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

Good morning, and thank you all for joining me. This is Nat Schindler with Bank of America Merrill Lynch. I'm the mid-cap Internet analyst. And I'm very happy to have Lynne Laube, CEO and Co-Founder of Cardlytics, here to join us to talk a little bit about her business and how it's navigating these times. Thank you very much for being here, Lynne.

Thank you for having me.

And if I could -- no problem. And let's just jump right into a question. Obviously, this came out on your recent quarterly call and even you guys reported Q1 a little bit late, but you saw the beginning of the COVID virus, COVID hitting you very early because you were heavily into travel. How are you guys navigating, getting the advertisers -- diversifying the advertiser base to get through this change, particularly because of your reliance on travel and restaurant and retail historically.

Yes. No. It's a great question. And we are -- the good news for us is we have the data as our navigation tool. It's our road map, if you will. So we've created a tool that really helps us understand at a very granular level, both at the zip code level and very granular category levels, what's happening with spend across the country. And so we're using that tool both to inform new advertisers that we should go after, kind of the rise -- their surge spending, right? So there are some categories of spending that are way up. Grocery, kind of over-the-top services or digital services, they're up. And so we're using that data to go after those advertisers. But you're right, Nat, we are heavily reliant. Our sort of legacy business is big restaurants, big retailers, travel. And so while many of them have stopped advertising, we're still having great conversations with them using this data, using this road map to help them understand when and how they should be thinking about coming back as consumer spend comes back. And I want to be clear, consumer spend is not back, but we're seeing little pieces and pockets of it in places, particularly states that have opened up. So we're able to really track that closely and we know when to go to the advertisers and say it's time to come back. So while we have definitely been impacted by this, we did say our April billings were down 50-plus percent month-over-month for the year -- over the year. But we do believe we're well positioned to be some of the first that are turned back on.

Now can -- these other categories, e-commerce, other things where people are spending money, can those make up for retail and restaurant and travel? Or are those just a minimizer of the pain until we get restaurants back and open and running and people spending.

Look, in the short term, they're a minimizer. There's no way they can make up for some of the very, very large clients that have pulled their advertising spend. If we continue to focus on them -- where there -- if there's good news about this is we are actually now developing relationships with advertisers that maybe we weren't as focused on in the past. So in the past, we tended to focus on advertisers that had big store footprints because that's what we do. We're very good at taking digital eyeballs and driving them into stores and proving it with actual purchases. But we're now spending more time talking to e-comm types of retailers with online-only presences that we probably weren't as focused on pre-COVID. So I think long term, we're well positioned both to get all of our existing advertisers back and now we have some new relationships. But in the short term, it's not going to mitigate or offset the loss of some of our big existing advertisers.

Now obviously, your biggest historical advertiser -- or one of the biggest, we all see it all the time on our offers, is Starbucks. And that kind of, in many ways, you think of the perfect advertiser for this product. It's a -- people use it every day. It's something that people switch between Starbucks and Peet's, and you can do all kind of great things to kind of adjust those offers. Are the other -- is that just such an outlier in how kind of perfect an advertiser it is for this category and this ad unit? Or are there a lot of other players that could be in there? And if there are, why aren't they on yet?

Look, I think Starbucks -- we have a handful of advertisers. Starbucks is one example. But we have others that are just early adopters and true believers in the platform. And I think you're going to continue to see that. I mean that's how businesses get started, right? You need early adopters both from the FI side, which Bank of America was, as you know, a very early adopter of the program. It took us years to get some of the other banks on board. And I think you see some of those same trends with advertisers. The challenge you have is, first of all, we're new. No one's ever seen anything like us. There is no real competitive set. So you can't say, "Oh, we're just like X." And when advertisers want to spend with us, the money has to come from somewhere else. And so it is a slow process to get advertisers to understand the power of our platform and to use it and then to adopt it in a really big, material way. But what's really accelerated that process is scale. The thing is before we launched Chase and Wells, we only had about 50 million monthly active users, and that made us a very small digital platform compared to the others that are out there. After the launch of Chase and Wells, which I'm happy to say we have now successfully completed the full launch of Wells, we're north of 150 million monthly active users. We have scale now that matters even to the largest advertisers in the country. And that's really changing the conversation. It's still -- it's going to take time for people to adopt a new platform. But I think that we are seeing real momentum as a result of the scale and having conversations that we were not able to have 2 years ago with some of the other bigger advertising brands that we all want to be on the platform.

That makes sense. But going into that point of you being new, you are -- obviously, there's no direct competition for your inventory because you're the only one who are allowed that inventory. But there are analogs. You do have Amex offers out there. And if I look on my Amex offers right now, I happen to be a BofA customer and an Amex customer, on my Amex offers right now, I have 100 ad units available. And I think that's actually just their maximum. There could be more behind that, but that's just the 100 they'll show me. Right now, on my BofA app, I have a very small number. I'm actually not even seeing enough to fill up the line, I'm sure, from Cardlytics. Why aren't all those Amex guys -- I mean what's the -- I'm sure there's some demographic difference between Amex customers and BofA customers, but why aren't all those Amex guys on your platform already?

Right. Well, first of all, a lot of them probably are. But remember, all of our offers are targeted. So if you're not using your card in the category, you're not going to get the offer. Amex offers -- and I believe my knowledge should be accurate but I don't want to represent Amex in any way, but Amex offers are not targeted. Everybody gets the same set of offers. And so as a result of not being targeted, they also don't generally have material revenue, if any revenue, associated with those offers. So the Amex model is very different from the Cardlytics model. It is a model that Amex uses to try and help the people that they have big banking relationships with or even small banking relationships with, generate more sales in a way to sort of justify some of the higher interchange rates that they have and not in a way to generate revenue. The Cardlytics model is very focused on, we're going to generate revenue and we're going to generate revenue for the advertisers and, of course, for us and our FI partners. So everything that we do is targeted. As a result of everything being targeted, it means that we can prove to the penny the return on ad spend and we can charge for it. So there's just a little bit of apples and oranges model. The other thing I would point out about Amex' model is they have -- many of their offers have very, very high minimum spend thresholds, average spends that most people -- it's 3x the average ticket of what somebody would spend at that advertiser. And again, they can do that because they're doing it generally for free for the advertisers. And they're generally able to -- it doesn't matter if they have -- if the customer doesn't spend 3x, then the advertiser doesn't have to pay. And even if the customer does spend 3x, the advertiser doesn't have to pay. We're very focused on making sure that our offers are relevant and accessible for our consumers. So we're not going to ask them to spend 3x the average ticket. We're going to ask them to spend a little bit more of what they would normally spend to drive value for the consumers. And that's a part of the overall relationship that we have with our banks. So they really are very different models, starting with one makes money and one doesn't.

That's important. Okay. So going back to looking at my Cardlytics ads that I'm seeing. And I'm not -- I'm seeing 2 actually right now. And I'm obviously not going out and spending a lot of money other than the grocery store right now, like here in a shelter-in-place California. Things might be different in Georgia. But if I look on that, it makes perfect sense of what I'm seeing. I'm seeing Starbucks, and I'm seeing ADT. ADT makes sense. People might be thinking this is a good time to get a security system. And Starbucks is always a product that you can sell, great to sell and it's a good product. But -- would I be seeing more personally right now, if I was in another state or if I was out shopping more frequently?

Yes. So I just pulled up my BofA account and I have 17 offers. Now I use my BofA card a lot. I also have a Chase card to be fair, but I use my BofA card a lot. And I'm in a state that is open up so -- or somewhat opened up, I guess, I would say. So yes is the answer to your question. Again, I go to -- it really matters how often you're using the card because everything is targeted based on purchases. So if you're not using your BofA card, for example, to buy any kind of restaurant food, we're just picking on that as an example which I'm sure you're not right now because restaurants are closed in California, then you're not going to be eligible for any kind of restaurant offers. Now we don't have tons of restaurants in the channel right now, but we do some. But you're not going to see those and I do.

Great. So how does that affect -- I know that the banks have always said the real driver -- and you guys have pushed, the real driver of why the banks want this on the platform is it not just generates little excess revenue for them when you pay them their FI share, but it also helps the retention rates. If we have a situation like this, this is an unusual situation, obviously, but in a situation like this, where [indiscernible] a lot of that basically that ad inventory, that inventory on my home page is sitting blank. How are the banks reacting to that change? Or are they just saying, "This is COVID, we know that it'll end at some point."

Well, first of all, I want to really drive home a point of most of our customers are seeing a lot more than 2 offers. So I just really want to drive that home. That being -- so it's very unusual for somebody not to have, for example, their widget filled with at least a handful of offers. That being said, the banks are being generally very supportive. They understand this is unprecedented. They understand that now more than ever, this program is important because as people start to spend and come back, many people have been seriously financially impacted by this virus, and they're going to be looking for all the ways they can to save some money here and there, and their banks are well-positioned place for them to do that. So the banks have been very supportive. They understand what's happening. We talk to all of our key bank constituents. Lately, it's been on a weekly basis, kind of updating them on where the conversations are with advertisers, who's in, who's out, and importantly, who's starting to come back in. Let's pick on the Starbucks example. Starbucks is only back in, in areas where those stores have either drive-through capabilities or pick-up-curbside capabilities. So we were very surgical with Starbucks, and we have been with a number of advertisers who've started to come back in. There's only certain zip codes that are eligible for those offers because there's only certain stores that can actually handle customers. So even though you say Starbucks is back in, they're back in at a fraction of the money that they were spending pre-COVID because their stores aren't open in a lot of places, right? And that is true for many of our advertisers. And so the banks, we're working with them to help them understand as the spend comes back, the advertisers will come back. But we have to look at it surgically on where it's safe and okay for the advertisers to come back. Starbucks, just as much as BofA, doesn't want to advertise someone -- to someone who is in a zip code where the only stores that are available to them are closed.

Makes perfect sense. And it would be very interesting to look at the change in the number of K-Cups sold versus Starbucks lattes just to -- I guess just how it applies in the COVID world but -- okay. So then let's talk a little bit more about some of the things you've talked about on getting these advertisers in. Obviously, as you come past COVID, one of your main focus has been for a while on these FIs, getting Chase up, working on the Wells integration, getting those launched. You're pretty much -- you're there with Chase and you're getting there with Wells and you could talk a little bit more about that. So...

We're actually finished with Wells, yes.

Finished with Wells. Okay, please...

Yes. I'm happy to announce today we are finished with Wells, yes.

Well, okay. So good. So that puts off a question I was going to ask. Okay. So you're there -- you've got -- basically, you've got the banks. You've got the biggest banks in the country, and you got them. So now it is the step to get the advertisers up. Ignore COVID. Say the world is back to normal. What gets the advertisers -- how long is the sales cycle on, as you said, a new form of advertising that they're not used to? And what gets them on? And what are the steps? I know you went and hired a lot of market -- sales -- ad sales people at the beginning of this year. What are the steps that they need to work on to get these advertisers onto this platform now that you would build it?

Yes, it's a great question.

On the fields of dreams that...

So the first thing that had to happen is -- that's right.

Sorry.

First thing that had to happen is we had to have the scale. I cannot understate how important -- or overstate, I guess, how important the scale is. In the past, pre-Chase, pre-Wells, advertisers didn't have to take our phone call because we weren't big enough to really matter. We are now a big enough, true digital platform, true, viable alternative to some of the other large digital platforms that are out there. So the first thing that's changed and the first thing that has to happen is you got to get the advertisers to take your call. Because of our scale and ironically because of COVID, more and more of them are taking our call, the scale, obvious reasons COVID, because we have a road map to what's happening and they don't. And so we can -- we're really elevating the conversation with them on what's happening, where they're gaining customers, where they're losing customers, who they are, how they're switching spend, et cetera. So it's the first thing that has to happen. Second thing that has to happen is they actually have to test the platform and understand the power of it and believe that we really are generating the return on ad spend that we tell them we're generating. One of the advantages to our platform is we have this amazing data asset that we get from the banks. One of the disadvantages is we can't send that data to anyone. So we tell advertisers we delivered a certain return on ad spend based on all of our analytics and data, they have to sort of believe us. And so that's why we spent a lot of time last year building third-party validation processes so that it wasn't just us telling the advertisers we generated the spend for you. It was third parties coming in and sort of auditing, if you will, and telling the advertisers we generated the spend for you. Once they believe the platform -- so again, first, they got to take your calls, then they've got to believe the platform. Once they believe the platform, then they do start growing, but then it is a question of where are they going to take the budgets from. And so they're pulling those from other, sometimes digital platforms, sometimes TV, sometimes print, all of the above. And that process just -- it doesn't happen overnight. You don't go from spending $0 on a platform to $20 million on a platform in a quarter. That takes multiple quarters. The thing that has accelerated is our ability to get the conversations and our ability to get to that first test. But it would be unwise for me to tell anyone that I believe you can get an advertiser, on average, spending going from nothing to $20 million in the same calendar year or potentially even $10 million in the same calendar year. But you can get them going from nothing to multi-millions in the calendar year and then grow from there.

Sounds great. And you've talked a lot about launching a self-serve platform. A lot of online advertisers talk about self-serve platforms. But it sounds like you're more at that stage of evangelizing, getting the advertiser to understand it and get it and use it and grow with it and get it out of experimental budget. Is the self-serve platform going to change anything near term? Or is it kind of table stakes that you need to have this for a longer term?

Yes. It's a bit of both. It is table stakes. But the place where it can help us evangelize that we can't today is agencies. Today, we are a managed service model, which means we basically can't work with agencies because they can't do anything on our platform, and they can't justify their fee to their clients. Self-service enables us to go to agencies and say, "Now we have a tool that you can use. You can run your own analytics on our data. You can import some of your own data with our data to understand customer behavior and segmentations. And you can prove value to your client by using our tool." And so our ability to actually start evangelizing, if you will, using your terminology, to agencies is going to be important because depending on who you believe, at least half, if not all, of ad -- half, if not more, of ad spend is still controlled on the client's behalf by agencies. And we're not in that mix at all today. That's what self-service is going to do.

So when you talk -- you go into -- half of all spend is on agencies, but is -- what I would call experimental spend or ad testing spend, learning new units, is that typically done through agencies? Or is that typically done directly through marketers at the firm? Okay, still...

Great question. I'd say that's changing. For the longest time, it was directly through the advertisers at the firm. And that's why our model was direct to advertisers for the first 10 years. But what's happening more and more is agencies are trying to prove their value to their clients. So they're trying to bring new ideas, new analytics to their clients. And so the agencies that we're focused on are going to be much more of these performance-based, analytically based -- driven agencies who are looking for new ideas to bring it to them. And so yes, I think it will matter. And I think you will have test budgets running through some of these agencies across multiple clients. The other -- the agencies that we're targeting also do have -- lots of them have clients that are in our sweet spot. And so we're being very surgical about who we're targeting from an agency perspective. But yes, I think they're going to matter. And I think they will absolutely do test budgets to learn and understand the platform and then bring it to more and more of their clients.

Great. And you mentioned -- going back to your FIs, you mentioned you are announcing Wells Fargo is done and launched. Can you tell us a little bit about that launch and what we should see? Obviously, I'm not a Wells Fargo customer, and they probably -- my firm wouldn't be too happy if I was. But -- so I haven't seen it. Are they using a very similar to the practices that you have used for BofA and for Chase, a front-page summary with the widget?

Yes. It's very similar. And more importantly...

Now -- go on.

, Wells, Chase, most of our newer banks -- yes, I was just going to say, importantly, most of our newer banks, the widget is important because that's where people first engage with the program. But once you engage on the widget, it goes to a page that shows all of the offer content. That page for most of our newer banks, if not all of them, is hosted by Cardlytics. So we own the development and the -- we have to get it approved with the bank, but we do all the work for that page. So as we talk about bringing a richer user experience into these newer banks, it's going to be a lot easier than with some of our legacy banks. So obviously, not like BofA, where everything is hosted by BofA. So it's going to take a little bit longer for some of the legacy banks to get the new experience, but some of our bigger, larger customers will have it a lot sooner because of that hosting arrangement, which is really important.

All right. Great. As I look towards -- you straddle an interesting line between what you would call not exactly brand but brand marketing or image-based, CPM-based marketing, and performance-based marketing. So your inability to give the direct data that you know for sure because you have to, you have to be able to give the rebate back to the customer, is that what kind of tips it off that performance scale even though it technically could be the most obvious performance marketing there is if you could give that information back between -- from the FIs to the advertiser?

Yes. I mean, for sure, that's the validation that I was talking about. Because we can't give back the granular level of information, there is some element of trust that what we said we did is indeed what we did. And as you know, some of these other platforms that are out there don't have high levels of trust right now. They've got fake MAUs and they've got bots and click fraud and all kinds of things going on. And so it's -- it's an environment right now where you really do have to -- you have to prove it not just to the CMO but to the CFO. That's why that validation product that I mentioned is so important. And as we start to prove it and as they start to really believe that we are delivering a true incremental 5:1 on ad spend, that's when they start to spend. But it does take time to cut through the noise, which having 150 million MAUs now helps us cut through that noise, and then to prove that this is a very different platform than some of these others that you're used to where you don't really know if the results are what they're saying the results are.

Going into that third-party validation platform you guys have been working on, how accurate is that? Because obviously, you know exactly how much revenue goes in...

Exactly.

Because you have -- oh, it is.

That's right. That's right. It's -- exactly. Yes. So it's -- actually, it's a partnership with Nielsen. And they come in and they run their own analytics on the campaign to say the incremental ad spend that Cardlytics said they drove for you, do we agree with that? Do we see that same incremental lift? And then they provide an independent report to the advertiser. And the advertiser can compare our report to Nielsen's report.

Great. Let's look going forward. As you -- how long do you think some of these effects will last on the COVID? Obviously, you had a lot of great partnerships with advertisers, even like to use, like Airbnb, that are in the travel space. Travel is probably not the fastest returning space. What are you hearing from advertisers? And when they want to start looking to come back to platforms that they were using?

Look, the advertisers are struggling more than anybody. I mean while our spend is down -- while billing was down 50% in April, I mean we have advertisers who almost went to 0 in April. So they are desperate to get back when they can, but they don't want to waste money. And so they're not going to turn on advertising until they believe that can actually drive performance and sales for them, which is why we believe we're well positioned. I don't know how long it's going to be. Georgia is already starting to reopen, but we've got riots on the street right now. I don't know if 2 weeks from now, we're going to have another outbreak and it's going to shut down again for a month. So I don't know how long it's going to be. But I do know that when the spend starts to come back, we have plenty of advertisers who are going to be desperate to try and generate sales. And in a pay-per-performance platform like we are and one that can very quickly prove performance, I mean we can prove it in a matter of weeks, I think we're going to be well positioned.

All right. And going to these advertisers you can generate, and a lot of them are great and you have had great advertisers. But one of the things, your banks have requirements on the content you can send. How stringent are they on what advertisers they allow onto their real estate?

Again, it varies by bank. For the most part though, our banks, as long as we're using reasonable judgment, I mean they want advertisers that people know, that people like, that people trust. So for example, we've had some banks -- you would not try to sell Hooters -- I'm just making that up, but Hooters into our bank channel. It's just not appropriate. Most banks would say it's not appropriate. So we kind of know how they feel about what type of content should go in there and we deliver that for them. So when a bank does sort of say, "I'm not happy about a particular advertiser and offer," there's usually some unique reasons. It's -- because we just know what kinds of advertisers they want. And it's pretty unusual. I want to be clear. For the most part, the banks just let us run our program.

I'm more interested when you're talking about some of the lesser-known e-commerce channels that are showing up now on you and everybody else because they're getting eased in. They don't have a large following. People don't know who they are.

That's right.

Are the banks reacting to that?

Yes. That's a great question. So I would say in the past, the banks weren't as excited about logos and brands that people didn't know. And so like emerging e-comm brands wasn't something that all the banks were terribly excited about, and some sort of said no. COVID has actually changed that. So the banks now understand consumer behavior is changing. It is going to go more online. These e-commerce channels are going to start taking off. And so I think the bank's attitudes toward those have changed quite a bit.

That makes sense. Looking forward in -- if you're going to look forward 3 to 5 years and you're talking about having a self-serve platform that helps in the ways, but what are the necessary steps to build out a real competitive marketplace for getting those ads up to the right people for advertisers? What product steps do you think you need to make going forward?

To get the self-service platform into the hands of lots of advertisers? Is that what you're saying -- asking?

Well, I don't mean just the -- not just the self-service. I mean what other products and capabilities are there?

I see. I'm with you. I'm with you. So past self-service, if you think about our channel today, we have very limited media capabilities. If we're honest with ourselves, we can display a logo with some ad copy. And so the big focus for us once we have self-service is how do we build new media capabilities so that we can go after more and different kinds of advertisers. So an obvious thing, all of our advertisers would love to be able to show a picture of not just the logo, but a picture of their products or their menus or whatever it might be. That's a very simple example. More complicated example is today, our user experience is such that we really can't advertise brands or products. We have to be at store level so we can advertise. We'll pick on Starbucks again. You can save money at Starbucks, but it's not this latte versus that latte. So going forward, as we build new media capabilities and new data ingestion capabilities, we can go after different buckets of ad dollars that we don't go after today. A very simple example, today, we don't call on any of the brands. So the C -- P&G guys, the Procter & Gambles or the Sonys or the Nikes, we don't call on any of them, which they're about half of all ad spends, because we don't have a real capability to sell a product versus a retailer. So as we build these new media capabilities and this new user experience, we can go after a bunch of advertisers that we don't talk to at all today. And that's going to be a huge part of the longer-term road map for us.

Well, that would be very interesting to Steven Boal, who was just on the phone with me an hour or so ago, from Quotient, which is very interesting because -- so if you went after the brands directly -- help me walk through this scenario. You go after P&G. I go to my local grocery store. And instead of having a P&G coupon connected to my whatever grocery store rewards card, it's connected to my credit card through you. Is that where you're seeing?

That's a great example. And I want to be clear now. I'm not -- we're not going to have this next year or the year after, but that is a great example of a way that we can really expand the breadth of this platform longer term.

And those coupons are fundamentally smaller dollar values usually than a lot of the stuff you see on your side.

That's right. Yes, we say it all the time, like, "Do you want to sell toothpaste or TVs?" Today, the way our platform is built and the way their user experience is built, you want to have higher value kinds of offer content that's out there. But if you can imagine, a new user experience inside the bank channel, which, as I said, for most of our banks, we host that so we can do it. You can imagine a place where you go to see your grocery offers and, to your point, link your grocery loyalty to your Bank of America card and you can save on your toothpaste, too. Now again, like I said, this is not something we're building in the next couple of years. But what we are building is the user experience and the ability to bring in new media capabilities. That has to happen first before you can start selling toothpaste from Procter & Gamble, which is why we're in the order that we're in. We've got to get the new media capabilities and the new user experience inside the bank so that we can bring in that different kind of offer content.

Now how much -- just to go a little bit on this, how much of that relies on the bank's consent? I mean -- so how much is in your current contract for...

The banks want it. Believe me, the banks love these ideas. So it's -- do we have to get their permission and all that? Sure. But the banks love it. They would love to have a grocery solution. And they understand why they can't today. They understand why you can't sell $0.10 off -- you can't have an offer to save money at Airbnb next to an offer to save money on Crest toothpaste. It just doesn't make sense today. So they understood -- that's why the banks are fully supportive of this new user experience and these new media capabilities that we're trying to build because they know that that's the precursor to bringing in new and different and more kinds of content.

Okay. And I'm going to -- I think we only have 1 minute left. So operator, are there any questions in the queue for Lynne? Operator? Or am I supposed to use some other platform? Sorry, virtual conference is fun.

Aren't they fun?

I'm not quite there. I'm sure there are -- there is a system here I'm supposed to be doing to get questions. Oh, yes. Well, here it is. I might be too late on this because we're actually at the last minute, but Lynne, I want to thank you very much for coming -- well, joining our call and...

Absolutely. Thank you.

I really hope that we're able to do this again in-person sometime in the future.

Amen for that. Thanks so much for having me. I appreciate it.

Thank you.

Okay. Bye-Bye.