Cardlytics, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Comparative periods are the three and nine months ended September 30, 2017. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and reporting period
Cardlytics operates a purchase-intelligence marketing platform using anonymized bank and credit-union purchase data. Its principal product, Cardlytics Direct, delivers offers through financial institutions’ digital banking channels; revenue is reported net of consumer incentives and gross of FI Share payments. The company began focusing most resources on Cardlytics Direct in early 2018 and discontinued its managed-service offering within Other Platform Solutions in July 2017.
The company completed its IPO in February 2018, raising $66.1 million in net proceeds. Preferred stock converted to common stock upon the IPO. It reported 21.4 million common shares outstanding as of October 31, 2018.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2018 | Nine months 2017 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $31.4 | $34.6 | $91.1 | $102.9 |
| Operating loss | $(2.5) | $(8.7) | $(14.9) | $(30.1) |
| Net loss | $(2.5) | $(8.4) | $(15.6) | $(41.5) |
| Adjusted contribution | $17.2 | $17.0 | $41.3 | $47.4 |
| Adjusted EBITDA | $0.1 | $(1.7) | $(7.7) | $(6.9) |
Q3 revenue grew 10%; Cardlytics Direct rose 14% to $34.4 million, while Other Platform Solutions fell 86% to $0.2 million. For the nine months, revenue grew 13%, with Cardlytics Direct up 22% to $101.6 million and Other Platform Solutions down 84% to $1.2 million. Q3 operating margin was approximately negative 25% and net margin negative 24%; nine-month operating and net margins were approximately negative 29% and negative 40%, respectively. Adjusted contribution is a company-defined non-GAAP measure; it was nearly flat year over year in Q3 and rose 15% for the nine months.
Operating costs increased faster than Q3 revenue: total costs and expenses rose 27% to $43.2 million. For the nine months, they rose 25% to $133.0 million. Nine-month stock-based compensation increased to $17.0 million from $3.7 million. FI Share and other third-party costs were 52% of Q3 revenue and 58% of nine-month revenue.
Nine-month operating cash use was $14.3 million, versus $16.6 million in 2017; investing cash use was $4.2 million versus $1.1 million. Financing provided $65.1 million, primarily from the IPO and refinancing activity. At September 30, cash and cash equivalents were $47.8 million, plus $20.0 million restricted cash; working capital was $75.1 million. Debt totaled $46.8 million: $26.8 million on the revolving line and $20.0 million on the term loan. The company had $3.1 million of unused line availability and reported compliance with loan covenants.
Material changes, outlook, and risks
- Losses widened despite revenue growth. Q3 adjusted EBITDA moved from slightly positive to negative; nine-month adjusted EBITDA improved modestly but remained negative.
- Non-cash and unusual items affected results, including $6.8 million of nine-month warrant-liability fair-value expense, $2.5 million of expense from FI-partner warrants vesting upon the IPO, and $0.9 million of debt-extinguishment loss. Q3 included a $0.8 million gain from warrant fair-value changes and a $0.8 million benefit from retroactive amendments to the Lloyds agreement.
- Cardlytics signed agreements for national Cardlytics Direct rollouts with JPMorgan Chase and Wells Fargo. The filing warns that implementation may be delayed, limited, or terminated; each partner has contractual termination rights. Lloyds renewed its agreement through December 2020, subject to termination on nine months’ notice.
- Management expects continued operating losses but believes cash and cash equivalents are sufficient for operations and capital requirements for at least 12 months after issuance of the financial statements. No specific revenue or earnings guidance is provided. Results are seasonal, with historically higher consumer spending and marketer activity in Q4.
- Management expected a $4–$6 million shortfall on a $10 million minimum FI Share commitment after specified milestones, then expected to be completed in the first half of 2019. The company also disclosed $3.5 million of scheduled Q4 2018 development payments, expected to be partly offset by $1.3 million in FI Share reductions.
- Key risks include dependence on a small number of FI partners and marketers: Bank of America represented 52% of FI monthly active users and 63% of FI Share for the nine months. Most FI agreements can be terminated on relatively short notice. The company also cites execution risk in new bank rollouts, privacy and cybersecurity exposure, competition, and its history of losses and need for continued investment.
Important facts for investors to verify
- Whether revenue growth and FI monthly active user growth translate into improving operating margins and cash generation, given rising costs and stock compensation.
- Progress, launch timing, economics, and termination provisions for the Chase and Wells Fargo rollouts.
- Timing and actual amount of the expected minimum FI Share commitment shortfall and related development-cost recoveries.
- Cash availability after considering the $20 million restricted deposit, debt service, the $5 million minimum liquidity covenant, and only $3.1 million of unused revolver capacity.
- How much reported loss reflects recurring operations versus warrant valuation changes and other IPO- or financing-related items; also review the company’s non-GAAP reconciliations.