Good afternoon and welcome to the Fluent Inc' First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would like now to turn the conference over to Ryan McCarthy. Please go ahead..

Good afternoon and welcome. Thank you for joining us to discuss our first quarter 2021 earnings results. Joining me on today's call are Fluent's CEO, Ryan Schulke, and our CFO, Alex Mandel. Our call will begin with comments from Ryan Schulke and Alex Mandel, 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.Fluentco.com.

Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof.

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.

These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intend, estimates and other words of similar meaning. The company undertakes no obligation to update the information provided on this call.

For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q.

During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of indicators, including media margin, adjusted EBITDA, and adjusted net income.

The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Ryan Schulke..

Thank you, Ryan and good afternoon. Thanks to everyone for joining us today.

As I shared with you on our last call, mid-March Fluent operates in a dynamic and rapidly evolving marketplace and we see a clear long-term strategic opportunity and further responding to the demand for higher quality digital experiences for consumers, more effective and sustainable solutions for marketers in turn we're motivated and energized as we thoughtfully accelerate.

The strategic transition of our business with quality is a foundational principle through this process, we're committed to enhancing our media properties and consumer experience against an industry backdrop that is experiencing rapid change in many ways, including through a regulatory lens.

We see the end game as delivering a fundamentally higher quality experience for consumers, which will enhance Fluent's brand equity with our clients and build enterprise value for our stakeholders.

I previously contextualize this transition relative to our three strategic growth pillars, the significant progress we've made on-boarding and scaling larger, more sophisticated clients on our performance marketplace and increasing the monetization on our platform has motivated us to further redefine our media footprint in the form of our traffic quality initiatives.

We see higher quality as the road to sustainable long-term growth and believe it will position us as an industry leader, even though in the near term, we're knowingly foregoing some revenue opportunities in our earnings released today.

Our numbers for Q1 reflect revenue being down 11% year-over-year media margin up 4% year-over-year and adjusted EBITDA representing 7% of revenue. All of these metrics are consistent with the ranges we indicated on our last call, further elaborate on our traffic quality initiative.

We're shifting from a higher volume approach to a quality based approach, which we believe will accomplish several important objectives.

These objectives start with improving consumer satisfaction with Fluent's promotional programs, thereby improving conversion rates and ROI for our advertiser clients, thereby driving increased pricing for Fluent products and ultimately enabling us to reinvest that incremental monetization into further improvements in our media sourcing.

This represents the spinning of our flywheel putting some time context around this initiative in the latter part of 2020. And in Q1 of this year, we cut back more significantly on traffic sources that did not meet our quality requirements, which sits at the crux of the reduction of our revenue in Q1.

While we actively monitor traffic on an ongoing basis, we believe the steepest of cuts needed at this time are behind us that said given the traffic adjustments to date and the time needed to develop partnerships with those who are as committed to quality as we are while concurrently on-boarding and optimizing new supply, we do anticipate revenue in Q2 to be down year-over-year while it's still early to call.

We're currently anticipating revenue in Q2 trending similar to what we called for Q1 down 11 to 13% year-over-year, I shared on our last call that we anticipate the strategic transition will take a couple of quarters to re-establish prior trending levels.

And we continue to maintain that outlook, the natural cadence of these traffic initiatives, which are a known phenomenon in our industry.

It's now net rebuild our supply base through both expanding existing partnerships and activating new partnerships, channels, and strategies to drive our rebuild on this partnership front we're leaning in with existing and new media partners who are aligned with our focus on quality and share our vision for building sustainable and profitable businesses together.

We're working to forge deeper, more strategic sourcing relationships, where we can innovate, develop bespoke campaign and invest our time and energy in redefining our media footprint with competence, there will be an exciting return profile on our efforts.

On the media front, we're seeing compelling opportunities and areas we belonged played in as well as new channels and strategies that this initiative has prompted us to bet. Although it's early innings, we see green shoots in our rebuild base to demonstrate how important the strategic imperative is for Fluent.

I'm personally leading our quality initiative along with two key co-founding executives, Matthew conch, president of our performance media group and Sean Colin, our executive vice president of product. We've been energized by our experience to date.

As we can clearly see that redefining our media supply will open up significant strategic product opportunities that can further expand and deepen our addressable consumer audiences and overall market opportunity regarding our second growth pillar.

Our platform, I mentioned on the last call that monetization has increased significantly in 2020, approximately doubling from Q1 to Q4. And we saw that as a sustainable win monetization remains strong in Q1 of 2021 and continues to remain strong in Q2.

This implies that as we build back, our traffic supply, even smaller volume winds can have a more meaningful financial benefit than they would have a year ago.

Another aspect of our platform I've spoken to is the expansion of our CRM efforts through which we have extended our relationship with consumers beyond their initial experience on our media properties and enhance their lifetime value.

A key initiative on this front has been our investment in the monopoly business, which is uniquely situated to provide telepany activations for Fluent clients through a live agent capability.

You're seeing that business perform ahead of plan and grow strategic partnerships with clients, high value verticals, including senior care financial services and home services regarding our third pillar, our performance marketplace. We continue to see world-class brand leaning in with strong demand that will exceeds our available supply.

This strength further supports our efforts to redefine our media footprint. Flint provides an innovative high value solution that addresses a massive market opportunity, the quality of our client base and demand from them validates the seven days a week.

I'd like to restate that we're enthusiastic about our strategic course and it remains our core tenet behind the current transition we're working through.

Fundamentally, we're confident that the higher quality model we are forging is the right path to achieving substantial and sustainable growth while generating a revenue and earnings profile that will be more highly valued by the market.

Our experience through this transition thus far confirms our confidence in the mission remains diligent and enhancing our brand equity, improving our own standards for the benefit of our clients and consumers, as well as our shareholders. And with that, I'll turn things to Alex for the detailed financial review..

Thanks, Ryan and good afternoon. As Ryan spoke to our team led personally by fluids, founding executives has been leaning in to drive the strategic transition of our business through our traffic quality initiatives.

In that context, the outlook we've previously shared for Q1 reflected a known and purposeful investment into redefining our media footprint in the quarter, the company generated $70.2 million of revenue down 11% year-over-year, which is on the favorable end of the outlook.

We have provided, we've mentioned the improvement in monetization on our platform during 2020 and the continuation of that benefit in 2021, our media margin in Q1 of $24.9 million representing 35% of revenue was up 4% year-over-year ahead of the outlook we had provided in addition to strong monetization, medium margin was supported by continued progress on our programmatic data offering and our CRM strategies, which target increased lifetime value of consumer relationships.

We noted that in the second half of 2020, as we tested various enhancements to the design of our rewards programs, we incurred higher costs of fulfilling rewards earned by consumers. Fulfillment costs is not reflected in media margin, but is captured in our GAAP cost of revenue.

Well, [indiscernible] costs moderators in Q1, although the increased media efficiency, which benefited our media margin was outweighed by the incremental fulfillment cost such that our cost of revenue as a percent of revenue increased to 72.7% in Q1 as compared to 71.7% in last year's Q1.

Q2 fulfillments expense is likely to represent a further sequential reduction, which would benefit cost of revenue and adjusted EBITDA. Our operating expenses on a GAAP basis for Q1 comprising sales and marketing product development and G&A grew in aggregate by $1.5 million or 9% year-over-year to $19.3 million.

However, G&A includes $1.7 million of non-cash accrued compensation for put-call expense relating to the monopoly acquisition, which was fully incremental on a year-over-year basis to G&N costs. Excluding this item overall operating expenses were relatively flat year-over-year.

Last week, Fluent executed a settlement agreement with the New York attorney general, putting finality around this matter, which has been disclosed in our SEC filings beginning with the 2019 10 K flow.

It will satisfy payments of the $3.7 million settlement amount this month, which had previously been fully accrued for as of December 31st and therefore has no current or future P&L impact. Adjusted EBITDA $4.7 million in the quarter represented nearly 7% of revenue relatively consistent with the outlook previously provided.

We closed on our new $65 million credit facility on March 31st. So it is reflected on our balance sheet, but not meaningful to our P&L in the quarter, the facility consists of a $50 million term loan, drawn it close with a $15 million unfunded revolver. This new financing reduces our current effective interest rate by 500 basis points.

And we therefore anticipate a significant reduction in interest expense in Q2 and going forward. The facility also provides meaningful financial flexibility for Fluent and extends the maturity of our debt to 2026.

In connection with the transaction, we recorded a loss on early extinguishment of debt of $3 million on our P&L of which $2.2 million is a non-cash write-off of capitalized discount and financing costs from our prior term loan in Q1, we continued to be a non-cash federal taxpayer due to the availability of NLLs.

We reported GAAP net loss of $6.3 million in the quarter and adjusted net income, a non-GAAP measure of 351,000. Our non-GAAP metrics are reconciled and today's earnings release and attend to in 10 K filings, turning to the balance sheet.

We ended the quarter with $34.1 million of cash and restricted cash working capital to find his current assets minus current liabilities ended the quarter at $45.8 million up $13.1 million year-over-year and 9.9 million sequentially total gross debt at March 31st of $51 25 quarter million included the $50 million funded term loan and remaining one and a quarter million note payable in connection with the 2019 AdParlor acquisition, which will be funded on July 1st, as we continue on our journey to strategically enhance the value of our customer acquisition solutions for our clients and build value for our stakeholders.

We appreciate your support. The strategic course we are charting has as its core premise. The belief at a higher quality model will enable substantial and sustainable growth while near term financial. Results will reflect this transition and investment.

We are motivated by the opportunity to enhance fluence value proposition and brand equity and generate a revenue and earnings profile that will be more highly valued by the market. Well, glad to field questions at this time,.

We will now begin the question and answer session to ask a question. [Operator Instructions] And our first question will come from Michael Graham of Canaccord. Please go ahead..

Yeah, thanks so much. And appreciate you guys taking the question and I think it's impressive and a good reflection that you're able to grow your media margin, you know, even when revenue is coming down from the traffic quality initiatives I had just a couple of questions to kind of maybe dive a little deeper into that initiative.

You know, one is can you just maybe put any color around, I know you said you think that the peak of the traffic cuts is behind you. Can you put any color around, you know, how much longer you think you need to kind of work through the initiatives.

And I also just wonder if you might be able to characterize a little bit for us you know, how much traffic has come down from, from sort of peak levels and you know, where you think that that process bottoms out?.

Yeah, Nice to connect with you. Michael, and appreciate the question on, on the traffic quality initiative. So really, you know, as, as we've been talking about it and, and per the last earning calls, we did say we'd probably take a couple of quarters to get back to a prior trend level.

So we are anticipating a stronger back half as we really start to strategically partner with both existing partners that are adhering to our traffic quality and compliance standards, as well as new partners that we're on-boarding.

There is a bit of an investment period in the sense of going out and establishing new relationships and, and testing into new types of channels and strategies.

But we're seeing nice progress on that front and something that we do anticipate will take more shape, greater shape in the back half of the year with respect to overall traffic volume there, there's a couple of different ways to look at it.

One of the things we highlight is that from Q1 of 2022 Q4, we, we almost doubled the yield per visitor that we make users that we drive to our properties.

So if you think about you know, the, the 11% figure in terms of revenue traffic actually, you know, went down quite a bit more than, than even that 11% number, but we're, we're making a lot of it back through to higher quality experiences and advertisers begin beginning to pay up for that.

It does take some time for advertisers to recognize some of the, the quality, that they're seeing and to pay up for it. But those are active conversations we're having, and we are seeing a material amount of movement with respect to clients quote, unquote, bidding up for, for our performance inventory..

Thanks fot that Ryan. And just to clarify, I know you, you know, even with revenue down 11%, you had nicely positive EBITDA in the quarter.

Then are you anticipating that condition persisting here as we go through the remaining quarters of the initiative?.

I would say that, you know, we're willing to sacrifice a media margin dollars to really get strategic footing in the right places that are going to sustain over time and have a lot of scale behind it.

So we will take a bit more of an aggressive attitude toward securing inventory and doing what we have to do even at the expense of media margin, if that is to come though we will maintain a fairly disciplined approach to overall operating expenses below that, that media margin line to ensure that there's continuity with respect to the amount of revenue flowing through the EBITDA..

Thank you. Next question comes from James Goss - Barrington Research Associates. Please go ahead..

Thanks.

Ryan, could you talk a little about what has been cut to this point and are other areas still on the block and maybe what the new business mix looks like in the aftermath of the traffic cloud quality initiative?.

Yeah. Nice to hear from you, Jim. And, and I would say that it sort of falls into two buckets.

One being publishers supply side partners, we were working with that either the type of content we were you know, being featured within or the way they would run ad creative or their, their lack of controls around ad creative was a big part of the conversation. So partners just not willing to adhere to certain guidelines that we outlayed.

And then second, maybe more importantly any concerns that we had around consumer data, consumer privacy and things like that, partners who were not adhering to what, where we really believe the market is going with respect to consumer privacy and data policies in general. Those were, those were the sharpest cuts. I would say.

There's, there's nothing I'm aware of that we haven't cut. And we're, we're eager to be forging the path forward with the partners that are still with us, as well as the new ones we've been on-boarding quite actively over the last you know, few months..

So it didn't involve the, the verticals or serving the media or home services, as you mentioned, are those sort of things that rather involved which avenues you're using to promote the services you're, you're choosing to promote?.

Right. It represented publishers, even specific channels and ways to go out get our ads in front of the, the general public to drive traffic to our property. So it wasn't, there's not a specific vertical to point to that that would have been impacted more than, than that another for instance, at our core. .

Okay. Can you talk about whether there are any global implications as you've been able to be gone to move into certain of the European markets in particular? Is it [inaudible] that area.

We're doing a solid job in English speaking? That certainly is something that we we've focused on and will be a continued focus for scale. The English speaking markets the EU is something that we haven't talked about.

You know, in quite a bit though, we are, re-examining how we may approach especially the Western European market and, and potentially things beyond that such as APAC. I would, I don't have anything to announce at this point. However, we are continuing to perform very strong in new English speaking markets.

We do need to rejigger some, some thinking around how to better enter the Western European..

Okay. And maybe lastly I think he made a comment about the better half, second half looking a little bit better.

So are you thinking the entire initiative will only take a couple of quarters to run its scars, which was sort of the optimistic kind of as think of what you said? Several months ago?.

Yeah. we, we do believe that we have good momentum, you know, especially as we get toward Q3 Q4, we, we believe that a lot of this behind us, the company has been designed in the culture is extremely agile. Our client demand is extremely strong right now.

So as we lean into these higher quality suppliers and channels and, and, and different strategies on the product end, that we're deploying to go out and engage consumers the conversations are happening more rapidly with our partners around quality, the ability to pay at higher rates for some of these new traffic sources that we're onboarding.

And we anticipate that we'll be able to scale nothing has changed materially in terms of our product outputs and our, our clients demand for our products. It really is. You know, if you think about it, a couple of steps backwards to be able to make many, many steps forward over the longterm. And that's really what we're, how we're thinking about this.

And we believe that the back half will be stronger than the first half..

Next question comes from Bill Dezellem of Tieton Capital Management , please. Go ahead..

Thank you. I'd like to start with the contact center, exceeding your expectations.

Would you please discuss that? And if it in any way ties in with the traffic quality initiative?.

Yeah. Bill, good to hear from you. And we, we certainly are excited about that transaction and monopoly in terms of, of where things have gone. Fluent had historically been excellent at web based execution.

So if you think about the business in terms of how it consumer looks at the products and services that we're promoting on behalf of our advertising clients really, we're really strong as we've always said in media and entertainment. So streaming services, gaming, things like that.

Also a lot of direct to consumer commerce and subscription commerce, where it is a lower cost consideration for the consumer and therefore we're driving those trials that are converting into paid trials. Our advertising clients can see it in near real time.

And therefore there there's ton of demand there pre having the live agent capability in some of the more complex verticals, things like financial services, home services, other types of professional services like legal or, or senior care products. We, we really weren't able to take consumers as far down that funnel without the live agent capability.

These are more complex decisions. Consumers are looking for more information. So that capability enabled us to start partnering and going further down the funnel with, with major players in these verticals and, and work with them to even an end sale or some sort of appointment set.

Whereas before we had the live agent capability, we we'd probably be working with them at some sort of qualified lead that we would drive or something like that, which results in more cat based budgets. Also with the CRM hooked in, and now we're able to see a consumer in which consumers are actually traveling that journey.

They're qualified, they're motivated to purchase whether it's a home security system or, or whatever the product or service may be that we're offering to them. We actually have real time data flowing into us. So we know which consumers are actually converting on, on these types of higher value offers and products and services.

So, so it's really been a boost from our standpoint in terms of the commercial outputs.

That that's helpful.

And, and what do you think is driving that when monopoly business exceeding your expectations?.

I think it's been a combination of being able to just go further down the funnel and see down the funnel. Whereas, you know, at a prior stage, really once we would drive a click out of one of our media properties to, to our customer, the best we were seeing was that a lead was being generated.

We didn't actually know who was converting on these offers. And if you look at the core of our business where we're driving uncapped demand, as I described in streaming services, subscription commerce, and things like that, we're getting all of that in real time.

So it's really a lot of it's about being able to ingest the data and, and meet the optimizations needed the CRM hooked in. And we do have really strong operators on top of that business that we, that we brought in through that, that JB. So, you know, all of those things coming together are really playing, playing strongly for us..

Thanks, Ryan. That's really helpful. And then I too will jump to the traffic quality initiatives have, as I think about this we really should be looking at it on a week to week, so sequential week basis. It sounds like, and, and assuming that that characterization is accurate have volumes of bottom now..

Yeah. I mean, you can never say anything with, with 100% certainty, but from our point of view we've worked through the traffic quality initiative. Anything that we were, we're looking to move away from, you know, we've, we've really completed that. And we're, we're looking at rebuilding better as they would say.

So, you know, I can't make an, an official call. However, I can say we have gone through things on our side and feel good about the types of traffic we are sourcing and the future partnerships where we're establishing at the moment.

That's helpful.

And and I know it's a little bit hard to pinpoint a specific time, but I'm going to ask it anyhow, what week or weeks was, was the bottom reached when you cleared out all of the traffic you wanted to move away from?.

Yeah, I'd say, you know, this, this type of initiative does have a life of its own, and it's, as you mentioned very real time, but I would say is as late as, you know, the last week or two, you know, we, were, you know, upon review satisfied with where we we're at.

Not to say something couldn't pop up, but we've been fairly robust, I believe in, in terms of how we've gone about this.

Will we get some potential false positives where we think a new sources is doing great, but there's some things that we, you know, need to address from a consumer satisfaction standpoint, consumer experience potentially, but we really do believe we're working on a lot of the right things right now and, and beginning to establish some, some momentum behind it..

Yeah. That's really helpful. So given that you've given the provided the same guidance, the 11 to 13% a decline in revenues that implies that you kind of went through the first quarter in a bit of a, of a week to week downtrend, but you're going to be coming out of the second quarter in that week to week uptrend.

And so we're kind of w we're looking now at the, at the light, at the end of the tunnel,.

Correct? Yeah, yeah. That, that's an accurate summation..

Great. Thank you. And if you'll allow me, I'm going to ask one more question on this.

Are there examples of other companies who have done similar traffic quality initiatives? And if there are would you talk about their their longer-term outcome and what that ultimately meant for their business?.

Yes. And I I've played less directly with you know, some of the companies that have gone through these types of initiatives, but it is something that happens in our space.

I know that Alex being the former CFO of lending tree is, is aware of a couple of his former competitors who went through initiatives like these I'd love for him to maybe share a little bit more detail here. I got to speak with you again. There are companies in our space who have gone through these types of initiatives. You're correct.

Some historical examples, going back to 2012 would include companies like bank rate as they worked through you know lead quality initiatives in respect of a specific client vertical, which related to insurance.

Quinstreet also had a similar experience and also addressed that with education leads and then another company ever quote you know, improved its traffic quality in 2018. So we have seen other companies go through this and, you know, that supports Ryan's earlier statement.

I think during the recorded remarks about this being a known phenomenon within our industry, and those companies have gone on to have successful uptakes from those various initiatives, they take a different amount of time, different set of circumstances, but in each case, those were companies that were able to turn the corner and tick up and make meaningful gains both operationally and in their stock prices in the 12 months following those initiatives..

Great. Thank you both. And congratulations on the refinancing..

This concludes our question and answer session. The conference has also concluded. Thank you for attending today's presentation and you may now disconnect..