Digital Media Solutions, Inc. (NYSE:DMS) Q4 2022 Earnings Call Transcript

Digital Media Solutions, Inc. (NYSE:DMS) Q4 2022 Earnings Call Transcript March 31, 2023

Unidentified Company Representative: Thank you for joining us to discus financial results for DMS Fourth Quarter and Full Year of 2022. With me on the call are Joe Marinucci, Co-Founder and CEO; and Rick Rodick, our CFO. We posted our earnings announcement this afternoon in the press release and also on our Investor Relations website. By now, everyone should have access. Before we begin, I would like to call your attention to our safe harbor provision for forward-looking statements in our financial results press release. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings.

Also during this call, management’s commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures for our reported results can be found in the tables of our financial results press release, which we have posted to our Investor Relations website at investors.digitalmediasolutions.com. The additional financial and other information to be discussed on this call can also be found on our Investor Relations website. Now, I’d like to turn the call over to Joe Marinucci, our CEO.

Joe Marinucci: Thank you, and good afternoon, everyone. Welcome to our fourth quarter and full year 2022 earnings call. Our fourth quarter results are as follows. Fourth quarter net revenue was $101 million, which while down 15% year-over-year was within our guidance of 97 million to $102 million. Gross margin and variable marketing margin came in at 24.8% and 30.6%, respectively. Adjusted EBITDA came in at 7.1 million, or margin of approximately 7% also within our guidance. Our full year 2022 results were full year net revenue of $391 million above our guidance of $385 million to $390 million. Gross margin of 26.4% and variable marketing margin or VMM of 32.7%. We generated adjusted EBITDA $25.7 million. Rick will add more details and dig deeper into the numbers and go over our guidance for the first and second quarters of 2023 later in the call.

During 2022 and now you’re in 2023, we continue to focus on how the DMS business is diversified. It is our diversification that allows us to remain agile and move as needed to adapt to market trends that result in shifts in ad spent. This is true for both our Brand Direct and Marketplace solutions. And our diversification can also be seen with the verticals we serve. Property and casualty insurance inclusive of auto and home health insurance including Medicare and Affordable Care Act marketing spent, career in education, e-commerce, and finally consumer finance. These verticals encompass our enterprise customers, which we closely monitor along with our SMBs, which include the insurance agents we serve, which further highlight the diversity of our business.

For 2022, we close with a significant enterprise customer count of 285. This is a new measurement we are introducing, which represents customers spending in excess of $100,000 annually with DMS. For 2022, ARPU per significant enterprise customer was 1.3 million. For 2022 SMBs on the DMS platform totaled 7,712 active insurance agents up from 7,690 agents in Q3 and 6,693 agents in 2021. The breakout by vertical of revenue for Q4 is as follows. Property and casualty insurance $39 million in Q4 revenue, which was 38% of total revenue for the quarter. E-commerce 23 million in Q4 revenue, which was 22% of total revenue for the quarter. Health insurance $16 million in Q4 revenue, which is 15% of total revenue for the quarter. Career and education $14 million in Q4 revenue, which was 13% of total revenue for the quarter, and consumer finance $13 million in Q4 revenue, which was 12% of total revenue for the quarter.

This diversity in our customer mix and verticals is part of what differentiates DMS. And I’d also like to say that continuing to invest in our technology, data and media capabilities is how we innovate and create solutions that provide value for consumers and advertisers alike. In 2023, we plan to continue to focus on developing these data first solutions, which are agnostic to power growth across our customers in these different verticals. Although the macro this year is expected to be choppy, we believe that digital performance marketing the primary DMS solution will win as it is a pure play for ROI performance thus de-risking customer aspects. Again, growth will come from focusing on leveraging our robust toolset including our proprietary data to serve our customer base which is diversified across those verticals we serve.

To this point earlier this quarter, we took a step to further position DMS as a diversified digital performance advertising business by acquiring the HomeQuote.io home services marketplace and ClickDealer international ad network. The acquisition demonstrates our commitment to executing our key strategic growth initiatives by investing and expanding our Marketplace solutions into home services in the U.S. market while also strengthening our Brand Direct business through international expansion. Home Services is one of the largest addressable markets and we’re excited to work with the ClickDealer and HomeQuote teams on leveraging DMS assets to capture growth in this market. In addition, DMS will now have access to diversified international media distribution and advertisers that will expand the current Brand Direct business that DMS operates domestically into over a dozen countries worldwide.

This will allow DMS to serve international advertisers in verticals like e-commerce, cybersecurity, retail, consumer finance, and gaming. We expect the acquisition to add over $60 million in revenue over the balance of 2023 and be accretive to DMS 2023 earnings. In March, we also announced the implementation of a restructuring plan designed to create efficiency, save costs, and strategically target areas with growth potential. With the business consolidation into DMS core service offerings, the restructuring resulted in a 14% reduction of the DMS workforce, the financial benefits of which will accrue in future periods. Having completed these foundational changes, we look forward to reigniting our growth engine and focusing on executing our strategic initiatives and opportunities.

We expect total annual savings from this restructuring to be between $7 million and $8 million on an annual basis. Also, as previously announced, during the quarter, we closed our strategic review process which started in August of 2021. After closing strategic review, we successfully raised a new equity financing to strengthen the Company balance sheet. This financing includes participation by DMS cofounders, along with strategic Investors will better position us to execute on our growth initiatives herein 2023 and beyond. To summarize for 2023, our focus is to drive growth in our business by growing the number of our existing significant enterprise customers along with average spend per customer by helping them acquire, grow and retain their customers, continuing to add SMBs to our platform, investing in our technology, data and media capabilities, managing costs, and finally focusing on the integration of the recently closed acquisition to further diversify our customer base and vertical served while strengthening our Brand Direct and Marketplace solutions.

Now, I have the pleasure of turning the call over to Rick who will provide more details on our financial results.

Rick Rodick: Thanks, Joe and good morning to everyone. Well, Joe shared our Q4 results. I’m going to focus on our full year results, all comparisons on a year-over-year basis unless otherwise noted. Full year 2022 net revenue was $391 million, while down 8.6% year-over-year, it was above guidance. Insurance accounted for approximately 61% of our total revenue in 2022, which was down 17% year-over-year. The breakdown of the insurance business was as follows. Auto contributed 67% of total insurance, while health was 24% followed by life at 6% and home at 3%. The decline in revenue reflects the impact of lower carrier demand while this industry stabilizes. DMS continues to be a diversified digital performance advertising business.

The-commerce represented 16% of our total revenue and was down 34% year-over-year. Career and education, which was approximately 14% of our total revenue in 2022 was up 13%. And consumer finance which accounted for 12% of our total revenue was up 26%. Gross profit was $103 million for 2022, equating to 26.4% margin versus a 29.9% margin in 2021. The margin percentage decline was driven by continued margin compression within insurance across both auto and health. Variable marketing margin was 32.7%, compared to 35.4% in 2021. Moving now to our segment results. Brand Direct solutions gross margin was 21.9% compared to 24.5% in 2021. Marketplace solutions gross margin was 24.3%, compared to 27% in 2021 and technology solutions gross margin was 23.8%, compared to 25.4% in 2021.

Looking now at operating expenses, we continue to stay focused on driving efficiency in our business through consolidation and reduction of operating expenses. During 2022, our SG&A expenses amounted to $91.8 million while up $3.7 million year-over-year. However, SG&A was down $7.3 million during the second half of 2022 versus second half of 2021, as a result of cost, synergies and continued strong collections. Let’s discuss profitability. Adjusted EBITDA for the year was $25.7 million, generating a margin of 6.6% and down $25 million year-over-year driven primarily by lower revenue and mix. Our net loss was $32 million in 2022 versus net income of $2.2 million in 2021. Approximately 50% of the 2022 net loss was driven by the impairment and intangible assets.

Now shifting our focus to the balance sheet and liquidity. We ended the year with $48.8 million in cash and cash equivalents, which was up $22 million as compared with December 31, 2021. At year end, our total that was $254.6 million and we had $10 million of our revolving facility undrawn. Our credit facility includes a decade with our covenant requirement of 4.5 times. As of December 31, our net leverage was 4.5 times debt to EBITDA. We believe we have sufficient liquidity under our facility, and we remain mindful of our obligations given the current economic volatilities. Turning now to our outlook. For Q1, we expect net revenue to be in the range of $90 million to $92 million and adjusted EBITDA to be $3 million to $5 million, which excludes performance for particular.

For Q2, we expect net revenue to be in the range of $108 million to $112 million in adjusted EBITDA to be between $6 million and $8 million. Our guidance ranks for gross margin is 24% to 26% and variable marketing margin range is 30% to 35%, for both Q1 and Q2. When we come back in May for Q1 2023 earnings, we will provide guidance for full year 2023, which will include the recently closed acquisition of ClickDealer’s full year impact, our organic growth strategy and the positive impact of our previously announced restructuring plan. With that, we thank you for your interest in DMS. I’ll turn the call over to the operator for Q&A.

Operator: Before we move to Q&A, I would like to hand back to Rick Rodick for further announcements. Please go ahead.

Rick Rodick: Thanks, Bruno. We appreciate everyone’s patience this morning and we sincerely apologize for any inconvenience with the delay in today’s call. I’ll now turn the call back over to Bruno or the Q&A session. Bruno?

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Q&A Session

Operator: Thank you. Our first question comes from Maria Ripps from Canaccord. Maria, your lines is now open. Please go ahead.

Maria Ripps: Great, good morning, and thanks for taking my questions. First, I just wanted to ask sort of a bigger picture question. Now that you sort of concluded your strategic review, can you just talk about your approach to managing the business? How that has changed if at all? Are there any areas that you’ll be prioritized? And maybe it’ll be more now it seems like international is becoming a higher priority now? And then maybe just talk about your framework around investing in sort of managing, managing your margins.

Joe Marinucci: Hi, Maria, good morning, this is Joe speaking. Thanks for your patience this morning, as per Rick’s earlier message. Okay, so first question now that we’re through strategic review. The question really pertains to how are we going to, I think, prioritize our focus, manage the business. So I guess what I would say there is, if you think about the analogy of an inch-wide and a mile deep, that’s kind of where we’re at, although we now have the international side of the business. And this really gets back into diversity. And we were looking at significant enterprise customers across all the verticals that we’re in, and the diversity of those customers in the verticals, and the two solutions being the Brand Direct and the Marketplace solutions.

So I know, this is not as pointed an answer as you want. But during times when markets can be challenging, it’s the agility and the diversification in the business around the central solution that really gives us confidence in our ability to go forward. And with the recently closed acquisition, it expands the Marketplace solutions into home services, which we’re optimistic about that market going forward. And it enhances our Brand Direct solutions by bringing in additional media distribution and spreading the solution, not just out domestically here in the U.S., but out internationally as well. And then specifically to the focus going forward, we touched on it in the earnings call, on the growth initiatives, and if you think about continuing to diversify the customer base, not only with enterprise customers, which with the acquisition enterprise, customers will go up customers spending more than $100,000 annually, the SMBs as well, because they behave differently than the enterprise customers.

So we had talked about this last year. And we said our focus is going to be to expand the SMB footprint, and we still have that goal of going from where we are today, which is just under 8,000, SMBs and we want to get up to 10,000, SMBs, by the end of the year. And no part of that revolves around adding more, or almost all of that revolves around an independent insurance agents. And to that point, we brought on a third major carriers agent network this year, so we think we can get there. So staying focused on those growth initiatives, managing costs, continuing to invest in the people process and technology. It’s a holistic approach to how we manage the business we’re very focused.

Maria Ripps: And then secondly, can you maybe talk about what’s going on in the auto insurance vertical for you? And what are your thoughts on the recovery trajectory as we sort of move through the year here?