Jordyn Kopin - Investor Relations Derek Dubner - Chief Executive Officer Dan MacLachlan - Chief Financial Officer..

Jim McIlree - Chardan Capital Jim Goss - Barrington Research William Gibson - Roth Capital Partners Operator Good day, ladies and gentlemen, and welcome to Cogint’s Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jordyn Kopin, Investor Relations. Please go ahead..

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2017 earnings results. With me today are Derek Dubner, our Chief Executive Officer; and Dan MacLachlan, our Chief Financial Officer. Our call today will begin with comments from Derek Dubner and Dan MacLachlan, followed by a question-and-answer session.

I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website www.cogint.com.

Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Form Act of 1995.

Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. The company undertakes no obligation to update information provided on this call.

For discussion of risks and uncertainties associated with Cogint's business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the most recent annual report on Form 10-K and the subsequent 10-Q. During the call, we may also present certain non-GAAP financial information relating to adjusted EBITDA.

Management evaluates the financial performance of our business on a variety of key indicators, including adjusted EBITDA. The definition of adjusted EBITDA and the reconciliations to most directly comparable GAAP financial measure is provided in our earnings press release issued earlier today.

With that, I am pleased to introduce Cogint's Chief Executive Officer, Derek Dubner..

Thank you, and good afternoon to all who are joining us today to discuss our second quarter results. Cogint is pleased to report a very strong second quarter with revenues of $53 million, a 29% increase over the second quarter 2016. Gross profit margin increased 300 basis points to 31%, and adjusted EBITDA increased 54% to $4.8 million.

We experienced strong broad-base customer demand from existing and new products across both our risk management and marketing services business with strengthening momentum transitioning into Q3. Our success this quarter is despite the modest seasonality that we would normally expect to see in the marketing services business.

Looking ahead to the second half of 2017 and beyond, we remain intently focus on the priorities that I have discussed in the past. First we are uniquely positioned to leverage our competitive advantages to drive growth in both the short and long term.

We have developed unparallel intelligent technology platforms both in power and scale, in core and our agile audience engine. Comprehensive data assets covering over 95% of the U.S. adult population, including our unique first-party marketing data asset of over 130 million U.S.

consumers in our custom audience identity graph, delivers holistic and dynamically generated views of consumers. Through these platforms and our capabilities, we grow and enhance the data base through creation of proprietary data, both through analytics and real time consumer interaction.

Second, our continued innovation introducing new products and solutions to market faster than others in our space and insuring that these products and solutions solve for the needs of our customers; third, leveraging these competitive advantages and capabilities to scale across existing and new markets.

In the risk management side of the business, we're executing on our robust product roadmap. IDI core continue to evolve with new data sets used during the quarter and new functionality. Recent implementations have enhanced our matching logic and are demonstrating increased hit rates for customers. Feedback is very positive.

We're making great strides expanding within and across industries with IDI core and related solutions. Our previously cited transition from a development-driven company to a sales driven company is progressing nicely. Our efforts are being rewarded.

We've entered into several strategic relationships with leading mobile identity authentication and background screening solutions providers. These relationships present great opportunity as these providers serve large industries with banking, financial services, insurance, healthcare and technology.

As these companies delivered their innovative solutions to their markets, we are powering the back end of these solutions. It is a reaffirmation of our fast forward that these companies have selected us amongst larger more well established data providers to power their solutions.

We attribute these wins to our intelligent designs, proprietary algorithms, unique data assets and speed to satisfy customer demand that these innovators are selecting us from head-to-head comparisons with others. While these relationships are early staged, we expect that they will provide meaningful revenue.

On the marketing side of the business, we aim to disintermediate or partner with large media and CRM agencies as well as DSPs, SSPs and exchanges in order to provide more cost-effective and scalable customer acquisition strategies for brands across verticals.

As a first-party data originator with our own content development and audience acquisition capabilities, we are uniquely situated to tailor our custom marketing programs and one-to-one communication strategies to our custom audience identity graph. We are focused on driving more conversions for our customers through both digital and offline channels.

We believe that the worlds of data and creative must work harmoniously to create more relevance, informative and engaging experiences for consumers. Three primary initiatives are in place to ensure the continued growth of our marketing business, all of which center around extracting greater value out of our unique and proprietary data assets.

First, we are increasing demand for our custom data products. These products generate our most profitable dollars providing margin expansion on needle to no additional traffic acquisition cost, or TAC.

As marketers become more tune to the value of highly targeted custom audience data and begin to extract greater value through their CRM initiatives, we continue to believe that our customers will have an increased appetite for this line of products, of which we are a leader in the U.S. market. Our data revenue is highly diversified across verticals.

Second, we are developing new performance marketing products in order to drive increased conversions for brands across all addressable channels. The nature of our first party data origination, which includes demographic and custom attribute data, provides us the ability to access our audience through much of their daily media consumption.

Whether I would be within Facebook’s news feed, a YouTube tutorial, a mobile gaming app or while listening to a Pandora or Spotify station. All of these experiences enabled the targeting of custom audiences using email address as oppose to cookies, which in addition to mobile phone number is our primary feed within our custom audience identity graph.

This gives us a distinct pricing advantage in our audience acquisition efforts by eliminating third-party ad tech platforms.

Additionally, we have the ability to communicate with our audience on an even more personalized level through addressable channels such as email, push notifications, SMS, contact centers and platforms like Facebook Messenger and Google.

Nearly 90% of our audience data is addressable to us in at least one marketing channel and well over 50% in more than three. In the marketing services business as well, we're developing strategic partnerships that foster the growth of our business.

By combining our first-party data asset with businesses already established at the C-suite of fortune 500 companies and technology businesses with embedded technology in desire media channels, we believe we can expand our market share of the multibillion dollar U.S. digital advertising space.

While direct customer relationships remain our primary focus behind the quality of our products and long-term scalability of our business, strategic partnerships with service and technology providers has always been a part of our growth strategy and we will use our increasingly distinguish data asset to create those opportunities.

As we have discussed in the past, cross-selling opportunities are available to us to capture a greater share of customer spend by leveraging the respective competitive advantages of each of our businesses.

We've established selective integrations between our risk management and marketing services businesses, effectively packaging our services to meet the desperate customer needs. Today, we're supporting marketing customers in not only customer acquisition but also on the backend in their age verification and identity authentication efforts.

As our marketing business is performance based, the differentiated ability to not only acquire prospects at massive scale but also to perform real time wedding of these prospects present a unique value-added solution, which efficiently increases ROI for our customers.

By way of example, today we're generating customer for our leading tobacco company while providing backend age verification services. We increase the value proposition for his industry leader at no incremental cost to the company. This exemplifies the synergistic effects we create across our businesses and the leveragability of our business model.

Now turning to a few recent events. We're pleased to report that James Reilly returned to the company as President as of July 1. For those unaware, James has a long history in the data and analytics industry, including his work with this management team, building a prior company which we sold to TransUnion.

James was responsible for building the revenue from startup to sale. As a result of a non-compete agreement entered into by James and the company that was acquired by TransUnion, James seek to performing services for us for the non-compete period. We're happy to report that this dispute is now resolved and James has rejoined the team.

James is a thought leader in our industry and he brings tremendous value to the team. We're excited to have him back in the role and we are already experiencing the benefits derived from his presence and efforts. Next I would like to turn to our settlements of multiple litigation matters with competitor, TransUnion.

We are happy to conclude these matters and are very pleased with the settlement. Until recently, we have been devoting hundreds of thousands of dollars per month to legal fees to prosecute and defend these complex matters, and this litigation could have carried on for years to come.

These matters were disrupted to the business not only financially but due to the requisite expenditure of significant time and focus by management.

While the terms of the settlement agreement are confidential, we were happy to report that the parties had come to an agreement to resolve all disputes between them and to focus on their respective businesses. The settlement requires company subsidiary IDI holdings LLC to pay to TransUnion $7 million over the course of a one year period.

As a result of the settlement, we have taken a onetime charge, which negatively impacted our net income. This settlement eliminated all material litigation of the company, removed a significant impediment to our continued expansion and immediately freed up resources to devote, to focus investment and development efforts.

We are very pleased with this outcome. Our information services segment revenue increased 39% to $18.6 million. Our performance marketing segment revenue increased 24% to $34.4 million. Within our information services segment, financial revenue increased 78% to $3 million. Emerging revenue increased 267% to $2.2 million.

Digital revenue increased 63% to $1.3 million. Within our performance marketing segment, consumer revenue increased 93% to $8.6 million, lifestyle revenue increased 45% to $7.6 million and financial revenue increased 7% to $5 million.

Finally, given our innovation-driven product roadmap and he increasing momentum we experienced throughout this quarter, we are very optimistic about the second half of 2017, a characteristically strong period for our company. Now I'll turn it over to Dan to discuss the financials..

Thank you, Derek, and good afternoon. I'm extremely pleased with our performance in the first half of 2017. We saw strong demand across both our segments as we continue to execute on all fronts, with growth initiatives propelling into the second half of 2017.

Our information services segment continues to expand our consolidated margin and releverage the scalability of the fixed cost model, thriving increased profitability. Our performance marketing segment continues to drive consistent growth across multiple verticals and channels. This positions us well for rapid growth in the second half of 2017.

Moving on to our second quarter results. Revenues were $53 million, a 29% increase over second quarter of 2016, driven by strong growth across both our segments. Adjusted EBITDA was $4.8 million, a 54% increase over 2016. Adjusted EBITDA margin expanded 150 basis points to 9% as compare to second quarter of 2016.

I do want to take a few minutes to discuss the litigation settlement and the impact it had on our second quarter results. Although the settlement was entered into in July, we accrued the full $7 million settlement in our SG&A expense as of June 30, 2017. This means the full impact of the $7 million is included in our second quarter 2017 results.

In addition, we spent approximately $1.3 million in related legal fees during the second quarter leading up to the settlement. As Derik mentioned earlier in the call, the settlement allows us to focus on the business and removes ongoing expense related to these matters. Continuing to the details of our PNL.

As mentioned, revenues were $53 million for the second quarter. Our information services revenue increased 39% to $18.6 million, led to strong growth from our financial, digital and emerging verticals. Our performance marketing revenue increased 24% to $34.4 million, driven by our strategic growth in our consumer and life style verticals.

Cost of revenues were $36.6 million compared to $29.6 million for the second quarter 2016. A result of increased data cost and tax associated with the increase in revenue, partially offset by increase scale of our information services segment, which produces higher gross margins.

Gross margin was 31% for the second quarter 2017, a 300 basis point increase over second quarter 2016.

SG&A was $22.6 million, excluding the $8.3 million related to the litigation matters I discussed earlier, a 38% increase over second quarter 2016, driven primarily by continued investment in the expansion of our sales, operations, infrastructure and technology teams, partially offset by lower professional fees.

The $22.6 million in SG&A for the second quarter consisted primarily of $9.3 million of non-cash share based compensation, $6.3 million in employees’ salaries and benefits, $1.1 million in IT-related cost and $0.8 million in accounting, legal and other professional fees.

Depreciation and amortization was $3.5 million in the second quarter 2017, a 15% increase over second quarter 2016. The increase was primarily the result of the amortization of internally developed internal use software.

Excluding the litigation-related expenses, loss before income taxes was $12.1 million for the quarter, largely a result of the non-cash based payments of 9.3 million. Loss before income taxes for the second quarter 2016 was $10.7 million, largely a result of non-cash share based payments of $7.2 billion.

We continue to recognize a full valuation allowance on our deferred tax asset, and as a result did not book any tax benefit in the period. As discussed on our last call, we expect to be in a full allowance position for the remainder of the year and do not expect to book a tax benefit in 2017.

Net loss inclusive of the onetime settlement and nonrecurring expenses totaling $10 million was $24.4 million. We reported a loss of $0.37 per share for the second quarter, based on a weighted average share count of $54.8 million shares. Moving on to the balance sheet.

Cash and cash equivalents were $19.2 million at June 30, 2017, compared to $10.1 million at December 31, 2016.

Total debt, including the current portion of long-term debt which was used to finance a portion of the Fluent acquisition, was $62.9 million at June 30, 2017, an increase of $12.9 million from December 31, 2016, a result of an additional incremental term loan taken in the first quarter of 2017.

Current assets were $54.6 million at June 30, 2017, compared to $43.1 million at December 31, 2016. Current liabilities exclusive of the current portion of long-term debt were $31 including $6.5 million in connection with the litigation settlement at June 30, 2017, compared to $22 million at December 31, 2016. Moving on to the statement of cash flows.

For the six months ended June 30, 2017, cash provided by operating activities was $2.7 million compared to $1.1 million for the same period 2016.

The $2.7 million provided by operating activities was primarily the result of operating income of $3.5 million, after adjustments for non-cash items totaling $29.7 million and the unpaid accrual of $7 million in connection with the litigation settlement as of June 30, 2017.

Cash used in investing activities was $4.3 million for the six months ended June 30, 2017, mainly the result of $3.8 million used for software developed for internal use.

Cash provided by financing activities was $10.7 million for the six months ended June 30, 2017, a result of $14 million in net proceeds from the incremental term loan taken in the first quarter 2017, partially offset by the repayment of $2.6 million in long-term debt.

For the trailing 12 months ending June 30, 2017, our leverage ratio was 2.3 times net debt to adjusted EBITDA. I will now turn it over to Derek to conclude our prepared remarks..

Thank you, Dan. In closing, we posted a very strong second quarter. We are still in the early innings of our development as a company, and I'm very excited about where we stand today, but I'm even more excited about where we are going tomorrow. Our innovative platforms continue to improve. Our product roadmap is strong and enduring.

Our data assets are expanding and evolving. Our infrastructure is fortified and opportunities are abound. We are leveraging our assets and capabilities to propel our aggressive expansion within our markets. And most importantly, we remain focused on our customers. Given all this, we are very excited about the remainder of 2017 and beyond.

Based on our performance year-to-date and underlying metrics, we are reaffirming our previously issued revenue outlook for 2017 in the range of $233 million to $239 million. Our operator will now open the line for Q&A..

[Operator Instructions] The first question will come from Jim McIlree of Chardan Capital. Please go ahead. .

So last year, your Q3 number versus Q2, you had a big jump primarily in the performance marketing, is that a reasonable, seasonable kind of increase to think about for this year as well?.

Jim, this is Dan, and thank you for the question. So what we're seeing in Q2, we normally have questions about seasonality and I'm waiting for you to answer that still but – or ask that still. But normally in Q2 and Q3, we see a bit of seasonality pressure in the marketing side of the business.

However, with the growth initiatives we started in Q4 of this past year following through Q1 into the second quarter, we pretty much moved pass any of that seasonality pressure and was able, as you can see going from Q1 to Q2 at the top line and continued at the bottom line, increase both that revenue and profitability.

What we're seeing in the first month of Q3 just continued growth in acceleration because of those initiatives and we expect the third quarter to continue on the path of growth, and if you will but any seasonality pressure that we see historically. .

Okay. But to hit that let's call it $235 million, you need to do like $65-ish million per quarter in the next two.

Is that kind of equally divided between Q3 and Q4 or you think one is bigger than the other?.

No, Q4 is normally our best quarter, but we're confident where we're today. And especially what we're doing so far in the first month and a half, if you will, of Q3, we're very confident and reaffirming our guidance for $233 million and $239 million for the year. But you will see growth in the Q3 and then substantial growth going into Q4. .

That’s helpful. I don’t want to be too negative about this, but just help me understand the margins in the quarter.

So if my understanding is correct, the incremental margins on the information services business are robust and you had at least as a percent of revenues a nice uptake in information services, Q2 verses Q1, but not much of an overall improvement in gross margin.

So I'm just wondering are my expectations too high or is there something else going on? Or maybe my underlying assumptions are wrong?.

I think the best way to look at is really look at it as a comparison to prior year. Q4 and Q1 tends to be especially on the performance marketing of the business our best quarter, or our best quarters.

But as you can see in Q2, we were able to maintain those margins and looking back to prior year able to expand and grow those margins by 300 basis points.

Going into Q3, I think you will see some consistency at the margin level and really see a breakout in Q4 as we really start to expand the information services side of the business as well as continued traction in growth on the performing marketing side of the business..

And one more if I might.

I think we have spoken in the past about the batch migration in the comfort port for the information services side, is that -- can you give me an update on that?.

Sure, Jim. This is Derek. Nice to speak you. Those are going very well. I would say that those initiatives are very far a long and we expect -- we have some parts of those in market already and other parts of those coming very soon. And that’s part of our excitement along with, as Dan said, the building momentum throughout Q2 and leading into Q3.

That’s part of the excitement we have, leading into the back half of the year..

The next question comes from Jim Goss of Barrington Research. Please go ahead..

I was wondering if you might talk about the contribution of IDI versus Fluent in the information services growth.

Is there any color you might add in the emergence of IDI in that regard?.

Jim, good to speaking with you. This is Dan. We don’t break out the business by risk management and digital marketing side of the business, but what I will say is we talked about on prior calls that we really moved from a development stage organization on the risk side of the business in 2016 to a sales side in 2017.

A lot of that revenue you will see that fall into the financial revenue side of the information services segment, and as Derek talked about, with some of the initiatives the early release, if you will, some of the portions of our batch as well as our comp report here in the near future, we are very excited about the contribution that the risk side of the business will continue to make on the information services.

Our performance marketing and digital marketing side of the business continue to be, of course, the lion’s share of the business, and that side of the business had done a magnificent job not only scaling at the revenue side but also leveraging their first-party data asset to grow the gross margin in their business as well..

And you made a comment that, or it’s in the tax that, there are more than 50 customers spending in access of $1 million on an annualized basis.

Are they all in the Fluent business, I would presume, given the earlier stage of IDI? And how does that break down between information services versus performance marketing?.

Jim, this is Derek. Thank you. We try our best being and early-stage company to give the transparency that we can. I think it’s a safe assumption to say, given how far along the performance -- the marketing services business is that those customers lie on the marketing side of the business.

But we are very excited about where we are on the risk management side of the business, especially given -- we didn’t comment about this but given the very high margins that come with that side of the business. So we are very excited as we move forward. Again as Dan said, we just don’t break out IDI against the marketing side of the business.

So hopefully that answers your question..

I think there is also a comment about software development expenses.

Is there a run rate of couple of million dollars per quarter or something like that sort of in this R&D-type vein? Or what guidance can you give in that cost area?.

Sure, I mean that’s kind of a good way to look at it. On both our agile audience engine platform as well as our core platform, there is a substantial amount of technology effort that goes into building that platform and enhancements. Some of the technologist time, as it relates to their salaries and benefits, gets capitalized as internal use software.

As both platforms mature, the amount of time that is capitalizable begins to diminish. But at this point I would say, looking at it from a run rate prospective, looking at that $2 million market is a good way to look at it. .

And then last thing I would ask. You mentioned that there will be no tax benefit in 2017, I was wondering how long before you would start to take credit.

And once you start, will you have a period of time during which your profit growth will be enhanced by that accounting treatment?.

So what we will do going into 2018 and we continue to do at each quarter, as we take a look at where we're at from the valuation stand point, we also look at projections from an income standpoint at the net level going in the future.

Based on where we're with the loss through the first eight quarters, if you will, ending June 30, 2017, we’ve taken a full valuation allowance, which does not allow us to take any tax benefit.

However, we're accruing those tax benefits, if you will, with the full allowance, and as we turn to profitable net income side of the business, you will start to see that we will be able to take that tax benefit. .

The next question comes from William Gibson of Roth Capital Partners. Please go ahead. .

You talked about new relationships that you're using with risk management, could you give us a little more color on that without naming names of who you're partnered with, just what types of businesses they are and how they are using your technology..

Sure, Bill. Nice to talk to you. This is Derek. There are some great companies out there that are innovators in their respective markets.

They have in this reference these would be those that can do identity authentication via multi-factor authentication, that is several variables entered by the consumer to validate identity and these particular companies have invented new ways of performing that authentication without the mundane and ofent difficult way of logging into multiple bank accounts, logging into multiple telecom accounts, you name it, with various user names passwords and the like.

So if you don’t use sort of different variables to login to an account and we have the ability to perform that backend solution for these providers.

There are other providers that could and probably do that business today, but we're very excited that we gone head to head with them and we’ve found our place at the table this early, and so we're excited about the opportunity.

The same exits in background screening, where we can provide verification of data points on the backend of many, many companies.

And so what is key about this relationships as these innovators, they serve many industries, many large industries, as I mentioned, banking, financial services and healthcare and technology, so it’s our way of the expanding into markets but doing that through another channel. And so we're very excited about this opportunity. .

And then on the custom analytics, is this something new performing in the cloud or is that behind the customers firewall? Or is that the combo of the two?.

The custom analytics is really -- that is our core competency. That is our secret sauce and that’s really what makes us so valuable, and special in my view.

We aggregate billions of records as we have discussed, and many of those data points are obtainable by others in raw data, but its when we take those massive data sets when we perform those custom analytics on that data, our brilliant team both here and especially in Seattle where they are doing much of the hard work.

When we use that data together and we create a connection that is otherwise unobtainable, that is that proprietary data point of ours that’s extremely valuable. And the custom analytics is built into the secret sauce.

We have done that since the day we created this company and that will continue to be our mantra forever at this company, and that’s what really differentiates us from other providers out there. So that’s a very excited part of what we do..

And then one last question. At the discussion, can you talk about First Union settlement being an STNA. I'm trying to get a base level for where sales and marketing is as opposed to G&A.

Can you share the breakdown or roughly what run rate should be maybe as a percent of revenue in the back half for sales and marketing?.

If you look at obviously our [indiscernible] earnings release and you look at the breakout of sales and marketing expense for the three months ended June 30, it ran about $5.8 million. The G&A expense ran $25 million, but that included those onetime charges that we previously discussed.

So if you are looking at a percentage of revenue taking that $5.8 million that’s in sales and marketing would be a good way to look as a run rate going forward..

So the charges were all in G&A?.

That is correct..

And this concludes our question-and-answer session. I would now like to turn the conference back over to Derek Dubner for any closing remarks..

Thank you very much. Again, thank you to all for joining us today on our call. We look forward to updating you on future progress at our next quarterly call. Hope you have a nice evening and a good afternoon..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..