📝 Cardlytics $CDLX (#4) Update: Q4 2022
My dear fellow investors, here is a quick summary of the events that have unfolded in the last few months.
Results & Guidance
The results for the quarter were in line with expectations (which is poor) and the guidance for the next quarter is quite dismal. As they pointed out, it’s true that AdTech is facing strong headwinds. The big players (Google and FB) are having their budgets cut because of recessionary fears. Feel free to check out their P&L and balance sheet. The two most noteworthy items were a rev growth of 11% (when it should be 25-30%) and impairments in goodwill and intangibles that surpassed their market cap. I don’t think I can add value in this category other than to point out that execution is everything.
Profitability
One of the critical barriers to overcome in 2023 is profitability. Sadly there was no real mention of the subject during the earnings call (which is concerning). The goal of being EBITDA positive by Q2 2023 seems to be further away now.
On the bright side Karim, cdlx’s CEO, restated their intention to be CF positive by Q3 2023 and mentioned the full migration of all customers throughout the year without specifying when (vs the full migration announced in the previous quarter by Q1 2023).
Liquidity Operations
I’ll start off with what cdlx has. As of Dec 31, 2022, cdlx has $120M+ in cash and an unused $60+$10M credit facility.
My calculations for operating loss came to about $58M from Q1 to Q3 2022, meaning -$20m per quarter. However, the company has gone through some cost restructuring and should see benefits throughout 2023. Realistically the adjusted EBITDA loss should be between $12-$15M minus a max CAPEX of $3M. Taking the base scenario to -$17m for operations for the first quarter of 2023 and a similar number for Q2.
Liquidity Bridg Dispute
I read carefully through the merger agreement in case I was missing something. To go straight to the point, there is a clause dictating a maximum dilution of 19.99%, several clauses explaining the calculations for the delayed payments, and a clause stating the minimum amounts that must be paid in cash. Here is a numerical summary of it all.
First payout:
Calculated Abril 2022. Varies with share price exclusively.
Payment of $126M.
Dilution of 6% at $40 per share to pay $83M in stock and $43M in cash.
Second payout:
Calculated Abril 2023. Varies with ARR of Bridg year 1 customer revenues.
Payment of $68M (TBC).
Dilution of 14% at $5 per share to pay $23M in stock and $45M in cash.
Dispute and summary:
45m+43m=$88m in cash
Dilution of 19.99%
If the dispute is lost then there is a bankruptcy scenario where the figure is just too large and cdlx has to liquidate. However, there are three elements that would prevent this if the dispute is lost:
Cdlx has almost no assets. In case of declaring bankruptcy, former Bridg owners would be left with nothing.
Cdlx’s customers are big banks. The reality is this makes banks a quick buck, $150M+ a year with no expense attached to it. That would be about $70M for JPM alone. This is also heavily linked to cloud migration, which is a big bet on the part of banks that makes cdlx very sticky.
Cdlx’s ultimate customers are big bank users. User loyalty is top of mind for banks, and these have become accustomed to certain standards. As cdlx offers become more popular, the system becomes more and more sticky,
These points make it so that liquidation is less of an issue since big banks and former Bridg owners would lose a lot in this scenario. It would be more likely that either party offers a long-term loan to pay for the conflict resolution. This loan can come as a plain loan, in the form of rev share adjustments, or in the form of a liability integrated into the company.
As a last note on the subject, cdlx published a PROSASR statement alongside its Q4 results. This statement was very concerning at first and less so after speaking with management. This document allows the company to issue up to $100M in securities. These have not been specified, meaning the securities could be stocks, bonds, or anything in between. The doc is most likely connected to the Bridg stock payments.
Management announced that they would notify shareholders of the state of the dispute by the end of April. If anything radical happens, expect a post about it ;D
Solutions and expectations
Cdlx still has an amazing product and operates like the monopoly it is. Customer adoption seems to have them stuck in place. The chicken and egg problems of users and ad budgets may lead nowhere for some time. To fix this, Karim mentioned evolving offer types (describing 3 in detail) and most importantly, reminded everyone where they’re putting their chips: migration and Bridg.
The company is betting big on Bridg. The subsidiary had a 155% YoY rev growth from $9M to $23M with a 45% EBITDA margin. This number is projected to be $40M by the end of 2023 which means $19M in EBITDA. Bridg uses PoS information to promote and personalize offers. Since cdlx collects this information, there is no rev share with banks, making it a lot more profitable. Additionally, PoS and bank information can be combined to improve targetability. To ensure this growth continues, management has appointed Amit Gupta as the new COO of cdlx and head of Bridg. Management seems to have a well-defined poaching list, but is hesitant to hire because of cash concerns and stock-based payment issues (aka dilution).