Fluent, Inc (FLNT) Q2 2021 Earnings Call Transcript

Fluent, Inc (FLNT -1.51%)
Q2 2021 Earnings Call
Aug 09, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Fluent, Inc. second-quarter 2021 earnings results call. My name is Laura, and I'll be coordinating your call today. [Operator instructions] I will now hand you over to your host to begin, Ryan McCarthy.

Ryan, please go ahead.

Ryan McCarthy -- Corporate Counsel

Good afternoon, and welcome. Thank you for joining us to discuss our second-quarter 2021 earnings results. Joining me on today's call are Fluent's interim CEO, Don Patrick; and CFO, Alex Mandel. Our call will begin with comments from Don Patrick 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 other words of similar meaning. The company undertakes no obligation to update the information provided on this call.

For a discussion of the risks and uncertainties associated with Fluent's business, we 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 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 are provided in the earnings press release issued earlier today.

With that, I'm pleased to introduce Fluent's Interim CEO, Don Patrick. 

Don Patrick -- Interim Chief Executive Officer

Thank you, Ryan, and good afternoon. Thanks to everyone for joining us today. Joining me today is Ryan Schulke, now our chief strategy officer, chairman of the board, and company founder, as we recently transitioned our roles. The key motivator to our recent executive changes is to position our founding team fully on the front lines of our business in order to harness their deep expertise and better align our executive team to drive our strategic agenda forward.

On prior calls, Ryan has articulated Fluent's three strategic growth pillars: our media footprint, our performance marketplace, and our platform, and how they best position us in this very dynamic and rapidly evolving marketplace in which Fluent operates. The success we reflected upon in 2020 and beyond vis-a-vis onboarding and scaling larger, more sophisticated clients at our performance marketplace while increasing and sustaining improved monetization on our platform motivated us to further redefine our media footprint in the form of our traffic quality initiative. We see higher quality as the road to sustainable long-term growth and are resolute in our belief it will better position us as an industry leader, even though through these more strategic media and client investments, we will knowingly forgo some near-term margin. In our earnings release today, our numbers for Q2 reflect revenue being up 3% year over year, media margin being down 19% year over year at 27% of revenue, reflecting investments in the quarter, which I'll discuss further, and adjusted EBITDA representing 3% of revenue.

We see our strategic North Star is capitalizing on the demand for higher-quality digital experiences for consumers and more effective and sustainable solution for marketers. With quality as a foundational principle, we've been accelerating our strategic transition of our business and unwavering commitment to and significant investment in quality across our performance marketplace. In practice, this means we're continuing to enhance our media properties and consumer experience in order to create more meaningful, enduring, and high-value connections for consumers with our top-tier clients and brand. The end goal of these efforts is to enhance Fluent's brand equity with our clients and in the marketplace by meeting and exceeding client ROI goals while building enterprise value for our stakeholders.

And we believe we are already benefiting from these efforts as we progress our journey. So, our current operating focus continues to be anchored around our traffic quality initiative. As Ryan has spoken to, in the latter part of 2020 and in Q1 of this year, we cut back significantly on our affiliate traffic sources that did not meet our quality requirements. While we continually monitor traffic quality, with the steeper cuts largely in our rearview mirror, our focus has been on growing traffic volumes with existing partners who share our commitment to quality, while testing new partners, strategies, and media channels.

Relative to our traffic volumes in early April, we are currently trending up 25%. Underpinning the rebound in our volumes has been accelerated expansion of traffic sources from the big digital media platforms, including Facebook, Google, Snap, and TikTok. While on the last earnings call, we indicated an expectation Q2 revenue would decline 11% to 13% year over year, during the quarter, we found opportunities that more rapidly drive platform spend ahead of our prior expectations. However, this spend, along with investing and testing affiliate buying strategies, produced a considerably lower margin than our more established side of our traffic mix.

As is typical in our business, a test-and-learn approach to validating scale and optimizing into profitability that positions us to leverage our media investments with incremental margin as we move into the second half of the year. On the last few calls, we indicated a view that our traffic quality initiative would take a couple of quarters to reestablish prior trend levels, and we continue to maintain that outlook. We anticipate year-over-year top-line growth in each of the third and fourth quarters, albeit with profitability concessions as we invest to test and learn with new affiliate partners continue to source more media from the digital platforms. However, we do anticipate sequential improvements in profitability relative to Q2.

And overall, we see the timelines in the arc of our traffic quality initiative as directionally similar to the industry precedents that we've alluded to previously by leading public companies that proceeded to rebuild volume, profitability, and substantial enterprise value. Certain strategically relevant, yet smaller business units performed notably well in Q2. Our jobs business was up two times year over year, with proliferation of vaccines spurned recruitment spend, and our AdParlor agency business enjoyed similar growth. Our content site branded the SmartWallet, along with our programmatic data sales business were both up three times year over year.

We foresee continued growth from these businesses in the second half of the year. We also expanded our international media footprint by launching in Canada, where we have already validated market viability and are working to scale. We remain optimistic about our growth prospects here and are targeting further international expansion in the back half of the year. Regarding our second-growth pillar, our platform, we have mentioned for several quarters that monetization has increased significantly over the course of 2020, approximately doubling from Q1 to Q4.

And I'm glad to share that our monetization remains robust, which we believe will continue through the second half. These results validate substantial return on investments we made in our technology and analytics over the last couple of years. Another aspect of our platform where we continue to invest is expansion of our CRM efforts through which we've increased lifetime value of consumers on our properties by reengaging them beyond what we call day zero, or their initial visit to our websites. A key initiative on this front has been our investment in the Winopoly business, which provides live agent telephony activations for Fluent leads and has grown considerably beyond initial expectations.

This platform enables us to take a consumer from digital experience to a live call interaction, through which we can connect them to higher-consideration, higher-value transactions with top-tier brands in senior, insurance financial services, and home services. Regarding our third pillar, our performance marketplace. We continue to see world-class brands leading in with strong demand that well exceeds their available supply. These critical and valuable relationships enable our efforts to not only redefine our media footprint but drive the establishment of new media partnerships.

In turn, this will drive margin expansion, greater predictability of earnings, and our longer-term growth opportunities. In sum, our growth strategy remains well-grounded and intact. We are well-positioned in our dynamic marketplace. And our investment in traffic quality initiative is on track.

As Ryan has previously noted, our approach to running the business is grounded in timeless principles with sustainable growth strategy, leading-edge operating protocols, and best-in-class code of conduct. Our recent management shift further concentrates the operating focus of our organization to accelerate our strategic road map and growth agenda, leveraging the industry-renowned talent of our founders as lead innovators and operators. Thank you for your support as we continue to move full speed ahead on our machine. And with that, I'll turn it over to Alex to cover our financial results. 

Alex Mandel -- Chief Financial Officer

Thanks, Don, and good afternoon. As Don spoke to, our team led by Fluent's founding executives has been positioned on the front lines driving a strategic transition of our business the foundation of which is a focus on quality across Fluent's performance marketplace. At the time of our last earnings call in early May, we were coming off the lowest month of consumer traffic volume this year, having cut back significantly in the preceding couple of quarters on traffic sources that didn't meet our requirements. At the time of that call, we were already hard at work, rebuilding our supply base with sustainable sources of traffic that meet our protocols and anticipated a reasonable time frame would be needed to build our volumes back up.

In that context, we anticipated Q2 revenue would be down year over year. Through the course of Q2, as Don mentioned, our team found opportunities to deploy media spend beyond what we had anticipated to accelerate our test and learn approach to supply discovery. This incremental volume was sourced primarily from the major digital media platforms, and we understood it would carry a lower margin profile that viewed the discovery as on point with our rebuild efforts. As such, our revenue for the quarter of $73.4 million represented growth of 3% year over year, exceeding prior guidance, while our media margin came in at 27.4% of revenue, reflecting the effect of lower-margin media spend to accelerate our supply discovery.

In the course of deploying this additional spend in Q2, we found success with new promotional campaigns, which expanded our addressable audience and new means of cross-promoting our programs across Fluent's own media properties. We've spoken over the last few quarters about testing enhancements to the design of our rewards programs, which had elevated the cost of fulfilling rewards earned by consumers. For the outlook, we indicated on our last earnings call, fulfillment expense did moderate sequentially in Q2, benefiting our nonmedia cost of revenue. Our operating expenses on a GAAP basis for Q2 comprising sales and marketing, product development, and G&A, grew in aggregate by $2 million or 12% year over year to $18 million.

This increase primarily derives from the growth of the Winopoly business, which was nascent in Q2 of last year. Adjusted EBITDA of $1.9 million in the quarter represented 2.5% of revenue, generally following the trend line of our media margin in the quarter. Interest expense declined by $900,000 year over year, benefiting from the lower cost of debt under our new credit facility. In Q2, we continued to be a noncash federal taxpayer due to the pre-tax loss.

We reported GAAP net loss of $5.2 million in the quarter and adjusted net loss, a non-GAAP measure of $1.9 million. Our non-GAAP metrics are reconciled in today's earnings release and our 10-Q and 10-K filings. Turning to the balance sheet. We ended the quarter with $26.6 million of cash and restricted cash.

Working capital, defined as current assets minus current liabilities, ended the quarter at $44.4 million, up $13.9 million year over year. Total gross debt at June 30 of $50 million included the funded term loan balance of $48.75 million and the remaining $1.25 million note payable in connection with the 2019 AdParlor acquisition, which was subsequently funded on July 1. As we continue on our journey to strategically invest into quality across our business to attract and retain the consumers, clients, and brands that we believe represent the future of our sustainable growth strategy, we recognize that our financial results reflect this transition. Our outlook for the balance of the year reflects continued progress operationally and financially, and we are motivated to achieve results that will convey meaningful value to the multitude of Fluent's stakeholders.

We're glad to field questions at this time.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Michael Graham from Canaccord. Michael, your line is now open.

Michael Graham -- Canaccord Genuity -- Analyst

Great. Thank you for taking the questions, guys, and congrats on the progress with traffic growth. It's definitely good to see that expanding after kind of expecting a decline from the guidance previously. So that's great.

And that's really kind of the cornerstone of my question. You know, you mentioned that you found some sort of rich veins in some of the bigger social media platforms. Do you think that that's sort of going to be the profile of your media mix going forward? Like how far afield from those platforms are you going to be taking your testing? And, you know, can you just talk about any signs that you have that the quality of that traffic is actually better than what you had, you know, been getting before?

Don Patrick -- Interim Chief Executive Officer

Hi, Michael. Thanks for the question. I'll put the traffic quality initiative a little bit in sort of a framework and then we can kind of answer specific questions. So, we kind of break it into three phases.

The first one was the cutbacks, right, of getting rid of traffic that was lower quality or with partners that would not meet our quality. The second sort of building back, which was primarily the easier part was going with current partners that we have, our current platforms, or strategies that we currently can lean more heavily into. And that's pretty much what we did in Q2 around the biddable platforms. We've been on the platforms for a long time.

We've been buying there, but we just really accelerated our testing and learning on how those properties and the creative and the offers would work across those. So specifically, you know, we did lean heavily into that. They were -- as we did lean heavily into current affiliate partners that we have. The second piece of that building back is obviously new partners and new strategies, new channels.

We've also -- we're doing that heavily into Q2, but those take a little bit longer time frame, a little bit longer of a cycle in terms of testing and learning. So, as we kind of look at the biddable platforms, it's critical to us. the monetization across those, you can imagine, are more variable than you would see in the affiliates or with our strategic partners because of the CPMs and how they move around. So, when you see the CPMs go down and it's attractive as we lean heavily into it when we see some of the seasonality or some of the things that come up on some of the platforms like we saw in Facebook with some of the iOS changes you kind of lean back and go into the affiliate side a little bit more.

So, does that answer your question, Michael?

Michael Graham -- Canaccord Genuity -- Analyst

It does. And, you know, thank you for that. And the follow-on was just, you know, what signs do you have that the traffic is higher quality?

Don Patrick -- Interim Chief Executive Officer

Yeah. You know, our main metric is really around the monetization, and monetization by that traffic source toward the audience and toward the brand. So, we sort of track those in a very, very granular level. We talked in aggregate about the monetization has more than doubled over the year and has held steady.

And as Ryan has indicated, some of the traffic sources that we took off the board because of quality, obviously, had a little bit heavier monetization. So, the fact that we hit that monetization steady -- from a portfolio perspective is positive for us.

Michael Graham -- Canaccord Genuity -- Analyst

OK. And thank you for that. And then maybe just last follow-up, and I'll go back in the queue, is just can you sort of refresh us on how to think about the road map from here with respect to timing, like you're going into that third phase of sort of the rebuilding, where you're going to be leading to new partners and new sources now? Like any thoughts on how long that takes? And, you know, is there any sort of updated view on when you think the traffic quality initiative is sort of done and sort of back to business more or less as normal?

Don Patrick -- Interim Chief Executive Officer

Well, great briefing, Michael. As our -- well, we've been really pushing internally here that the traffic quality initiative is a part of our DNA going forward. It will never go away, right? But the key part is that third phase, which will be more around how you optimize and how do you accelerate and how do you strengthening the quality on every single day basis. But specifically, the phase 2, we have leaned into the existing partners and platforms.

The one -- the new partners and the new channels that we've been going after, we've seen some nice acceleration. We've also seen some elongated sales cycles. So admittedly, there's some variability here as we establish those new relationships, and we raised the bar on our current partners. But we look at it from an overall perspective, we do see sequential growth in Q3 and Q4 on improving our margin, which we believe will continue to accelerate that phase 2.

Michael Graham -- Canaccord Genuity -- Analyst

OK. Thanks so much.

Operator

[Operator instructions] Our next question comes from Jim Goss from Barrington. Jim, please go ahead.

Jim Goss -- Barrington Research -- Analyst

Thank you. This first question probably reflects -- or relates to the last question that you mentioned that there were -- you had sourced some new business from these large digital providers but at lower margins. And I'm wondering what level of margin that was at and does not reflect the benefits you got from the higher quality traffic? And what's the margin -- where the margins are lower because they held the upper hand in those negotiations? Or was there some other reason? And I've got a couple of others.

Don Patrick -- Interim Chief Executive Officer

Hi, Jim, thanks for the question. The bottom line, we'll sort of put in one framework here is that obviously, it's -- we do not -- we have a baseline of profitability that we have to hit. And regardless of the sources and how much we're investing, there is a profitability threshold that we make across all of our media sources. Did we -- as we lean in and we try and test new things, we know that we might lose money and we might break even in the beginning, but that has to scale and scale aggressively over time frame, and we monitor that by source and buy traffic.

So the only thing that's different, as I mentioned, is a biddable tends to have some variability in pricing is beyond us. It's a marketplace, and we know that things that happen on those channels could be -- could move the pricing one way or another, and we are -- we watch it like on a minute-by-minute basis to make sure we make the change.

Jim Goss -- Barrington Research -- Analyst

OK. A couple of others who might serve your group. I know Ryan Schulke is one of that founding executives, of course, involved in this. You mentioned that there were several others.

I wonder you might say who is in that mix in this strategic process. How do you move from testing the strategies to executing them? And how is that process coordinated between the strategic team and the new executive team? And then are their relative impacts plus or minus in certain key verticals, or is it pretty much across the board?

Don Patrick -- Interim Chief Executive Officer

Yeah. So, just when we talked about the founders, Jim, in a couple of releases that we had, there's really four key ones. There was Ryan, who's chief strategy officer. There was Matt Conlin, who is chief customer officer.

Sean Cullen is EVP of Insights, who looks at the data and see the insights across the various properties. And then Matt Koncz, who's president of the Performance Media Group. So when we talk about them being down in the business, it's really around them connecting that strategy to the execution. So, they were hands-on.

They were detailed into the mix and looking at the numbers along with our teams to make sure that we're interpreting it the right way and moving -- and making the right moves to support that. So, you can imagine, you know, the industry is rapidly developing and has lots of changes to it and having that type of experience in the mix that has over 10 years plus is seeing how a performance marketplace works, really accelerates our -- accelerates that learning and accelerates that ability to scale or realize that, that new traffic source is met move on to the next one.

Jim Goss -- Barrington Research -- Analyst

OK. And then coordinating what they're doing on a strategic front versus what you are doing on the execution front? How does that work exactly?

Don Patrick -- Interim Chief Executive Officer

So, Jim, your question is how do we connect strategy to execution or --

Jim Goss -- Barrington Research -- Analyst

Yeah, basically. You know, I know there are some things you're trying and trying to determine the best ways of doing things, but then there has to be a control element because now we're a huge company, so you're probably talking every day with each other. Just if you might -- probably you might talk about that process.

Don Patrick -- Interim Chief Executive Officer

Yeah. So, obviously, where you're really pointing toward in my mind is how is the team working and how effective is it? And how granular are we getting? And one of the real strengths of Fluent has been our reporting in our numbers and how we look at things. So on a minute-by-minute basis, you can see how things are performing, how the consumers are acting, how the media is working, and how it's connecting to the advertisers. So what we really have done is just brought more experience to the current operating systems and numbers that we have.

So the connection there has been -- the senior team is that team along with me and Alex and a couple of others in terms of how we run the business on a day-by-day basis. And then the execution side and those four are getting in with the team's operating basis to move those basically, you know, core strategic growth initiatives forward.

Jim Goss -- Barrington Research -- Analyst

OK. And it does not really change the key vertical orientation you developed in recent years?

Don Patrick -- Interim Chief Executive Officer

No, we haven't. We did talk a little bit about the Winopoly call center and how we've started to connect to higher-consideration, higher-value transactions with brands in insurance and in financial services, home services. It has great growth possibilities from a vertical, Jim, but as in Q2, our vertical mix wasn't as strong as it was in Q1.

Jim Goss -- Barrington Research -- Analyst

Right. Thank you, Don.

Don Patrick -- Interim Chief Executive Officer

Thanks, Jim.

Operator

[Operator instructions] OK. We currently have no further questions. So, I will now hand back over to the host for any closing remarks. 

Don Patrick -- Interim Chief Executive Officer

OK. Thank you, everyone, for joining us today in Q2 earnings script. We are committed to moving forward with our mission and appreciate all your support. Thank you.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Ryan McCarthy -- Corporate Counsel

Don Patrick -- Interim Chief Executive Officer

Alex Mandel -- Chief Financial Officer

Michael Graham -- Canaccord Genuity -- Analyst

Jim Goss -- Barrington Research -- Analyst

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