CDLX - Cardlytics Is Moving Towards Positive Free Cash Flow

2023-03-05 03:00:28 ET

Summary

• CDLX's Q4 numbers are bad, but it was expected.
• The newly appointed CEO is implementing significant modifications to the company's operations in order to increase efficiency.
• The platform's stickiness is evident as customer engagement continues to increase.
• Despite the loss of Starbucks, the business has managed to strengthen itself.

Cardlytics (CDLX) has experienced considerable volatility in recent times due to its diminishing performance and numerous challenges throughout 2022. The stock went through significant ups and downs, which may cause anxiety and frustration among investors. Despite this, there are several compelling reasons to remain optimistic about CDLX, particularly its unparalleled scale and distinctiveness in the industry. The recent change in management is a significant positive, and it is highly possible to see improvement in 2023.

The Q4 decrease was as anticipated, but there were no positive surprises.

CDLX had its worst quarterly performance since the COVID lockdown period, with billings totaling $126.1 million, a 5.9% decrease year-over-year. Revenue was $82.5 million, an 8.4% decrease year-over-year. Adjusted EBITDA showed a loss of $6.1 million, billings margin was down 1.8% YOY. The decline was in line with their Q4 guidance, the management had already anticipated additional churn during their Q3 conference call . Nevertheless, there is no reason to be pleased with the fact that all numbers went down.

The Q4 call failed to deliver any pleasant surprises, unlike the Q3 call that disclosed unexpected news such as the migration of 50% of MAU to the ad server (which may include Chase), the objective to achieve cash flow positivity in Q3 2023, and the intention to migrate nearly all banks to the cloud by Q1 2023. On the other hand, the Q4 call lacks any notable announcements apart from a few minor operational improvements, making it rather mediocre.

It appears that the new CEO is prioritizing execution

In my opinion, CDLX has no shortage of excellent business ideas and visions. The previous founders have set up a great structure for growth. With 182.7 million monthly active users, it's almost on par with Facebook's US and Canada MAU of 266 million. The acquisitions of The Brig, Dosh, and Entertainment are brilliant, and the potential for further success is boundless. However, CDLX's main problem lies in its inability to provide the products and services it promised to deliver. The integration of its acquisitions hasn't happened. The user interface, pricing model, and customer compositions have remained largely unchanged for the past 12 years. The previous management team was simply unable to execute necessary improvements.

Karim Temsamani, the new CEO of the company, appears to be a pragmatic and results-driven manager. In his Q4 call, he emphasized the importance of "product" 28 times, which is significantly higher than his predecessor Lynne Laube, who only mentioned it eight times. Moreover, he focused on "efficiency" nine times and "operation" eight times, while former CEO Lynne Laube did not mention them in her last call .

Since assuming the role, Karim has prioritized achieving positive cash flow by Q3 2023. He has helped CDLX reduce costs by $35 million by the end of December 2022, which will be reflected in the Q1 report. In addition, he has shared specific measures to improve efficiency, such as upgrading the ad engine to increase RPM by 10% to 15%, implementing new pricing models to optimize between advertisers and customers, and improving product performance assessments.

CDLX has garnered greater significance and has been better received by the users.

Although financial numbers are not good, the KPIs for underlying business strength are actually doing really well. Despite losing a significant restaurant client, CDLX still observed an 8.6% year-over-year increase in users activating offers. Moreover, in 2022, engaged customers spent 1.2x more on their card and made 1.3x more shopping trips compared to non-engaged customers. CDLX also made significant progress in expanding their advertiser base by 8%, with a 17% increase in advertisers with billings between $500,000 and $5 million and a 44% increase in advertisers with billings greater than $5 million. These are incremental yet solid advancements, and it's evident that CDLX holds greater significance for consumers, banks, and advertisers.

Losing a significant customer might be a good thing

CDLX faced numerous critical crises in 2022, making it a challenging year. These included the delay in Bank of America contract renewal, questions raised by Chase's acquisition of Figg, and losing a significant customer as a key advertiser. However, despite these issues and macro headwinds, CDLX managed to achieve a full-year sales growth of 12%, demonstrating the resilience and antifragility of the business.

The loss of the significant customer is very bad for sales and earnings. However, this also prompted CDLX to undergo transformation and diversification, reducing their heavy reliance on several large customers and eliminating a significant risk.

As a result, in 2020, 2021, and 2022, CDLX's top five marketers accounted for 35%, 29%, and 17% of their revenue, respectively. In 2022, no marketer accounted for more than 10% of their revenue. I think this is a huge improvement.

Risks

While CDLX's business model is certainly unique and innovative, it is not immune to the risk of failure. As a new platform, CDLX must compete for advertising budgets with giants such as Google (GOOG) (GOOGL) and Meta (META), making it crucial for the company to maintain its ad performance and platform engagement. Currently, CDLX boasts a 30:1 return on ad spend for marketers, but it remains to be seen whether its appeal and effectiveness will diminish over time as the public becomes more accustomed to the platform. Additionally, CDLX is currently facing pressure due to earn-out disputes with the Bridg acquisitions, which entail significant payments of 126M (first earnout) and 67M (second earnout) fees. The path forward for CDLX to resolve these disputes remains unclear, and the company may face future dilutions and debt loads that pose significant risks if the business itself begin to deteriorate.

Bottom Line

The founders of the company had a visionary outlook, but they made a notable error by overpaying for Bridg and Dosh. As a result, the company recorded a non-cash impairment of goodwill worth 270 million. However, I believe that the new CEO, Karim, is the ideal candidate to resolve the company's present challenges. It is worth noting that he was the Head of Global Partnerships at Stripe , which is currently regarded as one of the leading tech companies in Silicon Valley and was recently valued at $60 billion. His decision to leave the company and join CDLX prior to its IPO suggests that he has recognized potential opportunities with CDLX.

The company has provided guidance for Q1 2023, estimating billings to be in the range of 84-93 million, which represents a year-over-year decline of approximately 10%. The adjusted contribution is expected to range from 26-31 million, resulting in an anticipated adjusted EBITDA loss between 10-17 million. The cash operating expenses for Q1 are projected to be around 42 million, with Q1 typically being the lowest point of the year. The company's historical data indicates that Q3 sales levels are often 1.5 times that of Q1 (chart below). Therefore, if the company can maintain operating expenses at the 40+ million level, there is a strong possibility of achieving positive free cash flow.

Excluding the loss of a significant customer mentioned earlier, CDLX anticipates low to mid-single digit YOY growth for its core U.S. business in Q1. This impact from losing a significant customer should disappear by Q3, at which point the company should resume a higher growth rate moving forward.

From a risk-reward perspective, CDLX presents significant potential. It is true that the company had some issues. But it is difficult to overlook the large number of monthly active users and untapped growth potential. The Q4 results showed lots of hidden strengths. I see a higher probability that CDLX can execute the adoption of the ad server and Bridg in 2023 which will be huge!

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