QUOT)
Q2 2016 Earnings Conference Call
August 2, 2016 4:30 PM ET
Stacie Clements - Vice President of Investor Relations
Steven Boal - President & Chief Executive Officer
Jennifer Ceran - Chief Financial Officer
Mir Aamir - President and Chief Operating Officer
Mark Mahaney - RBC Capital Markets
Ralph Schackart - William Blair & Company
Joe Maxa - Dougherty & Co. LLC
Aaron Turner - Wedbush Securities
Welcome to the Second Quarter 2016 Quotient Earnings Conference Call. During the call, all participants will be in listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of Quotient’s website following this call.
I will now turn the call over to Stacie Clements, Vice President of Investor Relations. Thank you. Ms. Clements, you may now begin.
Thank you. Hello, everyone, and welcome to our second quarter 2016 earnings call. Please note that slides to accompany the remarks on today’s call are available on the IR section of our corporate website, quotient.com. On the call and here with me today are Steven Boal, our Founder and CEO; and Jennifer Ceran, our CFO; Mir Aamir, our President and COO is available for Q&A after our prepared remarks.
Before we begin, please note that during this call, you will hear forward-looking statements. These forward-looking statements include our projections for our third quarter and full-year 2016, our expectations for our Retailer iQ platform, Shopmium app, our targeted media operating and consumer in CPG patterns, as well as the expected growth off and investments in our business generally, including our expectations regarding anticipated introduction of the redesign Coupons.com app.
Forward-looking statements are based on information available to and in good faith of our management team as of the time of this call and are subject to known and unknown risks and uncertainties that could cause actual performances or results to differ materially.
Additional information about 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 6, 2016. 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 and operating cash flow, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain expenses. A reconciliation between GAAP and non-GAAP measures can be found in the financial results press release issued today and on the slide deck posted on the company’s website.
With that, I’ll now turn the call over to Steven.
Thank you, Stacie, and welcome, everyone. As you all know, this is Jenny’s last earnings call with us. I want to take a moment to thank Jenny for her many contributions to the company and we wish her all the best in her new endeavors.
Before I walk through the highlights in the quarter, I have an exciting announcement to make. I’m excited to welcome Ron Fior, as our new CFO. Ron brings more than 30 years of public and private company CFO experience to Quotient. Prior to Quotient, Ron was CFO at Good Technology, Callidus Software, and at Remedy. Many of you will already know him and we’re thrilled to have him join the team. Ron’s first day will be August 10th.
Now on to the quarter. As you’ve seen from our results, we had another strong quarter, delivering revenue of $67.2 million and adjusted EBITDA of $8.1 million, both ahead of guidance. Cash from operations was $4.8 million. We saw momentum across all parts of our business, as we helped consumer packaged goods brands and retailers connect directly with our shoppers through digital offers and relevant media messaging.
Our scale in consumer reach is growing, and with that so is our ability to influence shoppers through both the audience we’ve built on Coupons.com, and our other consumer properties, and through the audiences of our many retailer partners. We delivered 535 million transactions in Q2, up 44% from a year ago, as we continue to scale Retailer iQ delivering value to CPG brands, retailers and shoppers.
As more shoppers, particularly Millennials rely on promotions and deals to decide where they shop and what they buy, we are seeing the expected shift from digital print to digital paperless. In the second quarter, digital paperless transactions represented 63% of all transactions, up from 50% in the same quarter a year ago.
Additionally, shopper reach on Retailer iQ is expanding, as we continue to migrate retail banners from our legacy sales to card platform. Benefits to retailers in CPGs. include a more robust data and analytics platform and additional features, such as, digital circulars, digital receipts, personalized e-mails, and access to sophisticated targeting capabilities. I’m also excited to announce that we have signed our first club retailer on to the platform.
In addition, we started signing our first partners to a new program we put in place to reach the fragmented long tail of the U.S. grocery channel. In total, retailers in this segment are estimated to have approximately $100 billion in annual sales. Through this program, we’re able to extend our reach more efficiently.
To-date, we have three partners signed and they have implemented over 75 retailers on to Retailer iQ. Excluding this channel, we now have 18 major banners live on Retailer iQ and 13 of those are marketing. Of those marketing, there are some retailers that are just getting started and others that have implemented a steady drumbeat of personalized digital marketing activities, with the latter showing higher levels of shopper adoption and engagement.
Retailers on Retailer iQ show increased basket sizes, more frequent shopping trips, and growth in comp store sales, the key objectives of retailers everywhere. CPG brands and retailers are embracing digital marketing strategies, as they realize the importance of personalized and targeted marketing in an increasingly competitive environment. A recent Forrester study found that 91% of marketers ranked personalization a top priority, as they seek to meet the expectations of today’s shoppers.
Forrester concludes that retailers doing the best job with this go beyond simple segmentation to create real-time personalization based on shopper intent. Retailer iQ was built for this exact purpose, enabling retailers to use purchase and intent data to influence shoppers at the right time.
Retailers with a more sophisticated approach to digital marketing use Quotient in a variety of ways. For example, we are seeing more retailers create digital marketing programs around themed events. With the aid of Retailer iQ’s – Retailer iQ, retailers are using shopper data and insights to launch personalized digital marketing programs for these events through e-mail, social channels, and digital circular integrations, with little or no lead time. They’re also deploying targeted offers to improve their digital marketing efforts.
Although, still a new feature of Retailer iQ, we launched over 80 targeted offers in the quarter, representing more than 30 brands. This was 10 times the number of targeted offers launched in the first quarter. Early results indicate that when shoppers are targeted with relevant promotions, basket sizes increase on average by over 20% compared to shoppers who purchase the same items without targeted promotions. We also note that engagement from these shoppers is higher, and redemption rates from targeted Retailer iQ offers are two times higher compared to on-targeted offers.
We believe these are meaningful results as CPGs and retailers leverage Retailer iQ to efficiently engage shoppers and drive increased sales. Until recently, our primary focus has been to engage with CPG brand managers, as they look to shift their promotions and media to digital.
Having achieved significant scale in Retailer iQ, we are expanding CPG relationships and having more conversations with their shopper marketing teams, who are also eager to leverage Retailer iQ. We believe this provides more opportunity for us, as they increase online marketing efforts with merchandising support from retailers. As a reminder, trade spend is approximately a $200 billion a year market, and primarily funded by CPGs through shopper marketing.
On the consumer front, we continue to grow Shopmium, the mobile cash back app in platform that we acquired in October. After shoppers scan their receipts, we send their saving directly to a PayPal or bank account, giving us a more direct economic relationship with shoppers.
CPGs can now take advantage of our Shopmium technology to reach a wider range of shoppers. For example, CPGs can now distribute mobile cash back offers via their own branded sites, social channels, and digital media, all powered by our Shopmium platform. We also continue to focus on expanding our own consumer audience, and later this year, we expect to launch an entirely new Coupons.com app that among other improvements also incorporates our new receipt scanning technology.
Turning to Quotient Media. This quarter, we saw growth as CPG brands and retailers continue to reach our valuable audience across the network and influence shoppers, as they plan their shopping trips. We recently released a new targeted media offering available on mobile and desktop, for the first time for participating retailers, we’re able to target shoppers with media in addition to promotions and identify incremental sales in real-time, using point-of-sale data collective through Retailer iQ.
Most importantly, CPGs now have the capability of managing performance and adjusting for in-flight campaign optimization, based on actual product purchase data. We already have programs in market and early results are encouraging. We’re also now focused on expanding our media offerings to partners and other networks, giving us access to shoppers across the mobile and web landscape and beyond our owned and operated properties. Over time, we expect this to greatly expand our sellable inventory.
As our network grows, our ability to deliver greater value to CPG brands, retailers and shoppers growth as well. We are continually looking to enhance our product offerings and bring new capabilities to market, such as Quotient Insights, our emerging data and analytics business.
Last quarter I talked about some of the exciting things we’re doing under Quotient Insights. We continue to build our media measurement offerings that will deliver real-time attribution of in-store sales for both digital and offline media.
In summary, we had a great quarter with strong momentum across the business. With Retailer iQ now operating at scale, we’re able to launch new products and capture new opportunities, including the opportunity to modernize the $200 billion of annual trade spend we’ve talked so much about.
Retailers continue to embrace digital marketing strategies, as they realize the benefits of timely personalization and targeting. We believe we are well-positioned to digitally connect retailer’s CPG brands and shoppers together, and we are excited about the opportunity ahead.
I’ll now turn the call over to Jenny.
Thank you, Steven, and welcome, everyone. As Steven noted, we had another strong quarter. Revenue was $67.2 million, up 20% over a year ago, reflecting healthy performance across the business. Transactions were $535 million, roughly flat versus last quarter and up 44% versus a year ago, driven by continued momentum in digital paperless and solid results in digital print.
GAAP net loss was $3.5 million. Adjusted EBITDA came in at positive $8.1 million, reflecting strong revenue, coupled with an increased focus on expense management, while we continue to make important investments in Quotient Insights.
We ended the quarter with a cash and short-term investment balance of $156 million and we generated $4.8 million of cash from operations. All in all, we’re very pleased with the performance in the first-half of the year, as Retailer iQ drove strong paperless transactions and enabled consumer packaged goods companies to meet increasing shopper demand.
Let me now provide more details on the quarter. As I just mentioned, total revenue for the second quarter was up 20% versus a year ago, a slight acceleration in growth versus the prior quarter. Breaking it down even further, revenue from digital promotions was $50.9 million, a 25% increase over last year and revenue from media was $16.3 million, a 9% increase over last year. Excluding the acquisition of Shopmium, which occurred in the fourth quarter of 2015, total revenue growth would have been 2 percentage points lower.
Moving to transactions. Q2 transactions were $535 million, about flat with last quarter. And compared to last quarter, digital paperless transactions were up 8%, while digital print transactions declined 12%. Comparing transactions to the same quarter a year ago, digital paperless grew 83% and digital print grew 5%, reflecting the continued trend toward paperless.
During the quarter, we migrated a couple of retailers from our legacy sales platform to Retailer iQ. And as a result, Retailer iQ transactions now represent about two-thirds of all paperless transactions.
Finally, average promotion revenue per transaction in the second quarter was $0.950, about the same as last quarter. As we’ve mentioned before, this metric will fluctuate, as is dependent upon the mix of transactions and customers, changes to our pricing models, and volume discounts. We expect this metric to remain in the $0.09 to $0.10 range over the course of this year.
Moving on to Retailer iQ. During the second quarter, we continued to sign new retailers on to the platform, adding retailers in the club channel and through our new partner program. We had one major banner go live and one start marketing. And as of this week, we now have 18 major banners implemented and 13 marketing.
As Steven mentioned, we are starting to see more digital marketing activities from our existing banners, a key driver of shopper adoption and engagement on the platform. Keep in mind, however, that the majority of our banners are still in the early stages of marketing.
Moving down the P&L. GAAP gross margin in the second quarter was 62.6%. Non-GAAP gross margin, which excludes stock-based compensation expense was 63.3%, up approximately 210 basis points compared to a year ago and 70 basis points compared to last quarter, due primarily to higher revenue, leverage in our fixed cost, and expense management, partially offset by a higher proportion of distribution fees from the growth in Retailer iQ.
Let’s move to operating expenses. For the second quarter, GAAP operating expenses were 45.4 million. Non-GAAP operating expenses, which excludes stock-based compensation and the fair value of contingent consideration was $39.5 million, compared to $42.2 million last quarter. This quarter, we saw an overall reduction in non-GAAP operating expenses, driven primarily by lower consulting and audit fees, employee-related expenses, and lower media and advertising costs. We will continue making investments to grow our business and scale in the future, while we focus on operational efficiencies to improve our overall profitability in the long-term.
Let’s move on to profitability. In the second quarter, adjusted EBITDA was $8.1 million, representing a 12% margin, compared to $4.3 million and a 7% margin in the prior quarter, primarily driven by operational efficiencies and cost management initiatives that drove lower spending.
Let me move on to our outlook for Q3 and full-year 2016. For the third quarter, we expect revenues to be in the range of $65 million to $67 million. We expect adjusted EBITDA to be in the range of $5.5 million to $6.5 million. Relative to Q2, we plan to spend more in marketing this quarter to drive awareness and engagement, and as we gear up for the release of our new mobile app later this year.
For the full-year, we are raising guidance to reflect the momentum in our business. We now expect revenues to be in the range of $265 million to $270 million, reflecting 12% to 14% growth over 2015. We are also raising our guidance for full-year adjusted EBITDA. We now expect adjusted EBITDA to be in the range of $25 million to $27 million.
Before I conclude, I’d also like to share a little more context around my decision to leave Quotient. It has been a great ride. But I’ve decided to pursue another opportunity that enables me to balance my career goals and personal interest.
I really enjoyed this past year building the finance team and implementing best practices that will help Quotient’s scale, and I’m confident in the company’s future. Retailers are recognizing the need for digital marketing, CPGs are looking for more ways to utilize Retailer iQ, and consumers are embracing digital promotions.
Internally, we’re also focusing on improving our profitability, while continuing to invest for growth. We are very pleased with the momentum in the first-half of 2016 and are excited about the opportunities ahead.
We will now open up the call for questions. Operator?
[Operator Instructions] Your first question comes from the line of Mark Mahaney of RBC Capital Markets. Your line is open.
Thanks. Two questions please. The – was there any pushback of expenses from the first-half or Q2 into the back-half of the year, it’s a small thing, but your raise in your full-year EBITDA is less than the beat in the second quarter. I think, you talked about some of those marketing initiatives maybe you’re just getting more – you’re accelerate – you’re getting accelerated in terms of some of those investments, given the opportunity?
And then second, if you talk about transactions or the revenue per transactions and similar to last quarter $0.09 to $0.10 range you talked about that being the pace for the balance of the year. In the last two years, you’ve been kind of a little bit north of that more in the $0.10 plus range. Could you just talk about why the transactions per – revenue per transactions has come down, and is this the stable way to think about it not this year, but in the years, going forwards? Thank you.
Sure, Mark, I’ll take the first one. This is Mir. No, there wasn’t any pushback from quarter to the future quarters, but typically if you look even at in our prior years, back half of the year has more marketing, more than 10%, more than the first-half of the year, just in terms of seasonality, because back-to-schools in back half of the year, the holidays in back half of the year. So our marketing spend follow that.
And then the other smaller factor, but a factor that does figure into our EBITDA guidance for the back half of the year is the investment that we are making in some headcount and some platform technology proportion insights. Those two are the main factor sort of factoring into the EBITDA guidance with back half of the year.
Jenny, do you want to add anything?
Yes, sure and on average promotion revenue per transaction, we talked about this in the last call that it’s really dependent on a number of factors that the mix of the transactions that goes through it as well as the customers, the volume discount and it just worked out. This quarter that it was roughly flat with last quarter. We expect it to vary quarter-to-quarter, but to be with the net $0.09 to $0.10 for the rest of the year. And then we’ll update has the business evolved towards the end of the year.
Your next question comes from the line of Ralph Shakur of William Blair. Your line is open.
Good afternoon. Just looking at the Q3 guidance and sort of what’s implied at the midpoint for Q4 after the kind of three really strong quarters were accelerating growth. Just curious if there’s anything different in the way you approaching the outlook for Q3 and Q4 because it would implies sort of a pretty strong deceleration with what appears to be pretty strong trends with a retort you, so trying to assess whether there is something unique there or just conservatism and the outlook?
Yes, so – this is Jenny. I’ll answer the question. As you know the way that we think adding the share is really looking at kind of what we know so far and having a bit of reserve as we further out, because we have less understanding of what can happen in the four quarter.
So looking at our guidance for the full-year, we did raise quite a bit. There is some upside to the back half, but I would say it’s not – it’s a bit conservative for Q3, while we have greater capabilities for our paperless space in our Q, we are still impacted by mix, retail marketing efforts and consumer demand. It’s also the summer month, but tends to be seasonally slow. And so we just started off with what we feel confident in and will update it as the quarter end.
Hey, Ralph just to add to that, this is Mir. One thing you might have heard in our past quarters, right, we are working on building demand for – with Retailer iQ, demand for digital coupons it’s been early paperless and so on right?. And then we share our forecast with CPG brands, but we plan in longer cycles. So if we have faster demand cycle growing in the second quarter do, for example, their speed to catch up isn’t always as quick.
So that’s what you start – that’s a bit of the factor you start to see that quarter-over-quarter, there is a bit of flatness for sometime until the supply or the CPG budgets to catch up. And then it over the longer or multi-quarters, it’s definitely in upward trend.
Okay, that’s fair and I appreciate the extra color. One more if I could on the fragmented long tail sort of market that’s addressing, I think you talked about three partners and 75,000 retailers. Can you give us any sense of the $100 billion that’s addressing is sort of 80/20 roll here or this is pretty fragmented market that sort of we’ll build over time to adjust that $100 billion spend.
Sure. It is a fragmented market just in terms of the overall $600 billion-plus that we talked about our CPG grocery sales. You’ve heard us talk earlier on about adding up to $500 billion with the relatively larger retailers. The smaller retailers, you can talk about handful of stores up to 30/50 stores or something like that, all across the country, so very fragmented long tail.
And then it depends – your timing question of how long it will take to cover that is it’s a bit difficult to answer right now. But what we did now is that the right strategy for us to do that is to partner with smaller players or other players they can go ahead and do that in the grassroots and that’s what we’ve done and we’ve just started to implement in that right now.
And just add to that, it’s Steve. So, it’s not quite 80/20. I’m not sure exactly where the percentage break would fall. But it’s also not every retailer and every partners create equally, and so there will be a tail towards the larger ones and although most likely be the ones that having more digitally engaged audience anyway.
Okay, thanks Steve, I appreciated it.
Your next question comes from the line of Nat Schindler of Bank of America Merrill Lynch. Your line is open.
Hi, great quarter guys. This is Jason here for Nat. Just kind of – you mentioned 80 targeted programs you ran this quarter for coupons, how much of that is – what percentage of your overall program is that so far and how big you think the targeted campaigns will gross versus regular coupon versus regular couple campaigns over time. And then just talking – following up on that kind of the long tail partners, since you’re using partners for that. Is there any different economics for retailers at queue in that situation versus when you get the retailers yourselves? Thanks.
Let me take the first one – let me take the second one. It’s Steve. And there is no difference in economics basically the same. So we wouldn’t expect any kind of change in mix there.
Jason, on your first one, the targeted over 80 campaigns and quarter two, over 30 brands involved in that still are relatively small portion of our business, relatively small, right. We do thousands-and-thousands of campaigns that we’re in overall. From a potential standpoint, this has the potential to be very, very significant as we talk about in our prior quarter.
So we just excited to be able to get it off the ground or some scale, which we have and to aggressively push it, which we will keep pushing. Keep in mind, one this one factor. And then we talked about how pricing gets impacted by mix and so. This is one factor. It’s – this is at the premium prices. So the more we do a best as a upward pressure on average revenue per transaction.
Okay. And then on your new kind of analytics program, I think you mentioned, you allowing to CPGs to do kind of real time campaign monitoring. Is that part of the new portion platform in our kind of comfortable, which are level of investment in that platform right now.
Sure. It’s very new, so it’s part of the new portion insides platform that the revenue for that in some ways we’ll shock in media. But we’ve just getting started. The first few campaigns on that were launched very recently. We are investing in that. So when I talk about Quotient insides investment on analytics data platforms and also on in the people for that. It is part of the whole. It is part of this business.
Okay, great. Thanks guys.
[Operator Instructions] Your next question comes from Joe Maxa of Dougherty & Company. Your line is open.
Thank you. Question on your thoughts regarding the back-to-school outlook. I think it’s expected to be stronger and maybe earlier than normal. Is that then – I mean are you assuming or factoring that in your guidance, or is that potential upside?
This is Mir. Back-to-school is hard to predict, as you’ve seen in the last two years, we’ve had a year over the back-to-school was so much better than we thought it was in another year that was at not as strong. So we – our sense right now is the same center you might have from what the sentiment out there from what’s been written. It seems like CPG is do want and winning this back-to-school. We like that, but it remains to be seen how it will transfer. I think from an economy standpoint, consumer standpoint, it feels like what I’ve read that the back-to-school should be good, but it still remains to be same, a bit early right now.
Okay, and the second question – on the $100 billion in the annual sales from the retailers, you addressing with your partner channel. Do you have a sense of how much of that has been signed? Is it 10%, 5%?
That would be really – hard for us to estimate at this juncture. We’ve got over 75 retailers now implemented through the channel program and that’s just with three partners and so as that channel develops, it probably be able to deliver more of an estimate for you. But right now, we’re in the early paces.
Okay, thank you.
And your last question comes from the line of Aaron Turner of Wedbush Securities. Your line is open.
Great, thanks for taking my question. Two question if I could. Just wondering if you could update us on how many registered shoppers you have on the Retailer iQ platform as of Q2, if possibly get that number for Q1 that would be great? And then the second question is around the partnership with the Target and the integration of the Cartwheel app, any color there would be helpful and did that have any meaningful impact on the quarter possibly? How do you see that relationship evolving over time?
Yes, I think the second one is the easiest. We’re not able to comment any specific programs are running with any specific retailers, beyond what either they or we have already said publicly.
Sure, and I think the first one. We don’t disclose registered shoppers, but we did in the past I’ve talked about, over $16 million registered notes a couple of quarters ago. So I’m pointing to that information to give you some guidance on this because we have talked about in that in the context of as we were launching our targeting programs.
We talked about the real registered shoppers households for $3 million at that time. So it gives us you a gauge. Hopefully maybe in a couple of quarters, we should be able to come out with when we have enough metrics on the customers that we are able to advocate and share will able to come out and show that.
Okay, great. Thanks.
And there are no further questions at this time. I would like to thank you for joining in the second quarter of 2016 course and earnings conference call. This concludes today’s call and you may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!