SpringBig Holdings, Inc. (NASDAQ:SBIG) Q4 2022 Earnings Call Transcript

SpringBig Holdings, Inc. (NASDAQ:SBIG) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good day, and welcome to the SpringBig Fourth Quarter 2022 Earnings Conference 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, Mr. Ryan Flanagan. Please go ahead.

Ryan Flanagan: Thank you. Hi, everyone, and thanks for joining our Q4 earnings conference call. Joining me on the call today are Jeff Harris, our CEO, Founder and Chairman; and Paul Sykes, our CFO. By now, everyone should have access to our earnings announcement. This announcement is also on our Investor Relations website. During this call, we’ll make forward-looking statements, including statements about our business outlook, strategies and long-term goals. These comments are based on our plans, predictions and expectations as of today, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors outlined in our 10-K that will be filed with the SEC.

Also during this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release on our Investor Relations website for a reconciliation of GAAP to non-GAAP financial measures as well as additional context on our key operating metrics. And finally, this call in its entirety is being webcast from our Investor Relations website at www.investor.springbig.com, and an audio replay will be available on our website in a few hours. With that, I’d like to turn the call over to Jeff.

Jeff Harris: Thanks, everyone, for joining this afternoon’s call. We have a lot of exciting developments to cover. During today’s call, Paul and I will provide you details on our fourth quarter and full year results as well as our guidance for the first quarter and 2023. I’m happy to report that we closed out the year on a high note with the revenue prior to a revision in accounting treatment coming in above the midpoint of our guidance despite persistent macroeconomic headwinds. Growth in the fourth quarter was again driven by subscription revenue, which in Q4 grew 33% year-over-year. Throughout the year, our subscription revenue growth has been consistently strong, culminating and 38% year-on-year growth for 2022. Recall, we are primarily a subscription-based SaaS business, which provides predictability and increases visibility into results.

Paul will discuss the fourth quarter in greater detail in a moment, but first, I’d like to highlight some of our accomplishments over the past year, including some noteworthy customer upgrades, I’d then like to lay out our key objectives for 2023. In 2022, we invested to scale the business for the long term. We doubled our commitment to profitable growth, which included a restructuring in Q4 and made material progress on new initiatives, all while successfully completing our IPO in June. While our focus remains on accelerating top line growth, we also remain committed to driving leverage through a balanced investment approach and reiterate our plan to achieve EBITDA breakeven during 2023. I would now like to discuss the two primary segments in our business, our retail and brand platforms.

Our retail platform provides merchants the tool set they need to create and manage a successful digital marketing and loyalty program, along with instituting a data-driven approach to how they connect and engage with their customers. The retail landscape across cannabis remains challenging with a pronounced slowdown in store openings. Given this backdrop, we are encouraged that we added 80 new retail accounts in the fourth quarter, reinforcing our view that budget considerations for maintaining and growing existing customers remains less discretionary relative to traditional marketing spend. Our brand platform, which we launched in 2020 to help cannabis brands more easily connect with their consumers continue to accelerate at a really nice pace in the fourth quarter, and we are encouraged by the run rate performance we have observed in the first month of 2023.

We’re uniquely suited for the selling motion by allowing brands to connect directly with customers through our retail platform, benefiting both the retailer by driving traffic to their locations and for the brand, increasing awareness and influence. Turning to the three areas we have talked about previously as key pillars of our growth. First, a network effect that we feel is a unique and powerful flywheel between our retail and brand platforms. Second, a high-growth subscription revenue component that increases predictability in our revenue stream, and third, new initiatives and the opportunity to monetize the pros of data that we’ve captured. Starting with the network effect, our purpose-built co-marketing platform allows brands to target customers who are shopping at retailers who are selling their products through the SpringBig platform.

This co-marketing platform is a unique differentiator in the cannabis industry, providing brands the ability to deliver messaging content to consumers and simultaneously incentivizing retailers to use the provided content. Importantly, this form of marketing also provides our retailers with co-op marketing dollars for their campaigns, subsidizing retailer marketing measures. Second, an increasing proportion of our revenue is from recurring subscriptions. Our retail clients enter into subscription contracts for 1 year or longer, largely tied to messaging volumes with messages being distributed through multiple channels, and we note a trend of clients increasingly leveraging direct push notifications to consumers who are utilizing mobile apps.

The net result is that superior results from campaigns drive platform utilization and a clear pattern of increased subscription contract size, creating a more predictable revenue stream. The third pillar is the intersection of our current business and our targeted set of new product initiatives. As a result of our platform being present in more than 3,000 retail locations installed in the smartphone deliver 35 million marketable cannabis conservers and our integrations with over 20 point of sale systems, we are uniquely positioned to introduce offerings to our client base that provides meaningful growth opportunities for both our client base and SpringBig. At present, we are focused on the introduction of a select group of initiatives. The first being our loyalty/payment initiative.

Spring Pay where consumers of our retail clients can use their loyalty points in conjunction with their preferred store payment option to complete their in-store and online transactions. The retailer benefits from higher transaction values and SpringBig benefits by facilitating these transactions on behalf of our retail partners. Second, in Q4, we launched a consumer subscription offering, enabling customers to pay a monthly subscription fee to their retailer to receive specific discounts and benefits at their favorite retail locations. SpringBig will manage these subscription programs on behalf of our retail partners and share in the subscription revenue generated from customers that sign up for these offerings. In addition to increasing our recurring revenue stream by tapping into the millions of consumers that are on our database, these programs will increase the stickiness of both the retailers and consumers that are on our platform.

Third, with over 900 million first-party data records, which we believe to be among the most complete data sets in the industry, SpringBig is working towards the introduction of various data-driven products that will provide both retailers and brands from both within the industry as well as those interested in learning more about it to have the meaningful insights needed for better decision-making at their fingertips. This offering will allow us to reach beyond the traditional marketing departments and become entrenched in other areas of our clients’ businesses, making our offerings even more critical. Additionally, in January, we announced our first integration with a point-of-sale solution outside of the cannabis industry, which allows us to expand into offering our loyalty and marketing communications platform across some of the other regulated industries, including alcohol, CBD and vape stores.

Marketing and selling to this audience has already begun with signed contracts from this group already in place, and we are excited with the progress we are seeing with this new group of potential customers outside of the cannabis vertical. We have an abundance of new product opportunities ahead of us and are simultaneously continuing to see significant growth in our existing business, given the long-term growth potential of the cannabis industry and the unique power of our platform to deliver exceptional returns to our clients. To emphasize this unique power of our platform and give some real-life examples of how we are delivering customer value, I’d like to share a couple of notable recent upgrades with enterprise clients that highlight why customers choose SpringBig.

First, one of our largest enterprise clients recently signed a significant upgrade and expansion contract, leveraging SpringBig’s digital marketing across their entire tech stack. This client expanded operations across multiple states in 2022 and growth in their tech messaging marketing strategy soon outpaced their existing contract, requiring or materially increasing their subscription. This client was already a six figure contributor to annual subscription revenue with the resulting contract upgrade representing a fourfold increase and bringing the total value to well over $1 million annually. Similarly, in the last few weeks, one of the largest MSO operators in the U.S. and also an existing enterprise client grew its retail location footprint significantly and has continued to leverage SpringBig as their preferred provider for digital marketing as they open new locations.

This MSO’s expansion included the implementation of SpringBig’s digital marketing program across their existing markets, displacing their prior provider who faced challenges with the rapid pace of growth that this client was demanded. Our robust integrations and enterprise scalability proved to be the clear differentiator. With this expansion, SpringBig is now live across all of this multimillion dollar annual subscription revenue MSOs end markets. In summary, while 2022 was a challenging year for the cannabis industry and broader economy, we have delivered solid growth, continuing to prove out the value we are delivering to our clients as the leading technology loyalty platform across the cannabis industry. Looking forward, while the dynamic conditions remain uncertain, we have a rich pipeline of revenue-generating initiatives and a strong high-growth subscription revenue base, which we believe will together deliver accelerated top line growth.

I’m incredibly proud of what our team has accomplished and wish to take this opportunity to thank all of our employees, partners, clients and investors for their continuing support and commitment to the company. With that, I’d like to turn things over to Paul, who will walk through our financial results for the fourth quarter and discuss our initial outlook for 2023 in greater detail. Paul, take it away.

Photo by Danial Igdery on Unsplash

Paul Sykes: Thank you, Jeff, and thanks again to everyone for joining us. I will start by reviewing our Q4 and fiscal 2020 results and then move on to guidance for both the first quarter and full year of 2023. Before discussing results, I would like to note that we have made a revision in how we account for credit issued to clients, which are now treated as a reduction in revenue, whereas these were previously included in our cost of revenue. The result is to report a lower revenue figure with no change in either gross profit or net loss and by implication, a higher gross profit margin. Our 2022 guidance of $27 million to $28 million was set prior to implementing this revision in accounting for credits. Our revenue using our prior approach was above the midpoint at $27.6 million.

The 2022 revenue adopting the revised approach was $26.6 million, representing 14% year-on-year growth with all periods revised. As Jeff mentioned, Q4 was a quarter of solid execution in a challenging macroeconomic environment. Our Q4 revenue came in at $6.8 million, representing growth of 2% year-over-year and a 7% decline sequentially from a particularly strong Q3. Our growth was underpinned by year-over-year subscription revenue growth of 33%, a continuation of the momentum that we have experienced throughout the year, with each individual quarter exceeding 30% growth, resulting in 2022 full year subscription revenue growth of 38% year-over-year. As a reminder, SpringBig is a SaaS technology business with 77% of revenue being derived from 12-month auto-renewing contracts.

Over time, we expect this percentage to increase further as we continue to replace excess use revenue with larger subscription contracts that are more predictable and higher quality. This has particularly been the case during the past year. And as a consequence, we have seen the percentage of revenue from subscriptions increased from 63% in 2021 to 77%. A byproduct of this conversion into subscription revenue has been a year-on-year reduction in our excess use revenue by 46% in Q4 due to a tough prior year comparison and 29% for the full year. Our brand revenue grew 16% year-over-year in Q4 with more planes running campaigns and average spend per campaign increased in. And in 2022, revenue increased by 44% compared with 2021. Our top line growth throughout the year has been driven by strong customer demand both in terms of new customer acquisition on the retail and brand platform, as well as expansion within the installed base.

We ended the fourth quarter and year with 1,319 discrete client platforms and are installed in more than 3,000 retail locations. We have in excess of 35 clients with annual subscriptions exceeding $100,000. While SpringBig services the full spectrum of clients from the largest MSOs to single-location retailers, a sophisticated user who is able to generate substantial ROI from utilizing our platform is our sweet spot, and we are well positioned to benefit from consolidation across the cannabis industry. We continue to see solid customer retention. Our Q4 net revenue retention rate was 105% versus 119% in Q3 and 110% in the year ago period. Recall we expected this metric to moderate to the 100% to 110% range and that at Q3, the ratio benefited from multiple upgrades by some customers within the trailing 12-month period.

As we add more products and functionality to our platform, we see an ongoing opportunity to drive upsell as customers leverage both our retail and brand platforms and as they expand to utilize the emerging data offerings. The New Year has started strongly in this regard with some significant upgrades. Gross profit in Q4 was $5.3 million, representing 6% year-on-year growth and our gross profit margin for the quarter was 78%. Moving on to operating expenses. We remain highly focused on improving the leverage in our business while at the same time balancing this with our investments for growth. On November 30, we announced a service initiative, including a workforce reduction through a combination of layoffs and attrition to reduce costs, drive efficiency and thereby accelerate our path to profitability.

These initiatives have now been implemented. Our employee count at the end of the year was 126. Although given timing, the impact of the initiatives on our expenses in Q4 was insignificant, as we move into the new financial year, we have an annualized operating expense base in excess of 20% lower than our expenses in 2022, positioning us well for more profitable growth longer term. Total operating expenses in Q4, excluding a $1.2 million provision for doubtful receivables decreased by 3% sequentially and grew 17% year-over-year to $8.8 million. Sales, servicing and marketing expenses were $3.2 million for the quarter and $12.3 million for the year, representing 46% of total revenue. Sales and marketing expenses increased by 21% year-over-year due to the full year impact of expanding our operations during the second half of 2021 and increasing travel and attendance at conferences and events post-COVID.

We expect to continue to realize leverage in sales and marketing over the longer term as we drive growth and capture the large TAM that is in front of us. Technology and software development expenses were $3.0 million in the quarter and $11.4 million for the year, representing 43% of total revenue. Expenses increased 35% year-over-year, the increase being attributable to higher headcount, primarily using offshore contract engineering resources to accelerate the pace of developing and enhancing our software platform and developing new complementary product offerings. G&A expense was $3.8 million for the quarter and $12.5 million for the year, representing 47% of total revenue and 150% growth year-over-year. This expense category includes stock compensation, bad debt and depreciation expenses, all of which are noncash expenses and which in total accounted for $1.9 million of the $7.5 million year-over-year increase.

The remaining increase is due to higher personnel-related costs and additional expenses related to preparing for and becoming a publicly listed company, including professional fees and insurance costs. Our key earnings metric is adjusted EBITDA as we believe this most closely relates to operating cash flow. Adjusted EBITDA loss in the quarter and for the year was $3.2 million and $12.6 million, respectively, in both cases, representing an adjusted EBITDA margin of approximately negative 48%. Free cash flow was negative $3.3 million in Q4, comprising $2.3 million cash used in operations and $1 million cash repayment of our convertible note. Turning to our balance sheet. We ended the year with $3.5 million in cash, cash equivalents and marketable securities and $2.9 million in receivables.

In addition to having a clear path to profitability, we are also committed to ensuring our balance sheet supports our growth objectives and are considering a potential supplemental capital raise. Before turning to 2023 guidance, to summarize the past year, our revenue increased 14% year-over-year in a challenging macro environment. And prior to the revenue accounting revision came in above the midpoint of our guided range, which was set two quarters ago when we announced our first quarterly earnings as a public company. Our subscription revenues, which are highly valued given their recurring nature and our high net retention increased 38% and now represent 77% of total revenue, benefiting from healthy renewals, upgrades and new logo additions.

And in addition, we have good momentum in our brand platform. Our gross margins improved year-on-year to 75% and through recent cost-saving initiatives, we have rightsized our operating expense structure to accelerate our path to profitability. With the results of the quarter and year behind us, I would now like to discuss our outlook for the first quarter and full year 2023. Reflecting increased predictability in our model due to a higher proportion of our revenue being from recurring subscriptions and to provide greater transparency, we are expanding our guidance to include both quarterly and annual revenue and adjusted EBITDA. Before offering guidance, I would like to include our usual caveat. While new states continue to open and issue licenses, cannabis end markets continue to experience industry-specific headwinds where in certain mature markets across the country, a litter product continues to have a negative impact on retail pricing, coupled with a material slowdown in discretionary spending by consumers given the general macro environment.

Although we view these issues as transitory, and think that current trends do not reflect the intrinsic growth rate of the industry, we have prudently considered these factors in building our guidance. Looking ahead, we expect a continuation of strong growth in subscription revenue increasing brand adoption and the emergence of sales from new initiatives to drive top line acceleration in 2023, and we reiterate our expectation of reaching the critical milestone of positive adjusted EBITDA within the fiscal year. For the first quarter of fiscal 2023, we expect total revenue in the range of $7.1 million to $7.4 million, implying a midpoint of 17% year-on-year growth. We’re expecting an adjusted EBITDA loss in the range of $1.4 million to $1.2 million for the first quarter of 2023.

For the full year of fiscal 2023, we expect total revenue in the range of $31 million to $34 million. implying modest top line acceleration at the low end of the range and the near doubling of our growth rate at the high end. We expect an adjusted EBITDA loss in the range of $2 million to $1.5 million. Note the midpoint of the quarterly and annual adjusted EBITDA implies the majority of our full year loss will fall in Q1. In summary, our Q4 and 2022 fiscal year results underscore the strength and resilience of the SpringBig model. As we look ahead to 2023, while macro and industry dynamics remain a factor, we remain focused on the significant opportunity ahead of us and are committed to fiscal discipline and driving compelling returns for our shareholders.

With that, I would like to open it up for Q&A. Operator, please poll for questions.

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Q&A Session

Operator: Thank you. And our first question comes from the line of Owen Bennett with Jefferies. Your line is open.

Owen Bennett: Well, I had a couple of questions, please. First one is, I know you said that the business has been encouragingly but I was hoping you could get a bit more specific on how the corona industry pressures have impacted your business most. And I’m curious to hear how this has differed across the smaller mom-and-pop like retailers and then the larger MSOs? Thank you.

Jeff Harris: Sure. So in terms of sales velocity, we haven’t necessarily seen a slowdown in new accounts coming in. As we mentioned, we saw 80 accounts coming into the fourth quarter, and we’re continuing to see that same pace as we move forward into 2023. So we haven’t seen a slowdown there. Churn has and reduced a lot. So therefore, from a churn standpoint, it’s been a banner fourth quarter where we had lower churn in the fourth quarter than we’ve had in a long time, which is great. So from those two perspectives, we’re seeing continued movement. I think we’re probably seeing how – where and how the pressure is affecting our clients is they are staying closer to their subscription budget. So therefore, although we are seeing some overage revenue, Owen, we are not necessarily seeing it in the same abundance that we saw before.

So – and that’s the result of two things. That’s a result of, number one, us working hard to get our clients into the right subscription, so they’re paying the right price for the usage that they need and the usage that they want. And we’re also seeing it where they’re being more careful of managing those budgets where they’re not necessarily going over as they did a year or 2 ago when they were not necessarily carrying as much about their budgets, they are definitely more mindful of their budgets today.

Owen Bennett: Great. That was really helpful. And then my second question is just where are we exactly with recognizing actual revenue from the incremental business areas? Obviously, you’ve spoken about providing data info And then you mentioned today’s PBD liquor stores and vape shops. I know you mentioned you signed some contracts, but just wanted to know when you might actually recognize revenue there? And then also possibly, is it possible to get a potential TAM do you think for these different areas over the next couple of years? That would be helpful as well. Thank you.

Jeff Harris: Sure. So in terms of non-cannabis so as we mentioned, non-cannabis sales have started. We have a number of contracts in already. So revenue has already started to be generated there. What we’re learning when it comes to the non-cannabis side is the – these referrals are coming in from the non-cannabis point-of-sale corona that we integrated with. And they are ramping up their communication to their clients. They have about 2,500 clients. So they’re ramping up their communication to their clients about the integration that we have with them and how it can impact their business. So those leads are starting to come in. Demos are happening and our deals are getting signed. In addition to that, we’re talking to at least two or three other point-of-sales that were in integration discussions with.

So therefore, as those evolve, we’ll actually have a much larger universe of clients in the non-cannabis space to solicit, work with and sign up. So that’s happening on that side. On the other areas, so we’ve been working on kind of like our payment facilitation as a product, as I mentioned before. And that product is in market. We already have contracts out. We have a couple of contracts in. So our ability to help both retailers and their consumers leverage loyalty along with payments is already happening. We probably expect revenue from those to start next month with an acceleration in the May, June time frame as we’re looking ahead at some of the contracts and when the action want to launch. And then the third area that we’re excited about is the subscription area that we talked about where we’ve already launched that but we actually have an enhanced offering that’s already been pitched to clients and we’re seeing receptivity for those.

So therefore, we expect to start seeing subscription revenue in Q2. And for those to mean payments and subscriptions to meaningfully grow from Q2 onward.

Paul Sykes: If I can just add to that in terms of revenue, it’s – as Jeff alluded to, it’s going to be very much back-end loaded this year. I wouldn’t assume there’s a huge amount. Business development in this area is great. The momentum is good, but it’s going to take time for meaningful revenues to accumulate. So very much back end of the year.

Owen Bennett: Thanks. That was really helpful. Appreciate the time.

Paul Sykes: Thank you, Owen.

Operator: Thank you. One moment for our next question. And that will come from the line of Scott Fortune with Roth MKM. Your line is open.

Scott Fortune: Good afternoon and thanks for the questions here. I just want to follow up a little bit color. You have over 3,000 retail locations down on the platform. Can you provide a little more color as far as the guidance for this year? And it sounds like you’re sticking with the 80, whatever range to kind of move forward from a client base. And what are we seeing from the penetration on the MSOs versus the independent kind of help on the size of these clients going forward for you in your guidance here going forward in 2023?

Jeff Harris: Yes, sure. So we’ve been tracking somewhere between 80 to 90 new clients a month – I’m sorry, a quarter. And we’re not seeing that necessarily slow down. The first quarter is right on track in looking at the numbers of where we are today, we expect to be between 80 to 90 new clients again in the first quarter, and we’ve been tracking that way for the last few quarters. So that’s kind of the range that we’re looking at in terms of clients. In terms of our average revenue per client, we are seeing that pick up in the first quarter. So we’re seeing it just at about $1,000. I think with some of the last few sales that we brought in, is probably just over $1,000 in terms of the average revenue per month per client. So we’re seeing renewed interest from what I’ll call, larger midsized operators, and we are definitely seeing renewed interest from some of the larger operators, whether they be MSOs or single state operators.

We have a number of major opportunities in place. We had one big expansion from an MSO where the pickup that we had with that client was the equivalent of probably a bunch of other MSOs if you would – if you would get them independently. And we are seeing like renewed excitement for some of the things that we’re offering from the MSO community in addition to what I’ll call the larger mid-tier.

Scott Fortune: I appreciate the color. Just follow up on that, are there states that are really starting to accelerate for you as we see some of the new adult-use states come on or regardless of New York and Mescon there, but there are other states you can call out that have been starting to adopt your technology in the loyalty platform here?

Jeff Harris: Yes. So we are actually seeing a lot of activity in New Mexico. We’re seeing a lot of activity in Missouri. We are seeing a lot of renewed activity in Colorado and Arizona. So those are markets that we’re seeing renewed activity in. We continue to see strong activity in Washington, and we’re seeing strong activity in California. So it’s a combination, Scott, some of the newer adult-use markets where we’re gaining a lot of traction as well as some of the more mature markets that ebb and flow a little bit. And right now they’re flowing in our direction in terms of new business coming in.

Scott Fortune: I appreciate that. And then last one for me, there’s emphasis on brands and building out that as far as the brand campaigns. And can you provide a little bit more color on the outlook of brands as a percent of revenue as that ramps up here into 2023, kind of, I guess, the number of brands on the platform, a large opportunity with over 5,000 or brands outside of the unbrand to monetize on that step. Just an update on the brand side of the…

Jeff Harris: Yes. So we’re seeing — again, we’re seeing some nice traction on the brand side. We don’t expect the brands business in 2023. We expect it to be somewhere between 5% and 10% of revenue in 2023. We expect it to continue to accelerate in 2024. We are introducing a couple of additional products on the brand side. So right now, as you know, we provide a co-marketing platform that allows brands to serve up content to offer up to retailers that are selling their products. So the retailer sends the message with that content to get interest from their consumers to come in and buy that brand. In addition to that, we are just launching a new offering where we’re going to facilitate the ability for brands to sponsor bonus point promotions at retailers.

We already have a number of brands and a number of retailers interested. So we think that that’s going to be a nice addition where we’re going to facilitate the ability for a brand to sponsor bonus points. And when they do, they will fund the bonus points that are earned at the retailer. So the retailer really has no downside to participating in those bonus point promotions and the brand themselves gets excited because they get the ability to influence the customer purchasing behavior in the store by offering those bonus points. So we’re going to be starting to add additional products. But I would still stay within the — it’s going to be within 5% to 10% of our revenue, and we continue to expect that to grow as brands kind of continue to figure out how they’re going to leverage their marketing spend in the space and how those brands start mature.

Scott Fortune: I appreciate the color. Thanks, and graduations once again.

Jeff Harris: Thank you.

Paul Sykes: Thanks, Scott.

Operator: Thank you for participating in today’s question-and-answer session. I would now like to turn the call back over to Mr. Jeff Harris for any closing remarks.

Jeff Harris: Thank you all for being a part of the earnings call, and we’re excited for ’23 and look forward to continuing the conversation with everyone. Have a great evening.

Operator: Thank you for participating. This concludes today’s program. You may now disconnect.