Cardlytics, Inc. (CDLX) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us virtually today. My name is Doug Anmuth. I'm the Internet analyst at JP Morgan. Just before we get started, I just want to remind everyone that we'll be taking questions from the audience via Zoom. So please go to the Q&A button to submit. But we're pleased to have with us Cardlytics co-Founder and incoming CEO, Lynne Laube. So Cardlytics uses purchase intelligence to make marketing more relevant and measurable. The company partners with banks and financial institutions to gain a secure view into where and when consumers are spending their money, and it uses these insights to help marketers target likely buyers at scale through its native ad platform in banks' digital channels. So Lynne will transition from COO to CEO, this Friday, actually, so pretty timely. And prior to cofounding Cardlytics, she held various leadership positions at Capital One. So welcome, Lynne. Thanks for joining us today.

Thank you, Doug.

So first, let me congratulate you on the transition to your new role. There are also some other leadership promotions as well at Cardlytics. So maybe you can just first talk about why now, and does it signal any kind of change that's happening at the company?

Yes, sure. So look, succession planning is a perfect example of something we take very seriously at Cardlytics. We've been working on succession planning across all levels of the company for a long time now. And so this has been in the works for a while. I think professionally, I was ready. Andy, our new CFO, was ready. I think professionally, Scott and David were ready to do some different things and some new things. And really, when you think about it, what we did was we created more executive capacity in the moves. By moving Scott to executive chair, he's now helping management sort of liaise with the Board, which can take a lot of time, and so that time is now something that he's taking most of the burden for. David, I now call David my Chief Problem Officer, right? So he is kind of in a position where he can go where I need him to solve issues and problems that we might have around the company. And then Andy, of course, our new CFO, I'm the new CEO. So we created a lot of extra capacity at the executive levels. I think the timing was just right. We had a great Q4, and everybody was [ ready ].

Got it. Okay. Good. All right. So for those, let's just take a step back for those who might be a little less familiar, can you just talk about kind of how you approach, kind of, value proposition to the banks and bank consumers and then also kind of the pitch to marketers as well?

Sure. Let me start with the advertising with the marketers. What we have created at Cardlytics is a digital ad platform, so no different than any other digital platforms out there. Whether it's a Facebook or Pinterest or an Etsy, we're a digital ad platform. Where we're special and unique is we built that platform on the foundation of banks. And so when we integrate with the bank, we get 2 access. We get access to 100% of all their consumer transaction data. So all debit cards, credit cards, bill pays, ACH purchases made on a daily basis. And we get access to the bank's digital channels: online banking, mobile banking, et cetera. And so we have created this digital ad platform that has the real advantage of using actual consumer purchase to both target people. I'd like to say there's no better predictor of what someone is going to buy in the future than by looking at what they bought in the past. And we know everything that an individual has bought in the past. And then we also use that for advertisers to sort of close the loop and measure the effectiveness of their digital advertising in terms of actually looking at purchases. The other thing that advertisers find really powerful about the channel is, it is a safe, secure, bot-free, fraud-free channel. These are real adults with real bank accounts, real people. So it's -- it was created, I think, we have a pretty powerful platform for our advertisers. So the obvious question is, why do the banks do this with us? We create better bank customers. So we take the advertising content that we get from advertisers and we convert some of it into the form of a reward for responding to the advertisement. So it may say, save 5%, if you actually shop at a particular store or shop at a particular website. That money goes directly back into the consumer accounts. And so customers love a program that helps them save money on things they're buying every day. They actually trade less when they use our program with the bank, they actually spend a little bit more on [ search ]. So we're basically giving banks a reward program funded by advertising dollars and it creates better bank customers. And then obviously, from a customer perspective, super easy way to save money. You click on an offer, you use your card, and they deposit into your account.

Got it. Okay. So just thinking -- as you think about positioning yourself as a digital ad platform, the company, of course, has transitioned, you have all the kind of banking customers basically in the U.S. We'll talk about that a little bit more in a minute. But just how have you had to change kind of the internal focus of the company and kind of shift things from what for a while was building up bank relationships and is now much, much more about building up marketer relationships and really growing that number of advertisers and the long tail and all of that? How has that changed your internal focus?

I mean, you're 100% right, Doug. We've really spent the last 10-plus years consolidating the U.S. banking market. Today, we have over 140 million monthly active users and an active user is defined as a customer where we have access to their data, we have access to their online banking account and we're able to present them offers. That 140 million number is going to grow out to 150 million plus by the end of Q2 with the completion of the integration of Wells Fargo. And so really, what we've done over the last 10 years is create a digital platform that has scale, that puts us as one of the largest digital platforms in the U.S. And now we're turning all of our guns to focus on monetizing the assets that we have, which is really about getting more and new advertisers. We do compete for ad dollars. What makes our platform special, times notwithstanding, is we are a digital platform that can actually track purchases that were made either online or in store. And so we can compete for ad dollars that come from anywhere. We have seen dollars come to us from TV, from print, obviously, from digital. But it's -- our focus right now is we're -- essentially, Doug, consolidating the U.S. market from an MI -- FI -- MAU perspective. And now the focus is really about monetizing what we have.

Okay. So let's talk about marketers and just some of the categories. So historically, you've leaned into retail and restaurants and subscription. I'd say those have been the 3 largest, but certainly much more focused here expanding into travel, entertainment, grocery, D2C, e-commerce as well. Just help us understand more about kind of the category shift here and then also how you're approaching the go-to-market strategy because you've had some changes there as well in the sales work over the last several months.

So prior to this pandemic, in the back half of last year, we sort of announced that we were going after some new verticals. Our roots, if you will, and you hit it exactly right, Doug, we started really focusing on the big brick-and-mortar businesses that were out there. So retail, restaurant, subscription. And prior to entering new verticals, we were roughly balanced across those 3 areas. So roughly 1/3, 1/3, 1/3. We started aggressively entering some of those new verticals that we talked about last year, e-com, direct-to-consumer, travel, luxury. And we were doing quite well and seeing some real nice adoption there and some acceleration of growth in those verticals. Obviously, when you think about what's happened now, our retail and restaurant business certainly been pretty impacted by COVID. Our subscription business actually has seen some nice wins because, obviously, people are staying at home. Obviously, e-com, direct-to-consumer, we're seeing some nice wins there. Travel, a bit unfortunate, obviously, for us and everybody. But I think we were seeing a nice balance across all of these verticals. And back to your question about the sales force. I would say a couple of years ago, our sales force was fairly generic. They sort of called on anyone who would take our phone calls, and we would go for that journey when we could. Now we've created a highly specialized sales force. So we hire experts in the verticals that we're going after. We focus on developing products and analytics specific to those verticals that speak those verticals' language. And so we've had a pretty significant upgrade of talent and expertise in our sales force to enable that diversification of verticals that we're going after.

Okay. So let's just talk about the last couple of months. So on your earnings call last week, you talked about some of the dynamics that gave you maybe some early insights -- perhaps reporting the previous quarter a little bit later, gave you some early insights into some states. And -- but basically, your billings in February grew about 32%, and then you dipped down to 5% growth in March. So curious if you can just talk more about what you saw there at the end of the quarter. And then also, obviously, the more current trends into 2Q with April down 50%, but it seems like you are certainly starting to see some lift there from those trough type of levels. So if you could talk more about that.

So where we have a real advantage over lots of others is we see spend. And so -- and we see it at a very granular level, we see it at the individual ZIP code level, at the person level, and we see it across lots of verticals. I mean, anywhere somebody spends, we see. And so I think we saw the impacts of COVID happening as late -- as early, excuse me, as late February. And that certainly influenced some of our guide for the quarter. The thing maybe that surprised me the most is just how quickly it happened. I mean we started seeing impacts in February, but by the third week of March, it was like a faucet had just been shut off, consumer spending just tanked, quite frankly. And I think we saw early reaction with most of our advertisers. The typical reaction was, I have no idea what's happening so pause everything, just stop all advertising completely. And it really happened in a very, very quick period. I think April was a month around most advertisers trying to figure out what is going on and again, a place where we really could shine. While we had a lot of advertisers stop advertising, we were still in constant dialogue with them around what we were seeing in the data. Where is consumer spend going, where is it dropping dramatically, where is it still in place, again, at the individual market level as well as just at the vertical and category level. So anything I tell you now won't be surprising. Travel is still just nonexistent. We've seen recoveries in a lot of the, obviously, stay-at-home type of verticals, so grocery, e-com. Surprisingly, recoveries in things like beauty. Customers are -- been staying up when they're bored. So they're buying makeup, right? So we've seen a lot of the same things that everybody else has talked about that they've seen. But we're actually able to -- the thing that makes us different is we can see it, we can also act on it at an individual customer level. So we can, for example, find a customer who's never made an online grocery purchase before, find whole groups of customers who are now doing it for the very first time and figure out how to [ greet ] that audience and go after them to help encourage continued online grocery spend, potentially even after this pandemic is over. So our analytics and our data have given us -- while April was certainly a tough month, it's given us some real advantages. And we are seeing some of the verticals starting to come back. And I want to be clear what that means. If they were down 35% in April, they're not back to normal, but they're now only down 22%, right, as an example. But we're starting to see the U kind of recovery in at least a handful of verticals. And we know that ad dollars follow consumer spend. So if the spend continues to recover, we expect the advertising dollars will recover.

Got it. Okay. That's helpful. So maybe you could just talk a little bit more about what you've done, what you're still doing during this period for marketers. You outlined last week some of the dynamics of kind of this rise, retain, return strategy. If you could just explain that, talk about some of the benefits you're seeing because there's obviously marketers have wide ranges of activity here.

So when this happened, again, we're super advantaged in that we see all the data. So the first thing we did was build a dashboard so that marketers could really understand at a DMA level, at the week-by-week level, what was happening to their spend, their category spend and even related category spend. So they could really understand how they were faring relative to others in the category during this time. And that was a really powerful tool because even for advertisers who are doing well, so there's a category of advertisers, obviously, who benefited from this, there were plenty more doing as well as their peers. And so it gave us a real advantage to go in and have meaningful sales conversations with a number of advertisers. We've coined the strategy with how we're using this dashboard, rise, retain and return. Rise is really focused on those advertisers who are receiving an influx of spend because people have changed the way they spend. So call it, stay-at-home type advertisers, subscription, e-com, grocery, those types of things. There's a second bucket of advertisers that we call retain. These are advertisers who, because they're receiving influx of spend, sometimes the same customers, sometimes new customers, they've got a whole group of people who weren't shopping with them before. And how do we help them retain those customers? So for example, back to the online grocery example I gave you, we see millions of customers who made a first-time-ever online grocery purchase. That is a super powerful audience for all grocers to think about how do you go after those customers, create good online grocery experience for them and retain them. And then the last one is, of course, return. As I mentioned, there are definitely advertisers who stopped all advertising activity. And our focus there is helping them know as soon as possible when they should start to return. So for example, we're working with a handful of advertisers on a literally DMA-by-DMA level to help them understand, it is now time to start advertising in this market because we see consumer spend coming back. We're also working with those advertisers to help them figure out where and how we can advertise capabilities, for example, drive-through capabilities, in-store pickup capabilities, not all places have that. So we're identifying individual markets and DMAs where the advertisers can still push for sales safely. So it's been an effective strategy for us. We have a decent number of new advertisers engaging with us because of this. And I think if there's a bright side to this, the level of conversation in terms of C-suite types of conversations that we're having as a result of having this amazing dashboard, these amazing insights that not only inform how they advertise with us but are potentially informing how they advertise everywhere, sets us up really well, I think, to be stronger after this than we were before with new relationships, more senior relationships and just the reputation of helping advertisers, even when they're not advertising, we're spending a lot of time with them. I think that goodwill will bode well for us in the future.

Okay. Great. So let's talk about how that all kind of rolls into ARPU. So obviously, a key metric for you. It's currently at lower levels, just as you've seen significant ramp in monthly active users. MAUs coming from Chase, for example, and then also currently, as you're continuing your Wells Fargo rollout. So can you talk about kind of expectations for ARPU just as you go through 2020, 2021? And then perhaps, how do you think about ARPU over time or on a longer-term basis?

Yes. So prior to this pandemic, we were pretty clear with The Street that our ARPU levels were obviously going to be depressed. As you bring on a huge flock of new MAUs, you're going to see ARPU side MAUs. But we are pretty clear also that we expected to return to ARPU levels that we saw before the significant influx of Chase and Wells MAUs by 2021 -- by the end of 2021. We were really confident in that before this pandemic happened. It's anyone's guess as to whether or not we can still do that. I think if this thing is over fairly soon, that's still very achievable. If this thing drags on for a number of quarters, probably less so. But we were really confident in the 2 things that we communicated to The Street where this happened in terms of long-term planning. One is ARPUs will get back to levels that -- the highs that they were at before the MAUs by 2021 and -- by the end of 2021. And that also we'd be a profitable business for 2020 and show up deleveraged. I would say that if this continues, like I said, if we really are seeing the trough, and this starts to come back. We might be able to achieve both of those. Profitability in 2020, maybe less so. But if this goes on for quarters, we'll have to wait and see and reevaluate. But in terms of the long-term fundamentals of the business and where ARPUs can go over time, it's the same as it always was. We have an incredible digital platform that now has scale, that rivals most of the other large digital platforms in this country, 150 million plus MAUs. We have an incredible data asset that we sit on top of, that I would say is potentially more special than most other data assets that digital platforms have. We have a really secure protected base of consumers, as I mentioned before, adults with bank accounts, no fraud, no bots, no clicks, no fake MAUs. And I think -- I don't see any reason why our ARPUs can't get to the levels of other digital platforms that are out there. Let -- maybe put Facebook aside, but you look at a Pinterest or a Yelp or a Zillow or an Etsy or any of those, and we see ARPU levels in the high single digit, low double digits. I don't see any reason why we can't get there in the next several multiyear journey. But So I'm still...

How do you think about the tradeoff there? Just some of those other platforms, for example, and social ones, in particular, may have this very high-intensity of engagement. You may have users spending on average 20, 30 minutes plus per day for example. Now granted they may be communicating and looking at posts and entertainment and other things, but high intensity of engagement, whereas people are arguably looking at their banking apps or their bank sites online as a more -- more of a utility. But then, of course, you have this very targeted and incredible set of information. So how do you think about the trade-offs between those two?

Well, first let me give you a couple of stats. The average customer logs into online banking 12 times a month. That's what we see in our network. They log into mobile banking 20 times a month. And ask yourself why they're doing that. For most customers, they're logging in to actually see how much money they have and maybe pay a few bills, right? And so when they're going to see how much money they have, the reason they're doing that is they're thinking about the next purchase they want to make. They're saying, I want to go out to dinner tonight or maybe not -- in today's environment, I want to buy some makeup online, what's my balance? Can I afford it? When do I next get paid? They're essentially -- for those of us who are over the age of 50, they're virtually balancing their checking account in their mind. That's why they're using online. So while you might be going to Facebook for 30 minutes a time, you're not thinking about where and how you're spending your money. When you're going into online banking or mobile banking, you're thinking about where and how you spend your money. So while they might not be there for very long, it is a really good environment to talk to consumers about ways to save money on things that they're buying. Remember, all the content is targeted based on your past purchase behavior. So if I don't buy fast-food, I'm not going to see a McDonald's offer. I buy a lot of online makeup, right? And guess what? There's a lot of online makeup offers on my stuff. So I think it's a really powerful channel. You're right, it's not -- it's a different use channel, but it's still a really powerful channel for advertisers because people are thinking about their money.

So I'm going to mix in some questions from Zoom here as well from the audience. But we get this one, of course, a lot as well from investors. But we talked about how you recently added Chase, currently, Wells Fargo. Bank of America has been a long-standing partner. So why don't the banks do this more themselves? What's the -- what's shifted in terms of their thinking over the last several years here?

Yes, great question. So look, 12 years ago, all the banks thought they could do this themselves. Several actually tried, including your organization. And I think they found two things. They found, first of all, to create a real digital platform of scale, there is no single bank in this country, even Chase, as big as you guys are and as fantastic as you are, you are not big enough to create an advertising platform at scale that can truly compete with the Pinterests and the Facebooks and the Googles of the world. You need a lot of users, you need scale to be able to move business for the advertisers. And you need to glue the banks together to create that scale. The other thing that banks, I think, started to realize is when they marched into advertisers who, oftentimes, they had a banking relationship with and said you're going to pay me even more money to advertise, the conversation went sideways a lot and you went back to interchange and all those kinds of things that advertisers and retailers are still pretty lumpy with banks over. And so I think it's a great example of a place where the banks have started to recognize that there are places where they can collaborate and use their collective scale to do something that no one bank could do. Zelle is a great example of that. I think we're a great -- sorry, yes. So I think we're a great example of that. And so I think that's what's changed as banks have realized that they should compete on core banking, and they should let some of these fintech companies that are out there help them leverage their scale to help retain and keep their core base of customers and not try to differentiate themselves on things that are not core banking products.

Okay. That's great. Let's talk about costs and just margins a little bit more here. So you talked about prudently investing through this current time period. And obviously, lots of broader challenges out there. How do you think about mix of expenses, fixed versus variable? What are the areas that you're focusing on most? And where do you find yourself kind of easing up in the current environment?

Look, we're a fairly fixed cost business, and we've been talking about this for a while. We -- it costs the same to build technology to support one large bank as it does three large banks. And so I think -- it really started to see that operating leverage -- prior to this pandemic, we started to really see that operating leverage kick in, in Q4 of last year and even before that. And so I maintain that we're a good, solid fixed cost business. We do have some variable costs, but there's -- a lot of the technology and people that you need to run 50 million MAUs is the same to run 150 million MAUs. And so you've seen our costs are starting to really level out even as we double the size of our MAU base. So we'll see that operating leverage continue to flow non-pandemic times plus that. In terms of where we're prudently investing, we are fortunate in that we have a really strong balance sheet. We've got $100 million-plus cash on the earned. And so we're not in a position where we have to take some unnatural or domestic actions, at least right now, as a result of these pandemics. Many others have. And so a lot of really good companies out there have laid off a large number of people, and our phones are ringing off the hook with talent that, quite frankly, I'm not sure we would have been able to pick up before this pandemic because they were in really good roles at really good respected companies. And now, all of a sudden, they're not. And so that's where we're looking to prudently invest. I don't think -- you won't see spend increase, but if we can pick up somebody that we couldn't have picked up 6 months ago, we're going to find a way to make room for them.

Okay. And what's the scenario where you could be EBITDA positive in 2020. How do you -- how would you frame that?

Well, I'm sure if our CFO were on the line, he'd tell me not to...

That's why I'm asking because he's not on the line.

Right. Yes. I mean, look, this thing would have to recover pretty darn quickly for that to even be a possibility, obviously. But Q4 -- Q3, Q4 are our biggest quarters. So if this thing is over and we can still have a gangbuster Q4, it's possible.

Okay. I want to hit on so something you talked about for kind of 3Q timing, in particular, self-serve. So pretty important strategic initiative. We obviously see it with all the other online advertising companies that we cover, the importance of self-serve and building out the advertiser base and removing friction basically in the process. So what does this mean for Cardlytics? How do you -- how does it change kind of your go-to-market strategy?

Yes. So today, we are 100% managed service, and that means if an advertiser wants to work with us, they have to pick up the phone and call somebody at Cardlytics, and we build it all for them. Some of our advertisers will always be that way, will never look at self-serve. But if you look at all the other digital advertising platforms that are out there, when they built a self-serve capability, their growth really started to explode. And I think it will be the same for us. Our strategy is to first build self-serve that our own employees can use, and we'll have that in place late Q2. Then once we sort of have our own employees to play around this tool and use it, we plan on handing it in the back half of next year to 1 or 2 handful of beta agencies, friendly agencies. And I want to be clear, I don't expect that they'll spend a lot, but their goal is to use this tool, tell us how to make it better and tell us how we can make it something where the agencies can really prove their own value to the clients as a result of using this tool, with the goal of having agencies able to broadly use this tool into 2021, and that's when we really start to [ ramp ] agency spend. That's important because depending on how you -- who you believe, agencies have half, if not more, of online dollars. And we don't have the ability to call out any of that today. So that's a very important part of why we need self-service. Longer-term into 2021, back half even 2022, we can use this tool also to go after the really long tail of advertising. If you look at most digital platforms, upwards of half their ad dollars come from really SMBs. And so we don't call those today either. And we've got some really strategic advantages with our bank partners. Our bank partners all have small business bankers out there, talking to these SMBs all day every day. Our vision is to have a self-service tool that we can hand to them so they can say, "not only can I help you with your banking, but let me help you grow your sales and use this tool." So I think it's going to be a big part of continuing to have really explosive growth for us. And it's really important. It is the #1 priority on the road map right now.

#1 priority on your road map through self-serve?

Yes.

Okay. Just following up on that, it's -- clearly, the likes of Google, Facebook have kind of laid out this path and yes, at of course very, very large scale. But the one thing that the companies who have built really successful online ad platforms have is really strong tech talent and engineering capability to build revenue product, which is not easy to do, and we've seen that in some other companies as well. So how do you feel like you're positioned there? How big of a priority is that? Are there other roles that you need to build here to kind of go down this product road map?

Yes. So I mentioned earlier how it's been fantastic to move David out of the CFO role and put him into sort of my Chief Problem Solver role. That is what David is spending a lot of his time doing right now. He's actually going through the engineering organization, the product organization with the leaders of those organizations and say, what else do we need to move as fast and as skillfully as possible here? So we actually have a number. Across those 3 -- across engineering and product, right now, we have 6 relatively senior VP-type roles open where we're trying to find the right expertise who have done this before in other environments. Where this pandemic has helped us is those experts are now willing to talk to us in a way that many weren't before, in large part because they've lost their job. So I feel pretty good about our ability to use our existing tech talent, which I want to be clear, is pretty good, right? They figured out a technology that no one's ever had to stand up 3 of the largest banks in the country. So I feel pretty good about our existing tech talent. But bringing in some of that really specialized expertise and people who have done it before, I think, is going to be really important. We've already done that at the top with our new products -- Senior VP of Products and Strategy, Michael Akkerman, who came from Pinterest and led a lot of this at Pinterest. So we got it at the top. Now we just got to get it in a few other levels as well.

Okay. One other thing I want to hit on, on the product road map that we've talked about in the past is richer media, so other kind of ad formats. That's also something, of course, across other ad platforms where we see more diversity, of course, where there's like stories ads and video. And I understand your -- you don't have control over this completely because it's obviously in banking channels. But what are the ways that you can make these ad units more appealing, more compelling to consumers, drive click rate and conversion higher?

Yes. I mean, none of this is going to sound like rocket science. Let's start by showing a picture of the product or the retailer, whoever we're advertising for. But also just richer experiences, ability to deep link into websites where you can purchase with a click. And all the types of things that most other digital platforms have, we just got to go copy it. The challenge there, you're exactly right, is we have to do it still respecting the fact that the consumer is in their bank. And they're there for a reason, and it's not always to view their offer or content. So we have to make sure that we do this in a way that works for banking. But for those who maybe have used our product who are familiar with how it works, we have limited space in the online portal and mobile portals or mobile apps on Page 1. But once you click on any of our offers, you're taken to a page where you see a bunch of content. That's actually, for most of our banks, something that we host at Cardlytics. So our ability to create a much richer experience in that page is a lot greater and a lot higher, and people are now there to view content. So the banks are much more open and flexible to what we want to do in that page. Obviously, the biggest challenge is the load. Getting the bank's online environments and mobile app environments to be able to handle all of this richer media that comes through is the big challenge that we're working through, and where the banks are still a little bit of the long pole in the tent. But from a -- conceptually, are the banks willing ready and wanting to do this with us? The answer is yes. They want to have a more, call it, a digital commerce experience.

Okay. Great. This was super helpful. Thank you for joining Lynne. Appreciate it. And thanks, everyone, for joining virtually as well.

Thank you, Doug. Yes.

You're welcome. Bye-bye.