Digital Media Solutions, Inc. (DMS) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. Welcome to the Digital Media Solutions, Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Thomas Bock, Executive Vice President of Investor Relations. Please go ahead.
Thomas Bock: Thank you for joining us to discuss DMS’ financial results for the first quarter of 2021. With me on the call are Joe Marinucci, Co-Founder and CEO; and Vasundara Srenivas, CFO. We posted our earnings announcement this morning in a press release and also on our Investor Relations website. By now everyone should have access.
Joe Marinucci: Thank you, Tom and good morning to everyone for joining the call today. We're excited to share the results of another very strong quarter here at DMS. Before we dive in, a quick welcome to Vasundara Srenivas, our new CFO as it's her first earnings call with us. I'm happy to have you here with us today for Vasundara.
Vasundara Srenivas: Thank you, Joe. It's wonderful to be here. Hi, folks. I'm excited to discuss our results with you today.
Joe Marinucci: Great. We continue to be extremely proud of our team and its execution against our strategic priorities resulting in another quarter of strong performance. First quarter highlights, include reported revenue of $96.8 million and adjusted revenue of $99.5 million, adjusted EBITDA of $14.1 million. Our Q1 adjusted revenue growth was an impressive 33.5% year-over-year and we continue to manage the balance sheet for growth and stability, having reduced net leverage to under three times. Before I pass the call to Vasundara, I'll provide some additional color on the quarter. As many of you know, DMS is a leading provider of technology enabled digital performance advertising solutions connecting consumers and advertisers.
Vasundara Srenivas: Thank you, Joe, and a good morning to everyone. It's been such a pleasure getting to know everyone across the DMS team, and I'm excited to join today's calls to present our first quarter results. I'm happy to report that in Q1 2021 on a reported basis, first quarter revenue was $96.8 million, up approximately 33.1% over the same quarter last year. We generated adjusted revenues of $99.5 million, up 33.5% year-over-year from Q1 2020. We continue to see strong revenue growth across our segments. Higher revenues in Q1 2021, compared to Q1 2020 was driven by expanded growth and spend by our current base of advertiser clients, who continue to transition more of their advertising spent to digital channels. Our Q1 adjusted EBITDA was $14.1 million, up 5.4% year-over-year from Q1 2020, driven by revenue growth and efficiency and managing expenses. Breaking down our revenue by segments, Brand-Direct Solutions revenue in the quarter was $56.2 million, up 37.4% year-over-year, Marketplace Solutions, Q1 revenue of $49.3 million, increased 44.1% from Q1 of 2020. Other solutions revenue, which primarily includes Sparkroom SaaS technology fees was $2 million in Q1, up 60.2% year-over-year. In regards to gross margin and gross profit, for the first quarter, reported gross profit was $27.6 million or a 28.5% margin, compared to 27.1% margin in Q4 2020, and a 31%, compared to a year ago. Gross Margin is in line with our typical range of 27% to 30%. The company has experienced rapid revenue expansion and has focused on high growth, highly competitive verticals, with significant digital advertising spend. As they continue to expand, we've had to balance a growing market share versus gross margin, which has resulted in a moderate increase in cost of goods sold. Our margin is also subject to quarterly variation, primarily due to changes in sales mix, as segment of a business carry different margin profiles. All that said, we do believe that over a longer period of time, margins will remain stable as we drive efficiencies and cost of revenue. Our recent acquisitions are also expected to have a positive impact. Breaking down GAAP reported gross margin by segment, Q1 Brand-Direct Solutions gross margin was 26.9%, up significantly from 22.1% in Q4 2020, and up as well from 24.5%, the same quarter last year. The margin was driven by substantial diversification in our distribution channels as we continue to scale growth. Q1 Marketplace Solutions gross margin was 25.7%, down slightly from 26% in Q4 2020, and down from 33% from a year ago. The segment is heavily weighted by our rapid growth in the insurance market, which carries gross margins of approximately 24.3%.
Operator: Thank you. We have our first question from the line of Maria Ripps from Canaccord. Your line is now open.
Maria Ripps: Good morning and thanks for taking my question. Firstly, just wanted to follow-up on gross margin in Brand-Direct solutions, can you please give us more color on sort of what drove upside there? And what are some changes in distribution channels that you mentioned? And I guess how sustainable these gains are? And could you please maybe address the gross margin dynamic in the Marketplace segment, and whether you'll be able to generate leverage in that line over time sort of despite this rapid growth in insurance vertical in the near-term?
Joe Marinucci: Hi, Maria. Good morning. This is Joe speaking. Good to speak to you again. So, with regards to the gross margin, when we last talked, we were coming out of Q4 and we were talking about some of the seasonality issues there. And we thought that we would see an improvement in gross margin as we moved into Q1, which across the entirety of the business, we certainly saw that. We're obviously trying to balance broad based demand across the totality of the business, which bridges across both solutions, that demand is accelerating. We're trying to leverage the tool set, which connects data technology. But most importantly, it goes into the media reach, which has spread across a number of different channels. So, in managing the growth of the business and looking at our ability to leverage first-party data and technology, which we believe gives us a competitive advantage that ultimately gives us leverage on the business, which is what allowed us to drive margin expansion here in Q1. Plus, we were dealing with some unique factors in Q4 that -- the last time we spoke had pushed margin down to the bottom of our range. We have guided the range for margin for the business between 27% and 30%. And as you can see, we're sitting squarely in the middle of that. And we very much feel that there's still an ability for us to get leverage on that as we extract those opportunities from the business. So, we're pretty happy with where margin sits right now. And what drove the margin expansion was the removal of the seasonality factors that we saw in Q4 and our ability to continue to leverage our data and our technology when we're connecting it to media reach. I think there was a second part to that. But I'll let you ask it again, based on how I answered the first part.
Maria Ripps: Yes. I think you answered it. I just wanted to get a little bit more color on the Marketplace segment as well. But -- so, I think you answered that.
Joe Marinucci: Well, in Marketplace it’s too, we have -- as you can see, we were moving from strength-to-strength in insurance, right? So, insurance in the first quarter was over 60% of our revenues. And we saw really demonstrable growth 102% year-over-year. And that's spread across both Marketplace and Brand-Direct. But specifically in the Marketplace side, we have a new Marketplace solution in Protect.com that we're obviously investing in, and when you're investing in that type of O&O strategy behind a new marketplace, like I said like Protect.com, typically, you'll do that at, what's called it, margin rates that are below what we would normally deem acceptable for the business, because we're trying to build the brand. So, there is some of that playing into Q1. But, we're balancing high expectations for growth and profitability. And that type of investment is important for us to continue to drive growth in the business, which is why again, you're seeing that strength in insurance. So some of that is factored into Q1, but longer-term we expect to get leverage back on the marketplace out of business. And again, we're guiding the business to 27% to 30% gross margins. As you can see, we came up nicely from Q4, and we're sitting in the middle of the range. So we're happy with where we are today.
Maria Ripps: Yes, that's very helpful. Thank you, Joe. And maybe a quick follow-up if I could. Just on Crisp acquisition, you highlighted a few areas of sort of cost savings and a number of cross-sell opportunities. Can you maybe just give us a little bit more color on what those are both on the revenue and cost side? And sort of what's the strategy to implement those and when would you expect to realize sort of the full spectrum synergies there?
Joe Marinucci: Maybe I'll walk backwards through that. So we obviously just close the acquisition at the beginning of the second quarter. So we're very much still in the middle of the integration and harmonization process with that business. And when we talk about our proprietary toolset that helps us grow the business in terms of dealing with the broad based advertising demand that we have, we’re consistently leveraging the first party data and the technology to access the extensive media reach. And we very much felt that it is the data and the technology and the media reach that would benefit the Crisp business inside of DMS plus, there were some efficiencies there with regard to processes that we have, and they have that could benefit from the consolidation of those processes. So we look at most acquisitions from the standpoint of acquiring them, and then running an integration process that could be anywhere from six to 18 months, but the vast majority of the synergy should come early in that process, with let’s call it the tail end being for the odds and the ends that aren't as critically important to the investment thesis. So it will be like say, we don't integrate for the sake of integrating, we want to do the right things for the business to allow the business to grow and allow for the right time to pass before those businesses are fully integrated inside of the business. But we very much intend to have that business fully integrated at the end of, let's call it, 18 months with the vast majority of those synergies coming inside of the first six months.
Maria Ripps: Got it. That's very helpful. Thank you, Joe.
Joe Marinucci: You're welcome, Maria. Have a great morning.
Operator: Thank you. Our next question is from the line of Marvin Fong from BTIG. Your line is now open.
Marvin Fong: Thanks for taking my questions. Good morning. Good morning, everyone, and welcome aboard Vasundara. Couple of questions for me. I just want to drill down a little more to follow-up on Maria’s questions on margins. You guys actually highlighted the insurance margins being about 24% this quarter. I think you actually mentioned it was close to 29% in the fourth quarter. So just within that vertical, could you just give us some insight, is there seasonality there, or is it just general margin compression we're seeing, any color there would be great? Thanks.
Joe Marinucci: Hey, Marvin, good morning. This is Joe speaking. So we – like I said, when Maria asked the question, we're balancing high expectations for growth along with maintaining healthy margins while looking to expand impression share. And specifically with regard to margins in Q1 on the marketplace side, one of the – we did have some -- aside from the Protect.com notes that I gave you already where we are investing behind that marketplace. And we are doing that at, I would say, ranges below where we want to see the business operating. So if we want to see the business operate between 27% and 30% investments in Protect, we might be tolerant of margins that are less than that, which we are currently, because that's obviously a strong brand. And we expect to see brand equity build. And with brand equity comes, brand drag. And you don't see that, typically, in the first -- let's call it, 90 days for media strategy, which we were very much in Q1. That site launched in early December, we were very much inside of that first 90 days. So there was very little brand equity and drag coming back on that media spend. So margins there would be compressed. In addition, specifically in insurance, which was 60% of our revenues inside of Q1, we did have some storm related issues, where that had a negative impact on margin and EBITDA. And that was an anomaly one-time factor. And we still managed to grow the business, demonstrably in the quarter, regardless of storm related interruption. So with the combined investments going into Protect, and let's call it, technical storm outage issues that we're very much fluid, we thought there would be a day, then we thought there would be two days. And they turned out to be a week. That is what negatively impacted margins. But again, as a reminder, we are -- for the totality of the business, we've got it to 27% to 30%. As you can see, the totality of the business for Q1 sits right in the middle of that, which was up nicely from Q4.
Marvin Fong: Okay, great. Yeah, it does sound like a lot of it is your investment in Protect. That makes sense. And then, my follow-up just, we're seeing a big privacy change on the iOS platform. We've had others in the past like Google. Can you just remind us, how that helps or hurts your business? How’d you leverage out your own data assets? And what clients are looking for? Is this particular move by iOS doing -- having any impact on your business? Thanks.
Joe Marinucci: Sure. So, yes, a lot of talk about iOS 14 and the continued move away from cookies is something that is talked about quite a bit. So just, as a reminder, our toolset, which I've referenced consists of our first party data asset that represents reach to 70% of American adults. And it's continually updated. Proprietary technology, built based on our specific advertising campaign management needs and requirements. And then, it is that first-party data asset and proprietary technology that allows us to connect in to the expansive media reach that we have. So, while the impacts of the various privacy updates and settings, and related targeting policy changes have yet to be seen. We are confident that, our toolset has prepared us for anything that we’ll face ahead. And we feel that, it competitively differentiates us as such.
Marvin Fong: That's great. Thanks, Joe. I'll hop back in the queue. Thanks.
Joe Marinucci: All right. Good speaking to you, Marvin. Have a great morning.
Operator: Thank you. Our next question is from the line of Nick Jones from Citi. Your line is open?
Nick Jones: Thanks for taking the questions. I guess there's one on the capital allocation strategy. From here, you made a couple acquisitions this year, so far. Can you just give an update on what your pipeline looks like, from here for the rest of the year? And are multiples kind of too high, too low in this market. And then, maybe other opportunities, you see kind of outside of the insurance vertical? Thanks.
Joe Marinucci: Hey, Nick, good morning. This is Joe speaking. Good to speak to you again. So with regard to the acquisition strategy, we've completed two this year, one in February, and then one just a month ago. So we're really excited about moving forward with the integration of those assets. Obviously, the thesis, we're very excited about the thesis and the most recent acquisition, Crisp being an insurance as noted, we're playing this from strength to strength there with pretty substantial growth in Q1, and we expect to see that rolling into Q2 and Q1 number was organic. So we expect to see some acceleration here with the combination of Crisp business in our existing substantial insurance business already. So again, it gets us excited. We've been very disciplined, as you know, and we've talked a little bit about this in the past, and we continue to be very disciplined. And we've got a connected corporate development team that's looped in with our broader executive team who -- there's no shortage of opportunities out there, because it is a relatively fragmented space. So we very much feel that we have our pulse on opportunities that are out there. But at the same time, we've just completed two acquisitions. And we're very focused on the integration of those acquisitions. And being early in the game, we feel that we have a lot of leverage that we can extract, as we further integrate those acquisitions with Maria's question, trying to get that leverage here, the majority of it in the first six months is a big priority for us right now. So, I guess generally, like, there are a lot of opportunities out there. We have a great team that's connected to those opportunities, and we're going to continue to look at them. We're very focused on the acquisitions that we've completed. We feel the business is modestly levered right now. We feel we're in a great position with cash and liquidity going forward. So continuing to operate the business, stay focused on core mission here while keeping abreast of opportunities out there, which there's plenty of them as mentioned.
Nick Jones: Great. Thank you.
Operator: Thank you. We have another question from the line of Jason Kreyer from Craig-Hallum. Your lines now open.
Jason Kreyer: Great, thanks. Joe. Just want to start on insurance where you've called out the good results that you're seeing. Can you break down the insurance performance by different category, perhaps what's driving the acceleration across insurance? And then on Protect, I know, that's another big part of the insurance vertical today, but where do you think that ultimately goes over time?
Joe Marinucci: Hey, Jason, good morning. So the growth and insurance, if you look at what's going on, obviously, I've mentioned this a couple of times -- we -- insurance is now at least in Q1, it was 60% of our revenues for the quarter, and it grew at 102% year-over-year. So we're really excited about that. The vast majority of our business, 60% is insurance, and it's growing over 100% year-over-year. And again, that's an organic number. And it's really -- I guess, specifically to your question, it's broad-based demand. And how I can reference that as if you look at how our total quote requests grew, which was across both sides of the business, brand direct and marketplace across all lines, which would consist of auto being the largest, followed by health then life then home. We saw demonstrable growth across both marketplace solutions and brand direct solutions in the form of quote requests across the business, 111%. If you dive into the marketplace side of the business, specifically in insurance, the majority of that revenue still sits in auto, but it's now with the acquisition of Crisp diversifying into more into health, and then you have life and home behind that, but even stronger growth on the quote request side. On the marketplace side of the business, you had 229% growth through the marketplace side of the business in quote requests. So again, total quote requests across the totality of business of 111%, and then even stronger quote request growth on the marketplace side at 229%. So really broad-based demand in the insurance business, as demonstrated in the very substantial growth of quote requests across both segments of the business.
Jason Kreyer: Perfect. Thank you. I wanted to go back to Marvin’s question on privacy. The changes that are coming to mobile IDs and cookies and things like that, how much does that come up in customer conversations today? And would you define that as just topical conversations with your customers, or are these being actionable? And then are you seeing that actually drive more business to DMS today?
Joe Marinucci: The conversations Jason are more topical in that, the advertising clients want to get their arms around disruption in the ecosystem, and they're speaking to their strategic vendors, like DMS trying to figure out, if they should expect any disruption. And from our standpoint, in answering this, look, we I mean, we take privacy very seriously. So, if you talk about general privacy, our business already meets the requirements of CCPA. So it's very stringent privacy law. And -- our legal and compliance teams work very hard to stay on the front side of this, right? So generally, we feel that we're equipped to handle any challenges, if additional state or federal privacy laws are passed. But then with regards to, iOS 14 and cookies, again, we're dealing with, I guess, general concern. We're speaking to the customers, but from our standpoint, we are able to alleviate those concerns, at least with regard to DMS because we feel that first-party data proprietary technology, connecting us to our expansive media reach differentiates us. And I do believe longer term it competitively differentiates us as we go further down this path where more changes are very likely coming.
Jason Kreyer: Great. Thank you.
Joe Marinucci: Of course.
Operator: Thank you. We don't have any questions at this time. Presenters, please continue.
Joe Marinucci: Thank you very much for your time today. We enjoyed talking to you. We look forward to keeping in touch in the coming weeks.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.
