Cardlytics, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. Cardlytics operates a purchase-intelligence marketing platform using anonymized data from financial-institution (FI) partners. It generates most revenue through Cardlytics Direct, a bank-channel advertising solution. The quarter included the company’s February 2018 IPO.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions. Year-over-year comparisons are with Q1 2017.
| Metric | Q1 2017 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $26.9 million | $32.7 million | Up 22% |
| Operating loss | $7.0 million | $9.8 million | Operating margin widened to approximately -30% from -26% |
| Net loss | $12.5 million | $20.1 million | Net margin approximately -61%, versus -46% |
| Adjusted EBITDA, non-GAAP | $(4.9) million | $(3.1) million | Still negative; company-defined measure |
| Operating cash flow | $(5.8) million | $(0.1) million | Near breakeven in Q1 2018 |
| Cash and cash equivalents | $21.3 million at Dec. 31, 2017 | $89.8 million at Mar. 31, 2018 | Increase largely from IPO proceeds |
| Working capital | $32.5 million at Dec. 31, 2017 | $55.3 million at Mar. 31, 2018 | Current assets less current liabilities |
| Total debt | $57.0 million at Dec. 31, 2017 | $58.6 million at Mar. 31, 2018 | Includes $25.6 million line of credit and $33.7 million term loan |
Cardlytics Direct revenue grew 31% to $32.1 million; Other Platform Solutions revenue fell 76% to $0.6 million. Adjusted contribution was $14.2 million, up from $10.6 million, equivalent to approximately 43% of revenue versus 39% in Q1 2017. Consumer Incentives, reported as a reduction of revenue, were $16.0 million versus $13.2 million.
Investing activities used $0.8 million in cash. Financing activities provided $69.2 million, primarily from the IPO. Net loss per common share was $1.54, compared with $4.80; the share-count basis changed substantially after the IPO and preferred-stock conversion.
Material changes and significant events
- The IPO issued 5.82 million shares at $13 per share, generating $75.7 million gross proceeds and $66.1 million net proceeds. Outstanding preferred stock converted to common stock; common shares outstanding rose to 20.2 million at March 31.
- Q1 2018 net loss included a $9.2 million non-cash net loss from changes in warrant fair value and a $2.5 million non-cash expense from FI-partner warrants that vested upon the IPO. Higher stock-based compensation also contributed to increased operating expenses.
- General and administrative expense rose 40% to $6.6 million, including higher stock-based compensation and personnel costs. FI Share and other third-party costs rose 28% to $21.4 million and increased to 65% of revenue.
- Interest expense declined to $1.7 million from $2.6 million, primarily because convertible promissory notes had converted in 2017.
- After quarter-end, Cardlytics announced a strategic shift to prioritize Cardlytics Direct and said it did not expect substantial Other Platform Solutions revenue in the foreseeable future.
Outlook, risks and contingencies
- Management expects continued operating losses and says current cash is expected to fund operations and capital requirements for at least 12 months after issuance of the financial statements. No numerical revenue or earnings guidance is provided.
- The company expects to refinance or obtain similar facilities before the line of credit matures in March 2019 and the term loan matures in July 2019. Both are secured by substantially all assets; the company reported covenant compliance at March 31, 2018. Term-loan interest is largely paid in kind.
- A May 2018 agreement provides for a national Cardlytics Direct rollout to JPMorgan Chase customers, with an initial seven-year term after general availability. Chase can terminate on 90 days’ notice; Cardlytics shares advertising billings with Chase. Implementation timing and results remain uncertain.
- Material business dependencies include Bank of America, which represented 51% of FI monthly active users and 69% of FI Share in Q1 2018. Many FI agreements are terminable on 90 days’ or less notice. The top five marketers accounted for 27% of Q1 revenue.
- Seasonality affects results and cash flows: marketers generally spend more in Q4 and reduce spending in Q1. Timing differences between marketer collections and incentive payments can add working-capital pressure.
- The company disclosed a $10 million FI Share commitment contingent on milestones not met as of March 31, and $9.0 million of unpaid FI implementation amounts. It also expects $5.4 million and $4.6 million of reductions in FI Share in 2018 and 2019, respectively, related to certain implementation arrangements.
- Management said ordinary-course litigation is not expected to have a material adverse effect; no material legal proceedings were reported. Key risks include FI and marketer concentration, competition, privacy and data regulation, cybersecurity, debt and covenant obligations, and execution of the Chase rollout.
Most important facts for investors to verify
- Whether Cardlytics Direct growth can offset the sharp decline in Other Platform Solutions revenue and support a path toward profitability.
- Actual scope, launch timing, investment requirements and termination protections for the Chase rollout; separately, the outcome and expansion prospects of the Wells Fargo pilot.
- Debt repayment and refinancing plans, interest accrual, covenant headroom and liquidity needs, especially around 2019 maturities.
- Exposure to major FI partners and marketers, including renewal terms, data access rights, and customer and FI concentration trends.
- The potential share dilution from equity awards and warrants, including Series G-related warrants whose share amount depends on the specified market-price calculation.
- How much of reported losses and adjusted contribution trends reflect recurring operations versus non-cash warrant remeasurement, stock-based compensation and FI implementation costs.