Cardlytics, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
Cardlytics operates a purchase-intelligence and advertising platform. Its Cardlytics Direct product delivers offers through financial institutions’ digital banking channels and measures resulting purchases. Revenue is reported net of consumer incentives but gross of the revenue share paid to financial institution partners (FI Share). The company completed its IPO in February 2018 and received $66.1 million in net proceeds.
Key financial metrics
| Metric | FY 2017 | FY 2018 | Change or context |
|---|---|---|---|
| Revenue | $130.4 million | $150.7 million | Up 16% |
| Operating loss | $17.1 million | $40.9 million | Loss widened |
| Net loss | $19.6 million | $53.0 million | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(7.2) million | $(6.6) million | Improved modestly; remained negative |
| Adjusted contribution (non-GAAP) | $58.7 million | $69.5 million | Up 18%; approximately 45% and 46% of revenue, respectively |
| Cash from operating activities | $(22.1) million | $(19.0) million | Cash use decreased |
| Cash from investing activities | $(1.6) million | $(7.3) million | Higher investment, mainly equipment and software |
| Cash from financing activities | $21.8 million | $65.2 million | Includes IPO proceeds |
Cardlytics Direct revenue grew 22% to $149.3 million; Other Platform Solutions revenue fell 83% to $1.4 million. Average annual FI monthly active users (MAUs) rose from 54.9 million to 65.0 million, while average revenue per user increased from $2.23 to $2.30. The company reported $68.3 million of consumer incentives in 2018.
Operating expenses rose materially: sales and marketing increased 31% to $41.9 million, research and development increased 33% to $16.2 million, and general and administrative increased 70% to $34.2 million. Stock-based compensation rose to $26.8 million from $5.1 million, including $18.6 million related to performance-based awards that vested after FI MAU targets were reached. Other significant 2018 items included a $6.8 million non-cash warrant-liability expense and a $0.9 million debt-extinguishment loss. Interest expense declined to $3.3 million from $8.2 million.
Fourth-quarter 2018 revenue was $47.8 million, compared with $39.3 million in Q4 2017. Q4 operating loss was $10.8 million versus $2.2 million, and net loss was $11.6 million versus $4.1 million.
Balance sheet, debt, and liquidity
At December 31, 2018, cash and cash equivalents were $39.6 million, restricted cash was $20.2 million, working capital was $72.4 million, and total debt was $46.7 million. Restricted cash principally secures the term loan; $20.0 million was required to be held in a lender-controlled account. Debt comprised $26.7 million outstanding under a $30.0 million asset-based revolver and $20.0 million under a term loan, both due May 21, 2020. The company reported $3.3 million of additional available revolver borrowings and compliance with financial covenants at year-end. Its loan facility also requires minimum liquidity of $5.0 million and a moving revenue covenant, set at $134.5 million for the year ended December 31, 2018.
Changes, outlook, risks, and unusual items
- Growth and mix: Revenue growth was driven by Cardlytics Direct, particularly increased sales to existing marketers. Other Platform Solutions continued to contract after the managed-service offering was discontinued; management did not expect substantial, if any, revenue from that business in the foreseeable future.
- FI launches: Chase launched on mobile in November 2018 and expanded to email in January 2019; online banking expansion was expected in the first half of 2019. Wells Fargo was expected to launch in 2019. Management expected these launches to increase FI MAUs, but also expected ARPU to decline as users grew faster than revenue. The filing gives no numerical revenue or profit guidance.
- Partner commitments: Development payments to one FI totaled $9.3 million in 2018, with $4.6 million expected to be recovered through lower FI Share payments in 2019. A separate $10.0 million minimum FI Share commitment was tied to milestones not met by year-end; management expected a $5.0–$6.0 million shortfall once milestones were achieved, then expected in the first half of 2019.
- Concentration and contract risk: Bank of America contributed 47% of FY 2018 average FI MAUs and 64% of FI Share. Chase contributed 27% of Q4 average FI MAUs. Many FI agreements can be terminated on 90 days’ notice or less, and the Chase and Wells Fargo agreements also contain termination rights. The top five marketers together represented 23% of revenue, though no single marketer reached 10%.
- Losses and funding: The company had accumulated losses of $321.5 million and said it expected further operating losses. Management believed available cash would fund operations and capital requirements for at least 12 months after issuance of the financial statements, while noting external financing might not be available on acceptable terms. The company expected to refinance or replace its loan facility before May 2020 maturity.
- Other risks: The filing highlights data privacy and cybersecurity, competition, marketer and FI retention, seasonality (typically stronger Q4 and weaker Q1), international and foreign-exchange exposure, and the potential effects of Brexit and evolving privacy laws. No legal proceeding was reported as expected to have a material adverse effect.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness because Cardlytics qualified as an emerging growth company.
Important facts for investors to verify
- Whether Chase’s online channel and Wells Fargo’s national launch occurred on schedule, and what user engagement and monetization they produced.
- Actual 2019 FI Share shortfall, milestone timing, and recovery of the $4.6 million in development costs.
- Revenue growth and adjusted contribution relative to rising operating expenses, stock-based compensation, and continuing GAAP losses.
- Liquidity available after accounting for restricted cash, revolver borrowing availability, loan covenants, and the May 2020 debt maturity.
- Retention and economics of major FI partners and marketers, given partner concentration and termination provisions.
- Effects of the shift away from Other Platform Solutions and the expected decline in ARPU as new FI users are added.