📝 Cardlytics $CDLX (#3) Update: Q3 2022
Hello Community,
I know a few of you have interests in cdlx. I would love to start a conversation about their Q3 earnings, Karim Temsamani, and the long-term prospects for the company.
Before we start, know that I am not looking at short-term results seriously and instead searching for clues for the long-term performance of the company.
Earnings
The company's earnings can be summarized as "ok tending to mediocre". Their revenues increased 12% YoY and the aggregate LTM revs increased by 25% (mostly due to an extraordinary Q1). For a company this size, with this much data and this many customers (184M MAUs), the target should be exceeding 30% YoY. With that said the growth is kind of unnatural when compared in relative terms. The two main players in the industry, Google and Facebook, had results with increasing ad volumes and decreasing ticket size. Google had a 6% YoY rev increase with clicks and CPC increasing by 18%. Facebook had a -4% YoY rev increase with the number of clicks increasing by 17% and the ticket size falling by 18%. Cardlytics had an average of -1% click increases, but the ticket size grew by almost 15%.
Engagement rates on a per-category basis are still very strong, with the lowest being e-commerce at 1.97% and the highest restaurants at 7.30%. Restaurants are particularly interesting given the synergies with Entertainment (long discussion if anyone wants to talk about it).
Part of these results may be attributable to headwinds. We all know that ad budgets are easy to cut when fat needs to be trimmed, but this is no excuse. This could be part of the reason why Q4 guidance was so poor at $80-$90M in revenue. To be in line with my expectations, revenues for Q4 should be between $110-$120M. To sum up, lagging performance.
Karim Temsamani
This was Karim's first public intervention with shareholders after being 60 days at the helm of the company. It would be unfair to attribute the quarter's performance to him. However, we can clearly see two things occurring from the get-go: Setting an Example by clearly Defining the Goals and Cost Cutting.
1) Defining Goals. He stated the order of business in what I think is a very sensible and thought-out fashion.
Priority #1: Obsess over bank partner relations. The outcome of cdlx is tied to that of the banks
Priority #2: Monetization. Exploiting ways of making money through business model alterations
Priority #3: Subsidiary synergies. Creating a dependable and well-rounded service ecosystem using the current subsidiaries (Dosh, Bridg & Entertainment)
Priority #4: Operational Excellence. Even though this can be seen as a generic comment, he gave some specific insights into the ad server. The goals are to reduce labor time consumption and improve efficiency through automation.
Priority #5: Profitability. Strong focus on protecting the balance sheet and being independent of debtors.
2) Cost Cutting. In terms of reducing cost, Karim pointed out that they cut the previously announced $15M and they had identified, and were working on, an additional $20M in fat they could potentially cut out.
Karim also pointed out that the platform was increasing the number of offers (600 quarterly rotation) and that they were talking with top 20 US banks and neobanks (fintech) to expand offer reach.
Long Term Prospects
In addition to these two main conclusions, we also had scheduled progress on the ad server. The biggest bomb was that 3 banks were already in the (cloud) ad server, one quarter ahead of schedule. They confirmed that +50% of revenue had transitioned, which means that JPM is on the server. There was a lot of noise about JPM not renewing since they bought out cdlx's only "competitor". I used the " " because Figg was a) having a tone of operational issues (24 months to initiate operations once hired by BofA), b) only using third-party data, c) hired and fired by BofA, d) losing a load of money and e) the owners were diligently trying to sell. True, they operate in a similar space, but cdlx was/is at least 3 years ahead. The use of Figg within JPM has also been confirmed. Instead of ad offers, the data processing capabilities of the firm will be used for SMB performance enhancement. In any case, for cdlx this means that JPM will remain as a client. It's highly unlikely that the bank would spend resources and money on an outsourced service that doesn't yield the expected results.
Three other items were ahead of schedule.
a) 100% MAUs transition to the ad server. Q4 2023 -> Q1 2023
b) (adjusted) EBITDA positive. Q2/Q3 2023 -> Q2 2023
c) FCF positive. Q4 2023 -> Q3 2023
Some additional points include a hostile Bridg earn-out dispute (the acquisition is supposed to be paid in 3 installments March 21, March 22, March 23). A 72% YoY offer activation rate increase which points to more people actually using the system, higher spending per user or both. And a small note on an (unidentified) large restaurant service provider demanding cloud access.
In the medium term, the server transition will enable cdlx to enter into a new monetization phase thanks to product-level offers and the improved UI/UX. Product level offers a) attract more advertisers (particularly retailers), b) provide higher margin offers and c) increase engagement drastically through personalization. We should see this occurring in the next 18 to 24 months.
I have not found any information that disproves my original thesis (and trust me, I've looked). My thesis is "cdlx will be the new minimum standard for all US banks". Today the standard is a 1% cash back, and cdlx provides 5-10% cashback offers.
What are your thoughts? Feel free to question anything in this post, and criticize it as harshly as possible.