Mobivity Holdings Corp. (OTC:MFON) Q4 2021 Earnings Conference Call March 30, 2022 4:30 PM ET
Brett Mass - Hayden IR
Dennis Becker – Chairman and Chief Executive Officer
Lisa Brennan - Chief Financial Officer
Conference Call Participants
Jeff Porter - Porter Capital Management
Bryce Daniels - Talkot Capital
Greetings, and welcome to Mobivity’s Fiscal Year 2021 Earnings Call. At this time, all participants are in listen only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Mass of Hayden IR. Please go ahead.
Thank you, operator. I'd like to welcome everybody Mobivity’s fiscal year 2021 earnings call. Hosted a call today are Dennis Becker, Founder, Chairman and Chief Executive Officer and Lisa Brennan, Chief Financial Officer. Before I turn the call over to management, I'd like to call it with attention to the company's Safe Harbor policy. Please note that certain statements made on this call will be looking statements which are subject to considerable risks and uncertainties. We caution you that such statements reflect management's best judgment based on factors currently known, and that the actual results or events could differ materially. Please refer to the documents filed by the company from time to time with the SEC and in particular, its most recently filed interim report on Form 10-K. These documents contain and identify important risk factors and other information that may cause actual results to differ from those contains in the forward-looking statements. Any forward-looking statements made during this call are being made as of today. If this call is being replayed, reviewed after today, the information presented during this call may not contain current or accurate information. Except as required by law, the company assumes no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in the forward-looking statements, even if new information becomes available in the future.
Today's call may include non-GAAP financial measures, which require a reconciliation of the most directly comparable financial measures, which are calculated and presented in accordance with GAAP and can be found in today's press release along with our recent corporate presentation, which is also available@ mobivity.com. With all that said, I'd like to turn to the commentator, Becker. Dennis, the call is yours.
Thanks Brett. And thanks everyone for joining us on our call today. First, I'd like to say how proud I am of the team in Mobivity for the innovation and progress we have achieved over the past year, and particularly in the fourth quarter. 2021 was a year of change in the digital marketing universe and at Mobivity. The digital marketing industry was turned upside down by stringent privacy regulations, and particularly to changes in tracking and advertising to mobile phones. Mobivity has always been a better solution to the many challenges in digital marketing. But we are unique in the way we address this new slate of challenges. We seize the opportunity presented by these changes and pivoted to some new exciting verticals, while continuing our expansion in restaurants and convenience stores. This pivot has positioned us to be able to achieve rapid growth with higher margin and higher value of recurring revenue by solving the new multibillion dollar problem in marketing, which is where advertisers find large audiences and how they target them.
Simply put, our legacy business drove the digital transformation for brands through building audiences for SMS marketing from scratch, and for fractions of a cent per customer. Our new business line, it focuses on connecting existing offline and digital audiences can bring in many dollars per customer across a larger and more active audience. Mobivity’s technology empowers our customers with 100% unique offer codes, perfect attribution and tracking all at scale better than any other competitor. Our customers use Mobivity technology to reach and engage more than 100 million consumers across more than 40,000 locations across the globe. We're executing millions of digital engagements to these customers on a monthly basis. And because we have demonstrated the incredible reach and the value of our unique technology, we're positioned to connect these millions of consumers across 1000s of locations and brands, to online businesses like video games, gambling and streaming video across all platforms, including mobile phones, desktop boxes, and gaming consoles.
These connections are some of the highest value in all of the digital industry. And we have the potential to transform digital marketing. I'm pleased to report that we began executing this pivot in the fourth quarter of last year. We connected several mobile gaming operators to our large brand consumer audiences and have already successfully launched multiple programs in the first quarter of this year. I'd like to explain in a bit more detail why we believe we are uniquely positioned to create a valuable marketplace at the intersection of digital and brick and mortar brands. First off, we're able to leverage most of our existing technology and product assets with minimal new development costs. For example, leveraging our unified offer solution that produces unique scannable coupon codes already used by many large brands. Consumers could redeem points earned by playing a video game, or watching a streaming video online for a pizza or $0.30 off gas at their nearest Circle K. Conversely, a burger chain could send an SMS text message offer giving their customers a free burger if they download a mobile game, or a convenience brand advertises a game in store and through their website, and offers customers a range of redeemable offers for trying a streaming video service.
In each of these examples, Mobivity is the technological plumbing that connects offline and brick mortar consumers to digital products and vice versa. We become the vital gateway between consumers’ physical goods and services, and digital only businesses and power promotions and offers that are organically placed within existing channels. Formerly, we relied on a long sales cycle to get brands to commit to deploying our solution, and then spend months to a year organically building audiences to market to through SMS text messages and digital promotions. Under our new model, we simply match digital and real world audiences and driving power consumer interaction between their respective businesses. Where we used to enter a month long deployment cycles prior to revenue production, instant audiences between digital and real world brands need much shorter time to revenue. Additionally, our technology has the scale, ability and is purpose built to power the interaction between consumers and brands uniquely across all marketing channels, and all points of sale whether in store or online.
On top of this, we have major brand clients such as Circle K, Pepsi, Subway, and others, which means we provide digital businesses and instant and lucrative real world stable of brands with which they can partner. The digital first companies that we connect with brick and mortar brands operate in the mobile gaming, mobile gambling and streaming video markets, among others. These are rapidly growing industries with massive addressable markets and valuable customers. These partnerships will exponentially grow the addressable market for our technology. Finally, just as with our former model, where we predominantly generated recurring revenue through fees from SMS volume and brand locations, our new model also drives recurring transaction fees as digital and real world brands conduct transactions, although it multiples higher dollar value. We're pleased to report that since developing this new model in Q4 of last year, we've already achieved four new key partnerships with digital consumer businesses that are running live programs with our existing brand customers. These programs have delivered 1000s of consumers from digital environments to brick and mortar brands and vice versa.
We're also seeing strong demand from additional brick and mortar brands and digital partners with many new deals in the pipeline. Or early velocity is supported by the fact that our existing product and technology platforms need very little development to power our new business model. Before I hand the call over to Lisa for a more detailed summary of our financial results. I will point out that our shift in our business model did require restructuring some of our existing customer contracts to support long-term upside. We made the tough choice to accept some short-term changes to ensure the long-term upside of continuing relationships with key customers. We strongly believe this will fuel tremendous upside within our new model. While we're not pleased with the short term impact of these changes, we are excited that these customers are continuing as a Mobivity partner to help us pioneer a revolutionary way to connect digital and brick and mortar consumers in an era of privacy protected commerce.
I will now turn the call over to Lisa for a more detailed view of our financial results. And then I will come back for a few summary comments. Lisa?
Thanks Dennis. While we ended the year with approximately $735,000 in cash, we recently completed a loan conversion in February of this year that added in additional $2.5 million to the balance sheet. We're confident that our cash on hand is sufficient to continue executing on the business model that Dennis previously described. Revenues for the 12 months ended December 31, 2021 were $8.2 million, a decrease of $5 million, or 38% compared to $13.3 million for the 12 months ended December 31, 2020. This decrease is primarily due to three key reductions from a large customer from 2020 to 2021. First, there was a reduction of $1.7 million of revenue from non-recurring engineering fees paid by this customer in 2020 that cannot repeat in 2021. Second, we restructured one of these customers’ contracts in late 2021, which resulted in a decrease in revenues of $1.7 million. And third this restructuring included another $1.2 million that ASC 606 related revenues booked in 2020.
While the year-over-year in revenue impact from this customer was negative, we continue to provide this customer with other services and feel confident we will grow with this customer through our new business model. Total operating expenses for 2021 increased by 22% to $12.8 million, compared to $10.5 million in 2020. This increase was primarily due to higher sales and marketing investments to capture market share in 2020. We also incurred approximately $1.2 million in non-recurring legal expenses during 2020. These fees were related to resolving disputes involving the Telephone Consumer Protection Act. And we feel strongly that these costs will not continue now that the Supreme Court has issued a landmark ruling in the Facebook versus Duguid case. Finally, I'd like to address our gross profit margin, our gross profit margin for 2021 fell to 47% from 64% in 2020, primarily because of the non-recurring engineering revenues earned in 2020. It did not recur in 2021 and did not carry the same wireless messaging and cloud hosting costs of goods with -- to our messaging business. That said, we are very excited by historically high gross profit margins being generated by our new line of business that are earning transaction revenues at multiples of our formal mobile messaging fees, and are free from wireless carrier transmission costs and surcharges.
I'll now turn the call back over to Dennis, for his closing remarks. Dennis?
Thanks Lisa. Thus far, we have seen a tremendous response from our digital partners, real world brand customers, and most importantly, consumers. It's obvious that consumers want real world rewards while enjoying digital services like video and gaming, and that digital and brand businesses are motivated to offer these rewards and incorporate these offers as a part of their long term strategy. In fact, since executing our pivot in the past few months, we've already forged partnerships with gaming operators reaching more than 40 million gamers across mobile, PC and console platforms, all of which are now counting on Mobivity to help bring those gamers to the food and convenience brands they love and vice versa. We believe we are powering a whole new approach to advertising. And we're excited to play a key role in building a valuable intersection between online and offline audiences. Thank you for tuning in and for your continued interest in Mobivity. We will now open up the call for Q&A.
Our first question is from Joe Schulte with Zero GE Capital.
Hey, guys, thanks for taking my call. Yes, can you just talk about how you're thinking about competition? And how you see competition developing in your vertical? Thanks.
Yes, good, thanks. Thanks for the question, Joe. So yes, like the way we think about this is our combination of patented technology and unique product capabilities are at the core of our competitive advantage here and how we're thinking about this new business line. When you think about how you can get presented with a voucher while playing a game or enjoying streaming video that could be used instantly, at any one of Circle K 7,000 locations or you think about all these brands we work with Subway 20,000 locations. So thanks to our patents relating to digital offers redeemed at physical point of sale locations, we have IP around dynamic codes printed on physical receipts at retail, and we have patents around text messaging that helps build a real IP portfolio around what we're doing. Beyond that, it turns out that text messaging is a perfect, ubiquitous way to get coupons to consumers from any environment.
So, again, when you're thinking about getting an offer since you, while you're playing your favorite video game, if that gaming publisher doesn't have to do a lot, in other words, build some type of couponing system or something to get that voucher to use, so that you can go to any store to redeem it and get instant gratification. That's reduced friction, and we already have all that built out. So in essence, our proprietary method to natively power or integrate with the coupon code system, point of sale devices across all these retail brands, for the things are plug and play we think has built a big first mover advantage and build a big path of least resistance for digital operators wanting to bring real world rewards into their ecosystems. So while we're not aware of any direct competition that's kind of woven together all of this as we have, at the same time we're acknowledging that this the high value game, their premiums that these digital operators are willing to pay to get consumers into their digital programs, and vice versa. At the time, we're pretty confident the most that we're building through patented protected technology and scaled product is a big advantage for us.
Our next question is from Jeff Porter, with Porter Capital Management.
Hey, Dennis. I'm trying to understand some of the nuances of the pivot and sort of the new pricing with these new customers and how that's going to impact gross margins and sort of can give us any flavor on that, and why you're confident that we're going to see gross margins go up fairly dramatically, with these new customers.
Yes, hey, Jeff, thanks for the question. So it's pretty straightforward. Look, on a year-over-year comparable basis, we in 2020, we had higher gross margins because we were doing a lot of non-recurring engineering during and helping our customers through COVID. So when we went into 2021 we kind of fell back to lower gross margins because in kind of the ordinary business or legacy business of delivering text messages to a brand's consumer, we're now in the game of helping different brands bring consumers to each other's respective services, whether it's a streaming video service, trying to get a convenience store customer to adopt their streaming service, or try their game, and vice versa. So as I mentioned, during the call, the premiums that are being paid to convert and transact those consumers, in other words, get somebody who visits the Sonic to try a game that's where the premiums that are paid are in the dollars or 10s of dollars, versus where in our legacy model, we're helping a Sonic or a Subway just send text messages to their existing customers. And those transaction fees being in the pennies. So what excites the most about our new line of business is that we can now command far higher transaction fees, and that massively dilutes the messaging costs of goods down to low double digit or even single digit cost of good levels.
So, again, as a hypothetical example the streaming video operator wants to pay us a transaction fee of $5. To convert a fast food customer to a subscriber, our cost to good is de minimis given that it's just a text messaging transaction that is giving that consumer a coupon code to incent them to try the streaming video service. So again making $5 and having a sub penny cost of goods, you just get dramatically higher gross margins than if you're working directly with a brand and their own consumers and charging that brand, say a penny and having sub penny cost of goods. So there's just such a higher premium being paid in our ability to uniquely service this gateway bringing these two audiences together than if we're just working with brick and mortars talking to their own audience. Does that makes sense?
Yes, so are there two pieces to the revenue? Is there like the user acquisition piece that sort of like one time if we get somebody to download a game or something? And then is there also we get paid on the coupon redemption? Or when they win tokens and come in and cash them in? How does that play out?
Yes, we think it creates a not just a onetime transaction, where we've gotten say a fast food consumer to try a game or a streaming video service or something else. Because we can also on the other side, bring that brand, say it's a convenience store chain, and they're offering $0.20 off gas if you try out a new streaming video service. And then once that consumer tries the streaming video service, or the mobile game, or the PC or Xbox game, we also bring that convenience store into the gaming environment. So there are other offers and discounts and whatnot that they can continue to enjoy, because we know they came from that brand. And now the digital operator being the gaming company, say, for example, can keep that consumer coming back to the game because they know they're going to earn ongoing offers and promotions back to the brand. So there's a transactional component of this, but also a nice long tail of recurring transaction fees that come from every successful transaction.
Is the gambling/ gaming vertical, like the DraftKings, FanDuel is -- are those potential participants in this universe?
Absolutely, we think that any digital business which because of the $200 billion advertising industry that's being dramatically impacted right now, I mean, the way that they all got whether again, whether it's digital gambling, digital gaming, entertainment, streaming video, contests, they've all used digital advertising networks to fish out customers, and that whole infrastructure has been built to the tune of more than $200 billion of advertising annually on the back of this kind of privacy invasion, where the ad networks follow consumers, as they use their phone, and they switch between apps. They switch between online banking to their social networking app, Facebook, et cetera. Advertising is follows the consumer route, that's being turned off almost overnight. In fact, I think this is exemplified with Facebook's announcement, which is now Meta, earlier this year that they expect these changes to impact their sales to the tune of $10 billion. So all these digital operators, again, whether it's gaming, or gambling, et cetera need to find new channels, they need to find ways to get back to getting audiences efficiently.
And since we're already serving all of these brands, I mean, a convenience store, sees 1000 consumers, on average, a day per location. So when you think about our customer Circle K that estimation would mean 7 million people go to a Circle K on a daily basis. And so again, we think this is applicable to any industry, who's trying to access large audiences to acquire customers and in some of these other verticals, beyond gaming and streaming video up to gambling and beyond that, that's where we're really excited about those customer acquisition, premiums can be as high as $300 - $400 per transaction.
Our next question is from Bryce Daniels with Talkot Capital.
Hey, Dennis, Lisa, thanks for the call. I think it's exciting what's going on here. Just kind of quickly, can you describe a little more kind of nuts and bolts like if I'm, where I'm interacting with Mobivity in my relationship with digital game? And how and what part of like the tech connection, you guys Mobivity powers? A little more kind of detail that would be great.
Sure. We're doing a number of campaigns. This is accelerating where the key innovation is coupling real world instant gratification to consumers for engaging in digital advertising experiences. So one example is how we brought a handful of our brands like Checkers and Rally's and Circle K, into gaming experiences for various mobile games. And everyone's played mobile games, whether it's Candy Crush, or Tetris, or what have you. And what I mean by this is that consumers playing these mobile games, in many cases, they play these games to progress in the game, they're paying for that progression using in app purchases, they're paying money to get to the next level, et cetera. But a lot of games now are also giving these gamers reward points. And so a timely example right now, live campaign we're running as where gamers can use those points they earned by playing the game to receive discounts on fuel at any of the 7,000 Circle K locations across America. So these gamers are playing games, they're earning points, and then they're turning those points in. And through a simple text message from the game, after they've turned in their points, they receive this voucher that they can take to any of the 7,000 North American Circle K locations and receive $0.20 off a gallon of gas.
Another example is where we've got a restaurant brand that's using their audience, their app audience, their email subscribers, their text message program subscribers, and offering their audience their restaurant audience incentive a free burger, if they download a mobile game. And then once the consumer successfully downloads the game, they go to the App Store, they go to the Google Play Store to download the game, our technology automatically detects that and detects that it came from that burger chain, and then sends that consumer a text message with a coupon code for their free burger or their free chicken sandwich that they can use instantly, at any of that brands 1,000 locations across America. So again, that's the other side where the brand is using the real world audience to help digital publishers like game operators acquire customers. And then kind of as a last example, I used here -- and we're beginning to experiment with new advertising products. So again, I mentioned there's about $200 billion, with a B plus spent on mobile advertising, where we've all experienced it or checking out ESPN sports scores, or we're using online banking or using whatever app we're using Facebook, and we see ads. And it's a massive industry. What we're doing there is where we can bring these real world rewards into those advertising experiences, so that consumers get a lot more than just getting another visual impression. So for example, maybe they're playing a game on their mobile phone a pop up ad, it's a free game. So those free games use advertising to monetize and support the game. If we see an ad pop up, that allows the gamer to get a free milkshake at any a Sonic’s 3,600 locations across America, if they click on the ad, and as with all other examples, once that consumer clicks on the ad, they look at the ad, they're then receiving a simple text message again, with that digital coupon code technology from Mobivity, so that they can instantly get that instant gratification and show up at any Sonic and get their milkshake the same day that they experienced that ad unit. So those are kind of all examples of some of these real world programs we are already running.
That's interesting. And is it fair to think about kind of just like the addressable market question is being our core restaurant convenience market is still there. And we're just adding the whole market of digital gaming, gambling, that everything you mentioned, is that kind of the right way to think about the addressable market?
Yes, absolutely. And I think that also highlights another interesting point is that when we think about the friction that we've experienced just selling this as a product to the restaurant and convenience store industry, for their use directly they're facing a lot of challenges. Labor costs, supply chain, and so over time, it's been a slower roll than we expected. And that's again, where this premium and we all experienced it. In fact, I just experiences this weekend. I got my kid a happy meal. And there was the whole happy meal was branded Super Mario Kart, the toy was Super Mario Kart. And that's just an example, in everyday life where this is already happening, where these digital brands wants to tap the real world experiences of consumers to acquire customers for themselves. And so we think that this is something that what we're doing now is bringing a big acceleration to that. And to your point, we now, our value proposition to those restaurants, convenience store markets that we're already serving, it gets that win-win to serve as a catalyst to help those brands move more quickly to digital adoption. Because the Super Mario Kart et cetera are willing to pay such a higher premium, it can also relieve a lot of that financial friction that the brick and mortar industry has had traditionally to expanding on, getting into these types of programs. So I guess in summary, whereas before we go to a brand and say, hey, you should be doing digitally should be talking direct to your customers, we can now go to them and say, here's a program where you can start digitally engaging your customers with a partner from the digital industry gaming streaming video. And because of the premium that's there to get involved in these interactions. It subsidizes the restaurant or convenience stores expenses, at least initially. So it really relieves a lot of friction and gets brands working more quickly, which we think what we've been spending a lot of time putting together a big pipeline of restaurant and C- store brands. We think this will make that pipeline move faster.
Yes, interesting. Interesting, really exciting stuff to see. Appreciate it. Thanks, guys.
We have reached the end of the question-and-answer session. This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.