Business context and reporting period
Cardlytics, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019, including fourth-quarter results. The company operates Cardlytics Direct, an advertising platform embedded in financial institutions’ digital banking channels. It uses anonymized purchase data to target offers and measure marketer sales; revenue is reported net of consumer incentives and before FI revenue shares. Other Platform Solutions generated no revenue in 2019.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $210.4 million | $150.7 million | +40% |
| Billings | $316.1 million | $219.0 million | +44% |
| Adjusted contribution | $95.2 million | $69.5 million | +37% |
| Operating loss | $(17.3) million | $(40.9) million | Loss narrowed |
| Net loss | $(17.1) million | $(53.0) million | Loss narrowed |
| Adjusted EBITDA | $6.1 million | $(6.6) million | Turned positive |
| Operating cash flow | $11.5 million | $(19.0) million | Turned positive |
Revenue grew mainly through existing marketers: $48.0 million of the $61.1 million increase in Cardlytics Direct revenue came from existing customers and $13.1 million from new marketers. Gross profit was $79.5 million, approximately 37.8% of revenue; operating margin was approximately negative 8.2%. These percentages are calculated from reported figures. FI Share and other third-party costs were $118.1 million; sales and marketing expense was $43.8 million, research and development $11.7 million, and general and administrative expense $36.7 million.
FI MAUs more than doubled to 122.6 million from 65.0 million, while ARPU declined to $1.72 from $2.30. Fourth-quarter revenue was $69.3 million; operating income was $1.3 million and net income was $3.4 million. The company reported full-year net loss despite fourth-quarter profitability.
At year-end, cash and cash equivalents were $104.5 million, restricted cash $0.1 million, working capital $117.6 million, and total debt $0.04 million, consisting of capital leases. The company had $40.0 million of unused revolving credit availability, subject to borrowing-base limits and covenants. Investing activities used $11.0 million in 2019; financing activities provided $44.2 million. The company raised $61.3 million net in a September 2019 equity offering and received $29.7 million from option and warrant exercises.
Material changes and unusual items
- Chase represented 47% of average FI MAUs in 2019, up from 9% in 2018; Bank of America’s share declined to 26% from 47%. Their respective shares of FI Share paid were 42% and 36% in 2019.
- Wells Fargo began a phased Cardlytics Direct rollout in Q4 2019, planned to continue into the first half of 2020.
- Stock-based compensation fell to $15.9 million from $26.8 million, largely because 2018 performance-based awards were fully expensed when their targets were achieved.
- The company reported a $1.2 million bad-debt expense in 2019, compared with $0.1 million in 2018. One marketer accounted for 11% of 2019 revenue and 10% of year-end accounts receivable.
- A $10.0 million minimum FI Share commitment is contingent on an FI partner completing milestones not met by year-end. Management did not expect the milestones to be completed in 2020; any shortfall would be accrued over the following 12 months after completion.
Outlook, commentary and principal risks
Management provided no specific numerical revenue or earnings guidance in the filing. It expects continued investment and operating losses may continue, but stated that year-end cash was expected to fund operations and capital needs for at least 12 months after the financial statements were issued. Management noted early disruption in consumer spending that may be related to coronavirus; the potential effect on marketer spending was unclear as of the filing date.
- Dependence on Cardlytics Direct and a small number of financial institution partners creates exposure to partner termination, reduced data access, lower customer engagement, or rollout delays. Chase may terminate on 90 days’ notice; Wells Fargo on 180 days’ notice.
- Marketer campaigns generally lack long-term commitments; top five marketers generated 27% of 2019 revenue. Consumer incentives may be payable before collections and, in some cases, can exceed marketer billings.
- Privacy, data protection, cybersecurity, technology outages, competition, seasonal advertising spending, and the ability to scale operations could affect results. The filing cites GDPR and the newly effective CCPA as regulatory risks.
- Quarterly results are seasonal, with marketer spending typically stronger in Q4 and lower in Q1. International operations expose the company to foreign-exchange and Brexit-related uncertainty.
- The $40.0 million credit facility is secured by substantially all assets and includes billings and liquidity covenants. The company reported compliance at year-end.
The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2019; the auditor did not attest to internal control effectiveness because Cardlytics qualified as an emerging growth company. No material legal proceedings were reported.
Investor verification priorities
- Track the Wells Fargo rollout, its contribution to active users and revenue, and whether the related milestones or $10.0 million FI Share commitment are triggered.
- Assess the sustainability of growth alongside the falling ARPU and the concentration of FI MAUs in Chase and Bank of America.
- Review operating cash generation against receivables growth, consumer-incentive obligations, marketer payment terms, and the 2019 increase in bad-debt expense.
- Reconcile adjusted contribution and adjusted EBITDA with GAAP results, including excluded costs and stock-based compensation.
- Monitor marketer concentration, campaign renewal patterns, the impact of seasonality and coronavirus-related spending changes, and privacy or cybersecurity developments.
- Check credit-facility covenant headroom, borrowing-base availability, and potential equity dilution from share-based compensation and future financing.