Cardlytics, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Unaudited results. Cardlytics operates an advertising platform in financial institutions’ digital channels, using anonymized purchase data to target and measure marketers’ campaigns. Revenue is reported net of consumer incentives and gross of FI Share.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $46.1m | $56.4m | $119.8m | $141.1m |
| Billings (non-GAAP) | $62.1m | $82.8m | $169.4m | $215.1m |
| Gross profit | $14.6m | $20.9m | $38.5m | $52.4m |
| Gross margin | 31.7% | 37.0% | 32.1% | 37.1% |
| Operating loss | $(16.1)m | $(6.6)m | $(47.8)m | $(18.6)m |
| Net loss | $(15.4)m | $(7.7)m | $(48.6)m | $(20.6)m |
| Adjusted contribution (non-GAAP) | $19.7m | $24.7m | $52.5m | $64.2m |
| Adjusted EBITDA (non-GAAP) | $(0.6)m | $3.0m | $(12.3)m | $(0.8)m |
Q3 diluted loss per share was $0.56 versus $0.33; nine-month diluted loss per share was $1.80 versus $0.90. No income tax benefit was recorded. Q3 operating expenses included $11.6m of stock-based compensation (up from $7.5m); nine-month stock-based compensation was $24.8m (up from $12.3m).
Cash flow and liquidity: Operating activities used $13.2m in the first nine months of 2020, compared with $7.4m provided in 2019. Investing activities used $6.3m. Financing activities provided $203.0m, principally from the convertible notes. Cash and cash equivalents were $287.6m at September 30, 2020, versus $104.5m at December 31, 2019; working capital was $295.7m. The company reported $40.0m of unused revolver capacity and no revolver borrowings. Management said available cash was expected to fund operations and capital requirements for at least 12 months from issuance of the financial statements.
Debt: In September, Cardlytics issued $230.0m principal amount of 1.00% convertible senior notes due 2025. Net proceeds were approximately $222.7m before the $26.5m capped-call cost; the balance-sheet carrying amount was $171.5m after discounts and issuance costs. The company intends to settle principal in cash, but may settle conversions in cash, shares, or a combination. The capped calls are intended to reduce potential dilution or offset certain conversion cash payments, subject to a cap.
Material changes and operating metrics
- Q3 revenue fell 18% year over year and billings fell 25%; for nine months, revenue fell 15% and billings fell 21%. Management attributed the declines primarily to COVID-19 impacts on consumer spending and marketers’ advertising budgets. Q3 sales to existing marketers decreased $14.9m, partly offset by $4.5m from new marketers.
- Average FI monthly active users increased to 161.6m from 128.3m in Q3, while Cardlytics Direct revenue per user fell to $0.29 from $0.44. Wells Fargo completed its phased rollout in Q2 2020; U.S. Bank rollout was expected to begin in the first half of 2021.
- Gross profit declined faster than revenue, and gross margin contracted. FI Share and other third-party costs were 61% of revenue in Q3 versus 58% a year earlier. Higher delivery, research and development, and depreciation and amortization costs also weighed on results.
- Cash increased substantially following the notes issuance. The nine-month operating cash outflow reflected losses and lower FI Share and consumer incentive liabilities, partly offset by lower accounts receivable.
Outlook, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expected near-term year-over-year declines in revenue and increased net losses, citing reduced consumer spending and marketing campaigns; the duration and severity were described as uncertain.
- Revenue growth was also expected to face lower ARPU as FI MAUs expand. Management expected FI MAUs to continue increasing year over year following the Wells Fargo launch. U.S. Bank’s planned rollout is a potential growth opportunity, with timing subject to execution.
- COVID-19 risks include further marketing-budget cuts, delayed or reduced renewals, payment deferrals or pricing concessions, and difficulty collecting receivables. The company deferred $0.3m of revenue and recorded $1.3m of bad-debt expense in the first nine months related to marketers considered particularly exposed.
- Customer and partner concentration is material: the top five marketers generated 40% of nine-month 2020 revenue and represented 45% of accounts receivable at September 30; one marketer exceeded 10% of revenue and one exceeded 10% of receivables. Bank of America and Chase together represented more than 75% of FI Share paid, each exceeding 30%. Many FI agreements can be terminated on 90 days’ notice or less.
- A $10.0m minimum FI Share commitment is contingent on a partner completing milestones that had not been met by September 30. Management did not expect the milestones to be completed in 2020; any shortfall penalty would be accrued during the 12-month period after milestone completion.
- Unusual charges included a $0.7m write-off of deferred FI implementation costs after an FI partner planned to discontinue certain interface enhancements, a $1.0m write-off of capitalized software development costs, and $1.3m of restructuring costs for the first nine months. The restructuring reflected a strategic shift to improve productivity and performance.
- Other key risks include reliance on Cardlytics Direct and a limited number of FI partners and marketers; privacy, data-use and cybersecurity regulation; seasonality (typically stronger Q4 marketing spend); foreign-exchange exposure; and potential cash requirements, dilution and accounting effects associated with convertible notes. Management reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether marketer spending and consumer activity recover, and how revenue, billings, ARPU and bad-debt expense trend in subsequent quarters.
- Whether the $287.6m cash balance and available revolver capacity remain adequate given operating cash use, seasonal working-capital needs and continuing losses.
- Terms and potential cash or dilution outcomes of the $230.0m notes, including conversion conditions, capped-call protection and the effect of future accounting changes.
- Retention and performance of major FI partners and marketers, progress on the U.S. Bank rollout, and status of the contingent $10.0m FI Share commitment.
- Whether higher stock-based compensation, operating expenses and customer concentration continue to pressure margins and per-share results.