📝 Cardlytics $CDLX (#8): Q4 2023 Earnings Call and Q1 Update

Cardlytics earnings call review and analysis

Welcome back, my fellow Cardlytics enjoyers! I wanted to provide a quick recap of events that transpired before, during, and following the last earnings call, including the signing of a new partner, the transition to the AWS server, changes in the capital structure, and a few other points. The following is a high-level commentary on my thoughts on Cardlytics. Please do not take any of it as investment advice and note that I hold shares in the company. Please enjoy.

Before I start, I wanted to let you know that I have started a small microcap advisory business. I may start to publish thoughts on the companies I hold a position in. For the moment, I have 6 companies that fit my investment style and that match the premise of my investing philosophy: 10x in 10 years.

So, Cardlytics… What a year… 2023 will surely be remembered as the year when the turns were tabled. Karim refocused the company on serving larger clients with a much leaner structure. And the result was spectacular. The company went from a loss-making enterprise to a Free Cash Flow (FCF) breakeven/positive endeavor. In terms of EBIT, cdlx went from -$127M in 2022 to -$64M in 2023. In terms of FCF, the company went from -$55M in 2022 to -$1M in 2023. For more information on what went down during the year, please check my previous post.

In my opinion, the two things stand out the most: 1) the hiring of what a friend of mine calls “creative liability management people” in the form of Alexis DeSieno who has already proven her incremental impact on pricing optimization, capital structure management, and reporting transparency. The other promising item also comes in the form of a new hire, Ian Carrington. To me, Ian is much more than just an expansionary effort in the UK, but I feel like there is more than meets the eye. More on this in future posts.

On to actual updates. Here is a list of updates that I expected to hear about during the call (numberless and crossed out are items that were not discussed):

1. Bank partner updates: I had heard some rumors about Citi and Capital One joining the network. Additionally, it seemed kind of sus that Cardlytics would push the earnings call to mid-March when they always close that out by the start of the month

   Changes in terms with bank partners

2. Progress on the transition to the cloud as promised aka Q2 of 2024 and adoption of the Ad Decisioning Engine (ADE)

   New hires

   Specific changes promoted by Alexis - pricing, automation and/or profitability

3. Debt/financing updates particularly related to Sept 2025 convertibles

4. Progress on the new initiatives

   • Engagement (including campaign duration and feedback loops)

   • Insights (and dashboard)

   • Bridg + Rippl

   • non-FI partners

   Possible Non-UK/US initiatives

   Comments about new and returning clients, particularly Starbucks

5. Guidance commentary

(1) Bank partners

Cardlytics pushed the quarterly call for a good reason. During the call, the company released a statement (8-K) announcing the signing of American Express (AMEX) as a new bank partner.

The announcement specifies American Express Travel Related Services, which seems to be the central distribution subsidiary for AMEX offers. (Data from 2021)

As posted in a previous post, AMEX is the second-largest bank in terms of purchase volume even though its number of cardholders is not as elevated.

Cardlytics could in theory see a massive boost in revenues given the size of the operations of AMEX. My estimation is about 75-85% of JPM in terms of revenue, and a very large increase in ARPU and possibly engagement given how AMEX users both spend more on habit and are already used to redeeming offers. In actual numbers, I would expect $105M to $120M in additional revenue once the users are integrated. And, on that front, I would be surprised if the agreement did not include the AWS server. This would mean total integration within the year 2024.

(2) Cloud and Ad Decisioning Engine (ADE) adoption

The ADE is software that suggests advertisers ways to optimize their spending. My understanding is that it adapts budgets, using the available offer construct option, to optimize targeting per the advertisers’ needs. Most times this is increasing Return On Ad Spend (ROAS), however after multiple conversations with clients and internal sources, the engine seems to be geared towards other metrics. I do not have final confirmation on this point, but I speculate it could solve for geo-lift offers whereby one could choose to optimize geographically.

During the call, Karim confirmed that 80% of network traffic was on the AWS server. I’m not sure whether this means 80% of MAUs are on the server, or whether 80% of activations aka revenue came from the server. It seems to be the former as he pointed out in a follow-up comment, that 80% of the network was using ADE, with 40% using v4 (their latest version). In my view, only users on the server can profit from the ADE, therefore 80% of MAUs must have transitioned. This matches well with our previous expectation of a full transition by Q2 2024.

Fyi, according to Karim, these new optimizations (through the ADE) had led to a 23% increase in redemptions (vs. a 9% increase in the whole network, aka non-ADE users). In other words, we should see a bump in revenues once we fully transition and as the ADE improves.

(3) Capital structure

This point was not addressed specifically during the call, however, cdlx put out an 8K filing the day after announcing the following development:

The company hired Evercore for what I expected to be financing optionality. The financing was sold to shareholders as something resembling a reverse stock repurchase program, whereby the company can periodically sell shares to the market worth up to $50M.

In reality, however, the company filled the $50M within the day with the sale of 3.9M shares at an average price of $12.80. To me the optionality of having an additional financing route seemed prudent. However, I was expecting something more periodic given how a) the new bank partner signing and b) the improvements in profitability should lift the price of the stock within the coming months. I may be wrong on this last front, only time will tell. Overall great in terms of creativity, but poor in terms of execution.

As a recount exercise here is the math for fully diluted shares outstanding as of March 18th, 2024:

• 39,728,342 shares outstanding at the end of December 31st, 2023

• 3,907,600 shares sold with the new offering on March 18th, 2024

• 5,766,880 shares in incentives for employees

• 3,600,000 shares as part of the Bridg earn-out settlement

• 83,569 shares in options (70,998 out-of-the-money)

In other words, on a fully diluted basis the company today has 53,015,393 shares outstanding. At a market price of $14.10 per share, that would give cdlx a valuation of $748M today. This figure does not take into account the following items which are unlikely to be redeemed or lack a redemption period:

• 2,701,443 shares if the convertibles are executed (>$80 per share)

• 1,859,106 shares reserved for future incentives

• 70,998 out-of-the-money options

During the call, Alexis mentioned that they renegotiated terms with their credit line facilitator increasing their limit to 75% of (eligible) accounts receivable (vs. 50% previously). This increases liquidity from $60M to about $90M, giving cdlx additional breathing room. Given this additional cash availability, I restate that the share sale might not have been necessary.

Cardlytics now has $91.4M in cash at year-end, $50M in cash from the new sale, and $90M from the new credit line. Summed up this is about $230M. It might or might not be a coincidence, but the number is exactly the principal amount of their debt due in September 2025.

Assuming positive FCF, cdlx could repay the entire debt. Refinancing is also an option. Assuming the same level of debt, new debt at current rates (FFR+6%) would lead to an increase in interest payments. Payments could go from $2M in yearly interest today to about $25M per year, which would require additional FCF generation. With that in mind, it’s useful to note Alexis has proven very creative, so I would not be surprised if things play out in favor of cdlx.

Note: From the total cash amount we need to subtract $20M from the settlement payment in Jan 2024, and $5M from the two further payments that will occur before Sept 2025.

(4) New initiatives

At this point Karim shifted the broad scope of the 3 pillars he stated in Q3, and made them more concrete points. In Q3 he mentioned:

• Engagement drivers and key insights

• Growth on the Bridg and Rippl networks

• Non-Financial Insitutition (FI) partner projects

However, during the Q4 call, these objectives became narrowly focused and concrete. On this new list, he gave details on how to execute each pillar, focusing on content and insights as the overall priority for the company:

1. Content and Insight

• Content quality: provide best-in-class information to large brands with broad information with scope across channels, cards, and geographies

• Automation: Cardlytics is working on deploying a dashboard by Q4 2024 that may lead to self-service for advertisers and will show them a snapshot of their performance vs industry benchmarks. It will give them insights into competitor activity, revenue generation, transactions, and customer growth across different brands

• Customer data: data on brand affinity, new customers, and churn benchmarks.

2. Campaign optimization

• Customizable tools: offers are tailor-made to match the customer’s needs

• e.g. airline client was experiencing soft demand during the low season. With the activation of a higher cash-back reward through Cardlytics, the client smoothened out ticket sales seasonality, where 45% of redemptions were during this period of low demand

3. Offer discovery

• Placement and new entry points: cdlx has been testing for placement of core widgets, call-out buttons, new entry points, and alerts within the bank partners’ platforms and apps

• e.g. 5x higher activation rate when one of the bank partners started placing offers on the line item transaction in the customer’s bank statements

4. Bank partner differentiation

• Bank differentiation: each bank will have unique aspects to their platform with special offers, constructs, and key insights

• Differentiated offers: featured offers, increased creations, and proximity offers with the added benefit of overall enrichment and customization to the offer experience

• e.g. the Big Game offers were launched on BofA during the Super Bowl targeting cash-back offers linked to the event

(5) Guidance

I’m generally not a big fan of guidance as it sets expectations for the short term rather than the long term. This case is not dissimilar, but the overall commentary did focus on a 5-year plan designed by the team (at least by Karim and Alexis).

On guidance, cdlx set expectation for 12% to 16% growth in revenues and adjusted EBITDA breakeven. Both results should be okay, with the breakeven part possibly resulting in the first Q1 FCF breakeven period in the company’s history. As a reminder, Q1 is cyclically the worst quarter for advertising in general and for Cardlytics in particular. With the addition of AMEX, advertisers may be even more interested in using this channel. So far we are seeing a record number of advertisers using the platform (about 140-150 right now). This includes returning advertisers like Starbucks (previously 10% of revenues) which seem to be interested in the new reach and offer types that the platform is developing.

Additional information

In addition to the comments during the quarterly call, there was a 13D related to a major “insider” shareholder increasing his position in the company.

Cliff Sosin from CAS Investments increased his position by 11% in the company. He previously owned 15%, but has been diluted. I am choosing to read this move as a sign of confidence and support for the project that Cardlytics is building. As a reminder, Cliff was the promoter of Alex Mishurov to the board of cdlx.

I hope you find this commentary useful. Feel free to reach out to me at any point, and leave any questions or thoughts in the comment section ;D

As a fun note here’s a chart I thought was interesting from the Fundsmith 2024 Annual meeting describing value creation on an industry level. ROCE is the Return on Capital Employed and WACC is the Weighted Average Cost of Capital. If you subtract WACC from ROCE you should get the overall value addition of the companies within a sector to society.