MaxPoint Interactive's (MXPT) CEO Joe Epperson on Q2 2016 Results - Earnings Call Transcript

| About: MaxPoint Interactive (MXPT)

MaxPoint Interactive, Inc. (NYSE:MXPT)

Q2 2016 Earnings Conference Call

August 10, 2016 5:00 PM ET

Executives

Denise Garcia - Investor Relations

Joe Epperson - President and Chief Executive Officer

Brad Schomber - Chief Financial Officer

Analysts

Kerry Rice - Needham & Company

Deepak Mathivanan - Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to MaxPoint’s Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the floor over to Denise Garcia with Investor Relations. Please go ahead.

Denise Garcia

Good afternoon and welcome to MaxPoint’s second quarter 2016 financial results conference call. Joining me on the call today are Joe Epperson, Co-Founder and Chief Executive Officer; and Brad Schomber, Chief Financial Officer. Please note that the earnings release issued after the market closed today, along with the live broadcast of this earnings call, are both available on our Investor Relations website at ir.maxpoint.com. A replay of this call will also be available later today on our Investor Relations website.

Before we begin discussing our results, I would like to remind you that our press release, this presentation, and our comments include forward-looking statements. These statements may include information concerning our guidance where possible or assumed future results of operations and expenses, business strategies and plans, market sizing, competitive position, the industry environment, and potential growth opportunities.

These statements are subject to risks, uncertainties and assumptions. Actual results and the timing of certain events may differ materially from the results anticipated by our forward-looking statements.

Please see our press release issued today, as well as our Form 10-Q filing for the second quarter for more details about such risks. We make these statements as of August 10, 2016, and disclaim any obligation or duty to update any forward-looking statements made during this call. If this call is replayed or reviewed after today, the information presented during this call may not contain current or accurate information.

Also I’d like to remind you that we may discuss certain non-GAAP measures of our financial performance during the course of this call, such as revenue ex-TAC, adjusted EBITDA, non-GAAP net loss, and non-GAAP net loss per basic and diluted share. Additionally, we may refer to adjusted EBITDA as EBITDA during this presentation.

We also use our number of enterprise customers, which is an operating performance metric. Definitions of these metrics and reconciliations to the most directly comparable GAAP financial measures are provided in the press release and accompanying financial tables issued earlier today. These non-GAAP measures are not intended to be considered in isolation from, or a substitute for, or superior to our GAAP results. Unless otherwise stated, growth comparisons made in the course of this call are against the same period of the prior year.

Lastly, all share and per share amounts mentioned during this call have been adjusted to reflect the 1-for-4 reverse stock-split of our outstanding shares of capital stock on April 25, 2016.

With that, I’d like to turn the call over to Joe Epperson, MaxPoint’s Co-Founder and Chief Executive Officer.

Joe Epperson

Thank you, Denise. Good afternoon, everyone, and thank you for joining our call today.

During today’s call, we’ll review our financial highlights for the second quarter 2016 and discuss the progress we’ve made against our 2016 strategic objectives. Then I’ll turn the call over to Brad who will provide more details on our financial results and we’ll open the call for your questions.

In the second quarter, revenue excluding traffic acquisition cost or revenue ex-TAC was $23.2 million, exceeding the midpoint of our guidance range by $200,000. Adjusted EBITDA was a loss of $3.1 million, at about the midpoint of our guidance range for the quarter. Our quarter-over-quarter results show the company’s ability to increase revenues without significantly adding additional operating costs.

Revenue increased by $6.5 million in the second quarter compared to the first quarter, while our operating expenses decreased by $500,000. I’m pleased to report that we are on track with our plans for the year and making progress against each of our strategic initiatives for 2016.

As a reminder, our strategic initiatives for 2016 are: one, expanding accessibility to MaxPoint’s data and intelligence; two, enhancing our products and more closely integrating with our customers; and three, growing internationally.

I’ll provide a brief update on the progress against each of these initiatives, starting with expanding accessibility to MaxPoint’s data and intelligence.

I’m pleased to announce that we signed agreement with Acxiom’s LiveRamp during the quarter, and more recently Adobe. Based on our analysis, our data and intelligence is now available to every major DSP and every major trading-desk operation on the agency side. Both of these partnerships expand accessibility to MaxPoint’s data and intelligence by offering MaxPoint branded and customized audience data to their customers.

Customers of LiveRamp may choose to include MaxPoint branded audience data or customize our data to help improve the performance of their own digital marketing applications or media platforms.

Our partnership with Adobe will integrate our data and intelligence into the Adobe Marketing Cloud as part of the Audience Manager product, where their customers can select MaxPoint branded audiences or customize our data and intelligence to fit their needs.

We’ve dramatically expanded the universe of customers that can reach MaxPoint’s data and intelligence. And we are excited about these new partnerships and their potential.

Our second key area of focus in 2016 is enhancing our products and more closely integrating with our customers. Recall, our solution can utilize data from our customers combined with our proprietary data to construct a closed loop measurement environment for marketing campaigns initiated through our platform.

And measurement is a key part of our solution and the value we can provide to our customers. Last year, we launched MaxPoint Traffic Analytics and MaxPoint Trade Analytics, where trade analytics studies can be conducted without running an advertising campaign on the platform.

In Q2, we performed traffic studies for three brand name customers and conducted 10 trade studies. As a result, we’re now delivering our new measurement products on a standalone basis. We have put a defined value on our core sales lift measurement product. We now record the portion of their ad-campaign associated with the measurement as deferred revenue.

This quarter, our deferred revenue related to this was approximately $400,000. Brad will explain the financial details in a moment.

From a business perspective, this shows our progress and our initiative to grow closer to our customers. At the end of the quarter, we had a record number of sales list studies in process. Each underpinned by data connections and integrations that include point-of-sale data and SKU level data, allowing us to get closer to our customers.

In many cases, we are able to provide results and ROI improving actual intelligence, while the marketing campaigns are running. Whilst still early we believe that these products will help drive additional revenue by improving revenue retention, deepening our relationships with customers and driving more activity on the MaxPoint platform.

Another approach to increasing activity on the platform is through the MaxPoint Solutions Group. Solutions Group’s customers using both advertising and measurement products drove 60% of the revenue from this group during Q2. Revenue from the MaxPoint Solutions Group increased 39%, as we expanded our efforts in providing additional service levels to our key customers.

The year over year growth from revenue contributed by the MaxPoint Solution Group is at a rate that is higher than the rest of the business. Our third key initiative is International.

Earlier this year, we announced that we had mapped 30,000 neighborhoods in Continental Europe and introduced pan-European campaigns to both U.S. and European advertisers wanting to reach these Digital Zips.

Our European headquarters is based in the UK, where revenue continues to accelerate from a 112% growth in Q1 to 189% in Q2. Following the Brexit vote, we observed a slow start to Q3. Our European team continues to make great progress and we take a long-term view towards international expansion.

We are excited to see our value proposition resonate in the UK and feel very good about our potential internationally. In summary, we continue to execute well against our strategic initiatives, and have made notable progress this quarter, expanding the accessibility of MaxPoint’s data and intelligence with two new partners, Adobe and LiveRamp.

We are building on our core data and technology solutions to broaden our relationships with clients. Ultimately, we are driving toward our vision of creating new and innovative datasets from our rich proprietary location-based intelligence to enrich consumer data, provide unique business intelligence and inspire transformational changes in how our clients and our partners’ clients go to market.

We are actively linking in-store, online and consumer touch-points for our customers to improve the entire selling process and we continue to innovate. Our technology roadmap is structured to realize the vision of having in-store retailers possess the same or even richer customer data as online retailers.

We continue to work on developing new products to expand our geobase [ph] technology to the next level, including more precise location technology focused on both households and stores, and we look forward to sharing more details as we develop these products during the year.

I believe we are on track with the right strategy, the right team and the most innovative technology. And I look forward to the rest of the year.

And now, I’d like to turn things over to Brad.

Brad Schomber

Thanks Joe. Good afternoon, everyone. I am also pleased with the progress we have made across our strategic initiatives. We made impressive progress increasing the accessibility of our data and intelligence with the announcement of two new partnerships. And we have continued to enhance our products and more closely integrate with our customers while also expanding internationally.

As Joe mentioned, we have applied an accounting treatment to delay the recognition of the value of sales lift measurement studies on campaigns where we delivered the advertising. Revenue is deferred until those studies are delivered, whereas previously they were recognized, when the related campaign was completed.

As most of you know, when our customers desire it and our data is integrated, campaigns on the MaxPoint platform have a full closed-loop measurement component. We have placed a value on that component for current campaigns, which is now reflected as deferred revenue.

This quarter our deferred revenue related to these sales lift studies was approximately $400,000. Absent this newly acquired accounting treatment, our revenue ex-TAC for the second quarter would have been $23.6 million, and closer to the top-end of our guidance range of $22 million to $24 million.

And our adjusted EBITDA would have been minus $2.7 million better than the midpoint of our guidance of minus $3 million. We had a good second quarter at MaxPoint. We added 13 enterprise customers to end the quarter with a total of 764, up 27% year over year, as we strive to go deeper with our best customers and increased their overall spend across our solutions.

As a reminder, we defined enterprise customers as those customers who have spent more than $10,000 with us during the trailing 12-months.

We also define them at parent company-level so one customer might have many brands. In the second quarter, our GAAP revenue increased 4% year-over-year to $35.9 million. We recognized our customers spending on a gross revenue basis in accordance with GAAP. As a reminder, we consider revenue excluding traffic acquisition cost or media cost as a key financial metric and the measure upon which we evaluate the growth of the business.

For the quarter, revenue ex-TAC increased 9% year-over-year to $23.2 million, slightly above the midpoint of our guidance range. Our revenue ex-TAC margin was 64.5% for Q2, improving 274 basis points compared to Q2 of 2015. As we continue to optimize our media buying, including improvements on viewability bidding, placement algorithms and leveraging our buying power and scale.

During the quarter, non-display advertising was 49% of our total revenue, up from 29% in the second quarter of last year and, for the first time, over half of our available impressions we served were on mobile devices.

In the second quarter, 81% of our enterprise customers utilized both display and non-display channels through MaxPoint, up from 65% a year ago. Mobile, which continues to be our fastest growing channel, was up 101% year-over-year in the second quarter.

In the second quarter, our gross profit was $18.2 million, which represented 79% of revenue ex-TAC. Our gross margin as a percentage of revenue ex-TAC decreased by 421 basis points year over year. Other cost of revenue was $4.9 million for the second quarter or 21% of revenue ex-TAC, compared to $3.6 million or 17% of revenue ex-TAC in the second quarter of last year, primarily due to capital expenditure depreciation and the amortization of capitalized software.

Other items included increased cost for data to support our campaigns. Note that we expect this line-item to delever throughout the year and leverage over time as we gain scale. Sales and marketing expense was $13.2 million or 57% of revenue ex-TAC, a 336 basis point improvement over the same period last year, as we continue to leverage investments made in 2015.

Ending quarter headcount in sales and marketing was 190 people down slightly from the previous quarter and up seven employees from a total of 183 at the end of Q2 2015. We expect further leverage in sales and marketing as we decrease the pace of net hiring in sales and marketing this year.

Research and development expense was $7.1 million during the quarter or 31% of revenue ex-TAC, due primarily to investments in our products. We added 12 new employees to R&D as compared to the end of Q2 2015 and ended the quarter at 145 R&D employees.

As we noted on last quarter’s call, the pace of our hiring in 2016 will be much more moderate than the previous two years. General and administrative expense was $4.4 million during the quarter or 19% of revenue ex-TAC, a 144 basis point increase versus last year.

We hired four new employees in G&A compared to the end of Q2, 2015, and ended the quarter at 48 G&A heads. A good portion of the increase of our G&A expenses in the second quarter were expenses related to additional headcount in 2015 and other costs necessary to support being a public company. We have put the personnel in place to support our operations and do not expect to increase headcount meaningfully during the year.

Net loss was $6.7 million in the second quarter compared to a loss of $4.9 million in the second quarter of 2015. Adjusted EBITDA was a loss of $3.1 million in the second quarter, compared to a loss of $1.8 million in the second quarter of 2015, about at the midpoint of our guidance range.

For the second quarter earnings per share on a GAAP basis was a loss of $1.02, non-GAAP earnings per share was a loss of $0.87. Please note that these per share amounts take into consideration the 1-for-4 reverse stock split of our outstanding shares of capital stock on April 25, 2016.

Capital expenditures including capitalized software costs were $2.1 million in the second quarter of 2016. We ended the quarter with $27.1 million of cash. Our credit revolver classified as short-term debt is $27.6 million versus $25.3 million at the end of the first quarter. As a reminder, our credit revolver is secured by our receivables and serves as a working capital bridge between our receivables and payables.

During the quarter, we purchased a $125,000 of MaxPoint shares as part of our share repurchase program. We continue to expect to end 2016 with approximately $20 million to $25 million in cash, depending on the size of our share repurchase program. I would note that our share repurchase program is not factored into our share count forecast.

As we continue our culture of innovation, we expect our new initiatives to have a portfolio effect and build over time. We are making progress against our strategic initiatives and believe we are on track with the right strategy to reaccelerate growth. We are executing well against our plans and expect these initiatives to collectively contribute to the top line as the year progresses.

With regard to adjusted EBITDA, we will continue to manage our expenses in relation to our revenue growth, and like most years, we expect a typical seasonal revenue patterns to drive a larger second-half and naturally improve our EBITDA performance. We expect that the combination of our revenue initiatives and expense management will lead to overall positive adjusted EBITDA in the second-half of this year. And we commit to being adjusted EBITDA positive for 2017.

Moving on to our revenue and adjusted EBITDA guidance, for the third quarter, we expect revenue ex-TAC to be in the range of $23.5 million to $26.5 million. We expect our adjusted EBITDA to be in the range of negative $3.5 million to negative $1.0 million.

We expect our basic and diluted share counts to be between 6.6 million shares and 6.7 million shares for the third quarter. For 2016, we are reiterating guidance for the full year. We expect revenue ex-TAC to be in the range of $93 million to $97 million. We expect our adjusted EBITDA loss to be in the range of $9.5 million to $7.5 million.

We expect our basic and diluted share counts to be between 6.6 million shares and 6.7 million shares for 2016.

To wrap up, we are on track with our plans and expectations for 2016 and we continue to feel confident that based on our growth expectations and expense management of the business, we will reach profitability on an adjusted EBITDA basis in 2017.

Now, we’ll open the call to your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kerry Rice from Needham.

Kerry Rice

Thanks a lot. First question is on the expanded accessibility to the MaxPoint’s audience and audience data. You mentioned partnerships with Acxiom LiveRamp and Adobe. How do you monetize that, if you could give us any context around the visit? Is it on the data they use? Is it on spending, from media spending through the platform from that data they use? Any clarity there would be helpful.

And then on the customer count, it went up by a fewer amount than it has in the previous quarters. Is there a focus shift there on larger customers or any clarity on the customer additions there? Thanks.

Brad Schomber

Hey, Kerry, this is Brad. Thanks for the questions. On the new partnerships, the terms are confidential. We had discussed in the previous calls that we are looking to eliminate friction as we go to market in some of these new initiatives that we have. Now, as such, as we develop these and gain traction, we’ll go ahead and let you know what the overall higher level terms are. But for these individual terms, we’re not disclosing how those are structured.

From a customer count perspective, you’re right. Our new strategic initiatives that we put in place really are most relevant to those larger brands that we deal with. And you can imagine that those larger brands are the types that would deal with these Adobes and the LiveRamps. As these initiatives ramp, we would expect a reduction in the growth rate of our enterprise customer base, and also because we’re already working with most of those top advertisers.

Kerry Rice

That’s helpful. Thank you.

Brad Schomber

Okay.

Operator

Thank you. And our next question comes from the line of Ross Sandler from Deutsche Bank.

Deepak Mathivanan

Hey, guys, thanks. This is Deepak on for Ross. Two questions from us. So first, you called out I think Europe and UK as one of the stronger performer regions in 2Q. I think you mentioned that revenues accelerated and then kind of softness after that. Was there anything specific, maybe from product or sales process standpoint that was driving it? And then, I have a follow-up.

Joe Epperson

Yes. You talk about the driving the acceleration of the business or the…?

Deepak Mathivanan

Yes.

Joe Epperson

Yes, so that acceleration was driven by - it’s the intersection of two things, we’ve been working to make sure that we have measurement products available such as traffic lift and such like that, plus as we continue to build out that team, and they are able to big deeper into the market. We’re finding great reception across the market for our - for what we are offering there.

Deepak Mathivanan

Okay. And then, subsequently into 3Q, what was going on there?

Joe Epperson

Yes, post the Brexit vote we saw a slowdown, but I will say that we are beginning to see the business slowly return to our more normalized trend line right now. And I want to reiterate that we take a long-term view towards international expansion. And as you saw with the acceleration in Q2 we’re really excited about the market reception that we’re getting across the UK and Europe.

And we have a very strong team and the opportunity in Europe - that the opportunity that Europe represents is quite attractive to us.

Deepak Mathivanan

Got it, and then second question with respect to the deferred component for the sales lift measurement studies. Was that just accounting or the contract is structured like that, or the contract structure that...

Brad Schomber

The contracts are structured the same way they always have been. It’s an accounting change and that we need to defer that because we are now offering a standalone measurement product. What also plays into this is that we had a record number of sales lift measurements going on at the end of the quarter, which really goes to that initiative of us driving deeper relationships and deeper integrations with our customers.

So it’s a two-factor approach, both the accounting and the business side of things.

Joe Epperson

And I’d like to say, this is a direct result of our efforts and focus to get deeper connections and integrations with our customers. And that’s what you are seeing here reflected in their ability to do these studies. You can’t do these studies without deep connections to our customer’s data sources.

Deepak Mathivanan

Got it, okay. How big is the customer base for these? I mean, I’m sure it’s still in a very early stage, like, do you expect it to ramp faster among the customer base or is it going to be - is there a sales process behind it?

Brad Schomber

Yes. In the standalone measurement products, we expect to see these fluctuate a little bit from quarter to quarter based on the measurement requirements of our customers. And you will see that we disclosed the number of - that we had done over the past two quarters.

From a sales lift perspective, the ones that we do with advertising campaigns, we’ve been running those for a long-time and that really hasn’t changed since then.

Joe Epperson

Yes, and from an adoption or a ramping perspective, as you can see we had a record numbers of them in Q2. So we are really excited about how our customers are gravitating towards this closed loop solution. And as customers, once they get used to using closed-loop, they have a tendency to use that repeatedly over and over again. So we are excited about - as we’ve seen both the number of customers and the frequency of them grow we’ve been very excited about that.

And it’s a core piece of our strategy and it’s also very core to our customer base. If you think about MaxPoint being centered around CPG and retail in categories like that, closed-loop sales lift measurement is at the center of making sure that their media works and having them being able to drive the ROIs that they require.

Deepak Mathivanan

Great, thanks so much.

Operator

Thank you. [Operator Instructions] One moment for any additional questions.

And that concludes our question-and-answer session for today and it concludes our conference call. We thank you for your participation. And you may now disconnect. Everyone have a good evening.

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