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

Good morning, everybody. This is Tim Willi with Wells Fargo Securities. We're thrilled today to have with us the CEO of Cardlytics, Lynne Laube, also the Co-Founder. Thank you for joining us this morning. Before we get started, I just wanted -- if anybody had any questions that they wanted to e-mail me during the discussion, I'll be sure to leave those in here. My e-mail address is Timothy, dot, Willi, that's W-I-L-L-I, @wellsfargo.com. Feel free to send me your questions, and we'll make sure to get them front and center here. But that being said, kick things off, Lynne, again, thank you very much for the time and being here. I know you got a full day of meetings, which is always great to see.

First question that I think I'll throw out there, and I think it's one that, obviously, investors are very focused on. It's a new element to the story, is just sort of discussing the self-service platform, which is in beta, and sort of the whole move to greater wallet share and into the mid-market. So maybe if you could just sort of talk about that journey because it's been multiple years of building that out and thinking through it. So people can give them a real appreciation for that process and where we're at.

Yes. So there's really 2 waves to the self-service platform and why we're building it. Wave 1 is to go after agencies and to have a way that we can work with agencies. Today, our model is entirely a new service model. So if you want to advertise on Cardlytics, you call us and we run the program for you. Self-service enables anyone to run their own advertising on our platform, which makes agencies have the ability to sort of, if you will, justify what they're doing on behalf of their client. And so that's sort of the wave 1 of the self-service platform, is to go after agency spend, and that's what we're very hyper-focused on for 2021. Wave 2 is going after much more of the SMB space. And while Cardlytics doesn't have a direct-to-consumer brand, all of our banks, of course, have a direct-to-consumer brand. So being able to use the bank relationships that we have and use the commercial relationship bankers that are out there calling on the SMBs all day every day and being able to help them promote their own businesses through Chase Offers or BankAmeriDeals or My Wells Fargo offers or whatever it might be. That's more of a 2022 and beyond initiative. The biggest challenge with building self-service for agencies is sort of twofold. First is every agency believes that they have their own unique data or insights on behalf of their clients. And so they want to be able to add their insights and their data to ours so that they can bring, if you will, their secret sauce to the platform. So that's the first big thing that we're building, is the way to connect our ID with the agency's ID so we can overlay their data onto our data. We'll never actually share data but we'll create segments and they can overlay their segments on top of it. So that's the first big thing that we're building. And then the second challenge, of course, that you have is just managing use, access, budgets, do you have signing authority to run this campaign, those types of things. So all the, I guess, security features, if you will, around it. So those are the 2 big things we're continuing to build and flush out with our 2 agency beta partners. So that's why we're doing beta, to make sure we got those 2 things right. And then the tool will be ready for full rollout in 2020, and we'll put it in the hands of as many agencies as we can, recognizing that their adoption curve will look very similar to any individual advertiser. Just because they have it doesn't mean they'll all spend unlimited amounts of money day 1, but we'll see slow adoption over multiple years. And if you study other digital platforms, when they created their own self-service tools when they saw a big wave of additional growth, and we believe will be the same.

And one of the things that I think, obviously, self-service become very front and center in the last couple of quarters. We get a lot of questions from people about why or has this been rushed. And this is something that, if I remember correctly, not long after going public, you talked about some step-ups in investment, and this was one of those. So we're talking about a 2 to 3-year journey. And if I remember correctly, it was also something where you're sort of hearing that from your larger, big enterprise customers that if you want more of our wallet, you're going to have to do this. I mean could you talk maybe a little bit about that dynamic, just give people confidence that this wasn't just some quick knee jerk reaction but really something that had a clear mission goal and path to more wallet?

Yes. It's been a multiyear journey not because it takes multiple years to build it but because we needed 2 things before we build self-service. First, we needed scale. If you don't have material scale, it doesn't matter what you have for agencies. They're not going to bother using it. So we needed to get Chase and Wells launched. So while we've been talking about this for a while, until we got Chase and Wells launched, it was sort of irrelevant, quite frankly. The second thing that you need with self-service is the ability to have the banks understand and approve going from an individual kind of approval, if you will, of campaigns to more of a rules-based model, which is also why we wanted to have Chase and Wells launched so that we could have the scale and go to a rules-based model with all of our banks at once. So that's why we've been talking about it for 2 years, but the plan was always don't release this tool until you have that scale. Obviously, we just finished launching Wells. Thank you, Tim. And self-service tools and beta in the hands of agencies. So it's not a multiyear build, but there's a progression that I just described. And the reason we know this is right is, again, as I mentioned, if you go look at any other digital platform out there, from the big guy like Facebook all the way down to whoever you want to consider as a reasonable comparable to us, maybe a Pinterest or an Etsy or a Yelp or any of them, they all build self-service tools. And when they did that, that's when they saw another nice progression, if you will, or wave of growth because they could go after clients that they couldn't go after when they were just managed service. And we're no different.

Yes. So on that topic, you've now got 150 million plus MAUs, whatever the number is, and there will be some organic growth. You got U.S. Bank coming on. And then the growth rate of MAUs probably becomes a little bit slower, low single digits, something in that. But could you compare and contrast, now that you've got this big network, how expectations of the marketers may have changed? And sort of what's the bar for Cardlytics versus what it might have been a couple of years ago, the sales cycles, the people you're dealing with and whether that -- does that get rid of the lumpiness? Or do we talk about bigger campaigns, more complicated that just may still be hard to predict? I mean honestly, I don't know either, but I'd just love to get your thoughts on how all that's changed with this big network growth.

Yes. I mean again, going back to scale matters. So when we were pre the launch of Chase and Wells and we only had about 59 million, 58 million monthly active users, we just weren't big enough to command the attention of some of the largest advertisers in this country. We certainly got the attention of a few of them. But for the most part, the larger advertisers in this country, there's a reason they're all addicted, if you will, to Facebook and Google and Amazon. It's because they have scale and they can drive sales for them. And so we needed to create that scale such that they could meaningfully pay attention to us. So what I would say is today, we have enough scale that advertisers can't ignore us. It doesn't mean they have to use us, to be clear. And I'll talk about what prevents them from using us. But it does mean that they're taking our phone call. And the hardest challenge still with Cardlytics is we are still -- I say this all the time, we are the biggest company that no one's ever heard of, still getting into the door of the right decision-maker who really actually believe that we are a platform that has the same scale and can drive the same impact as a Google or a Facebook for them in terms of driving sales. That is still our biggest challenge, is to get into the door to the right person and have that conversation. Once we do, things tend to go pretty predictably and pretty well. And we tend to know what that ramp pattern is going to look like. And in many cases, that pattern has accelerated because, again, scale matters. So that's why it's so important. Now that we have the scale, here's what I would say about our platform. We've got an amazing channel, right? We have real customers with bank accounts. There's no bots. There's no fraud. They're not there to share pictures. They're there to think about their money. There's no devices -- there's no Russian advertising. So we've got this amazing channel, and we've got this amazing data asset to support our advertisers. Now what we're building is the stuff that everybody else has. So in theory, it's the easy stuff. We started with the hard stuff. Now we're building the easy. So we're building the self-service. We're building richer UI, which means simple things like advertisers can now have pictures in their advertising campaigns or links to their menus or their online sites or whatever it might be. So we're building the stuff that everybody else has to truly make us on par with those other digital platforms relative to media capabilities, and then I would argue still dramatically advantaged relative to the quality of our channel and the data asset that underlies our channel. And so that's kind of where we are in the journey.

Great. One of the things that interested me, I think it came out on -- I don't know, maybe it's the first quarter call. You talked about a partnership or an agreement with Sainsbury and Nectar, I believe, in the loyalty space. And what jumped out at me is just the sort of a tangential offering, but very logical, right? You have all this data. You can find ways to influence spending and understand. Could you talk about that partnership, that relationship? And then I guess just what does that point to in terms of other tangential offerings outside of just the core card spending opportunity that everybody identifies you with?

Yes, yes. So that offering is built on the foundation of a regulation that is going through most of the rest of the world called open banking. And one of the premises of open banking is that consumers own their transaction data, not the banks. And so in countries that have adopted open banking, which includes the U.K., soon Australia, Japan is looking at it seriously, Canada, it's starting to go throughout the rest of the world, banks are required to create APIs to enable a consumer to say, I would -- I'm giving permission to my bank to give all of my transaction data to another trusted party. And so it really is going to, in theory, revolutionize fintech acceleration by giving lots of different parties access to this consumer data if the consumer permissions it. So in this scenario of open banking -- and if you think about what Cardlytics does incredibly well, I would say better than anyone else in the world, is we know how to process transaction data, clean it, make it usable and monetize it. So in a world of open banking, when the consumer is giving you permission, we can now go to other large institutions that have large customer pools and virtually make them look just like a bank because we can get permission. The only difference is you got to do it one customer at a time versus if you get a Wells Fargo, you turn them on one day, you have access to all their customers. In an open banking environment, you have to do it one customer at a time. But think about large retailers all over the globe or large telcos or large airlines that all have massive customer bases and have programs that customers like, loyalty programs that customers like. And now we can accelerate the rate at which these customers can earn their loyalty points, which is what we're doing with Sainsbury and Nectar. So Sainsbury -- Nectar is the name of their loyalty program. Sainsbury is a large grocer. Nectar is their loyalty program. More than half of the U.K. -- people in the U.K. have a Nectar card or they're part of the Nectar program. And they earn Nectar points the more they spend with Nectar. So we're using open banking. Sainsbury is sending e-mails to all their Nectar customers to say, give us access to your transaction data by simply clicking these 3 buttons, and then we use the APIs that the banks were regulatorily required to build. We get access to their data, and now they look just like a bank to us. And we're going out, and instead of giving them offers for cash back, we're giving them offers and we're just converting them into Nectar points. So that's what we're doing. I think it's probably one of the largest -- will be one of the largest and only open banking models like that in the world when we do roll out with Sainsbury, Nectar. We obviously had a pilot. It was very successful. Then COVID hit. So it's on pause until we're on the other side of COVID. And that is the model by which we think we can do international expansion. The beauty of that model is you don't rely on the bank, so you don't have revenue share. The downside of that model is you do have to do it one customer at a time. But like I said, these large retailers, telcos, airlines, they have great responsive customers, and it's not that hard to send a couple of e-mails and get a decent number of customers signing up for this thing.

Yes. Interesting. On that topic, referencing fintech and open banking, obviously, the U.S. banking system is very large, very entrenched. And everybody understands that. But there is this -- for the time being, there is this rising wave of fintechs that are trying to become sort of a bank, right? You've got the [ Chimes ] or the Square Cashes, the Venmos. I mean is that an opportunity somewhere? I mean obviously, there are a different type of customer spending levels, distribution channels. But they're in accounts and they spend and they drive transactions. And is that something we should think about the Cardlytics keeping an eye on or pursuing some of these big fintech platforms?

100%. The answer is 100% yes. The caveat there is we built our technology platform for very, very large, heavily regulated institutions. Right or wrong, that's what we did. So we started with the Wells Fargo and the Chases and the BofAs of the world. And so our platform is much more heavy, if you will, than some of these, I call them, the neobanks or the emerging fintechs than they need right now, quite frankly. And so we are working. It's part of what self-service will actually enable in the new user experience, is a much more simplified API type of model that doesn't require all the heavy lifting that the large financial institutions require. We're building something to really enable those neobanks to use us in a way that today, we're just kind of overkill for what they need. And also, obviously, getting MAUs is not our challenge right now. It's getting ARPU. So every neobank that we add just takes away, at least in the short term, from the ARPU that we're delivering for Wells or Chase or BofA or SunTrust or Truist or -- the list goes on and on. So we're careful there. But we are very aware. We're very much watching these neobanks, as are our banks, by the way. And I definitely think it's an opportunity, but it's not an immediate focus for us. But we're watching them closely.

Yes. So on the topic of banks, one of the questions we get from investors is trying to understand how important Cardlytics is to a bank, the engagement levels, the revenue that a bank receives. Obviously, these are huge banks. We understand that the revenue share at BofA relative to all the BofA is not huge. But if we boil this down, to the person that owns the loyalty or the card business, how do they think about the revenue share? How do they think about the engagement that they're seeing?

Yes. So very much by bank, which is -- unfortunately, I say that all the time because it's true. Some banks only care about engagement. And they are taking much, if not all, of their revenue and plowing it back into engagement. And in fact, I think over time, there's an opportunity for us to do more with that revenue and even maybe take some of it back but plow it back in differently through investments or other things that we're doing with that bank. But there are some banks who only care about engagement, and they're using their revenue to drive engagement. There are other banks who actually do care about the revenue because it is funding a lot of their digital innovation. And you're exactly right, Tim. Brian Moynihan is never going to talk about us. Jamie Dimon is never going to talk about our revenue ever. But the person, the guy or the gal, who owns digital innovation, which is generally a cost center, our revenue can be material to them over time. And so it just -- it depends on which bank you're talking to and what they care about. But I would say the trend is more and more towards this program drives engagement with my customers. The value there is so high. They're never -- they're not going to just give us the revenue back. But the conversations around can we use this revenue differently, can we use it to drive engagement, that's where the conversations are going. I think with all of our banks, it's just some are way ahead and some are not quite as progressed there.

In terms of engagements, when a bank looks at -- I guess they're probably measuring it based upon transaction volumes, dollar volumes, frequency, how often somebody is coming to the app. I mean are -- for your longer-lived customers, have those metrics improved to a degree that it's not trivial? Like hey, the person that owns that digital innovation, they're walking into their boss. She's going to their boss. He's going to Brian Moynihan and saying, look at our engagement levels. Like they are up 10, 15, 20. This does make a difference way down on the ground.

Yes. 100%. You're exactly right. People who use our program spend a little bit more on card on average. They're much more digitally engaged. They attrite less. And they are just generally better bank customers. And that's what the banks have proven over and over again, which is why -- I mean unfortunately, you're never going to hear a bank -- they're not going to tell me how amazing the program is because they're always beating us up for what we can do better. But it's why we continue to sign banks. It's why we have this access that we have. I mean if you think about it, we have access to all of the data and all of their customers. It is remarkable what we have. And it's because we fundamentally drive better bank customers through this program.

Yes. In terms of the pandemic, so a lot of things have been pushed around change, consumer spending change. What are the opportunities that have come out of this last 9 to 10 months for Cardlytics that maybe you never thought of or maybe you thought someday, but here it is like this vertical, this way of reaching customers, it's here and now it's a big opportunity?

Yes. It's a great question. And you're going to -- my answer is going to sound funny initially. But the biggest opportunity or the biggest advantage that we've had in this pandemic -- and we've had plenty of disadvantages. As we all know, Q2 is a disaster for us, and we're still recovering. But the biggest mind shift change that has happened is our banks now have a completely different perception of what is appropriate content for the channel. Pre-COVID, they wanted the big-box retailers that everybody knows, that their perception was that's where their customers wanted to spend. And things like D2C brands or online-only content, those were all dirty words with our banks. COVID changed that perception entirely. And so the acceleration that we've had on being able to go to some of these D2C brands, which are very progressive, very fast to move, very analytical, very different than calling on some of these big-box retailers that have been around for 100 years, the acceleration in the adoption and just the way that our platform works for how they think has been amazing. And I'm generalizing, but not really, pre-COVID, our bank said no to most of that kind of content. And COVID changed everything, and that's why we're seeing acceleration. And a lot of our recovery in Q3 and even in Q4 -- because consumer spend is still way down in stores and still way down in verticals we were big in like restaurants and travel, we're making up for it with some of these newer D2C online-only types of brands in a way that we just wouldn't have been able to do pre-COVID because the banks just didn't think they were appropriate for what customers wanted. And it's changed all of that.

What about digital content and entertainment, right? The gaming and the streaming services [ grow ] more now and -- I mean are those an opportunity?

Yes, absolutely. That's -- I put those in some of these direct-to-consumer/ -- yes, but 100%. And like I said, pre-COVID, that was not that was not something the banks got terribly excited about when we brought them a Hulu, for example. And it's totally different now.

Yes. Two more questions. We've got about 7 or 8 minutes left here. The first one is we referenced back at the beginning of the conversation around self-serve sort of the mid-market. And I think SMB came up. Obviously, lots and lots of small businesses hurting now. And I know this has to progress in terms of self-serve. But is it real to think that somebody that owns 1 or 2 or 3 locations in a metro market is going to be able to leverage the Cardlytics platform through their bank? It's, call it, in a reasonable time frame? Was that 2 years, 3 years? Or is it farther off that they'd be able to leverage that?

No, that's the plan for 2022. 2021 is about getting this tool in the hands of agencies and proving its capabilities and features. 2022 is about getting it in the hands of the SMBs, primarily through our bank relationships but maybe other partnerships as well. But that is absolutely a 2022 objective.

Yes. That's a big market. So last question here. There's been a lot of change in management at Cardlytics, which I think probably caused some people's heads to do spins and what's going on here and for people that aren't close to the story. So a 2-part question. One is maybe talk about those high visibility changes, David, Scott, in particular. But beneath all that, there's been a tremendous amount of hiring of senior talent across a lot of different areas of Cardlytics. And I don't think people appreciate the depth that's been built across technology and ad tech and marketing. And so maybe in our last 5 minutes, could you sort of talk about just quickly, David and Scott, and then the depth of the bench that's been built over the last 1.5 years?

Yes, yes. No, thank you for asking that because it has been a succession plan that has been in place for a very long time. And here's what I would describe. The first 12 years of Cardlytics, we were a fintech company that happened to sell advertising. Our focus was on signing the big banks and launching the big banks and getting to the 161 million plus MAUs that we have today. And most of our DNA was very fintech bank focused. Me, Scott, David, we're all fintech bankers or ex-bankers, as an example. But it went through the whole organization. There has been a very deliberate, very purposeful and very careful, I would add, even though I don't know that the Street built that, but very careful planned transition of going from being a fintech company that happens to sell advertising to an advertising platform that happens to work with banks. And I know that sounds trivial, but it's not. It is material. We are fundamentally changing the DNA of the company. And we're hiring advertising and platform executives at every level in our organization. And you're exactly right. We've probably hired 30 VPs and above, not new positions, but 30 VPs and above that are new relative to the 30 VPs and above that we had before, who have just very different backgrounds and DNA. Scott and David were just a natural part of that transition. Scott, I mean, he's been doing it with me for 12 years. He's almost 60. We got to make this transition. We got to make room for people. We're not just going to randomly spend a whole lot more money, so it's been a very careful and well thought through transition. And while Scott and David were very visible, if you just go just one layer beneath, Tim, to your point, it's been across the board, across the company, slowly making this transition of bringing in these executives who've seen the movie before. I think that's probably the biggest thing. What we did initially had never been done before. Building an advertising platform on the backs of banks and on the backs of banks' data and their access to their consumers was completely revolutionary, totally unheard of. We got kicked out of every bank in the country for the first couple of years. What we did had never been done before. Now we have an amazing digital platform with this amazing asset and this amazing channel, and now we just have to do what everyone else has done. We've got to build self-service. We've got to build better, richer user experience. We've got to build more media capabilities. We've got to build access to the SMBs. Everybody else has done that. And so there's a road map out there. Now we just have to go hire executives who've done it before at these other platforms, and they know how to do it. And so that's what we're doing. So ironically, investors should be thrilled that we're doing this. But I do understand that the Scott, David transition, in particular, it did not go unnoticed on Andy and I when our stock price plummeted. It was a real confidence booster.

It was a pretty interesting earnings call. There's a lot to digest at the time back there. And I -- yes. And I know in conversations with David, he always referenced the incredible people that were being hired a year ago and 2 years ago. Again, I think it's part of the story that people don't have as much appreciation for. But it will be -- the success in the future will be attributable to those kinds of moves. Just one last -- a quick question here, I guess, while we had, I think, about 2 minutes here. I don't want to get into financials. But I guess if we think about just at a high level, you've done the self-service. We're working through COVID. Is there anything at a high level, investors should still be thinking about that would get in the way of a margin story starting to emerge? We don't have to go to like margin goals. But are we at a point that when revenue comes back and we sort of just get back into a cadence, a margin story should start to play out like investors have been expecting?

100%. 100%. I mean COVID may delay it a quarter or 2. Still to be determined. It's still possible. It doesn't delay it at all, depending on how quickly we get a vaccine and what happens to consumer spend. But at most, it's just a delay. There's no other reason that we won't get to all of those objectives we laid out.

And no other big investments that you're seeing? You referenced like international and things like that, that should be pretty scalable. There's no additional investment around international or anything?

If there is, it will be over and above, and we'll be able to show a business case to the Street. That will be over and above all those goals that we submitted.

Well, great. Well then, thank you so much for the time. I know I got a busy day. So we'll you back to your meetings, but I really appreciate all your time this morning. Thanks, everybody.

Thanks.