Cardlytics, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Cardlytics uses anonymized purchase data accessed through financial-institution (FI) partners to offer marketers targeted advertising and measure sales impact. Cardlytics Direct, its native bank advertising channel, generated nearly all revenue in the first half of 2018. The company completed its IPO in February 2018, raising $66.1 million in net proceeds; outstanding preferred stock converted into common stock.
Financial performance
| Metric | Q2 2017 | Q2 2018 | Six months 2017 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $32.8m | $35.6m | $59.7m | $68.3m |
| Operating loss | ($5.3m) | ($11.6m) | ($12.4m) | ($21.5m) |
| Net loss | ($0.6m) | ($13.1m) | ($13.1m) | ($33.1m) |
| Adjusted contribution | $13.5m | $16.2m | $24.1m | $30.4m |
| Adjusted EBITDA | ($2.8m) | ($2.2m) | ($7.7m) | ($5.2m) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | ($6.1m) | ($12.8m) |
- Revenue and mix: Q2 revenue increased 8%; Cardlytics Direct revenue rose 21% to $35.1m, while Other Platform Solutions fell 88% to $0.5m. First-half revenue grew 14%, with Cardlytics Direct up 26% to $67.2m and Other Platform Solutions down 83% to $1.1m.
- Margins: GAAP operating loss was 32.7% of revenue in Q2 2018 versus 16.2% a year earlier; for the first half, 31.4% versus 20.7%. Adjusted contribution margin was 45.5% in Q2 versus 41.1%, and 44.5% for the first half versus 40.3%. Adjusted contribution and adjusted EBITDA are non-GAAP measures.
- Drivers of loss: Q2 operating expenses rose to $47.2m from $38.1m. Q2 stock-based compensation was $8.3m, compared with $1.2m a year earlier. First-half net loss included a $7.6m non-cash warrant-liability charge and $2.5m non-cash expense for FI-partner warrants vesting at the IPO; Q2 also included a $5.6m increase in stock compensation from revised timing estimates for performance-based awards.
- Per-share results: Q2 basic and diluted net loss per share was $0.64; first-half net loss per share was $1.99. Share counts increased substantially following the IPO and preferred-stock conversion.
- Operating metrics: Average FI monthly active users were 58.8m in Q2 2018 versus 53.7m; Cardlytics Direct average revenue per user was $0.60 versus $0.54.
- Cash and liquidity at June 30: $50.5m unrestricted cash and cash equivalents, $20.0m restricted cash pledged to the lender, and $64.9m working capital. First-half operating cash use was $12.8m; investing cash use was $2.2m and financing cash provided was $64.2m, primarily reflecting the IPO.
- Debt: Total debt was $47.5m: $27.5m drawn on a $30m revolving facility and $20.0m term loan. The facilities mature May 21, 2020; $2.5m of line availability remained. The company reported compliance with financial covenants at quarter-end.
Material changes and notable items
- Cardlytics refinanced its previous credit facilities in May with a $30m asset-based revolver and $20m term loan. The facilities are secured by substantially all assets; $20m cash is required to remain in a blocked account. Covenants include a minimum trailing-12-month revenue requirement, $127m for the period ended June 30, and a minimum $5m of cash plus revolver availability.
- Management began shifting most resources toward Cardlytics Direct and does not expect substantial near-term revenue from Other Platform Solutions; it expects that segment’s revenue to decline. The discontinued managed-service offering was a major source of Other Platform Solutions revenue.
- After quarter-end, Cardlytics signed a national Cardlytics Direct rollout agreement with Wells Fargo, with an initial term through July 1, 2022 and termination on 180 days’ notice. A Chase national rollout agreement was signed in May for an initial seven-year term, but Chase may terminate on 90 days’ notice.
- After quarter-end, 792,434 common-stock warrants were exercised at $0.0004 per share, increasing shares outstanding.
Outlook, risks and contingencies
- Outlook: No formal revenue or earnings guidance is provided. Management expects continued operating losses and says existing cash and cash equivalents are expected to fund operations and capital requirements for at least 12 months from issuance of the financial statements; additional financing may be needed as the business grows.
- FI commitments: A $10m minimum FI Share commitment begins after specified milestones, which were unmet at June 30. Management expected milestones within 3–9 months and a $4m–$6m shortfall, with most related expense expected in 2019. It also disclosed $7m of unpaid FI development amounts, expected second-half 2018 FI Share reductions of $2.7m, and 2019 reductions of $4.6m.
- Concentration and execution risks: Bank of America represented 51% of FI MAUs and approximately 67% of FI Share in the first half. Many FI agreements can be terminated on 90 days’ notice; most marketers have no long-term spending commitments. Successful launches and engagement at Chase and Wells Fargo are not assured.
- Other risks: The company cites sustained losses, seasonal marketing spending, dependence on data access and FI partners, privacy and cybersecurity regulation, competition, and foreign-exchange exposure. Debt covenants, variable interest rates, and the $20m restricted deposit constrain flexibility. No material adverse legal proceeding was reported; ordinary-course matters were not expected to materially affect the company.
- Controls and accounting: Management concluded disclosure controls were effective at a reasonable-assurance level, with no material change in internal control reported. The company had not determined whether adoption of the new revenue-recognition standard would have a material impact.
Key facts investors should verify
- Whether Cardlytics Direct growth and FI MAU engagement can offset the continuing decline in Other Platform Solutions and rising operating expenses.
- Actual cash burn, including seasonal working-capital movements, FI development payments, and the expected $4m–$6m FI Share shortfall.
- Progress, economics, launch timing, and termination provisions for the Chase and Wells Fargo rollouts.
- Debt availability and covenant headroom, including the blocked $20m deposit, revenue covenant, variable rates, and remaining revolver availability.
- Share dilution from IPO-related conversions, equity compensation, and warrant exercises; also distinguish GAAP results from non-GAAP adjusted contribution and adjusted EBITDA.