Cardlytics, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the same 2018 periods. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context
Cardlytics uses anonymized purchase data obtained through financial-institution (FI) partners to run and measure marketers’ campaigns, primarily through its Cardlytics Direct banking channel. The company has shifted resources away from Other Platform Solutions and does not expect substantial revenue from that offering in the foreseeable future.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $48.7m | $35.6m | $84.7m | $68.3m |
| Billings | $73.8m | $51.4m | $132.3m | $100.2m |
| Adjusted contribution | $21.8m | $16.2m | $39.5m | $30.4m |
| Adjusted EBITDA | $(0.6)m | $(2.2)m | $(3.8)m | $(5.2)m |
| Operating loss | $(5.5)m | $(11.6)m | $(12.0)m | $(21.5)m |
| Net loss | $(6.5)m | $(13.1)m | $(12.8)m | $(33.1)m |
| Net loss per share, diluted | $(0.29) | $(0.64) | $(0.57) | $(1.99) |
Q2 revenue increased 37% year over year, while billings rose 43%; first-half revenue and billings grew 24% and 32%, respectively. Management attributed most Cardlytics Direct revenue growth to existing marketers. Adjusted contribution, a non-GAAP measure, grew 35% in Q2 and 30% in the first half. Q2 adjusted contribution was about 45% of revenue, versus about 46% a year earlier. GAAP operating and net losses narrowed; the 2018 comparisons included higher stock-based compensation and warrant fair-value expense. These measures are not directly interchangeable with GAAP profit.
Q2 average FI monthly active users rose to 120.1 million from 58.8 million, largely following Chase channel launches. Average revenue per user fell to $0.40 from $0.60. Consumer incentives were $25.0m in Q2 2019 versus $15.8m in Q2 2018; reported revenue is net of these incentives.
Cash, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $32.5m and restricted cash was $10.3m, compared with $39.6m and $20.2m at December 31, 2018. Restricted cash includes lender-controlled security; $10.0m was used in Q2 to repay term-loan principal.
- First-half operating cash use was $3.0m, investing cash use was $5.2m, and financing cash use was $8.9m. Cash, cash equivalents and restricted cash totaled $42.7m at period-end.
- Total debt was $36.7m: $26.7m drawn on the revolving line and $10.0m on the term loan. The amended facility matures May 14, 2021; $13.3m of line availability remained. The company reported compliance with financial covenants at June 30.
- Working capital was $57.9m, down from $72.4m at year-end 2018. Management said available cash should fund operations and capital requirements for at least 12 months after issuance of the statements, while also expecting operating losses and possible need for additional capital.
Outlook, commentary and key risks
- No numerical revenue, earnings or cash-flow guidance is provided. Management expects continued operating losses and investment in the business; fourth-quarter marketer spending has historically made results seasonal.
- Management expected Wells Fargo to begin a phased Cardlytics Direct launch in Q4 2019. Launch timing, implementation and customer adoption are uncertain.
- Chase and Bank of America represented 47% and 27% of Q2 average FI MAUs, respectively. Management expects both to remain significant. FI agreements are generally terminable by partners on 90 days or less notice, despite typical stated terms of three to seven years.
- Debt is secured by substantially all company assets and carries financial and restrictive covenants. The facility requires a $10.0m controlled deposit and at least $5.0m of cash plus line liquidity. Interest rates are variable.
- A $10.0m minimum FI Share commitment is contingent on milestones not met as of June 30; management did not expect those milestones to be completed in 2019. Any expected shortfall is to be accrued after milestone completion. The filing also notes anticipated recoveries of earlier FI development costs: $2.3m of a projected $4.6m had been recovered by June 30.
- Principal business risks include dependence on a limited number of FIs and marketers, declining ARPU as the user base expands, delayed or unsuccessful partner launches, data privacy and cybersecurity, competition, seasonality, foreign exchange and the company’s history of losses. The company reported no legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Wells Fargo’s planned phased launch occurred as expected and what it contributed to users, billings and revenue.
- Whether growth in FI MAUs translates into improved revenue per user, contribution and cash generation.
- Ongoing concentration in Chase, Bank of America and major marketers, and the renewal, termination and data-access terms of key FI relationships.
- Available revolver capacity, covenant compliance, required restricted cash and the company’s ability to fund continuing losses through the facility’s 2021 maturity.
- Timing and accounting impact of the milestone-based $10.0m FI Share commitment and remaining development-cost recoveries.
- Potential dilution from equity awards: 1.846 million RSUs were unvested at June 30, including performance-based awards, and the company reported $26.3m of unamortized RSU compensation cost.