Fluent, Inc. (NASDAQ:FLNT) Q2 2023 Earnings Call Transcript

Fluent, Inc. (NASDAQ:FLNT) Q2 2023 Earnings Call Transcript August 14, 2023

Fluent, Inc. beats earnings expectations. Reported EPS is $0.0323, expectations were $0.01.

Operator: Good afternoon, and welcome. Thank you for joining us to discuss our Second Quarter 2023 Earnings Results. With me today are Fluent’s CEO, Don Patrick; Interim CFO, Ryan Perfit and Chief Strategy Officer, Ryan Schulke. Our call today will begin with comments from Don and Ryan Perfit, 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 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, 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 thefinancial performance of our business on a variety of indicators, including these non-GAAP metrics. 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 CEO, Don Patrick.

Don Patrick: Good afternoon, and thank you all for joining our call today. I’m here together with Ryan Schulke, our Chief Strategy Officer; Chairman of the Board and company Founder; and Ryan Perfit, our Interim Chief Financial Officer. I’ll make some brief comments about our second quarter results that continue to reinforce the imperative behind our commitment to enhance the quality of our consumer engagements within our performance marketplace while also reflecting the more volatile macroeconomic and evolving regulatory environment we’re operating within. I’ll then update you on the meaningful progress we’re making in establishing Fluent as the industry leader relating to our previously announced FTC settlement. After 3-plus years of cooperating fully with the FTC and investing strategically and financially in the process, we are now establishing leading-edge protocols, which we believe will act as best-in-class model for our entire industry.

This was the imperative we chose to improve consumer experience relative to engagement and satisfaction and drive higher quality outcomes for our advertisers while ultimately leveling the industry playing field that or less committed competitors have tilted against us. Our Q2 ’23 results reflect the current strong headwinds we continue to face and are consistent with the more cautious near-term business road map we laid out in previous earnings releases. Our focus is in sequentially rebuilding our base, consisting with the strategic pivots we are making and the new business ventures that we embarked upon, some of which we’ll explore with you today. Financial results were as follows, revenue of $82.1 million, representing a 6% increased sequentially over Q1.

We continue to see the parallel levels of unpredictability as does the entire digital advertising industry with consumers and clients pausing to access the current economic uncertainty. Our media margin of $25.9 million was a 18% sequential increase over Q1. At 31.5% of revenue, our media margin percentage to expand quarter-over-quarter as we saw media costs, primarily on the social media platforms, return closer to historical norms. Adjusted EBITDA of $5.6 million represents 7% of revenue. This reflects both our ongoing strategic investments and our growth opportunities as well as the impact of additional quality initiatives we proactively implemented during the last two quarters, as we continue to learn and react on the regulatory front. Relative to the headwinds, first, our clients’ consumer acquisition strategies continued to shift from growth and return on ad spend to clear prioritization on return on ad spend due to continued consumer volatility in the market.

In the immediate term, we continue to leverage Fluent’s performance marketplace to respond to those shifts by managing media margin mix. Second quality results are also directly impacted by our conscious strategic and financial decisions to forgo certain revenue streams in our rewards and job businesses that we felt did not meet our evolving quality standards across our performance marketplace. This decision will continue to impact us over the next several quarters as we re-establish our strategic base while setting the course to lean into our growth agenda on a sequential basis in fiscal year ’24. To be clear, we look to lead the industry in redefining regulatory standards that exist in the market despite the short-term impact it will have on growth to include some lingering impact in subsequent quarters.

But our leading-edge processes and protocols come with strategic purpose and we are sending a resounding assertive message to the industry and the competitive set. They will lead in elevating the consumer engagement performance standards that we believe must be manifested more broadly in the marketplace. And I’ll state again, we are resolute to that degree, that we are willing to invest short-term revenue and profitability in order to serve our commitment to the ongoing strategy that will begin paying more concrete financial dividends in fiscal year ’24 as well as longer term. More importantly, we are confident that this path represents a more strategic, sustainable growth in future quarters. So let’s speak about our evolving growth agenda.

As we’re investing today, we are bullish regarding our early-stage strategic results in three specific business units where we see more than $150 million of revenue growth potential in the next 2 years. Importantly, these businesses will drive margin accretive to the core over time. Essential to our growth agenda is our core performance marketplace, a highly differentiated Fluent capability and the foundation on which we are leveraging and fueling our exciting new strategic investments. Although we see a core performance marketplace growing more modestly in the future, a strong and healthy core will act as a catalyst to drive the significant growth opportunities we see in the business units we discussed today. Influencer, Call Solutions and AdFlow.

First, we’re excited to announce our major launch in the e-commerce market, where $38 billion of U.S. advertising spend is growing double digits. Our AdFlow launch represents unique potential for us to expand our roster of major brand partnerships in a high-growth vertical by leveraging our core capabilities in the Fluent performance marketplace. Over time, we’re confident we can generate consumer and advertiser value that will make us a credible player in the market. Fluent’s core business brings consumers to our own digital owned and operated properties, and through surveying discovery, we curate a more meaningful consumer experience that connects them to world-class brands. With the recent launch of our turnkey e-commerce solution AdFlow, Fluent is now leveraging our core proprietary performance marketplace technology platform and our robust first-party data to connect world-class brands where high-quality consumers exist.

This business creates an exciting new and growing market opportunity for Fluent while opening the door to new brand partners that we’ve yet to do business with. AdFlow delivers incremental profit streams to our e-commerce partners while representing a new opportunity for world-class brands to reach consumers at the optimal purchase point. Appearing between the purchase processing and the confirmation page, AdFlow’s powerful machine learning leverages the e-commerce partners first-party data to analyze consumer behavior preferences and purchase history in order to deliver relevant and personalized offers. Although early stage, AdFlow is already active on more than a dozen e-commerce sites with a strong pipeline of new partners where we are building a foundation by testing and learning and to enhance our differentiated value proposition.

We are quite enthusiastic about this major strategic investment we’re making based on the longer-term ROI is this exciting new business. And good progress is being made as we reported last quarter, where we continue to experience significant double-digit growth in our Influencer and Call Solution businesses year-over-year. Both of these smaller strategic footprints are also high continuing sequential growth opportunities where we believe Fluent can differentiate ourselves in the marketplace with margin potential that exceeds Fluent’s core. Importantly, and further validating our strategic veracity around the future course. All three of these business units, AdFlow, Influencer and Call Solutions, enhance Fluent’s total value proposition for consumers and clients and are designed to generate greater long-term shareholder value.

We are quite excited by the early stage results. You can see why we continue to accelerate our strategic agenda and why we’re so enthusiastic about our course. We’re like so many in our industry, we’re facing challenging and evolving regulatory environment where the rules of consumer engagements are rapidly changing in a meaningful manner, and this will be reflected in our short-term results over the next several quarters as we continue to reestablish our growth agenda. Last month, Fluent settled with the Federal Trade Commission resolving the FTC’s previously disclosed investigation. Working tirelessly and collaboratively with the FTC over 3 years, we’re pleased to have reached a resolution. Our goal is to position Fluent at the forefront of our industry and the FTC consent order sets a clear new industry compliance standard that we have led the Fluent way.

Fluent’s foundational commitment to enhance the quality of consumer engagement within our performance marketplace is an investment we believe is unequivocally worth making that will come at immediate-term expense of top and bottom lines. With our commitment to quality, consumer engagement at the forefront, we saw opportunity to improve our go-to-market capabilities and client deliverables in a differentiated manner, so we chose to lead and are forging ahead with those core fibers in place. While it may take a few quarters or more for the industry playing field to finally level, we will look to leverage our leadership position to grow our market share with our media and client partners. Importantly, we’ll monitor the reality that some of our competitors regrettably and sometimes unabashedly operate with less compliant protocols as they will now be strongly urged to meet our standards or take significant regulatory risk.

So what we have thoughtfully planned and executed over a couple of years will require competitors to react more immediately or risk regulatory action, of strategic relevance and in light of these industry changes, Fluent can now leverage our proven track record of pivoting our performance marketplace to leverage higher quality consumer engagement and create competitive differentiation in distance. This positively impacts our longer-term business while providing us a unique opportunity to develop deeper, strategic relationships, both consumers and world-class brands. The successful FTC settlement gives us important clarity on our strategic road map and we will continue to appropriately invest in our growth agenda, quality as our North Star and with higher quality consumer experience as our scorecard.

And we are excited about the level competitive playing field that should have Fluent returning to growth at or above industry growth rates with sequential margin improvement. However, in the immediate term, as the market reacts to the new industry standard Fluent has chosen to lead. We believe it will take a few quarters or more for our competitors to implement these industry compliance standards. And frankly, we expect some of them to try to take advantage of it financially at their own business and regulatory apparel. Given the lack of short-term clarity on this important industry inflection point, along with our continued investment in our exciting new strategic business ventures, we see it taking time for us to return to sequential growth trajectory in fiscal year ’24.

In closing, we’ve invested aggressively and prudently in our forward path and remain confident that the fundamentals we have continued to put in place over the last fiscal year will pay longer-term strategic and financial dividends as we move further into fiscal year ’24. Ultimately, market and industry conditions will improve and the new consumer norm will prevail. And our new business units will continue to strengthen our market position given the investments we’re making. In the immediate term, we’ll continue to implement our strategy while managing the mix across our different business units as a clear path to deliver our margin expansion goals. And with that, I’ll turn to Ryan to provide more detail on our financial results.

Ryan Perfit: Thank you, Don, and thank you for joining us today, everyone. I’ll now delve into our Q2 earnings performance, providing year-to-date comparisons where applicable. For the quarter, Fluent produced $82.1 million in revenue, down 16% from prior year but up 6% sequentially from Q1. Year-to-date, our total revenue stands at $159.4 million, reflecting a 15% decrease from the same period last year. Sequential growth was driven by the media and entertainment sector specifically gaming and streaming clients and offset by continued challenges within the financial services and staffing and recruitment sectors. While still hindered by the challenges of the macroeconomic environment, we were heartened by year-over-year and sequential growth of our strategic Influencer channel and year-over-year growth of the Call Solutions business.

As mentioned previously by Don, prevailing economic headwinds, primarily stemming from shifts in our clients’ consumer acquisition strategies, including pricing pressures from certain sectors, along with our commitment to define and exemplify the evolving regulatory standards will continue to cause sequential growth challenges for the remainder of the year. Our media margin in Q2 of $25.9 million represents a 20% year-over-year decline and 31.5% of revenue, up from 28.4% in Q1. Year-to-date, our media margin of $47.9 million represents an 18% decline over the same period last year and 30% of revenue. The declines versus prior year periods were largely a factor of the previously mentioned client spend challenges not being offset by lower cost of media.

The sequential improvement of media margin as a percentage of revenue can be attributed to a market correction in media pricing and efficient sourcing. On a GAAP basis, our aggregate operating expenses for Q2 were $16.8 million, marking a $4.2 million year-over-year decrease. For the 6 months ended June 30, our aggregate operating expenses were $38.9 million, a $1.8 million decrease from the same period last year. Of note, our G&A line in Q2 includes specific litigation and related expenses amounting to $785,000 and a $2.5 million benefit from an over accrual related to the FTC settlement. For the 6 months ended June 30, specific litigation and related expenses, excluding the benefit from the over accrual were $2.2 million. The G&A line also includes accrued compensation expenses linked to the Winopoly and True North acquisitions of $562,000 and $1.2 million for the 3 and 6 months ended June 30, respectively.

All of these costs and benefits fall outside of the normal course of business and thus are excluded from adjusted EBITDA. The company did not bear any impairment expense in Q2, but on a year-to-date basis, we’ve recognized a noncash impairment charge of $25.7 million for the goodwill associated with the acquisition of the Fluent operating business in 2015. This impairment charge is disregarded in our year-to-date adjusted EBITDA calculations and does not impact our operations or liquidity. Our Q2 adjusted EBITDA totaled $5.6 million, representing 6.8% of revenue. This accounts for a year-over-year decrease of $3.8 million and was a consequence of the previously noted decline in revenue, coupled with the decrease in media margin as a percentage of revenue, offset partially by a decrease in operating expenses.

For the 6 months ended June 30, 2023, adjusted EBITDA of $6 million represents 3.8% of revenue and an $8.1 million decline from the same period last year. For the remainder of the year as we continue to invest in the growth opportunities like Call Solutions, Influencer and AdFlow, we anticipate adjusted EBITDA as a percentage of revenue to remain in the low single digits. The company cannot provide a reconciliation to expected net income or net loss in Q3 and Q4 due to the unknown effect, timing and potential significance of certain operating costs and expenses, share-based compensation expense and the provision for or benefit from income taxes. Interest expense in the second quarter increased over prior year by $365,000 to $795,000 as an effect of increased interest rates.

For the 6 months ended June 30, 2023, interest expense increased $670,000 to $1.5 million, also an effective increased rates. For the quarter, the provision for income taxes amounted to $750,000 for the year-to-date period, the provision is $851,000. For the second quarter, we reported net income of $1.2 million and an adjusted net income, a non-GAAP measure of $956,000 equivalent to $0.01 per share. Year-to-date, our net loss stands at $30.8 million, with an adjusted net loss of $1.7 million, equivalent to a loss of $0.02 per share. Turning to our balance sheet. We ended the quarter with $21 million in cash and cash equivalents, a $4.6 million decrease from the end of 2022. Our working capital, defined as current assets minus current liabilities, closed at $37 million, a $5 million decline from year-end 2022.

Total debt as reflected on the balance sheet, as of June 30, 2023, was $38 million, representing a $5 million reduction as compared to the balance at June 30, 2022. In Q2, we invested $1.2 million into capitalized product development and technology as compared to $1.1 million in Q2 2022. Year-to-date, the company has capitalized $2.4 million in product development and technology versus $2.2 million for the same period last year. As the management team, our focus remains on sourcing quality traffic and enhancing consumer experiences with the goal of improving our clients’ return on ad spend. We maintain strong confidence that the groundwork we are laying now to rebuild our base would yield substantial and enduring strategic and financial benefit in fiscal year 2024 and beyond.

Finally, I wanted to let our listeners know that we’ll be not filing our Form 10-Q today as we continue to finalize our disclosures and we will be availing ourselves of a permitted extension by timely filing a notice under SEC Rule 12b-25. We appreciate your ongoing support. We’ll be happy to take questions at this time.

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Q&A Session

Operator: Thank you [Operator Instructions] Our first question comes from Maria Ripps with Canaccord Genuity. You may proceed.

Maria Ripps: Great, good afternoon. And thanks for taking my questions. I hope everyone is doing well. So you mentioned the lack of predictability across the space. Can you maybe talk about what you’re seeing so far in Q3 relative to your expectations? And maybe broadly, how should we think about revenue trajectory in the second half given easier comps, but also some of the dynamics or some of the headwinds that you talked about?

Don Patrick: Hi, Maria, thank you for the question. So I’ll break it into two pieces. One is the macroeconomic headwinds we talked about. And then the second is obviously the FTC related headwinds that we talked about. So from a macroeconomic perspective, our advertisers are certainly more bullish on budgets and spending in the second half. And into 2024, but we’ve not seen any specific change in sort of their spending. They certainly are talking about spending more in the second half, but we haven’t seen any real major change in actions. We have seen some things move between the verticals. We talked – Ryan talked about a media side of it going and even on the streaming side, although we’re watching that extremely close based on sort of the Hollywood strikes and would – might reduce spend and also might provide some consumer pullback based on the lack of inventory.

So relatively speaking, we’re hearing more positively than we saw in the first half, but we’ve not seen that across our entire network. Regarding the FTC piece, and this is a little less clarity where we have great clarity in the medium term, but we have a little bit less clarity in the short term, Maria. So we’re pleased to have this behind us after 3.5 years, 95% of the settlement was already implemented by Fluent prior to the start of Q2, and we’ve implemented the remaining part before we signed the settlement in the end of May. In the medium term, this is a significant advantage to us. With our new compliance standards in the industry that others have to follow and we work on. We’ve worked on over 3-plus years to put into place and drive the quality of the consumer side of it.

Our competitors are going to have to put in place in a relatively very short time frame or face some risks. So – and in the FTC announcement, they talked about this being the beginning of how they’re looking at the industry and change not at the end of an investigation. So medium term, we have great – we think, is a significant advantage to us, and we will look to gain market share and grow. In the immediate term, though, the impact actually has some headwinds that don’t have a ton of clarity to us. At the highest level, our business model, as you know, is based on us buying media for our own account bringing consumers to our website, providing meaningful experiences and in connecting them to the brand. The difference between what the brands pay us for the connection to that consumer, and our media is what we call our yield.

It’s just the difference in profit. In the immediate term, our competitors that do not have to – that will not enforce the new FTC compliance standards or the discipline on the media or the media partners that they work with, will have a short-term advantage over Fluent and buying media. They’ll be able to produce a higher yield and also have less restrictions with their medium partners. So the key piece is they do not have a quality advantage of Fluent. Our quality is outstanding, and they will not catch up to it, but they do have a volume advantage to us. That means Fluent either has to buy less media to slow down revenue or have to manage by the same media of lower margins. And that’s the balance that we’re working through as we work through the FTC headwinds.