Tremor Video's (TRMR) CEO Bill Day on Q4 2016 Results - Earnings Call Transcript

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Tremor Video (TRMR) Q4 2016 Results Earnings Conference Call February 9, 2017 8:00 AM ET

Executives

Andrew Posen - Senior Director of IR

Bill Day - CEO

John Rego - CFO

Paul Caine - Interim CEO

Analysts

Alex Giaimo - Jefferies

Austin Moldow - Canaccord

Operator

Greetings. And welcome to the Tremor Video Fourth Quarter 2016 Earnings Call. At this all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference call over to Andrew Posen, Senior Director of Investor Relations. Mr. Posen, you may begin.

Andrew Posen

Thank you, operator. Good morning. Welcome to Tremor Video's fourth quarter 2016 earnings call. During the course of today's call, we may make forward-looking statements, including statements regarding Tremor Video's future financial and operating results, future market conditions, and Management's plans and objectives for future operations. These forward-looking statements are not historical facts but, rather, are based on the Company's current expectations and beliefs and are based on information current available to us.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including, but not limited to, those factors contained in the risk factors section of the Company's most recent annual report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 15, 2016, its Form 10-Q for the periods ended March 31, 2016 and June 30, 2016, and our future SEC filings.

All information provided in this conference call is as of today, February 9, 2017. Except as required by law, we undertake no obligation to update publicly any forward-looking statements made on this call to conform the statement to actual results or changes in our expectations.

Our commentary today will include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding company performance, but note that these measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP, reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release issued today. A copy of which can be found on our website.

And now, I'll turn the call over to Bill Day, Tremor Video's CEO.

Bill Day

Thanks, Andrew, and welcome to our fourth quarter 2016 earnings call. I am proud to report great results, which met or exceeded our expectations across all metrics, including record attainment [ph] total spend, revenue, gross profit and adjusted EBITDA.

In particular, our programmatic and higher function products continue to drive our growth with record results in the quarter. For the second consecutive quarter we delivered positive EBITDA as we continue to benefit from operating leverage driven by the adoption of our programmatic buy and sell side software platforms, as well as strong expense discipline.

As you saw in today's press release, and after a long consideration, I've decided to leave my role as CEO, our Non-Executive Chairman, Paul Caine is leading the search for the next CEO who will be stepping in as the Interim CEO during this transition.

Paul is a proven leader and a proven media industry veteran with deep knowledge of Tremor Video's business, having been the company's board since 2014. He is ideally suited to serve as Interim CEO during this transition. Paul brings abundant energy and experience in his role, and work diligently for our shareholders, customers and employees. I look forward to working with him during this transition and will remain a strategic advisor through June 1st.

I've got the honored of serving as CEO since 2008. I believe that my decision to make this change comes at a near perfect time. Tremor Video is operating from a position of strength, going to take further advantage of this dynamic marketplace.

As evidence in today's result, the company is on a positive trajectory with a strong strategic roadmap. We believe we are on a pace to achieve our long-term growth and profitability objectives.

Throughout the past year we've talked about the consistent growth and adoption of our programmatic software platforms, especially our sale side platform. Programmatic platform spend increased more than 96% year-over-year to $138, and represented 54% of our total spend for the year, up from 35% of our total spend in 2015. And nearly 90% of our programmatic spend is self-service, up significantly from last year.

The adoption of our SSP is becoming more global with new initiative in the UK and Brazil, complementing our leading presence in the APAC region. International business more than doubled in 2016 to a 11% of total spend from 5% last year. We have seen rapid adoption of our seller platform by new projects, as well as increased spend from existing clients.

As a example, I am very excited to announce that we recently entered into an exclusive two year partnership with Hulu. The premium [ph] online video content provider at the forefront of transition of TV to digital video.

Our partnership with Hulu and coupled with our previously announced partnership with DISH Sling TV demonstrates our expertise in OTT monetization, ahead of the widely anticipated shift in consumer behavior to connected devices. We all also signed a number of premium partners, including AMC Network and Gameloft.

We continue to execute against our goal of being a go-to global technology partner to power monetization for the most recognizable premium video brands.

Our buyer platform had a strong Q4 with increased agency trading desk adoption of self-service DSP, as well as strengthened our higher function buying products, highlighted by exclusive partnership with Alphonso. Alphonso was a data company that analyzes TV viewing behavior so that marketers can synchronize their digital and TV advertising. This is another example how we use our higher function product s to innovate advertising across screens.

Combined, our programmatic platform and higher and function products represented more than 91% of our total spend in 2016. This spend grew 46% year-over-year versus 2015. We believe that we will continue to grow our business and in conjunction with our ongoing focus on cost control, we'll be able to increase operating leverage and deliver profitable EBITDA in 2017.

As a result, I believe that the company is a strong place, creating the most opportune time for me to hand over the reins to a new CEO. I'd like thank our outstanding employees and management team that have built Tremor Video into what it is today and clients for their business over the years.

I also want to personally thank Paul Caine, stepping in as Interim CEO and our Board of Directors for making this transition a smooth and successful one.

And with that, I like to turn the call over to Paul, who will make a few comments before John walks you through the financials and then we take questions.

Paul Caine

Thank you, Bill. As Bill said, Tremor Video continues to be well positioned to take advantage of the growing online video marketplace and we remain firmly focused on executing against our strategy.

On a personal note, and on behalf of the Board, I'd like to take a moment to thank Bill for his extensive contributions. We are indebted to him for his innovation and leadership as he guided our company to its current position.

Looking forward, I'm excited to continue that work and towards even more closely with our strong and very capable leadership team over the coming months. We have commenced a comprehensive search to find our next CEO and have retained Heidrick & Struggles, a leading executive search firm to assist us. Our objective is to find the right leader as quickly as possible.

Now, I will turn the call over to John to walk into the financial and close with our expectations for 2017.

John Rego

Thanks, Paul. Q4 was a record quarter for us across all key metrics and provided an excellent finish to a strong year. During the quarter we reported record revenue of $53.8 million, record total spend of $84.8 million and record adjusted EBITDA of $3.5 million.

Our full year total spend was $254.2 million, at the high end of our expectations and that reflects 25% growth year-over-year. Revenue was $166.8 million, well above of our guidance and adjusted EBITDA was a loss of $2 million in line with our guidance.

Our strong results this year were once again driven by our programmatic platform business, which increased its total spend 96% in 2016. Our higher function buying also grew 6% in 2016 to $93.5 million. Collectively, programmatic and higher function buying represented 91% of total spend in 2016, and our legacy ad network represented 9%.

Revenue decreased 4% in 2016 to $166.8 million, while our gross profit increased to $76.3 million and our gross margins increased to 46% compared with 43% last year. And as we've mentioned on prior calls, our year-over-year revenue growth, as well as our comparative gross margins are impacted by the mixed shift of our business towards our seller platform, which is reported on a net basis.

Our blended take rate has decreased due to the shift in our business from managed service to self-service. However, we are not seeing pricing pressure, nor take rate pressure on a like-for-like basis.

We ended 2016 with an adjusted EBITDA loss of $2 million and were adjusted EBITDA positive for the second half of 2016, including a record $3.5 million in the fourth quarter. Throughout the year, we maintained our strict focus on cost management and continue to drive operating leverage, while scaling our programmatic platform business.

Total core operating expenses, which exclude non-cash items decreased as a percentage of total spend to 33% from 40% last year. Our net loss for the year was $20.9 million compared to a net loss of $43.2 million in 2015, which included a non-cash impairment charge of $22.7 million related to our goodwill and certain intangible assets. Basic and diluted net loss per share for the year was $0.40.

Now before I talk about our outlook, I want to spend a moment on our balance sheet. We ended the quarter with $91 million of available liquidity, including $56 million of working capital and a $35 million line of credit, which we just renewed and increased. During the fourth quarter, we repurchased 2.1 million shares at an average price of $2.15.

Now I wanted to finish with our expectations for Q1, as well as the full year. As we saw in 2015 and again in 2016, our business has consistently been stronger in the second half of the year, and we expect to see a similar trend for 2017.

For the first quarter, we expect total spend to be between $56 million and $60 million, revenue to be between $34 million and $38 million and adjusted EBITDA to be between a loss of $6 million and a loss of $3 million. For the year, we expect total spend to be between $315 million and $325 million, which represents a 26% increase at the midpoint of the range.

We expect revenue to be between $180 million and $190 million and adjusted EBITDA between positive $2 million and positive $6 million. The weighted average basic share count is estimated to be $50.1 million for Q1 and $50.4 million for the year. We are pleased with the strong results from our business in 2016, and we believe that we are on the right trajectory to deliver strong growth and profitable EBITDA for 2017.

And now we can open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Brian Fitzgerald with Jefferies. Pleas go with your questions.

Alex Giaimo

Hey, guys. This is Alex Giaimo calling in for Brian. Thanks for taking my question. Last quarter you mentioned social media platforms perhaps becoming a focus area in the future. So any update in that regard and then maybe just broadly speaking, in what way do you think those platforms can fit into your offer [ph] Thanks.

Bill Day

Hi. Thanks for the question. We [indiscernible] to be plugged into the social media, it is not something we're announcing any specific milestone on this earnings call. I think the way to think about it, is we believe social should be part of both sides of our platform initiative, right. So we should be able to align into social inventory through our DSP and potentially offer up of social inventory on our SSP.

I think or as we said, our focus and we said last time too, right, our focus is really driving hard into OTT. HULU is a great example of that and social will follow likely after that.

Q –Unidentified Analyst

Great. Thank you.

Operator

Our next question comes from line of Michael Graham with Canaccord. Please go ahead with your questions.

Austin Moldow

Hi, it’s Austin on for Mike. I had two questions, please. The first is how you are thinking about growth in the DSP versus the SSP in relation to your guidance, specifically in relation to your MSAs signed and I don’t know-how those are working out for you and I think they will factor in 2017?

The second question is on your higher function buying, can you talk about any services or products in there that are – I don’t know, being worked on to become a self-serve products, may be your all-screen and how those are moving into the DSP functionality? Thanks.

Bill Day

Exactly. So I thin, again the exciting news we had last quarter is really about getting the MSA set up, so that we can grow DSP more aggressively to start to be in line with where we've been from an SSP standpoint. The SSP sales continues to grow more strongly and that trend has continued, but we saw I think good evidence in Q4 of the DSP on a self-service basis starting to grow base on those MSA. So we're very I think optimistic about how that will play out this year, now that we have those MSAs set up.

So that is factored into our guidance, it’s both the fact that we expect continuing growth on the SSP and continued wins of new clients. Our goal again on the SSP is really to be the global leader and I think we're much nicely towards that goal.

And DSP environment is more fragmented. It’s hard for anybody to claim that they are the global leader right now and we think that is fragmented around the customer needs. The customer needs that have been particularly focused on, as you asked, our transition is second part of the question, but higher function buy is really about how you can start to move down a path where customers can self activate higher function products, so not just buying on a CPM, inventory on a CPM, that’s pretty straight forward and you can do that for a lot partners. But how can you really start to activate against products like as said are all-screen, like products like – so eventually Alfonzo, both of which sit in our plans, either things we offer now or in case of bunch of things, there if it continues the pace, so where we've seen a pace will be something we build in from a self activation standpoint.

The big focus right now in terms of taking something that was historically in just a managed service sense is cost per viewable impression. So cost per viewable impression in essence allows someone only to pay when the impression was viewable throughout the play of the video and completed, and the video is completed. And so that is something now that customers can fully execute through the platform and do that entirely on a self-service basis.

That’s only been our argument that the synergy between managed service and self-service is a beautiful one and that managed service allows you to innovate and try new things and build up a real business case around new buying models and then you can leverage our self-service platform to drive into a self-service model and get the broadest market base adoption.

And I think we just – that will be an ongoing thing. We'll talk about it probably in terms of things that accomplish every quarter against that goal, but I think it puts the company in a really productive place. Hopefully that’s helpful.

Austin Moldow

Yes. Thank you.

Operator

Our next question is from the line of Stephen Ju with Credit Suisse. Please proceed with your question.

Q –Unidentified Analyst

Hi, guys. It’s Chris on for Stephen. So as we think longer-term, I think crunchy role, just rolled out from an ad supported to a subscription model, are there signs from your other inventory suppliers that they may try and monetize via subscription model versus some kind of the traditional ad supported?

Bill Day

Yes, this is always the pendulum swing, they give any advertising business - publishing and I think it’s not in there - it’s a similar experience, it’s only the balance. I think in the end [ph] we have a strong belief that both will exist and do well, that the idea that market's going to hard down subscription only is not supported by experience we have and the willingness of people to pay for only so many products and the idea that things will be entirely only ad supported it is probably not likely.

Again, our partnership we just announced with Hulu, it’s a great example of a company that’s pushing hard down both ad-supported and subscription-supported services dissimilarly, right.

So I think our belief about advertising always has been that it’s got to be really great. If it’s not great, it’s not going to fit because if there is a subscription based service if you are showing too many ads of those, as our targeted well if they are not delivered effectively, it becomes a net negative to the overall user experience and puts the seller and the publisher in a really tough position.

So our focus on efficacy and showing the right ad at the right time, the fewest number of ads with highest yield for the seller I think fits nicely with that. We don’t see anything and are now hundreds and hundreds of sellers we work with that suggest that there is any material shift towards subscription more than anything else that was going on prior.

Q –Unidentified Analyst

Okay. Thanks, guys.

Operator

Thank you. I will now turn the conference back to Paul Caine for closing remarks.

Paul Caine

Okay. Than you, operator. I want to thank everyone for their questions. I'd also like to thank each of you for joining us this morning. In summary, we're very excited about our strong 2016 results and we're confident about the company's future. We've entered 2017 in a great position and are well positioned to continue providing our customers with solutions that best deliver video advertising effectiveness and enable our partners to more efficiently monetize their inventory. So again, thank you for your participation in the call this morning. And we look forward to updating you in the months ahead.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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