Quotient Technology Inc. (NYSE:QUOT) Q3 2018 Earnings Conference Call November 7, 2018 4:30 PM ET
Stacie Clements - VP, IR
Mir Aamir - President, CEO & Director
Ronald Fior - CFO & Treasurer
Steven Boal - Founder & Executive Chairman
Zachary Schwartzman - RBC Capital Markets
Steven Frankel - Dougherty & Company
Thomas Forte - D.A. Davidson
Welcome to the Third Quarter 2018 Quotient Earnings Conference Call. [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, operator. Hello everyone, and welcome to our third quarter 2018 earnings call. Please note that slides to accompany the remarks on today's call are available on the IR section of our corporate website. On the call with me, today are Mir Aamir, our President and CEO; and Ron Fior, our CFO. Steven Boal, our Executive Chairman, is here as well and available for questions after our prepared remarks.
Before we begin, please note that in the call, you will hear forward-looking statements. These forward-looking statements include projections for our fourth quarter and full year 2018; our expectations for our offerings, partnership, pricing strategies and platforms; as well as the expected growth of and investments in our business generally. Forward-looking statements are based on information available to you and the good faith beliefs 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 risk factors identified in our quarterly report on Form 10-Q filed with the SEC on August 3, 2018. 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, operating expenses, gross margin and net loss, 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 result 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 Mir.
Thank you, Stacie, and welcome, everyone. We had a record third quarter delivering record revenue and record EBITDA and marking our first quarter with revenue over $100 million. Third quarter revenue was $103.6 million, up 26% from a year ago, driven by Retailer iQ and our data-driven media solutions.
Retailer iQ revenue grew 17% and media was up 69% over Q3 of last year. Adjusted EBITDA was a record $16.4 million. CPG marketing spend estimated at $225 billion annually continues to converge with media, promotions, e-commerce and data, all coming together in a new paradigm of analytics-driven digital marketing. We believe we are leading this transformation for CPGs through our integrated digital solutions and significant and proprietary shopper data. In Q3, total revenue from our top 20 CPG customers grew by 19% over Q3 2017. And revenue from all other customers, which includes many small and mid-sized CPG brands, increased by 42% in the same time period. This is a true testament to the strength of our platform as smaller brands with high growth potential also turn to us to drive sales efficiently through digital marketing.
Last week, we announced the acquisition of U.K.-based Elevaate that we believe will greatly enhance our digital media capabilities and drive e-commerce sales for our retailer and CPG partners, something I will speak more about in a moment.
I'll now walk through some of the quarterly highlights. Revenue from promotions grew 9% year-over-year. Within promotions, revenue from digital paperless coupons on Retailer iQ grew 17%. Our recently launched Quotient Analytics, a self-service platform that gives CPGs near real-time insights and campaign measurement, is serving as a catalyst for more business. Additionally, we now have a database of over 1,000 measurement studies that we use to optimize future campaigns. To date, the majority of our promotion revenue has come from national budgets, where CPGs spend almost $3 billion annually in coupons, primarily through paper. National digital coupons continue to grow on our platform, although shopper demand for coupons from us far exceeds the supply from CPGs.
To help drive more spend, we're also selling more retailer-specific coupons and tapping into trade promotion budgets, which represent more than $100 billion that CPG spend on discounting products on shelf. These discounts are not personalized. And by spending on digital coupons, CPGs can drive sales more efficiently. For example in Q3, we piloted a few campaigns with a large CPG and the results were great, driving an average of 26% increase in sales. We are the natural digital partner for CPG brands and retailers to do this at scale, with over 75 million shoppers registered to programs powered by Quotient's Retailer iQ with a significant amount of shopper data. And with innovations like digital circular, CRM for CPG brands and targeted coupons, we believe we have a unique advantage in terms of technology and scale to accelerate CPG promotion spend shift from offline to online.
Additionally, we continue to bring ROI-based pricing to the market. One example of which is coupon fees based on redemption rather than activation. We signed a prominent CPG recently on this model. As a result, they have committed to increase their digital coupon spend with us by over 50% in 2019. We are also bringing packaged programs to CPGs, whereby we enable them to maximize working dollars by buying combined campaigns that include digital media, digital coupons and audience data, all at package pricing. In Q3, we launched 7 campaigns, which are live and have already sold additional campaigns for Q1 2019. The concept is resonating well with CPGs as it further improves their ROI on marketing spend. For Quotient, it fits well with our integrated platform for digital coupons, media and data.
I'll now turn to media. Media has been a tremendous and exciting growth story for us. Revenue increased 69% year-over-year, driven by our entire suite of solutions and particularly from shopper marketing media to our partnerships with retailers. As a reminder, Quotient's platform offers full service performance media solutions, reaching a verified buyer audience of over 100 million based on shopper transaction data that is used for targeting and measurement and intent data from our flagship consumer property, Coupons.com. In addition to audiences based on actual shopper data, as we model audience segments based on this data, we expect to have a reach of almost 100% of U.S. adults estimated at about 250 million people.
We also continue to expand our retailer media partnerships as well as our media technology capabilities. I'm very excited to announce that we have expanded our partnership with another Top 3 grocery retailer in the U.S. to be their exclusive digital media partner, which is expected to go live in the coming months. This makes our fifth retailer in which Quotient serves as the exclusive digital media partner, meaning that CPGs wanting to deliver digital ads to these shoppers using purchase data must work with Quotient. Collectively, these retailers represent annual grocery sale of about $150 billion. This success has been driven by our media technology and solution that we built as well as integrated through acquisitions. That includes dynamic creative ad units in mobile, influencer marketing and social and now sponsored search for e-commerce, all using offline and online shopper transaction data.
We're delivering strong return on ad spend on the CPG campaigns that on average outperform industry benchmarks. Additionally, we're seeing great momentum from our social media influencer solution Ahalogy. Independent research from Forrester just recognized Ahalogy as a leader in its first-ever report on influencer marketing. The report stated that Quotient's influencer solution is "the best fit for CPG and retail brands and shopper marketers eager for full service." As an example, Del Monte after working with a number of agencies chose Ahalogy as its partner almost a year ago. The result, Del Monte says it saw ROI from its influencer programs rise by over 300%.
We're also increasing focus in investment on our capability to drive e-commerce. As mentioned, last week, we announced our acquisition of Elevaate, a technology platform that drives e-commerce sales through sponsored search and product ads on retailer's e-commerce properties and elsewhere on the web, attracting budget currently spent with Google, Amazon and other search platforms. The acquisition enables us to help our retailer partners boost e-commerce media and sales at a time when shoppers are initiating more of their products searches directly on retailer digital properties and retailers that sell groceries are investing heavily in e-commerce. We have several retailer partners eager to add our new sponsored search capability into their e-commerce sites.
Overall, we continue to strengthen our value proposition to CPG brands and retailers through great technology, content, data and consumers. And as a result, we're accelerating our revenue growth rate. And we continue to invest in building and acquiring new technologies. One such innovation is CRM solutions for CPGs to run brand loyalty programs with their consumers at scale. With these programs, shoppers are rewarded for repeat purchase of a brand across retailers over time. Earlier, this year, we began testing a Retailer iQ capability in this space. And in Q3, we acquired a company called Savingstar to enhance this capability, which adds to our already large amount of shopper transaction data. With their CRM product and retail relationships integrated into our platform and leveraging our retailer partnerships, we're launching a CRM and loyalty offering to CPG brands at a scale previously not available in the marketplace. We believe this should be another catalyst for accelerating promotions revenue growth.
Converging some marketing spend is happening in the marketplace. Our CPG and retailer partners are redefining how they go-to-market in the face of tremendous macro and competitive challenges. We're very excited to help them do that. Our significant data assets, technology in media and coupons and scale with consumers provide us with a significant competitive advantage that we believe will allow for accelerating growth for years to come.
I will now turn the call over to Ron.
Thank you, Mir, and welcome, everyone. As you just heard from Mir, we had a record third quarter, driven by continued year-on-year growth in media and Retailer iQ promotions. Total revenues in Q3 were a record $103.6 million, up 26% over Q3 of 2017.
Transactions in the third quarter were just over 1 billion, up 4% over Q3 of last year. We recorded a third quarter GAAP net loss of $7.8 million compared to a GAAP net loss of $10.8 million in Q3 of 2017. Growth in media and promotion revenues offset by increased cost of revenues as well as stock-based compensation expense and the change in fair value of escrow shares and contingent consideration led to the smaller GAAP loss.
Adjusted EBITDA was a record $16.4 million, up 32% from $12.5 million in Q3 of 2017. Adjusted EBITDA excludes interest expense, provision for or benefit from income taxes, depreciation and amortization, stock-based compensation, net changes in the fair value of escrowed shares and contingent consideration, other net income or expense, restructuring charges, ERP software implementation costs and certain acquisition-related costs. GAAP cash from operations in the third quarter was $4.4 million. Excluding the cash used for the Crisp burnout that was included in operating activities, we generated approximately $14 million in cash from operations.
Net of cash used for the stock buyback program, M&A payments, the Crisp burnout and investments in retailer partnerships, we ended the quarter with a cash and short-term investment balance of $328.6 million, down $29.4 million from Q2.
In summary, we are very pleased with our performance this quarter. Look at revenues. Drilling down into our $103.6 million Q3 revenues, promotions revenue came in at $63.3 million, up 9% over last year and netting of 17% revenue growth in Retailer iQ, our digital paperless coupons, with the anticipated decline in specialty retail of 14% and a slight uptick in digital print of 2%.
Looking at media; media revenue in the quarter was $40.3 million, a 69% increase over last year, driven by our integrated media solutions, now including Ahalogy and our focus on shopper marketing. Looking at our growth engine; digital paperless coupons and media combined in the third quarter to grow 39% over last year and accounted for approximately 76% of our total revenue. And over the past 7 quarters, this combination has shown an average quarterly year-on-year growth rate of 43%.
Looking at our top customers; CPGs continue to spend more on Retailer iQ. Revenue from our top 10 paperless customers grew 18% year-on-year in Q3 while increasing their proportion of total promotions revenues. On the media side, our Top 10 customers grew their spend with us 86% in Q3 compared to last year. Looking at total revenue from CPGs. As Mir mentioned, in the third quarter, total revenue from our top 20 CPG customers grew by 19% over Q3 of 2017. Revenue from all other customers, which includes many small and mid-sized brands, increased by 42% in Q3 versus a year ago.
Let's look at transactions. Total transactions in the third quarter were $1.03 billion, up 4% from a year ago. Breaking it down further, our digital paperless coupon transactions were approximately 9% over Q3 of 2017, representing 86% of our total transactions in the third quarter. Digital print transactions decreased approximately 20% from the same period last year. Transactions are becoming less of a proxy for the health of the total business -- of the total business as our solutions become more tightly integrated and CPG budgets converge. Our focus is on total revenue growth from our customers. As a reminder, we only report transactions that have specific revenue attached to them. On a go-forward basis, as we sell packaged solutions, which include promotions, media and analytics, the lion share of revenue will likely end up in media.
Moving on to the P&L; Gross margin, our GAAP gross margin in the third quarter was 44.9% and reflected the continuing shift in our product mix as a greater proportion of our revenues came from media, which generally has a lower gross margin than promotions. This compares to last quarter's gross margin of 46.7% and 54.2% in Q3 of 2017. Non-GAAP gross margin which excludes amortization of acquired intangible assets, stock-based compensation expense and restructuring charges came in at 49.9%. This was down from last quarter's 51.6% and 58.2% in Q3 of 2017, primarily a function of product mix changes I described previously. We continue to make strategic investments in multi-year retail partnerships, data relationships, technology, solutions and services to drive more revenues and gross margin dollars.
Operating expenses; for the third quarter, GAAP operating expenses were $52 million, up sequentially from the $44.2 million and down from $55.7 million in Q3 of last year. The increase over Q2 is primarily related to the charge for the net change in fair value of escrowed shares and contingent consideration of $4.7 million, restructuring charges related to severance for impacted employees as well as absorbing a full quarter of Ahalogy expenses. Year-over-year, the decrease is primarily due to the lower charge for the net change in fair value of escrowed shares and contingent consideration in Q3 of 2018.
Non-GAAP operating expenses which exclude stock-based compensations, net changes in the fair value of escrowed shares and contingent consideration, acquisition-related costs, amortization of acquired intangible assets, ERP software implementation costs and restructuring charges, were $37.3 million in Q3 of 2018 versus 35.2 -- $35.4 million in Q2 of 2018 and $37 million in Q3 of 2017. The sequential increase is primarily due to a full quarter Ahalogy expenses. In percentage terms, non-GAAP operating costs were 36% of revenues in Q3 of 2018, down 4 points from last quarter's 40% level and a significant improvement over last year's 45% level, despite absorbing a full quarter of Ahalogy's operating expenses. This reflects the combination of revenue growth and greater efficiencies in our overall operating expenses.
Looking ahead, we intend to continue our efforts around operational efficiency, while expanding our presence across geographies.
Adjusted EBITDA; in the third quarter, we delivered a record $16.4 million of adjusted EBITDA or 16% margin and over our guidance. Compared to last quarter, we generated an additional $3.5 million in adjusted EBITDA and increased our margins almost 2 percentage points. The positive impact on adjusted EBITDA was driven primarily by continued operating efficiencies as well as reallocating some marketing spend to Q4 for the holiday season. As our business evolves, we continue to focus on revenue growth, profitability and cash. As revenue growth accelerates, coupled with continued operating efficiencies and cost management, we believe this positions us for expansion in both EBITDA dollars and margin percentages longer term.
M&A activity; during the quarter, we purchased a small company called Savingstar to enhance our CRM capabilities by helping brands build and track brand loyalty campaign and purchases across multiple retailers. We also recently announced the Q4 purchase of Elevaate adding sponsored product search into our retail performance media platform. We expect the revenue impact in Q4 from both of these acquisitions to be immaterial. As we worked to integrate both products with our current offerings, we expect a negative impact of over $1 million on EBITDA in the fourth quarter.
Stock buyback; earlier, this year, we announced a 1-year stock buyback program of up to $100 million through a combination of 10b5-1 plan and an open window 10b-18 plan. In the third quarter, we repurchased approximately 308,000 shares of common stock for a total of $4.2 million. Year-to-date, we have bought back just over 800,000 shares and used approximately $11 million of the approved program, leaving us with $89 million available.
Let's now talk about guidance. For the full year, we are guiding to a revenue range of $395 million to $400 million, which translates into a fourth quarter 2018 range of $115 million to $120 million. We expect full year adjusted EBITDA to be in the range of $59 million to $61 million, which converts into a Q4 range of $18 million to $20 million. The EBITDA guidance is reflective of increased strategic investments in retailer partnerships, our recent technology M&A, reallocating marketing expenses from Q3 to Q4 and the margin impact of products mix shift with the proportion of media revenues increasing. We believe there's a significant opportunity for increasing EBITDA in 2019 and longer term based on our expectations of increasing revenue growth while managing operating expense growth at a much lower level.
We believe the strategy we put in place is the foundation for longer-term growth opportunities. We continue to be focused on efficient expense management. And as revenue continues to grow, we believe we have set ourselves up for improving EBITDA dollars and margins, thereby increasing shareholder value. This quarter, we'll be attending RBC's TMT conference in New York on November 13. We look forward to seeing you there.
We will now open the call for questions. Operator?
[Operator Instructions] Your first question comes from the line of Mark Mahaney with RBC Capital Markets.
It's Zachary Schwartzman on for Mark. Ron, on the last call, I think you suggested that 2019 could have 30% revenue growth given the prior run rate from the expanding media solution offerings. I know it's still early, but does this 30% growth number for 2019 still sound realistic today? And do the acquisitions of Savingstar and Elevaate changes this outlook? Or are those embedded into those prior comments? I had a one follow-up.
This is Steven, thanks for the question. So we made a prior comment. We didn't have either of those in mind. And so those will be ex those. And again, just pointing out some highlights we talked about today, 76% of our revenue grew at over 39%, so consistent with what we said last quarter. If you just take the growing parts of our business and straight line them out and take the declining parts of our business and continue to straight line them out that does get you to over 30%.
Let's be clear, that's not our guidance also for 2019.
That's not our guide for '19. That's just math on the current trajectory.
And the follow-up is what are the direct strategic? And if there are any near-term positive financial synergies between your three most recent acquisitions, Savingstar, Elevaate and Ahalogy. And if you can talk more about how these solutions integrate with each other? And how -- and what's the learning ramp like for CPGs and retailers for these new tools?
The synergies because they are capability acquisitions and their wonderful capabilities that are very complementary to what we have and what we're bringing to the marketplace, the synergies are in revenue growth, right. So we are -- our goal is to garner a bigger and bigger portion of CPGs, $225 billion in marketing spend on all aspects. And this is where this fits in. Ahalogy on the social influencer side, and that's doing really well under our umbrella. Elevaate and Savingstar relatively new, but Savingstar on the CRM side, again, CPG looking -- spending on brands to connect with consumers. And then Elevaate on sponsored search e-commerce, I mean, there is a whole trend, as you can -- as you know and you've read about on initial -- product searches initiated on retailer properties.
And currently, CPG budgets for that largely are spent on Google and Amazon and other search properties. And so this capability on retailer properties allows us to tap into those budgets and grow our sales synergies, again, on the top line side.
Your next question comes from the line of Steven Frankel with Dougherty.
Steve talked a lot over the last year to -- about the supply side shortages, just not enough of promotional volume. Do you think packaged campaigns will help materially close that GAAP? Or are there other tweaks you need to make to the model to solve that problem?
This is Steve. I think it's a good question. So absolutely, packaging is a way to solve that and to change the way that, that looks in that complexion of that. Remember, the media spend at these companies before really, really large. And so what we asked them to do is not increase the media spend, but shift it to our platform and turn their promotion working dollars into a higher ROI spend. And so that really should solve the problem having more consumer demand than supply.
And what kind of early feedback are you getting on these packaged campaigns? Do they want further tweaks to your media platform? Or do they feel like that platform is the right place to spend those incremental dollars?
Very positive feedback right now. Very positive feedback and then, they're working on annual plans, right. So I mentioned this before. CPGs always work on annual plans. So we do this. They like it, and then we start taking it into the next year plan. But just in terms of your question on -- your sub-question media platform capabilities, we have now an end-to-end media solution which can absorb all types of marketing expense, media expense. And it's connected with coupon platform, and it's all tied into data. Data that can be used to target consumers on the front of it with media and coupons whether on property or any third-party properties, right, including social and then data that can be used for measuring the actual return on in-store sales. So it's a very good combined value proposition.
So far, the early results and early feedback from CPGs is positive. As they plan their next year, we should expect to see more and more of this happening.
You've talked a lot about the age barrier or mindset barrier you fight with the CPGs, even though you can show them the data, they don't always get it. They like to do things the traditional way. As your analytics have improved has it made it easier to fight that battle?
It has. And analytics are absolutely a key to doing that. But despite the analytics, it's slow and not only because of traditional practices that's hard for them to sort of break in a quick -- they bake it slowly, but also because the number of these budgets sit in different silos in the CPGs, and we're actually working to break down those silos. It's working. It's starting to work well. They know they need to do that in the world of digital anyways. And we're helping them, leading them, but it's slower than we would like.
Your next question comes from the line of Thomas Forte with D.A. Davidson.
Thanks for taking the time to walk through your recent M&A activity and how that all comes together. I wanted to look ahead though and think about what your M&A strategies going forward? And what particular types of opportunities you're looking for? I think you talked in the past about wanting to make either data analytics or data-related acquisitions as an example.
So we've talked in the past that our focus for M&A is on capabilities and technologies, things that fit well with our platforms today, right, and fit well with the needs of the CPGs and retailers that we are aiming to serve. So that's consistent and that will remain consistent. We mentioned three areas that we focus on: promotions, digital, media, right, Media solutions, including ad tech and data and data, which includes analytics, but also data that can help with audience data and digital media, audience data, landing audience data at various places and then the analytics in the back end, right. So those are the three areas. And if you've looked at our history of already -- the recent history of our M&A, it's been in those areas, and it's been focused on capabilities that do really well under our umbrella. And that's panning out really well so far, and that's what we're going to focus on going forward.
There are no further questions at this time. I'll turn the call back over to our presenters.
Thank you. Thank you all for joining us today. We had a record quarter on both revenue and EBITDA. And with our leadership position in the marketplace, we are well positioned to accelerate our growth in 2019. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.