Digital Media Solutions, Inc. (NYSE:DMS) Q1 2023 Earnings Call Transcript May 15, 2023

Digital Media Solutions, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.13.

Operator: Good afternoon. My name is Hannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital Media Solutions First Quarter Financial Results 2023 Conference Call. [Operator Instructions]. Now I would like to pass the call over to Tony Saldana, DMS General Counsel.

Tony Saldana: Thank you for joining us to discuss financial results for DMS for the first quarter of 2023. With me on the call are Joe Marinucci, Co-Founder and CEO; and Vanessa Guzman-Clark, our Interim CFO. Early this afternoon, we posted our earnings announcement in the press release on our Investor Relations website. By now, everyone should have access. Before we begin, I would like to call your attention to our safe harbor provision for forward-looking statements in our financial results press release. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings.

In addition, management’s commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures can be found in the tables of our financial results press release, which we have posted to our Investor Relations website at investors.digitalmediasolutions.com. The additional financial and other information to be discussed on this call can also be found on our Investor Relations website. Now I’d like to turn the call over to Joe Marinucci, our CEO.

Joe Marinucci: Thank you, Tony, and good afternoon, everyone. Welcome to our first quarter of 2023 earnings call. Our first quarter results are as follows. Our first quarter net revenue was $90.3 million, which while down 17.2% year-over-year was within our guidance of $90 million to $92 million. Our gross margin and variable marketing margin came in at 24.7% and 29.8%, respectively. Adjusted EBITDA came in at $3.4 million, or a margin of approximately 4%. Also within our guidance. Vanessa will add more details, dig deeper into the numbers and go over our guidance for the second quarter of 2023 later in this call. We kicked off 2023 with a modestly positive first quarter, which highlighted the effectiveness of our diversified strategy across multiple verticals within DMS.

In Q1, we carried out a strategic reorganization of our business and a thoughtful reduction in our workforce, a move that considerably cut our operating costs. The goal here was clear and simple, to focus more intently on the key solutions that are poised to drive our long term growth. Stepping into Q2, our momentum has slowed as the positive trends from Q1 have reversed inside of our largest vertical insurance. Typically, our Q2 is cyclically impacted, as health insurance demand slows, and we tend to see trough level performance for the year in this period. We’re now seeing this coupled with unprecedented pressure in the auto insurance vertical, which has led to additional significant pullback and client marketing spent. That said, we remain optimistic as we anticipate the P&C Insurance markets will normalize when loss ratio is correct.

And in health insurance, we are now outside of enrollment period windows when marketing spend would be higher. When those enrollment periods open again later this year in Q3 and Q4, we expect to regain momentum in this vertical. Despite these temporary fluctuations, we also maintain a positive long term outlook, as our diversified approach gives us the agility to swiftly adjust to market trends that result in shifts in ad spend. This is true for both our brand direct and marketplace solutions and is visible in our verticals as well. As reminder those verticals are property and casualty insurance, health insurance, career and education, ecommerce, consumer finance and home services, which we added with the recent acquisition. As we’ve discussed in the past, we monitor both our enterprise customers and our SMBs which include the insurance agents we serve.

For Q1 exclusive of our recent acquisition, we closed with a significant enterprise customer count of 291, up from 285 last quarter. For Q1 ARPU for significant enterprise customer was $1.3 million flat from last quarter. For Q1 SMBs on the DMS platform totaled 6,477 active insurance agents down from 7,712 agents in Q4 2022. The reduction in active SMBs in the quarter is tied to volatility insurance in various state pauses at the carrier level, we expect our SMB count to recover once stability returns to insurance. The breakout by vertical revenue for Q1 is as follows: property and casualty insurance $38 million in Q1 revenue, which was 39% of total revenue for the quarter. Ecommerce, $18 million in Q1 revenue, which was 19% of total revenue for the quarter.

Career and Education, $50 million in Q1 revenue, which was 16% of total revenue for the quarter, and consumer finance $18 million in Q1 revenue, which was 19% of total revenue for the quarter. The comment further on property and casualty insurance is our largest vertical, although down significantly, quarter on quarter performance was mostly in line with our expectations for what we expected in the vertical in Q1. However, with pressure continuing to mount and the negative trend we see here in Q2, the floor is once again moved and the stability we thought was settling in appears to have faded. This continues to pressure our business here in Q2. The volatility of this underwriting cycle has been extraordinary. At some point, this shall pass as inflation subsides and rate increases cycle through.

With consumers continuing the price shot, we do continue to believe that property and casualty carriers will eventually aggressively return to growth mode, once loss ratio is normalized and underwriting stability is restored. Outside of property and casualty, diversity in our customer mix and our verticals is what continues to differentiate DMS. With the recent acquisition, we’ve added another vertical marketplace solution in home services, and we expanded our Brand Direct Business internationally. During the quarter, we saw positive trends in both Ecommerce and Consumer Finance with both verticals showing quarter-on-quarter growth of 14% and 43% respectively. These are areas we’re going to continue to focus on. I’d also like to reinforce that we’re continuing to invest in our technology data and media capabilities which empower us to innovate and create solutions that provide value for consumers and advertisers alike.

In Q2 2023, we plan to continue to focus on developing these vertical agnostic data-first solutions, which power growth across our customers in a multitude of verticals and our brand direct and marketplace segments. And again, we believe that digital performance marketing, which is the primary DMS solution will win as it is a pure play for ROI performance, thus derisking customer ad spend. As noted during last quarters call and as noted earlier in this call, we closed the acquisition of ClickDealer and HomeQuote at the end of Q1. Moving into q2, we’ve seen stability in both the Home Services vertical in the international markets we now cater to. Although we’re in the early stages, we feel this stability demonstrates the likelihood of positive progress and growth and both of these areas.

To summarize, for our go forward 2023 plan, we will drive business growth through the following strategies. Expanding the number of existing significant enterprise customers along with average spend per customer helping our clients acquire, grow and retain their customers. Continuing to add SMBs to our platform, investing in our technology data and media capabilities, managing costs. And finally focusing on the integration of the recently closed ClickDealer acquisition to further diversify our customer base and vertical serve while strengthening our Brand Directed marketplace solutions. Now I have the pleasure of turning the call over to Vanessa, who provide more details on our financial results.

Vanessa Guzman-Clark: Thanks, Joe. And good afternoon, everyone. I’ll begin by discussing our financial results for the first quarter and conclude with our guidance for the second quarter. All comparisons are on a year-over-year basis unless otherwise noted. Net revenue was $90.3 million while down 17.2% year-over-year, it was within guidance. Insurance accounted for approximately 39% of our total revenue in Q1 which was down 49%. The breakdown of the insurance business was as follows: auto contributed 66% of total insurance, while health was 23% followed by life at 6% and home at 5%. The decline in revenue reflect the impact of lower carrier demand, while this industry restabilizes. DMS continues to be a diversified digital performance advertising business.

Career and Education, which was approximately 16% of our total revenue in Q1 was down 2%. Ecommerce represented 19% of our total revenue and was up 14%. Consumer Finance accounted for 19% of our total revenue and was up 43%. Gross profit was $22 million for Q1, equating to a 25% margin versus a 29% margin in Q1 2022. The margin percentage decline was driven by continued margin compression within the insurance across both auto and health. Variable marketing margin was 29.8%, compared to 35% in Q1 2022. Moving now, to our segment results, which include intercompany revenue. Q1 2023 Brand Direct Solutions gross margin was 22.7% compared to 20.9% in Q1 2022. Q1 2023 Marketplace Solutions gross margin was 21.3% compared to 27.9% in Q1 2022. And Q1 2023 Technology Solutions, Q1 gross margin was 74.2% compared to 88.6% in Q1 2022.

Looking at operating expenses, we continue to focus on driving efficiency in our business for consolidation and reduction of operating expenses. During Q1 operating expenses was $32.5 million down $2 million when compared to the first quarter in the prior year. This is the result of our continued focus on cost reduction and business optimization. Now on to business profitability, our adjusted EBITDA for the quarter was $3.4 million, generating a margin of 4%. Down $7.1 million driven primarily by lower revenue and margin compression and offset by $1.9 million of lower operating expenses. Our net loss was $20.7 million versus net loss of $5.4 million for the same quarter. Driven by warrants expense as a result of share price volatility, interest expense, resulting from the impact of rising interest rates and costs related to the acquisition of ClickDealer and HomeQuote.

Shifting our focus to the balance sheet and liquidity. We ended the quarter with $20.1 million in cash and cash equivalents, which was down approximately $1.6 million compared to the same quarter last year. As a reminder, with this close and fund the most recent acquisition, we cash from our balance sheet on March 30 2023. At quarter end, our total debt was $256.6 million and we have $10 million of our revolving facility remaining undrawn. Our credit facility includes a debt-to-EBITDA covenant requirement of 4.5 times. As of March 31, our net leverage was 4.46 times debt-to-EBITDA. We believe we have sufficient sources of liquidity and remain mindful of our obligations, given current economic volatility. Turning over to our outlook. For Q2, we now expect net revenue in the range of $90 to $93 million and adjusted EBITDA of $3 million to $6 million.

This updated guidance reflects the previously mentioned pullback in marketing spend, cost reduction and the most recent acquisition performance. Our guidance range for gross margin is 23% to 26% and variable marketing margin range is 29% to 34% for Q2. When we come back in August for a Q2 2023 earnings, we will provide Q3 guidance, growth drivers across DMS and our recently completed acquisition, and the positive impact of our previously announced restructuring plan. In summary, as Joe noted, we remain heads down and focus on our strategic growth initiatives. These are items we believe we can control. And we are pleased with the progress we are making, along with the associated positive trends. Still, we believe we will continue to face headwinds in the coming quarters with an unsettled insurance market and further shifts in consumer behavior.

Despite these headwinds, we are confident, we have the right people, processes and technology in place to be agile and successfully navigate our company for these volatile times and execute our growth initiatives. With that, we thank you for your interest in DMS. And I’ll turn the call over to the operator for Q&A.

Q – David Marsh : Thanks for taking questions. So first, did I miss something with regard to Rick Rodick? I didn’t see any type of an announcement.

Q&A Session

Operator: Our next question is from Marvin Fong with BTIG. You may proceed.

Operator: The next question is from Maria Ripps with Canaccord. You may proceed.

Operator: Thank you, Ms. Ripps. Our last question is from the line of Jason Kreyer with Craig Hallum. You may proceed.

Operator: There are no further questions at this time. This concludes today’s conference call. You may now disconnect.