Fluent, Inc (FLNT) Q1 2019 Earnings Call Transcript

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Fluent, Inc (FLNT 3.35%)
Q1 2019 Earnings Call
May. 08, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Fluent, Inc. first-quarter 2019 earnings conference call. [Operator instructions]. Please note, this event is being recorded.

I'd now like to turn the conference over to Ryan McCarthy. Please go ahead.

Ryan McCarthy -- Corporate Counsel

Good afternoon, and welcome. Thank you for joining us to discuss our first-quarter 2019 earnings results. With me today are Ryan Schulke, CEO; and Alex Mandel, CFO. Our call today will begin with comments from Ryan Schulke and Alex Mandel followed by a question-and-answer session.

 I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our investor relations page on our website, www.fluentco.com.  Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intends, estimates and any other words of similar meaning. The company undertakes no obligation to update the information provided on this call.

For a discussion of risks and uncertainties associated with Fluent's business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of key indicators, including media margin, adjusted EBITDA and adjusted net income. The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure is provided in the earnings press release issued earlier today.

With that, I'm pleased to introduce Fluent's CEO Ryan Schulke.

Ryan Schulke -- Chief Executive Officer

Good afternoon, and thanks for joining our first-quarter 2019 earnings call. As our numbers for Q1 indicate, we have solid first quarter, delivering results consistent with our guidance. Revenue for the quarter increased 19% and media margin was up 20% as we expanded the footprint and profitability of our performance marketing business year over year. EBITDA declined 5%, which is a reflection of the investments we've made into our team and infrastructure to support future growth.

 On today's call, I'll be speaking about our philosophical and strategic approach to running the business as well as some of the performance factors contributing to our Q1 results. And our CFO Alex Mandel, will speak to the numbers in more detail. I'll start off by revisiting the framework through which we think about and manage Fluent's business. There are two core constituencies which we seek to engage and earn trust with: consumers and clients.

Our North Star is to deliver compelling value to both these groups. And as we do so, our business will continue to thrive. As we think about the key areas for operational excellence in our business, Fluent sits in the middle of our two core constituencies, connecting them through our platform and managed service offerings, which we deliver on a true performance basis.  On the consumer side, we think about: one, the media channels through which we attract consumers to engage them on our platform; and two, the product or experience they have as they engage with our content and surveys as well as the offers we deliver on behalf of our advertising clients.

On the advertiser side, we think about: one, our in-house sales and client suggestions, which bring new clients to our platform and strive to ensure they win with Fluent; and two, the type and scope of offerings we bring to clients to drive value for them.  So in each sides of the business, we think about going broader in terms of attracting incremental consumers and clients and deeper by expanding and extending their engagement with us. From where we sit in the middle, Fluent seems to create relevant, efficient and enduring connections between our consumers and clients, which we do primarily through proprietary analytics that fuel creative and campaign delivery in the right place at the right time. I'm highlighting this framework, which we think of as our core, because these are areas of operational focus which, if we execute on, invest into and extend effectively, we believe we can take our business to the next level.

And as we report to you today and in future quarters, we'll be able to share insights into our initiatives in this context at a level of depth that hopefully balances being informative along with protecting our proprietary plans in what is a highly competitive industry.  As we look back to our performance in Q4, we referenced testing new media channels through which we look to expand our consumer reach. We continued that effort in Q1, and you can anticipate that we will always reserve a portion of our budget toward testing and learning on new channels and platforms that consumers are engaging with so long as we see the opportunity to access them at scale with acceptable return on ad spend for our clients and ourselves. Also the consumer side of our business, we have been testing and extending new media formats through which to engage consumers that have different user acquisition and retention dynamics as well as opportunities to communicate our clients' value propositions and drive outcomes for their businesses.

On the client side of our business, we referenced our emerging data offerings in the 2018 10-K, which was filed in March. In the course of executing our performance marketing business day in and day out, an asset that we continuously build upon, which we believe has significant latent value, is the data we capture pertaining to the consumers interacting with our experiences. And by data, we're talking about first-party demographic, attitudinal and behavioral data, which enables deep insights as to consumption and purchase behaviors and other attributes we know to be highly valued by advertisers. Our recently launched programmatic offering has been yet another example of the value of our data asset and has helped us drive greater recognition from brands across our industry.

 When you look at the talent we've added over the past few quarters and anticipate adding to further, you can see how that fits into our focus on the consumer side of our business with regard to media and product, the client side of our business with regard to sales and data initiatives and the Fluent platform in terms of our analytics capabilities and executions that tie all this together. So if we zoom out, our longer-term success can be themed around growing and innovating our performance marketing business and doing more to unlock value from our data. For context, we're committed to growing revenue and profitability over time organically. We also believe there are strategic investment opportunities that can generate an appropriate return on our capital.

 Our execution road map comprises several parallel ongoing disciplines: First is the hammer and nails worth, optimizing and enhancing our performance marketing business, which our team is committed to on a daily basis.  Second are the expansions and extensions to our performance marketing business that we build, test and rapidly iterate on such as product formats to access new media channels, new media formats for consumers to engage with and newer tailored offerings for our clients.  Third is what I'll refer to as a structured strategic approach to innovation. Our approach to date has been to invest organically into initiatives set up as pods with very specific focuses.

We staff them with entrepreneurs who have demonstrated track records of performance in specific disciplines that we anticipate can leverage our core platform on an accelerated basis.  And last is the potential for tuck-in acquisitions that could expand or extend our capabilities along the lines of the framework I've just shared. Naturally, investment in growth cycles will have some quarterly variability, but we are laser-focused on executing our strategy and taking advantage of this exciting market opportunity. We look forward to continuing to deliver long-term value for our consumers and clients and the Fluent brand and its shareholders.

 And with these thoughts, I'll turn to Alex for a review of our numbers for the quarter.

Alex Mandel -- Chief Financial Officer

Thanks, Ryan, and good afternoon to those on the conference line. As Ryan noted, our results for Q1 were consistent with our outlook. In the quarter, the company generated 66.6 million of revenue, representing 19% growth year over year. Growth is derived primarily from our performance campaigns through which we deliver specific actions or outcomes desired by our clients such as the submission of a registration form, an app install, a trial subscription to include our service or a completed transaction.

These outcomes are specified by our clients with doable events and pricing that are designed to meet their profitability objectives, and we deliver these outcomes on a performance basis, enabling our clients to precisely measure the return on their spend with Fluent. Included in our performance campaigns is our life cycle marketing initiative through which we reengage consumers who have previously interacted with our media properties. This provides us with incremental revenue opportunities at a lower cost profile than the initial consumer acquisition.  Revenue growth in the quarter was also supported by the consumer side of our business, where we accessed additional media supply, both by capping new channels such as the larger digital media platforms as well as sourcing new partners in our existing publisher channels.

And we've also begun to scale a new content-based media format, which Ryan referred to.  The company produced media margin of 23.1 million, representing growth of 20% year over year and a margin of 35% of revenue. Media margin as a percent of revenue was relatively unchanged from Q1 of 2018. For reference, media margin is a non-GAAP metric, which is reconciled in our earnings release issued earlier this afternoon and which is a primary metric we use to measure the return on our media spend and related expenses.

 Adjusted EBITDA of 9.1 million in the quarter represents 14% of revenue as compared with 17% of revenue in Q1 of 2018 and had a decline of 5% year over year. As Ryan discussed, part of our core strategy is to invest in a structured and strategic manner into innovation opportunities that leverage the core assets of the company. Our investment in this area is observable in our product development expenses. We have also discussed previously our investment into human capital and expanded office space to support our growth plans, which are reflected in our G&A.

Provision for income taxes was zero as we maintained a full valuation allowance against our deferred tax assets for both periods.  With respect to the company's NOL position, we don't anticipate being a cash taxpayer in 2019. Adjusted net income, a non-GAAP metric that excludes from net income from continuing operations certain nonrecurring and non-cash items, was 4.1 million in the quarter, an increase of 5.5% over 3.9 million in the prior year's quarter.  Moving on to the balance sheet.

Cash and equivalents were 18.7 million at March 31, while working capital, defined as current assets minus current liabilities, was 36.8 million. Total debt under the credit facility was 59.4 million, which reflects a reduction of 875,000 as compared with December 31.  The company continued to exhibit favorable cash flow dynamics with 9.1 million of adjusted EBITDA converting into 5.2 million of cash flow from operations, with the primary uses of operating cash being 1.5 million of interest expense and a 2.5 million change in working capital. Cash used in investing activities consisted primarily of 1.4 million of PP&E related to occupancy of our new corporate headquarters, while cash used for financing activities of 2.5 million was comprised of our quarterly scheduled principal amortization on the credit facility of 875,000, along with 1.6 million deployed for withholding taxes to net settle the vesting of RSUs, enabling us to take close to 322,000 shares into treasury.

 In conclusion, our numbers for the quarter were consistent with our outlook, reflecting a business that grew nicely at its core year over year while investing in innovation and infrastructure to support our future growth plans. We have demonstrated consistent GAAP profitability on an operating and net income basis in each of the four quarters following the spin-off with favorable cash flow dynamics and maintaining a solid balance sheet.  Should you have questions, we're glad to take them now or later. Our IR contact information is included on the earnings release.

Thank you for your interest.

Questions & Answers:

Operator

[Operator instructions] The first question will be from William Gibson of Roth Capital Partners.

William Gibson -- ROTH Capital Partners -- Analyst

Thank you. You moved into your new headquarters so what do you expect capital expenditures to be the rest of the year?

Alex Mandel -- Chief Financial Officer

On a PP&E basis, Bill, we don't anticipate significant capex. We have a relatively small-ish amount of capitalized costs included in intangible assets that you can see in Q1 in the earnings press release and could be similar to slightly increased throughout the remainder of the year.

William Gibson -- ROTH Capital Partners -- Analyst

And you referred to the new media formats and channels. Could you share with us or give us a little more color on exactly or -- on what those are?

Ryan Schulke -- Chief Executive Officer

Yeah, Bill, and good to hear from you. So we've just been expanding in terms of how we're going out, designing content to interact with consumers, certainly been very heavy into new video formats, user-generated content, things like that, buying into some of the social platforms as we work really hard to have our data inform creative across these different channels and on behalf of our clients. One of the new properties we recently spun up is called thesmartwallet.com, for instance, and we're doing a lot of with video content there. There is -- as a case of example.

William Gibson -- ROTH Capital Partners -- Analyst

Thank you.

Operator

The next question will come from Jim Goss of Barrington Research.

Jim Goss -- Barrington Research -- Analyst

Thanks. With several years in operation, you acquired a significant database. And I'm wondering how your request for information have varied and how well you're able to take advantage of the previously acquired data in perhaps making the whole process more efficient.

Ryan Schulke -- Chief Executive Officer

Yeah, Jim, good to hear from you. In terms of how we go out and acquire data, just to be clear, that's self-reported from the consumer themselves and it's a function of our media properties as they're engaging with them. Many of our content, in order to access some of it, you have to register. We weave surveys into our experiences.

So that's been iterated on over time. As we're seeing consumers over and over again, we're able to deepen the profile, refresh that. And with respect to how they're going about requesting to hear from our advertising partners and their offers, that's becoming more and more dynamic. So we're starting to play into areas such as Messenger and different areas like that and seeing consumers starting to interact through some of the new platforms -- new technology platforms for communicating with brands.

So that's certainly a big focus of some of the large platforms and it's a big focus for us as well as the result.

Jim Goss -- Barrington Research -- Analyst

Yeah. And that's actually what I was getting to. I understand it's information volunteered by the consumer in return for maybe something that you might promise them. But I wondered how much more efficient the whole process gets over time because you probably have a lot of the same people coming back and back and more and more.

And therefore, that, as you say, you're deepening the profile. Does that, say, improve that media margin? Does it improve other metrics you're measuring or the efficiency of getting the right sample group for the advertiser who's looking for that email list or whatever else it is they're trying to get from you?

Ryan Schulke -- Chief Executive Officer

Yeah. Absolutely. So I'd answer that in two parts. And one, absolutely, the consumers that we're seeing more and more, we can capture that information a lot more efficiently and efficiency has been the key there of how can we sort of condense that experience and make sure we're matching them up with relevant content and advertising offers since we have such a deep knowledge on that base.

It also frees us up to get to the perimeter, as I would characterize it, and start to think about breadth of audience and going out and designing content to access new consumers, which is where a lot of our investment is going toward. So yes, those efficiencies are certainly in place and supporting margin expansion on the set of consumers and the demographics which we see more frequently.

Jim Goss -- Barrington Research -- Analyst

Do you get a sense that the -- some of the people you're dealing with get to know that it's you who are behind this and that they want to receive information from you on a more regular basis and there -- you can create some continuity out of it?

Ryan Schulke -- Chief Executive Officer

Yeah. Absolutely. And it's a big focus for is to continue to strengthen media brands in which we go-to-market with and really start to personalize and tailor around the consumer expectation. So a lot of that is very top of mind for us in terms of our existing brands and a lot of the demographics we see the most.

And again, that's freeing up resources to go out and spin up some of the new types of content and executions we're looking to go out and deliver to market in order to attract new audiences.

Jim Goss -- Barrington Research -- Analyst

And finally, does this process then in affect that media margin measure you have talked about since that effectively is sort of a cost of sales type measure? And should that be an improving percentage over time as you go through this -- continuation of this process?

Ryan Schulke -- Chief Executive Officer

To a certain degree, yes, Jim. We can see the areas of the business where we have clear opportunities for margin expansion. At the same time, I'll just remind you, we're a growth-oriented organization. We're continually investing into innovation and growth.

We do spend into media channels where we're not going to make money day one or day 30 even. So as those margins are coming in, we are reinvesting some of that toward new media channels that may take a bit more time to mature. So I don't want to "call the shot" on the exact amount of margin expansion you'll see in a whole because we're seeing some very interesting opportunities across the marketplace as consumers are starting to shift some of their consumption behaviors. And we're very actively trying to learn and grow on some of those new channels where they're engaging more frequently.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Ryan McCarthy -- Corporate Counsel

Ryan Schulke -- Chief Executive Officer

Alex Mandel -- Chief Financial Officer

William Gibson -- ROTH Capital Partners -- Analyst

Jim Goss -- Barrington Research -- Analyst

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