Title

Presentation

Operator: Thank you for standing by, and welcome to Fluent Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s program is being recorded. And now I would like to introduce your host for today’s program, Dan Barsky, General Counsel and Chief Compliance Officer. Please go ahead, sir.

Dan Barsky: Good afternoon and welcome. Thank you for joining us to discuss our fourth quarter and full year 2022 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 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, 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 this 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 these non-GAAP metrics. The definition of these metrics and reconciliations to the most directly comparable GAAP financial measures are provided in the earnings press release issued later today. With that, I’m pleased to introduce Fluent’s CEO, Don Patrick.

Don Patrick: Thank you, Dan, and good afternoon. 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. Ryan Perfit rejoined us in February having led our finance group at Fluent for seven years from 2012 to 2019. We’re excited to have Ryan back with us given his deep knowledge of Fluent and our industry. I’ll make some brief comments about our annual and fourth quarter results that we believe 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 environment we are operating within.

I’ll then update you on a disciplined progress we’re making against our strategic priorities along with the required strategic and economic adjustments we’re making to enhance our consumer solutions while reinforcing the strategic and value-added role we play with our partners and clients. In the earnings release today, we reported for the full year 2022 revenue of $361.1 million, which represents top-line growth of 10% versus 2021, $110 million of media margin, an increase of 10% at 30.5% of revenue and $22.7 million of adjusted EBITDA, the decline of 2% at 6.3% of revenue. Overall, our 2022 financial results were consistent with the business roadmap we laid out in our previous earnings releases as our strong first half performance landed where we planned for the full year 2022.

In 2022, we are encouraged by the double-digit revenue growth in our core U.S. and international rewards businesses directly resulting from momentum in our performance marketplace and driven by two of our strategic initiatives: consumer engagement and CRM. Our targeted investments to improve consumer experience while also enhancing our CRM capabilities led to a higher quality marketplace experience and thus a more engaged consumer for our clients. In turn, our monetization continues to improve on our owned media properties, which we see as a reflection of consumer satisfaction. We continue to see a significant market play before us to further create meaningful and engaging consumer experiences that expand our relationships with world-class brands and key industry verticals by enhancing our consumers’ lifetime value in their branded ecosystem.

Rewards revenue growth was partially offset by our jobs business based on economic headwinds reducing second half demand, coupled with first half challenges we faced on our technology platform migration. Our new technology platform offers longer term market opportunities to strategically pivot our jobs business model in a manner that will strengthen our integration with our partners, while improving quality of our jobs consumers experience. We are currently assessing that strategic opportunity. We’ll have more to share in that in the future. A strategic and financial relevance is how we continue to proactively manage the mix across our initiatives. We are methodically expanding our business unit margins, where higher quality consumer experiences differentiate us in our competitive set and thus create a market opportunity to do so.

In turn, we’re pleased that the majority of our businesses show double-digit year-over-year margin improvement. Our ability to remain strategically focused yet nimble is important given the current market realities. Our fourth quarter results reflect the macroeconomic headwinds we’re seeing across the entire industry. Revenue of $84.7 million, down 15% year-over-year, media margin of $23.7 million, down 24% year-over-year at 28% of revenue and adjusted EBITDA $2.7 million or 3.2% of revenue. As discussed in Q3, we are currently seeing a parallel level of unpredictability as the digital advertising industry. Towards the end of Q3, consumers and clients were pausing to access the road ahead that extended into Q4 is continuing in Q1 2023. We have seen our clients’ consumer acquisition strategies shift from growth and return on ad spend to just return on ad spend due to the continued consumer uncertainty in the market.

And while Fluent’s performance marketplace is well positioned to respond to these shifts by managing media margin mix, Q4 margin was impacted primarily based on certain media cost increases in our core rewards business being above historical Q4 seasonal norms on social media platforms in industry-wide reality. Importantly, we see media costs returning to the more historical norms in Q1 and correspondingly our ability to successfully manage our media mix will improve. In 2022, we expanded our media footprint spend on social channels focusing not only on digital platforms like Facebook, Google, Snap and TikTok, but also against the emerging channel of influencers that leverage them. Influencer credibility is growing presence in the marketplace.

Their ability to affect consumer behavior is also growing and thus significantly impacts trends in the demand for particularly products and services in a variety of verticals. Although early stage, in the latter half of 2022, we accelerated working with these media partners while building a proprietary influencer platform with functionality and tools that support influencer effectiveness while enhancing quality for our clients. We are motivated by the strategic opportunity here as our emerging Fluent platform brings stronger market capabilities that improve influencer experience while enhancing consumer engagement and satisfaction. Net we believe influencers are a growing and increasingly important industry channel for customer acquisition and we’ll continue to evolve and invest here.

Our long-term strategic growth plan remains focused squarely on consumer engagement by enhancing all aspects of the quality experience of our performance marketplace. This is the prudent strategy regardless of the current challenging economic and industry environment. We remain undeterred as we lean into key growth areas that differentiates Fluent from our competitive set, while evolving our capabilities to fixate on the quality fundamentals at the core of our business model that will have us win in the longer term. An inherent strength of Fluent’s performance marketplace is our pay-for-performance model, which is the signature of our brand partnerships. Fluent only gets paid when we directly connect to consumer with our brands, partners, goods and services in agreed upon purchase action.

As our brand partners share this critical data with us, it creates an opportunity for Fluent to analyze real-time consumer behavior, providing us the ability to see the direct connection between Fluent’s consumer and our brand client. And converting this data into insight is an unequivocal competitive advantage. The Fluent’s platform leverages that insight to fuel our media spend and ad-serving, while enhancing the consumer experience. This not only improves our brand partners’ return on ad spend, it further solidifies the value of Fluent partnership, at the same time expanding our margins. We are seeing our most strategic clients in key verticals invest more aggressively with us here, a reflection of Fluent’s evolving brand equity. Our goal is to expand this capability with clients in other verticals vis-à-vis full data transparency.

This is obviously short-term value proposition and return on ad spend benefits for our brand partners, but as important, this emerging Fluent capability has longer term strategic benefits for us, which delivers additional competitive advantage in the marketplace. As a direct reflection of the challenging macroeconomic environment, we are prudently reviewing our 2023 strategic investments and priorities along with scrutinizing our operating costs in order to ensure that we drive acceptable, medium term financial performance. Our assessment has led us to pause or eliminate lower priority projects, while also streamlining our organization, resulting in some difficult layoffs in restructuring. We believe our subsequent, flattened organization is more appropriately designed to facilitate faster strategic and financial decision making, while improving our productivity and speed in executing.

Regarding Q1, given the somewhat unprecedented macro and geopolitical economic outlook, we are certainly seeing a continued parallel level of unpredictability in the digital advertising industry. The immediate term ramifications for Fluent are difficult to gauge as we remain fluid in responding to market conditions. Similar to Q4, we expect to see modest declining revenue growth quarter-to-quarter with consumers spending less and clients operating more cautiously as they tighten their budgets and continue to focus on return on ad spend. We also expect to see improving margins quarter-to-quarter as we manage our media mix, with media costs returning to more historical norms. We remain bullish on our agenda, albeit at a more moderate investment level, and we will continue to make strategic bets against our quality centric consumer platform, maintaining clear focus on enhancing consumer engagement, while improving customer experience.

Overall, we believe 2023 financial results will show modest revenue growth at or above industry growth rates with sequential margin improvement over time. In turn, we will continue to appropriately invest in our growth agenda while making the necessary strategic and financial adjustments to be successful in the long-term. We are also confident that the fundamentals we’ve put in place over the last fiscal year will pay longer term strategic and financial dividends, as market conditions improve and the consumer normalcy returns. In tandem, we’ll continue to manage the mix across our different business units as a clear path to our margin expansion goals. Finally, our industry will continue to rapidly evolve where regulatory considerations and guidelines will naturally increase.

As a company, while we continue to learn and grow, Fluent is also committed to exhibit the industry leadership role in both setting and reflecting these industry standards. We believe this is a critical strategy for our long-term success with consumers and clients. But we also believe we have a unique opportunity to elevate the entire industry by way of our enhanced processes and protocols. We are aggressively investing in the strategy and the business protocols and will continue to update our industry and our investors on our course. While the economic realities have created unique challenges, we remain steadfast at building a higher quality digital experiences for consumers, while creating more effective and sustainable customer acquisition solutions for our clients, represents the winning road forward.

As we execute against our strategic and financial growth agenda, our team remains grounded in our operating principles. This is the decided path to winning the consumer who demands higher quality, while establishing competitive advantage in the marketplace and creating shareholder value for our investors. And with that, I will turn to Ryan to provide more detail on our financial results.

Ryan Perfit: Thanks, Don. And good afternoon everyone. I am glad to be back and to report our full year 2022 and Q4 results. For the full year, Fluent generated $361.1 million in revenue, up 10% year-over-year, and in line with overall digital advertising industry growth. As Don mentioned, we were encouraged by the growth of our core rewards business, which was bolstered by continued investments in consumer engagement and CRM capabilities. Continued consumer traffic monetization improvements have allowed us to be less dependent on volume of users to generate revenue growth. The increases were partially offset by a decline in the jobs business, which was challenged by market conditions and a technology platform migration in the first half of the year.

In Q4, the company generated $84.7 million of revenue, down 15% year-over-year and down 5% sequentially from Q3. As Don mentioned, Q4 was adversely affected by continued unpredictability in the broader digital advertising industry, where we did not see the higher seasonal ad spend we have historically experienced, In Q1 we continue to see headwinds in the industry. Although we haven’t experienced the historical sequential decline from Q4, we do anticipate revenue will be down mid-single digits from the fourth quarter. We expect to continue to increase in consumer engagement along with an expanded media footprint in the influencer channel to drive growth in 2023. Our full year media margin was $110 million, representing 10% year-over-year growth.

Media margin as a percentage of revenue remained constant at 30.5% from full year 2021. Our media margin in Q4 of $23.7 million represented 28% of revenue and a 24% year-over-year decline. The fourth quarter decline was largely a factor of the previously mentioned ad spend challenges not being offset by lower media costs. In Q1, we expect media mix to drive media margin higher sequentially. Our full year operating expenses on a GAAP basis comprising sales and marketing, product development and G&A, grew in aggregate by $12.1 million or 16% year-over-year to $88.8 million. Within that mix, we continue to strategically invest in sales and marketing and product development, in supporting growth initiatives and product innovation. Full year operating expenses, exclusive of non-GAAP adjustments were $70.9 million.

Our operating expenses on a GAAP basis in aggregate for Q4 were $28.3 million, up $8.5 million year-over-year. Exclusive of non-GAAP adjustments, operating expenses were $17.4 million, a $79,000 year-over-year increase. In Q1 we completed a reduction in headcount and are continuing to review strategic investments and operating expenses given the current environment. Our G&A line includes certain litigation and related costs of $11.1 million for the full year and $8.6 million for Q4, representing a year-over-year increase of $8.1 million. These costs are outside of the ordinary course of business and are excluded from our adjusted EBITDA. G&A also includes $2.2 million of accrued compensation expense related to the Winopoly and True North acquisitions that is excluded from our adjusted EBITDA.

As detailed in our 10-K filing, the company determined that the decline in our market cap and under performance in Q4 represented a triggering event and an indication of impairment of our goodwill. Based on this analysis, the company recorded a non-cash impairment charge to goodwill associated with the acquisition of the Fluent operating business in 2015 and the ad part of business in 2019, a $55.7 million in the fourth quarter and $111.1 million for the full year. The non-cash impairment charge is excluded from our adjusted EBITDA and will have no impact on our operations or liquidity. Full year adjusted EBITDA of $22.7 million represented 6.3% of revenue. Q4 came in at $2.7 million or 3.2% of revenue. Full year net interest expense declined by $219,000 to $2 million as we reduced our debt principle outstanding by $5 million year-over-year.

For the full year, the provision for income taxes was $1.8 million with an effective tax rate of 1.5%. We reported a full year GAAP net loss of $123.3 million and adjusted net income, a non-GAAP measure of $5.7 million or $0.07 per share. For the fourth quarter, we reported a net loss of $67.5 million and an adjusted net loss of $794,000 or $0.01 per share. Our non-GAAP metrics reconciled in today’s earnings release and our 10-Q and 10-K filings. Turning to the balance sheet, we ended the quarter with $25.5 million in cash and cash equivalents. Working capital defined as current assets minus current liabilities, ended the quarter at $42 million, down $7.3 million year-over-year and $9.8 million sequentially. Total debt as reflected on the balance sheet, ended the quarter at $40.6 million.

Our debt balance has declined by $4.7 million as compared with the prior year balance sheet. Over the past year, we invested $4.4 million into capitalized product development and technology and $1 million into acquisition and related costs, compared to $3 million and none respectively in 2021. Strategically, the management team continues to focus on consumer engagement and higher quality traffic, which yields higher conversion rates and ultimately higher return on ad spend for our clients. We believe this approach will continue to drive increased monetization and higher media margin. We’re confident in our ability to execute on the opportunity ahead. We appreciate your ongoing support. We’re happy to take questions at this time.

See also 12 Biggest Cloud Providers by Market Share and 11 Best Performing S&P 500 Stocks in 10 Years.

Operator: And our first question comes from the line of Maria Ripps from Canaccord. Your question please.

Maria Ripps: Great. Thanks so much for taking my questions. First, could you maybe talk about your budget €“ how your budget conversations with your clients have been developing so far this year? I know you mentioned that some clients are tightening their budgets, but how much visibility would you say you have into budgets for the remainder of 2023? And are there any dynamics outside of the broader macro environment that could impact budget allocations in either direction?

Don Patrick: Hi. Thank you, Maria. Thanks for the question. Generally overall when we saw the pullback in Q3, most of our clients were sort of looking at a more short-term quarter-by-quarter view. When we do talk the longer term over the course of 2023, they are confirming that their budgets look to be flat-to-slightly up. But what we’re seeing is in the short-term, they’ve been pulling back more focused on return on ad spend rather on growth. So the metrics that we’ve been driving for our clients have been more on that return on ad spend, which our model €“ our business model obviously adheres to pretty closely. So they’re confirming that the spend is generally the same or slightly up, but obviously very short-term focus quarter-by-quarter.

The only thing we’ve seen in verticals that are slightly different is we have in the health industries like Medicare, Medicaid, AEPs, things like that in our Call Solutions business that has not been affected. In fact in Q4 that seasonality did happen for our business and we did see the margin growth expand, but for generally across the streaming services, the Media & Entertainment things like that we’ve seen €“ we’ve seen a big pullback from growth to return on ad spend.

Maria Ripps: Got it. That’s very helpful. And then could you maybe talk a little bit more about your efforts to expand your media footprint? Did you add any new channel sort of partnerships in Q4 and any call or maybe you can share and what drove sort of this slide, slightly higher cost of revenue in the quarter compared to Q3? And then maybe related to that sort of in addition to the influence the channel that you mentioned on the call, what are your sort of top priorities in 2023 as it relates to sort of this pillar of your growth strategy?

Don Patrick: Sure. And Maria, your last question was around our media or just in general around our growth?

Maria Ripps: Around your sort of media footprint?

Don Patrick: Got it. Yes, perfect. Yes. So as you know, we’ve lean pretty heavily into the, what I’ll call the social channels. And that has been really from start of 2020 when we started the traffic quality initiative and we’ve been obviously continuing to invest in that. We did see in Q4 cost on the biddable platform is higher than they typically are from a seasonality perspective. They always do go up in Q4. But it was up, up higher based on the things that you saw go on across those platforms. So the good news is on Q1 we did see those pricing come back to the norm and our ability to manage that mix successfully. As we look into our clear growth initiatives around biddable and around our social programs, it’s really the influence is a pretty big play for us.

It’s nothing new. It’s a huge market, 16 billion and it’s growing aggressively. The big change has been around consumer behavior. Over 50% of the consumers now depend on influencer’s opinion and make a purchase. We’re really leaning into that. The influencer is between sort of mega and macro influencers. We’re really going after the micro section, which tends to have more influence over their audience and more engaged and, and more likely to take an action. So our platform was a big play in that media shift in order to really building a marketplace for those influencers to work with us, to connect with our brands, and then also more effectively operate in a compliant way. So social and clearly the influencers is a big play for us going in 2023.

The radio and the TV and the things that we play on the search side that we have talked to you before, that Maria continues to grow and expand. But in this environment where we would invest fairly aggressively across our media channels, we are obviously very focused on making sure managing the mix effectively during this timeframe.

Maria Ripps: Got it. Thank you so much for the call. Thank you.

Operator: Thank you. And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Don Patrick for any further remarks.

Don Patrick: All right. Thank you. Fluent remains steadfast in building our higher quality digital experiences, while creating a more effective and sustainable customer acquisition solutions for our clients. We do believe that’s a winning road forward for all Fluent stakeholders. So thank you for participating today, and thank you for your continuous support.

Operator: Thank you. Ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect.