Research Notes: Cardlytics $CDLX (Quantitative #1)
Quantitative notes from researching, investigating, and thinking through Cardlytics.
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Research Notes: Cardlytics $CDLX (Quantitative #1)
Subject
Cardlytics ($CDLX)
Quantitative Research Notes #1
Last Updated
Updated as of 5.11.2023
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Table of Contents for Notes #1
These are the notes on this page (for the remained of the notes, see Quantitative Research Notes #2 and #3).
Earnings1
Q1 2023 Earnings Call
Notes and Thoughts After the Call
Notes and Thoughts Before the Call
Q4 2022 Earnings Call
Notes and Thoughts After the Call
Notes and Thoughts Before the Call
Q3 2022 Earnings Call
Notes and Thoughts After the Call
Notes and Thoughts Before the Call
Q2 2022 Earnings Call
Notes and Thoughts After the Call
Notes and Thoughts Before the Call
Q1 2022 Earnings Call
Notes and Thoughts After the Call
Notes Before the Call (Possible Management Changes, Third Party Content Providers, BofA, Numbers, Open Banking, Dosh, Bridg, New Ad Server, New Banks)
Q4 2021 Earnings Call
Notes From After the Call
Notes and Thoughts Before Q4 2021 Earnings Call (Thoughts on Possible Results and What Could be Released / Discussed / Announced. IDFA, CDLX, FB, and More)
Q3 2021 Earnings Call
Notes From After the Call
Notes and Thoughts Before Q3 2021 Earnings Call
Market Price / My Buying and Selling
Update Log
5.8.2023, 5.9.2023
Earnings: Q1 2023 Earnings Call: Notes and Thoughts After the Call
(#176) 5.11.2023: Thoughts After Q1 2023 Earnings Call (Part 3)
(#175) 5.9.2023: Thoughts After Q1 2023 Earnings Call (Part 2)
(#174) 5.8.2023: Thoughts After Q1 2023 Earnings Call (Part 1)
4.3.2023, 4.4.2023, 4.5.2023, 4.7.2023, 4.12.2023, 4.17.2023, 4.18.2023, 4.22.2023, 4.23.2023, 4.24.2023, 4.25.2023, 4.27.2023, 5.1.2023, 5.4.2023:
Earnings: Q1 2023 Earnings Call: Notes and Thoughts Before the Call
(#173) 5.4.2023: Final Thoughts Before Today's Earnings Call
(#171) 5.1.2023: First Thoughts on “Update to Bridg Earnout Payments”
(#170) 4.27.2023: Updated VWAP Projections (5 Days Remaining of 20) + Additional Bridg Earnout Payment Possibility
(#169) 4.25.2023: Updated VWAP Projections (7 Days Remaining of 20)
(#168) 4.24.2023: Follow-up Thoughts on the Timing of Q1 Earnings + Announcing the Bridg Resolution
(#167) 4.23.2023: Thoughts on the Timing of Q1 Earnings + Announcing Bridg Resolution
(#166) 4.22.2023: Updated VWAP Projections (9 Days Remaining of 20)
(#165) 4.18.2023: Updated VWAP Projections (12 Days Remaining of 20)
(#164) 4.17.2023: Current VWAP for 2nd Bridg Earnout Payment + VWAP (Stock Prices and Volume) Projections
(#163) 4.12.2023: Potential Stock Price After the Bridg Resolution
(#161) 4.7.2023: Interpreting the Possible Timings of Announcements
(#160) 4.5.2023: 2025 Convertible Senior Notes + Updated Liquidity Analysis / Share Count / Future Value (with 100% cash for 2nd earnout)
(#159) 4.4.2023: Updated Liquidity Analysis / Share Count / Future Value (Based on higher stock price for VWAP + updated guidance)
(#158) 4.3.2023: Dates for 2nd Bridg Earnout Payment VWAP, and Timing of Possible Announcements / Earnings
3.28.2023:
Thoughts on Market Price Over Time / My Actions
3.3.2023, 3.4.2023, 3.5.2023, 3.6.2023, 3.8.2023, 3.9.2023, 3.11.2023, 3.14.2023, 3.15.2023, 3.18.2023, 3.19.2023, 3.23.2023, 3.27.2023
Earnings: Q4 2022 Earnings Call: Notes and Thoughts After the Call
3.27.2023: Possible Upcoming Announcements that Could Increase the Stock Price for the 2nd Bridg Earnout
3.23.2023: Updated Bridg Dispute Thoughts (Offsetting Factors, Change in Probability, MNPI)
3.19.2023: Updated Liquidity Analysis, Future Share Count, Future Value Per Diluted Share
3.18.2023: New LOC Covenants Related to the Bridg Earnouts and the Dispute (Related to Partial Drawdown of Line of Credit)
3.15.2023: Limit from Accounts Receivable (Related to Partial Drawdown of Line of Credit)
3.14.2023: Partial Drawdown of Line of Credit, and Interest on the LOC (Related to Drawdown)
3.11.2023: CDLX’s and Bridg’s Prior Use of SVB, Updated Liquidity Analysis (Under New VWAP + New Possibility)
3.9.2023: Chase and the New User Experience (on the new ad server), Convertible Senior Notes (a change related to maturity)
3.8.2023: Insider Buying, Confirmation of Reporting Mistakes, Confirmation of an Executive Leaving
3.6.2023: Changes to the Line of Credit, Bridg Earnouts and Dispute Updates, Liquidity After Bridg Earnouts and Dispute
3.5.2023: Actual/Guidance vs Expected Financials (MAUs, Billings Margin, Revenue, Gross Profit, EBITDA, FCF)
3.4.2023: Potential Reporting Mistakes (x3): Latest 10-K, Press Release, etc.
3.3.2023: New User Experience, New Ad Server, Product-Level Offers, Category-Level Offers, Engagement Stats, NOLs, Shares Outstanding
2.5.2023
Earnings: Q4 2022 Earnings Call: Notes and Thoughts Before the Call
2.5.2023 #2: Bridg Dispute and Liquidity
2.5.2023 #1: Macro Ad Market, New Offers, New Ad Server, New Banks
11.1.2022, 11.2.2022, 11.10.2022, 11.11.2022, 11.12.2022, 11.16.2022, 11.18.2022, 12.4.2022, 12.5.2022, 12.7.2022
Earnings: Q3 2022 Earnings Call: Notes and Thoughts After the Call
12.7.2022: Dec 7 Raymond James Conference Notes / Thoughts
12.5.2022: Second Bridg Earnout + Upcoming Dec 7 Conference
12.4.2022: Charging for Engagement to "Better Optimize the Monetization"
11.18.2022: Revenue Share (Deferring vs Boosting Offers)
11.16.2022: Chase Offers Section Updates
11.12.2022: Increasing Pricing as one method to "Better Optimize the Monetization" (Near-Term Impact / Solution)
11.11.2022: Incorrect Cash Burn Assumptions/Concerns (Related to Macro / Lower Advertising Spend)
11.10.2022: Liquidity / Line of Credit / Bridg Dilution
10.20.2022, 10.25.2022, 10.27.2022
Earnings: Q3 2022 Earnings Call: Notes and Thoughts Before the Call
10.27.2022 - Cost Cutting: Closing Multiple Offices
10.27.2022 - Cost Cutting: Employee Headcount
10.25.2022: Insider Actions, Chase/Figg , Gain/Loss of Bank Partners
10.20.2022: Notes from “How Marketers are Achieving Measurement Confidence in a Time of Performance Pressure”
10.16.2022
Market Price: Thoughts on Market Price Over Time
9.20.2022, and 9.25.2022 x2
Earnings: Q3 2022 Earnings Call: Notes and Thoughts Before the Call
9.25.2022: Detail on layoffs, and employee comments on new CEO
9.25.2022: Current Observation of Actions by Advertisers During this Environment
9.20.2022: Chase updates (related to the new ad server)
9.6.2022 - 9.7.2022
Earnings: Q2 2022 Earnings Call: Notes and Thoughts After the Call
9.6.2022: Later in the day I added to this update, with an additional important observation related to new ad server and Chase migration
9.7.2022: Another update confirming which bank is scheduled to launch the new ad server in Q4 2022.
8.2.2022 - 8.3.2022
Earnings: Q2 2022 Earnings Call: Notes and Thoughts After the Call
7.29.2022
Earnings: Q2 2022 Earnings Call: Notes and Thoughts Before the Call
7.17.2022
Market Price: Thoughts on Market Price Over Time
7.16.2022
Earnings: Q2 2022 Earnings Call: Notes and Thoughts Before the Call
5.6.2022
Market Price: Thoughts on Market Price Over Time
Earnings: Q1 2022 Earnings Call: Notes and Thoughts After the Call
5.2.2022
Earnings: Q1 2022 Earnings Call: Notes and Thoughts After the Call
4.26.2022
Earnings: Q1 2022 Earnings Call: Notes Before the Call
Numbers
Management Changes
BofA Renewal
4.24.2022
Earnings: Q1 2022 Earnings Call: Notes Before the Call
Management Changes
4.22.2022
Earnings: Q1 2022 Earnings Call: Notes Before the Call
Numbers
Management Changes
Market Price: Thoughts on Market Price Over Time
4.20.2022
Earnings: Q1 2022 Earnings Call: Notes Before the Call
Management Changes
4.18.2022
Earnings: Q1 2022 Earnings Call: Notes Before the Call:
Possible Management Changes, Third Party Content Providers, BofA, Numbers, Open Banking, Dosh, Bridg, New Ad Server, New Banks
3.11.2022
Q4 2021 Earnings Notes From After the Call
3.8.2022
Q4 2021 Earnings Notes From After the Call
3.2.2022
Q4 2021 Earnings Notes From After the Call
2.25.2022 - 2.28.2022
Earnings. My Notes and Thoughts Before Q4 2021 Earnings Call. Thoughts on Possible Results and What Could be Released / Discussed / Announced
2.9.2022
Earnings. My Notes and Thoughts Before Q4 2021 Earnings Call. Thoughts on Possible Results and What Could be Released / Discussed / Announced
2.8.2022:
Sentiment by Other Investors Over Time
Thoughts on Market Price Over Time
2.6.2022
Earning. My Notes and Thoughts Before Q4 2021 Earnings Call. IDFA, CDLX, FB, and More
11.2.2021
Q3 2021 Earnings Call
10.12.2021
Sentiment by Other Investors Over Time
10.10.2021
My Notes and Thoughts Before Q3 Earnings Call
10.4.2021
Thoughts on Market Price Over Time
8.6.2021
Thoughts on Market Price Over Time
5.17.2021
Thoughts on Market Price Over Time
5.10.2021
Sentiment by Other Investors Over Time
Disclaimer for Research Notes
There may be incorrect information, outdated information, or errors in the following contents, as the following are notes that I wrote down while researching. I include dates where I have them, making it easier to know when the notes / thoughts were written down. The older the notes, the more likely I have changed my mind or found new information.
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Earnings: Thoughts Before and After Calls
Q1 2023 Earnings: Notes and Thoughts Before the Call
(#176) 5.11.2023: Thoughts After Q1 2023 Earnings Call (Part 3)
11. Updated FCF Timing Expectations (and an additional liquidity scenario)
In my quick liquidity analysis in Update #174, I assumed $13M of cash burn in Q2, Q3, and Q4, to account for the deferral of CF positive. Assuming CF by Q1 of 2024, this analysis showed CDLX would be fine from the perspective of not needing any additional cash in the near term for operations.
After the call, CDLX has made it seem they are expecting CF positive in 23Q4 given it is a strong quarter due to seasonality, and could still be CF positive in 24Q1 but it may be close given it is a seasonal low, with expectations of CF positive from 24Q2 and forward.
As a second scenario, more closely matching CDLX’s post-call commentary:
$139.2M Q1 Cash Position
- $72.6M Bridg Earnout
- $13M Q2 Burn (mid-point of EBITDA guidance at -$8M, but then used $5M lower for FCF)
- $6.5M Q3 Burn (mid-point of Q2 loss and Q4 breakeven)
- $0M Q4 Burn (seasonal high to get to breakeven)
- $6.5M Q1 Burn (same as Q3, due to seasonal low)
= $40.6M Estimated Ending Liquidity at 3/31/2024
Given less cash burn in this scenario, it leads to higher ending liquidity, and the same conclusion is reached, with CDLX having enough liquidity for operations (thanks to the favorable Bridg outcome).
CDLX also later said they still have some room to cut expenses if needed. I’ve been assuming $45M operating expenses per quarter (based on CDLX in Q4 saying $42M cash cash operating expenses but increasing for merit and promotions), but sounds like CDLX could get that down to maybe $38M. I believe the marco would have to turn quite bad for that to be needed and to occur, but it is an option.
12. Additional Notes on Line of Credit (Amount Available, vs Factoring)
CDLX reported they had $42.282M and $5.48M left on their line of credit, in Q4 and Q1 respectively:
In the 10-Q it says: On November 29, 2022, we amended our 2018 Loan Facility to modify the eligible account receivable to exclude UK accounts, reduce the ability to borrow up to 85% of the amount of our eligible accounts receivable to 50% and adjusted the required minimum level of adjusted contribution.
Using the information CDLX provides + this detail, I get the following when attempting to match their numbers:
12/31/2022: $115.6M account receivable x ~92% US (to exclude UK) x 50% advance rate (used to be 85%) - $0 drawdown as of 12/31 = $53.180M available.
vs $42.282M CDLX lists in the 10-Q (or a $10.898M difference)
3/31/2023: $93.7M account receivable x ~95% US (to exclude UK which is smaller now) x 50% advance rate - $30M drawdown = $14.511M available.
vs $5.48M CDLX lists in the 10-Q (or a $9.031M difference)
I am not quite sure why I am off by $9M-$11M. It could be that UK accounts receivable are a higher percentage than their percentage of revenue. Maybe it is more a function of minimum liquidity requirements. Regardless, this is now much less of a concern given the Bridg outcome and CDLX having enough liquidity for operations.
CDLX did say there are undisclosed calculations based on receivables that leads to the $5.480M at 3/31/2023. While that may be the case, I am still hesitant to believe that, since at one point CDLX said they didn’t disclose any of the LOC information, despite them including every document and amendment in the exhibits at the end of the financial statements (although key figures were redacted). And even here, CDLX provides general information, such as saying UK receivables are excluded and the advance rate decreased to 50%. Again, while this may not matter, if CDLX has more liquidity than they realize, that would be good for them and others to know. And while 99% of the time I would never question a company’s reported numbers, CDLX had many issues in the last report (including even this amount available) + the large error in ARR for Bridg, so I don’t think it is too unreasonable for me to question it. I’m most likely wrong here though. But again, it most likely doesn’t matter, since CDLX has enough liquidity without this additional capacity.
With respect to getting more liquidity with the same accounts receivable, or refinancing the LOC before maturity, CDLX currently says they have no plans to do factoring at this time. However, I believe this could change under the new CFO, given it would seem factoring would lead to more liquidity on the same accounts receivable.
13. Additional Notes on Converts (and potential near-term ARPU)
Wayfair announced yesterday the pricing of $600M converts at 3.5% due 2028. They intend to use the proceeds to repurchase their 2024 and 2025 notes.
While different situations / businesses / balance sheets, to me this is a good sign that CDLX could do something similar in this market with their current 2025 converts. I am not talking about the same terms, but more regarding the fact new converts are occurring in this market.
Many seem to think CDLX will need come up with cash for the 2025 maturity, such as cash from operations, but given what I’ve heard from others + what I’m seeing in the current market, I believe we will see CDLX rollover the existing converts into new ones.
I do not think CDLX will rollover to new converts any time soon, and no reason to do it soon, since have 2+ years. If CDLX executes on their stated plans, it should lead to higher ARPU and CF, which should lead to a higher market price, which likely increases the market price on the converts and decreasing their yield, altogether making any future actions easier.
The following is how I’m thinking about potential ARPU in the near to medium term (which should help with the stock price):
I do think CDLX increases ARPU here in the next couple of years, which will have an impact given the large MAU base + operating leverage + near CF positive.
So if they get all banks on new ad server and new user experience by end of this year 2023, then have a full year of new offer constructs like product level offers + more A/B testing + more users seeing and engaging throughout 2024, I think you get to $3-5 ARPU run rate in 2025.
BofA was $2.30 in 2018 with less offers, old tech, old UI, no new offer constructs, etc. ARPU decreased somewhat from denominator effect of large increase in MAUs from Chase and Wells, leading to about the $1.5 seen today.
So should get back to $2.30, then $3 with this now larger reach and additional time and more advertisers, then $4 - $5 with all the other improvements and higher engagement + unlocking new ad budgets through category and product level.
$4 - $5 ARPU is still quite low in relation to Pinterest at $24 TTM for US and Canada, and Snapchat at $31 TTM for US and Canada (I don’t think it is accurate to compare to global ARPU numbers).
(At $5 ARPU run rate x 200M MAUs x 50% rev share - $180M OpEx - $25m delivery costs - $50M extra OpEx and delivery costs for growth) = $245M. (Likely little to no taxes from large NOLs.)
So with a little CF positive in 2024 + this in 2025, could have a small build up of CF that gets close to covering converts.
This requires very good execution by CDLX. But this is also about 2.5 years post Karim taking over, leading to $1B in rev, where at Google in 2.5 years he took the new Global Mobile division from $0 to $10B.
So I don’t think this is crazy, given Karim has more experience now, leveraging existing CDLX infrastructure, essentially only doubling 2018 BofA ARPU from larger reach + new user experience + product-level offers and more, etc.
14. Other Less-Discussed Liquidity Resources
As shown in the liquidity analysis, given the favorable resolution of the Bridg dispute, CDLX likely has enough liquidity even with CF+ being pushed out.
And if things got tight, as also mentioned earlier, CDLX could cut some expenses, or instead securitize / factor their accounts receivable to get more than using it as collateral for the LOC (current CFO will not pursue this, but the new one might).
But there is even another underdiscussed liquidity resource. It isn’t too liquid, but it could be converted to cash if CDLX needed another quarter or two of runway (without taking on additional debt or dilution). I discussed this here, but copied this section of notes for convenience, and updated it to reflect the current situation:
Entertainment as a Liquidity Resource
With CDLX updating the Entertainment app, it got me thinking.
Entertainment could be sold if CDLX really needed the additional liquidity.
Maybe it is harder in this environment to sell, and could come with an even lower price if the buyer knew CDLX was selling out of desperation, but it could be an option.
Entertainment was bought at $14.6M on January 7, 2022 for less than 2x revenue, so approximately $7M in revenue.
With an updated app to improve the product, as well as possible other enhancements learned from CDLX and Dosh, maybe CDLX could still get 2x revenue (meaning, 2x originally, then <2x from environment and force selling, then 2x from improvements).
Where CDLX could likely even get a slightly higher multiple than where they paid, and why this could be a good transaction, is CDLX could agree to still partner with Entertainment to use their offers within the banks. (This is similar in a way to a sale leaseback)
Originally this was one of the purposes of Entertainment, to have this small to mid-market offers within the banking channel.
“Our plan is to use Entertainment's content on the Cardlytics platform once our bank partners launch our new ad server and roll out the new user experience.” - 21Q4 Earnings
If CDLX did use Entertainment offers within the banks, such as under its own tab on the new UI, it would increase Entertainment’s exposure and usage significantly, even if it is just Chase currently. This would increase its value compared to pre-CDLX.
So together you have improving app and features + possibly higher distribution, which could more than offset any multiple contraction in this environment or from a quick sale, and possibly a higher multiple given the expected growth from more banks moving to the new user experience. Then additionally, possibly more subs and higher revenue, leading to both a multiple expansion on top of earnings growth.
In terms of Entertainment having even higher revenue now, there was the trial with AmEx, and CDLX had 40% off offers in all the banks for an Entertainment subscription, so both could have led to more subscriptions and higher revenue.
In terms of estimated revenue:
“For the year ended December 31, 2022, Entertainment's combined revenue included in the consolidated statement of operations was approximately 3% of consolidated revenue, respectively.”
At 3% if $298M of revenue, that is about $9M revenue, showing the growth discussed. 3x multiple is $27M. 4x multiple is $36M. Pretty significant in relation to cash burn around $5M-$15M.
However, it is possible having these offers in the bank is no longer the plan (which would be another reason to sell). Karim mentioned before they are waiting on local offers, or at least with self service for small business. But some of Entertainments offers are mid market, and likely larger than a very small business that has a higher risk of going out of business after placing an offer (which was kind of the risk Karim mentioned from what I remember).
Altogether, it would seem CDLX has more options that one may first think when considering their liquidity options (beyond raising equity, rev share deferral or exchanges for equity, new debt given they are about CF positive, etc.)
Entertainment as a Liquidity Resource (Potential Buyers)
I have been thinking more about the potential divesting of Entertainment to get additional liquidity IF CDLX absolutely needed it, such as if they were not getting to FCF positive.
In terms of who could actually buy Entertainment, and why this may make even more sense than I originally considered, is CDLX could sell Entertainment to one of their bank partners, like Chase. So instead of CDLX getting new financing from someone like Chase, they instead sell Entertainment.
Why I think this could make a lot of sense:
Chase would be helping CDLX stay alive via this cash, which also helps Chase by continuing to have CDLX offers. This may also lead to a more favorable exit multiple. (Some think Chase would want CDLX to fail to buy them up cheap, but the advantage of CDLX is an in independent party who aggregates the banks’ reach).
Chase can then offer Entertainment subscriptions for free to its users. This would be a similar perk to have a free DoorDash subscription or Instacart+, both of which I use with my Chase card.
Chase could also add their SMB clients to the Entertainment app, helping their SMB clients grow their business.
Doing it this way, where maybe Chase does not use these Entertainment offers in their Chase Offers section, it does not create a conflict of interest between the other CDLX bank partners (where Chase would not have further differentiation utilizing these offers that were supposed to be in all banks on the new user experience).
But maybe there is still too much conflict that CDLX cannot sell to a CDLX bank partner. So a very logical buyer is a non-CDLX bank partner who also already trialed offering free Entertainment subscriptions to their users, and continued to offer it as of 3/25…AmEx.
Again, this is only if CDLX absolutely needed the funding. But shows there are options, and CDLX is likely in a better position than most realize.
15. Possible Reasons for Lack of Positive Commentary on the Call
While a lot of the big positive news came ahead of earnings, such as the updated guidance + Bridg resolution, I still felt there was a lack of positive commentary. My first reaction after the call was while there were a few good updates, such as the 50% higher impressions or 74% higher redemptions, there wasn’t too much else.
However, there were signs that CDLX is holding back some of that more positive commentary + updates.
For one, CDLX said after mentioning the 50% higher impressions on the new UI,
“We believe this is only the beginning. As the new UI has rolled out, we've observed other engagement metrics on the new UI that are equally promising, and we intend to disclose some of these statistics when we have scaled data across more bank partners”
Therefore, CDLX wasn’t sharing everything.
So while CDLX has less incentive to provide more positive updates and commentary, I still felt it was strange they wouldn’t want to share more, such as these additional stats.
Well post call, CDLX said too many are focused on liquidity and cash flow at this time, that they did not want to waste providing the other positive items, since they would simply go ignored. Maybe this is not fully the truth, however, it does make some sense, since CDLX would not get credit or market price benefit from sharing non-material positive news at this time. I wonder though if that means CDLX is waiting on holding an investor day.
16. UK Bank Update + Fintechs
In Update #175 I discussed the UK bank that left, Santander, and for Tenerity. Supposedly Santander has already ben disappointed by the switch. So we will see. Could be interesting if they resign with Santander, and with the change in auto enroll, it could end up being a positive, given auto enroll is only for new users, not existing.
CDLX also mentioned the signing of a UK fintech. The only two I really know are Monzo and Revolut, and it sounds like it may end up being one of them. Signing one of these may offset the loss of Santander.
17. Final Thoughts
While cash flow positive is pushed back, this is much less of a concern now given the Bridg resolution, with CDLX having enough liquidity until cash flow positive.
If CDLX absolutely needed additional liquidity before cash flow positive, there are other solutions, such as factoring their accounts receivable to get more than their LOC, or even selling Entertainment, or other options such as a small rights offering (but not too much, to avoid too much dilution at these prices).
Other upcoming liquidity / cash requirements, such as with the maturing of the LOC and 2025 converts, while both something CDLX will need to handle, they are not too much of concern, at least not at this time and not in relation to how much others are worrying about them. There are multiple options to handle both (LOC: extend with PacWest, refi with new bank, factoring AR, etc. Converts: rollover to new converts, other options previously discussed including above), and the ease of handing increases as long as CDLX executes (which is the most important). I do not think we will see these addressed until a new CFO comes in, which will likely be for the better anyway.
So if CDLX can survive the short-term, then the question becomes more a function of the long-term potential value of CDLX.
I still find CDLX trading far too cheap in relation to the medium-term future (let alone the long term), and I don’t think much, if not anything, that was on the call changes that future for CDLX. The loss of the UK bank isn’t great, but CDLX doesn’t need international growth for this to work from an investment perspective at these market prices. And the small early stats with the new user experience is pointing to it having a positive impact.
Stepping back, overall it seems the business is continuing to improve, which increases the odds of realizing the long-term potential of the business:
New CEO, COO, CPO, CTO and soon CFO
Banks are moving to the new ad server, with Chase already on it
Banks plan to rollout the new user experience this year, with Chase already rolling it out (with early stats showing higher engagement)
New offer constructs will be coming out this year, including product-level offers (which have also shown early stats showing improvements)
More US banks are likely to join given ongoing discussions, which will lead to higher MAUs and more reach for advertisers (increasing number of offers, which increases engagement and redemptions by users, leading to more interest from banks and fintechs and so on)
I also think we will start seeing accelerated improvements, with Karim having more time to focus on the business now with the Bridg dispute behind him.
(#175) 5.9.2023: Thoughts After Q1 2023 Earnings Call (Part 2)
The following is the second set of notes and thoughts regarding the Q1 earnings call and 10-Q.
7. Loss of a UK Bank
Geographically, U.S. revenue decreased 0.9% year-over-year. U.K. revenue, which comprises approximately 5% of total revenue, decreased 48.2% in U.S. dollars.
The decrease in U.K. revenue is primarily due to the loss of a bank partner in the channel.
It sounds like the UK bank that CDLX lost is Santander.
It also sounds like this has been known for a while (discussed more below), which could also be why Karim has been so vocal about prioritizing the relationships with the banks.
This loss is not great to hear, but it doesn’t surprise me, compared to if it was a US bank. The reasons this doesn’t surprise me:
It has seemed like the UK division was deprioritized lately, especially after budget cuts. At one point I heard CDLX was shifting resources in the UK to focus on the new ad server.
Peter Gleason, the President of International Operations who was in the UK office left in August 2022 + other senior staff in the UK office. I think the timing was around when there were some layoffs to cut back on expenses.
Additionally, CDLX even said in the past they didn’t have enough scale in the UK for advertisers. Demand is/was there, just not enough reach to take advantage. This was one reason for pursuing open banking. Part of the lack of scale came from not having enough of the major banks, but also due to the opt in requirement for UK users, further limiting the number of UK MAUs, leading to not enough scale (this was CDLX’s issue when they only really had BofA, and changed once they signed Chase and Wells Fargo).
Therefore, between previously lack of prioritizing the banks in general (something Karim has focused on more now) + possible deprioritization or shift in focus + departure of senior staff + not great offers from lack of scale, I can see why this may have occurred.
Given partially a function of past management, and given not a US bank, I am not as concerned.
In terms of the surrounding details of the UK bank that left, there are quite a bit of information online showing Santander is the bank (h/t Poppy for finding all of this).
One article says:
One week left before Santander axes retailer offers: What you need to know
Santander will shut down its current retailer offers scheme next week as it looks to launch ‘Santander Boosts’ – an improved rewards programme.
Retailer offers will be withdrawn a week from today (Thursday 17 November 2022).
This means you will no longer be able to activate deals after this date. But you can activate as many offers before then and they will then be valid for the specific time as per the individual retailer’s terms and conditions, though no later than 31 December.
This confirms CDLX knowing about this for quite a while, given the program ended Nov 17, 2022. The reason CDLX didn’t mention it until Q1 2023, is the program was still active until December 31st.
They also advertised that Santander Boosts will have “even more offeres than you did with Retailer Offers”. And there were discussions that it would have updated imagery and layouts.
In terms of who is powering this new “Santander Boosts”, there was a press release:
Tenerity launches new digital rewards program for Santander.
Tenerity’s Connect platform is the power behind Santander Boosts.
Where “Tenerity operates in 18 countries and our 1400 associates work with more than 2000 clients.” LinkedIn shows 577 employees, so a decent sized company.
More interesting, Tenerity is from cxLoyalty.
Why this is interesting, is in Dec 2020 Chase bought their global loyalty division (source 1 and 2), and not the customer engagement division (now called Tenerity).
cxLoyalty Group Holdings, Inc. ("cxLoyalty Group Holdings") today announced that it has entered into a definitive agreement to sell its Global Loyalty division ("cxLoyalty") to JPMorgan Chase & Co. (NYSE: JPM) ("JPMC"). The deal includes cxLoyalty's leading technology platforms, full service travel agency, gift card, merchandise, and points bank businesses. cxLoyalty will operate as a business unit within JPMC. The transaction excludes cxLoyalty Group Holdings' Global Customer Engagement division and other ongoing businesses (collectively "the Global Customer Engagement Division").
So Chase likely had the opportunity to also buy Tenerity if they wanted to have an in-house offers platform, but did not. (Further indication of Chase intention of staying with CDLX is now seen with them moving to the new ad server + rolling out the new user experience, even nearly 1 year after acquiring Figg, which they said was for SMBs, which CDLX is no longer focused on).
8. New Banks and Fintechs
There are several new initiatives that we expect to increase our MAU base, including an enhancement by one of our large U.K. partners that will result in users being auto enrolled into our program and the launch of new bank partners that we expect to occur in late 2023.
We do not have a lack of advertising demand in the U.K. So these MAU growth initiatives are expected to result in positive returns shortly after implementation.
The auto enroll feature, rather than requiring users to opt in, is great. However, it sounds like it is only for new users, and not on the existing user base. Therefore, this will likely have very little impact in the near-term in the UK.
It also sounds like the new UK partner is on the smaller end, but maybe could benefit from the auto enroll change.
We are focused on increasing our MAU base by signing new partners. Our progress in our pipeline over Q4 is solid.
We're in discussions with multiple top 20 U.S. banks and several high upside fintechs, and we believe we will sign at least one of these major partners by the end of 2023.
It would be nice to sign one of the remaining large US banks, but I’m not sure that will happen until Chase and possibly others like BofA and Wells fully rollout the new user experience with new offer constructs and CDLX has quantifiable data to show the benefits of not only CDLX vs in-house or some affiliate program, but also from the new improvements (new ad server + new user experience + new offer constructs).
Given CDLX is still trying to sign fintechs, it would be nice to know if CDLX has plans to increase ARPU within the neobanks. While primary transactions are still in the traditional banks, there is pretty decent scale with CDLX’s existing neobanks, like Venmo and Credit Karma. While I essentially never transact with them, I have used Venmo offers when they are good enough, even just for 5% off next 3 gas transactions.
Therefore, while the vast majority or essentially all transactions won’t occur within these neobanks at this time, CDLX can still incentivize transactions + leverage more push notifications and other benefits that may be more restricted in the banks.
This could have a decent impact on overall CF given CDLX is about FCF positive + the size of these neobanks + given the operating leverage (where Dosh’s fixed costs are already a part of the overall cost structure).
However, focus should remain on the traditional banks given it will have the greatest impact, but I don’t won’t to lose sight of the potential and runway of the Dosh business.
9. Goal and Timing for MAUs on New Ad Server + New User Experience
On our last several calls, we have consistently talked about progress on 3 important product initiatives for our bank partners and advertisers. The new ad server, our new user experience and cloud migration. Each of these initiatives complements the other. And we are making great progress on all.
For the cloud, all of our major U.S. banks have data in AWS and 4 have systems in AWS. We expect nearly all of our major banking partners to move to the new ad server and user experience by the end of 2023.
I believe this is the first time hearing CDLX expects to have more major banks on the new user experience by the end of 2023, not just be on the new ad server (which is required for the new user experience).
There was a change in the presentation from having 100% of the MAUs by end of 2023, to now “nearly all” by the end of 2023.
At first, I thought that meant either BofA or Wells isn’t moving this year. If that was true, I was leaning towards Wells being the one taking longer, since I believe BofA is larger, which gets you closer to the “nearly all” language.
However, after speaking with others, I was told to not focus too much on the semantics between “100%” and “nearly all”.
Given the language in the call, it may be a function of trying to also fit into the expectation those banks moving to the new user experience as well.
Even if all the banks are not on the new ad server and rolling out the new experience this year, this is less of a concern, given Chase being the one on the new user experience (given it reduces the risk of leaving for Figg + one of CDLX’s largest partners so can have a large impact on its own + leads to enough scale for product-level offers).
Also, in a few years, will it matter if 100% of MAUs were on the new ad server and rolled out the new experience a quarter or so later than expected? Maybe depending on the macro environment, but I don’t think this will be something we discuss in the long term. As long as CDLX gets through the short-term, which I think they will given the Bridg dispute is behind them + CDLX has enough liquidity, then this isn’t the end of the world if this proves to be the case.
I think once Chase fully rolls out the new experience, as well as with new offer constructs, the other banks may accelerate their timelines or have an increase in the priority, especially if CDLX can provide data on the increase in benefits from the new ad server + new user experience + new offer constructs.
10. One Question on the Call
Hearing only one question on the call was strange. CDLX is covered by others like Chase and BofA, so I’m surprised someone from there wasn’t asking any questions (especially since they still updated their analysis after the call, but still posed their same concerns that they did not ask about…).
Possibly some impact from other earnings calls that occurred at the same time after hours, like Carvana, where some of these analysts are covering both. But I heard usually someone else then from the company would take their place for calls if multiple calls occurred at the same time.
There may also be some element of just less coverage or investors following the business, especially from the large price declines and entering micro-cap territory.
Just shocked me a little, since there were many things I was wondering about and wanted clarification on, but had to wait to hear from others who spoke to CDLX after the call.
(#174) 5.8.2023: Thoughts After Q1 2023 Earnings Call (Part 1)
I had quite a bit of notes and thoughts following the call last Thursday evening. However, I wanted to wait to send anything out until I had more time to discuss with others and think things through. This also got pushed back a little given I went to Omaha this weekend for the BRK meeting.
The following is only some of my notes. I plan to add the rest soon (likely tomorrow). I wanted to break it up into multiple parts, given the quantity of notes.
1. Cash Flow Positive Timing
CDLX changed their cash flow positive goal/guidance from “second half of 2023” to “as soon as possible”:
I didn’t think the Q3 CF goal would get pushed back, since CDLX just reiterated it when they announced the CFO transition. From what I am hearing, the change in expectation is from the recent change in the ad market and what CDLX is hearing from advertisers.
Obviously this is not what I wanted to hear, that it could now be later before turning CF positive.
However, this is much less of a concern after the Bridg dispute resolution, where there is now much more visibility into liquidity. I would be more concerned with this deferral of cash flow positive if we didn’t know the Bridg outcome, and we were wondering how tight CDLX was on liquidity.
2. Liquidity Resources (Cash, Line of Credit, Accounts Receivable)
The following are the updated liquidity resources as of 3/31/2023:
CDLX’s cash position increased QoQ due to the $30M drawdown of the line of credit (LOC).
This drawdown is also partially to explain why the “unused available borrowings” decreased QoQ. The other reason for the decrease is from the decrease in accounts receivable which back the LOC and limit how much can be borrowed.
While we have 12/31/2022 above, I wanted to include the table from the 10-K, given some changes were made compared to the previously provided 12/31/2022 numbers.
For one, CDLX fixed their accounts receivable, which before was just equal to restricted cash and didn’t match the balance sheet. So now it is correct in the latest 10-Q.
CDLX also changed the “unused available borrowing”. In the 10-K it was $60M as of 12/31/2022, which was the max possible under the LOC. However, CDLX was limited to 50% of the US accounts receivable, which was less than $60M. Therefore, I believe CDLX also corrected this line to more accurately reflect what CDLX can actually draw down, and may also reflect other requirements. So seeing CDLX only had $5.5M of unused available borrowing wasn’t too surprising, given it was expected accounts receivable would come down, and given this is likely why CDLX only withdrew $30M and not more. But the remaining LOC capacity is also likely not a worry, given the Bridg outcome, and as seen next.
3. Updated Liquidity Numbers (Post Earnout and Q2-Q4 Burn)
Below are some quick liquidity numbers, based on the updated cash position, the known cash component of the Bridg earnout payment, and some estimates for the cash burn from operations.
$139.2M Q1 Cash Position
- $72.6M Bridg Earnout
- $13M Q2 Burn (mid-point of EBITDA guidance at -$8M, but then used $5M lower for FCF)
- $13M Q3 Burn (same as Q2 burn, vs FCF+ positive before)
- $13M Q4 Burn (same as Q2 burn, vs FCF+ positive before)
= $27.6M Estimated Ending Liquidity at 12/31/2023
To me this shows there are no near-term liquidity needs, and really shows the benefit of the Bridg earnout outcome, removing near-term liquidity fears. Therefore, CDLX should have some time to execute.
If CDLX needed some additional liquidity in the near term, such as from the ad market worsening, they could instead factor / securitize their accounts receivable, rather than use it as collateral for the line of credit. With $93.7M in accounts receivable, CDLX says they can only get access to $35.48M from it ($30M used + $5.48M unused), or only 38%. I have a feeling CDLX could get quite a bit more via factoring / securitizing, where a small percentage change is quite significant given the large amount of account receivable + in relation to the $20M-$30M ending liquidity position. I don’t think the current CFO will explore this option, so it will be a function of who comes in to replace him. Given CDLX’s partnerships with banks, this shouldn’t be too difficult, especially with accounts receivable that largely is composed of large national advertisers.
4. Chase and the New User Experience
One of our largest bank partners has rolled out the UI to more than 25% of its users.
25% of users currently on the new user experience is around the percentage I’ve heard other speculate, and seems to match my own small samples.
CDLX IR said Chase is rolling it out slower than CDLX expected, but their expectation is for 100% of Chase to be on the new user experience by the Q2 call.
I know others have been very concerned about the timing of the full rollout, but this has not bothered me, not even the slightest. I’m just happy Chase is actually rolling it out. US Bank has been on the new ad server for 2 years, and has only added pictures within the images, where Chase has done this and more, including adding images on the outside of offers and changed their intro offers format.
As I’ve said before, a phased rollout makes sense. I would have hated for Chase to rollout the new user experience to 100% of MAUs and find issues. This is why rolling out to even 25% to start is kind of surprising (compared to something much lower).
While it would be nice to have everyone on the new user experience today, it is also nice that that with a phased rollout CDLX can get more data on the impact of the new user experience (that can also be used to convince other banks to do the same, and for new banks to join CDLX).
While early, we have seen around a 50% increase in impressions on the rewards summary. We believe this is only the beginning.
As the new UI has rolled out, we've observed other engagement metrics on the new UI that are equally promising, and we intend to disclose some of these statistics when we have scaled data across more bank partners.
The 50% increase in impressions stood out. It is quite a large increase.
I don’t know for sure, but this could be from more time scrolling through the offers and seeing more offers, since it is now more enjoyable and insightful to look through the offers now since there are images on the outside of the offers. There could also be a benefit from the new categorization, which I believe could increase the frequency of openings (such as discussed in update #172).
This could get interesting if CDLX started charging for impressions, which I heard was possibly one of the new monetization models Karim was exploring, and would then make sense why this was an engagement stat that was shared.
In general, you would expect higher impressions to increase the odds of users finding relevant and attractive offers, and increasing redemptions and ARPU. I would very much like to know the difference in redemptions and ARPU for these users before concluding that is occurring. It doesn’t matter if impressions are higher if it doesn’t translate to higher ARPU.
5. New Offer Constructs and Timing
Spend Stretch Offers
We expect to launch an alpha version in Q2 of the spend stretch offers that we discussed on the prior call. As a reminder, spend stretch allows advertisers to incentivize a set of customers spending in a certain range to increase their spending on the next visit.
For example, customers who spend $20 on average could receive a $5 cash discount if they spend $40 or more.
Good to hear new offer constructs like spend-stretch offers will be rolled out in Q2.
There may also be a benefit from this new offer construct being more similar, or even the same, as AmEx offers.
I don’t know how many, if any, advertisers are directly involved with placing offers in AmEx, rather than just AmEx placing offers on their behalf and funding them, but there could be some benefit from the similarity aspect:
For one, if advertisers are involved with these AmEx offers, or have even just seen them work with success, having a similar offer construct on CDLX could help increase the odds of them placing offers with CDLX.
There may also be a small increase in probability of signing AmEx, if CDLX can give them the offer construct they are used to placing.
Multi-Tier Offers
We also expect to launch an alpha version of multi-tier offers in Q2. These offers allow flexibility for advertisers to provide variable incentives based on their objectives. The steering structure also gives customers more choice.
For example, a travel client can reward 10% on all stays in Los Angeles and 5% on all other states in the U.S. Our subscription provider could reward 10% back on annual subscriptions and 5% back on all other purchases.
CDLX actually placed this offer in US Bank (who is on the new ad server) back in August 2022:
Spend Stretch vs Multi-Tier
We have already seen some examples / tests of these new offer constructs. However, I am not positive which definition they fall under at this time.
In a past conference, Karim used the United Airlines example where you earn 5% when you spend $50 or more, but earn 10% when you purchase an Economy Plus ticket. Before this was defined as the spend stretch offer, but now it almost feels like it is the multi-tear offer given the different objectives.
There have also been tests in Dosh, such as with Panera, where the more you spend, the more you save. I feel like this is a spend stretch offer.
Product-Level Offers
I did hear that CDLX plans to start placing some product-level offers in the second half of 2023 with one of the large bank partners (which I assume is Chase, given they are already on the new ad server and new user experience).
I was pleased to hear this, given I was a little nervous from not hearing an update on the call.
6. New Targeting
Here are 2 new targeting features we released in our Ads Manager.
First, share of wallet or functionality that allows advertisers to target audiences who shop and spend at competitive brands. A great example is a large restaurant customer that wants to increase breakfast traffic could target only customers of breakfast brands.
Second, mean max targeting or the ability to let advertisers target based on minimum or maximum amounts of spend during the same period. This gives advertisers a tool to drive elevated spend from the current customers.
This surprised me a little at first, where I thought at least wallet share targeting was already a part of CDLX and a key feature of the platform.
However, what I missed the first time while listening to the call was this was added to the new ads manager, which has the self-service component for advertisers. (As a reminder, as even Karim has mentioned in the past, there were many aspects that may have been less automated or more manually done by CDLX, so this could be one step in that direction.)
Closing
I will be adding the rest of my notes soon, such as regarding the UK Bank, MAUs on the new ad server, and more.
Q1 2023 Earnings: Notes and Thoughts Before the Call
(#173) 5.4.2023: Final Thoughts Before Today's Earnings Call
Cardlytics releases their Q1 financial results and has their earnings call after market close today.
Below are most of the items I am looking forward to hearing/reading about within the new 10-Q and hear on the call (or get clarification after today’s call). I am using this somewhat as a checklist, to not forget anything to check up on.
Bridg Earnout
Timing of the Bridg earnout payment (if not already completed)
Details on the dispute (such as was it regarding how joint contracts were allocated?)
Details on the second earnout (and whether it going to zero was due to the change in method caused by the dispute, and related to joint contracts like SBUX)
Chase on the new ad server and rolling out the new user experience
This has never been publicly announced yet, so today is likely the first time
I’m not sure if CDLX will mention them by name. CDLX usually will not single out a bank.
Could lead to some favorable reactions, given it confirms Chase was the 1st large bank to move to the new ad server + decreases likelihood of Chase leaving anytime soon. But again, how many do not already know about this?
Early stats and engagement (activations, first time users, click-out rates, redemptions)
Why not fully rolled out to all users yet
Timing of product-level offers and new offer constructs
Also haven’t heard anything regarding the self-service for banks (“Engage”) recently
100% MAU Goal
Could have a surprise with 100% of MAUs on the new ad server, ahead of schedule
In the 22Q3 call, “We are also rapidly migrating our bank partners to the cloud and made significant progress in the quarter. We believe we can migrate nearly all of our banks by Q1 of next year, which places us well ahead of our Q3 2023 goal.”
I think Wells and BofA will want to get to the new ad server and rollout the new user experience quickly with Chase now live with it. So maybe Wells and BofA are already on the new ad server.
Current Financials
Cash position (such as after Q1 burn + drawdown of LOC on March 14th + if collected any accounts receivable)
Future Financials and Q2 / Q3 / FY Guidance
More than anything, I just want to have an idea what Q2 Burn will be (based on assuming an amount larger than their EBITDA range)
Also want to see that CDLX is maintaining their expectation of being FCF+ by Q3
Would be nice to see a full year guidance as well
New Banks
Any new banks added, or any change in commentary related to partnering with new banks
During the 22Q3 call, “We are in discussions with multiple top 20 U.S. banks and several high upside fintechs. While these conversations are early, our pipeline to increase MAUs over the next 2 years is strong.” Karim has also mentioned partnering with international banks.
There was also a recent hiring for an Integration Consultant, but that could be related to moving banks to the new ad server, but still possible it is related to a new bank (since I believe this team handles both)
PacWest and LOC
Impact if PacWest goes under
Remaining available on LOC (will have to take into account updated accounts receivable, and I would like to know more about how the minimum adjusted cash works)
If there are any new LOC amendments
Investor Day
There has been mention that CDLX would hold an investor day in May, so I am curious if this will be mentioned today
2025 Senior Convertible Notes
I am not sure CDLX will address this, but it could be asked about in the questions on the call (I am not worried about these converts, but others are, so removing this concern could be beneficial to the stock price)
Reporting Corrections
There were quite a few errors in the Q4 information released, so it would be nice to see all of these fixed (quarterly vs annual MAUs were flipped, liquidity resources reported wrong, inconsistent change in ARPU calculation, material cash requirements timing was off, etc.)
RSUs
Would like to update my assumptions based on new unvested RSUs
Karim and Nick Lynton (Chief Legal & Privacy Officer) got 200K and 100K RSUs respectively. I also would like to know more details regarding those 200K and 100K RSUs. Makes sense if tied to the Bridg resolution, since it seems it was only those two who received RSUs.
New CFO
Heard CDLX may have already hired someone that could become CFO. Not sure if CDLX will address this.
Dosh
Partners: Looks like Dosh signed at least one new partner, “h.way”, possibly as of May 3rd. There could be others.
App: Dosh recently updated their UI. Not sure if CDLX would discuss this at all, such as where tested items have worked well and could later be seen in the banks.
Bridg and RMNs
Would be nice to hear more about Bridg and their shift to Retail Media Networks. This may have to wait until an investor day. Not sure if they will ever mention any clients by name.
Entertainment
Would like to know if CDLX still plans to add Entertainment offers on the new user experience
Still have not had an update on the AmEx trial of Entertainment subscription, which may have just recently ended
I know they are releasing an updated Entertainment app soon, so some focus must still be on it
$100M Shelf
I don’t expect CDLX to raise at these prices, given both Karim’s past comments + no real need at this immediate time. However, some have been worried given the recently filed $100M shelf. But we know this was more a formality now that they are <$700M market cap and loose their well-known seasoned issuer (WKSI) status. May be beneficial to CDLX and their stock price if CDLX addressed this, but that seems less likely.
I put together this list just this morning, so there are likely other important information I am missing, but I will address after the call.
Given the Bridg dispute is done, there should be a window where CDLX insiders can buy after the call. It would be great to see even just a little insider buying.
(#171) 5.1.2023: First Thoughts on the Bridg Dispute Outcome
Cardlytics Announces Update to Bridg Earnout Payments
Today, May 1st, 2023, CDLX announced:
An Independent Accountant determined the First Anniversary ARR to be $23.2 million.
Based on the Independent Accountant’s determination and the terms of the merger agreement, the First Anniversary Payment Amount would be $208.1 million, inclusive of fees and transaction bonuses and accounting for all true-ups and credits.
Cardlytics anticipates the Second Anniversary Payment Amount due under the merger agreement to be $0, inclusive of brokerage fees and transaction bonuses and accounting for all true-ups and credits.
In sum, the total cash anticipated for both earnouts, inclusive of brokerage fees and transaction bonuses and accounting for all true-ups and credits, is $72.6 million.
Cardlytics anticipates the remaining consideration for both earnouts will be paid with 3.4 million shares of Cardlytics common stock, which significantly decreases investor dilution as compared to Cardlytics’ previous publicly disclosed estimates.
The issuance of these shares will result in dilution of approximately 10.0% to the ownership interests of existing stockholders, based on the number of shares of common stock outstanding as of February 28, 2022.
“We are pleased to reach a conclusion in the Independent Accountant proceeding that gives us clear visibility into the total amount of both earnout payments, which are collectively in line with the expectations we set out on our most recent earnings call. I am also delighted that the outcome will reduce shareholder dilution significantly from our previous estimates and we expect that it will eliminate any additional cash outflow stemming from the second anniversary earnout payment obligation,” said Karim Temsamani, Chief Executive Officer.
First Earnout versus Expectations / Fears
An Independent Accountant determined the First Anniversary ARR to be $23.2 million.
Based on the Independent Accountant’s determination and the terms of the merger agreement, the First Anniversary Payment Amount would be $208.1 million, inclusive of fees and transaction bonuses and accounting for all true-ups and credits.
This $208.1M compares to $126.4M expected by CDLX, or $81.7M more. This large difference is from the large increase in ARR (I will discuss this more below), where the first earnout was a function of 20 x (ARR - $12.5M). Therefore, even a small increases in the ARR could lead to large increases in the first earnout.
One benefit CDLX had was that the dispute was on the first earnout payment, which had a $40.15 VWAP that applied to approximately 70% of the payment. Therefore, the increase in the cash component was not near as much.
Cash versus Expectations / Fears
In sum, the total cash anticipated for both earnouts, inclusive of brokerage fees and transaction bonuses and accounting for all true-ups and credits, is $72.6 million.
The $72.6M in cash for both earnouts compares to CDLX’s expectations of $67.3M ($43.3M for the 1st earnout + $24.0M for the 2nd), or only $5.3M / 7.9% more cash than expected.
While the actual payment is higher than what CDLX expected, this total cash payment of $72.6M is significantly lower than the amount investors feared from the dispute, as well as from the low stock price impacting the second earnout (where a lower stock price = lower stock component = higher cash component).
I had some estimates of ~$115M in cash that could be owed depending on the dispute outcome and second VWAP, so this actual outcome is much better.
Also, with this low level of cash, I wasn’t expecting this little of dilution.
Dilution versus Expectations / Fears
Cardlytics anticipates the remaining consideration for both earnouts will be paid with 3.4 million shares of Cardlytics common stock, which significantly decreases investor dilution as compared to Cardlytics’ previous publicly disclosed estimates.
The issuance of these shares will result in dilution of approximately 10.0% to the ownership interests of existing stockholders, based on the number of shares of common stock outstanding as of February 28, 2022.
The 3.4M shares for the first earnout is higher than the 2.07M CDLX was expecting.
But 3.4M of total shares compares to 6.7M-8.3M some where expecting, so there is much less dilution in total than expected. This higher expectation was based on the 19.9% dilution cap that could have come into play (where the range is from it depending on how the cap was applied).
This outcome of 3.4M shares in total for both earnouts is also dramatically lower compared to the dilution feared by those who were not aware of the dilution cap (they were worried about a continually decreasing stock price leading to more shares issued, which could lead to a lower stock price, and so on…so they feared unlimited / infinite dilution…but I think many later became aware of the dilution cap).
This lower total dilution comes from the 100% weight to the 1st earnout with a $40.15 VWAP. The VWAP on the second earnout would have been much lower. Given the second earnout is $0, that lower VWAP does not come into play.
Second Earnout $0
“Additionally, because of the Independent Accountant’s determination, Cardlytics anticipates the Second Anniversary Payment Amount due under the merger agreement to be $0”
One reason the second earnout could be $0 is from the second earnout being based on the increase in ARR for second anniversary customers only. Therefore, given the first ARR increased, there may now be no increase in ARR for these second anniversary clients, leading to the $0 for the second earnout. This is very good, given the significantly lower VWAP on the second earnout that no longer comes into play (which is why there is so much less dilution than expected).
There were also mentions before where Bridg was disputing the allocation of a large joint CDLX / Bridg contract (likely the $25M two-year contract), where Bridg wanted more of that contract allocated to them.
If that is true, it could be that this allocation method (that was disputed for and ruled in favor of Bridg) led to this higher ARR and first earnout payment.
However, given the change to Bridg’s method, it could have also changed other joint contracts.
Given Starbucks was both a CDLX and Bridg client, CDLX may have actually benefited from SBUX leaving during the dispute under this new method, since it likely contributed to this $0 second earnout.
(There may also be some insights from the fact it is $0 for the second earnout, and not some lower number like $4.321M vs the $67.8M that was expected. There was likely a very large decrease in the ARR for second anniversary customers [such as from SBUX leaving] that lead to being below the first ARR. Therefore, with no increase in the total ARR for these second anniversary customers, the second earnout is zero).
This is also why the odds of Bridg disputing the second earnout are likely very low. The judgement was ruled in favor of Bridg, where this possible change in method of allocating joint contracts is likely what also led to the decrease to $0 for the second earnout. Not sure how Bridg can dispute exactly what they wanted and won. I think disputing your own dispute would be a first.
New Liquidity Position
Below is a quick CDLX liquidity analysis that factors in this Bridg outcome:
$121.9M cash at 12/31/2022
+ $30M drawdown of LOC
- $20M FCF burn for Q1 and Q2 (then FCF+ in Q3)
- $72.6M cash for both Bridg earnouts
= $59.3M ending liquidity
Again, the ending liquidity amount above is after Q2 and the associated burn. And given CDLX still expects to be FCF positive in Q3, CDLX is positioned well.
The above also ignores:
Remaining liquidity available under the $60M LOC
Possibility of lower cash flow burn in Q1 and Q2 (from better than-expected results)
Possibility of CDLX collecting some of their $115.6M in accounts receivable (leading to higher cash flow)
Therefore, CDLX has plenty of liquidity to handle both Bridg earnout payments (and accomplished with less dilution than expected).
So it doesn’t look like CDLX will be going bankrupt from the Bridg earnouts (as some have feared).
2025 Convertible Senior Notes
Some may now shift their focus / fear to the $230M of 2025 convertible senior notes, but CDLX has over 2 years to worry about them.
Given CDLX is going to be FCF+ in Q3 of this year, I believe CDLX won’t have too difficult of a time getting new debt to refinance these 2025 converts.
Or CDLX could issue stock to cover. While at today’s prices this would lead to a lot of dilution, it would still mean CDLX doesn’t go to zero due to the converts. But there is no reason for CDLX to do that at this time. CDLX will instead continue improving and growing the business, which will likely lead to a higher stock price, decreasing the dilution that could occur.
Underappreciated Secondary Benefit
CDLX CEO, Karim Temsamani, ended his statement by saying,
“We are excited to move past this short-term issue while we continue to focus on our strategic priorities.”
This may be an underappreciated aspect of resolving the dispute.
Karim and others have likely been spending a large amount of their time dealing with this dispute. With the dispute now behind them, they can have more time + focus for improving and growing the business.
Closing Thoughts on the Bridg Outcome
Overall, this is a very good outcome for CDLX, with significantly less cash and dilution than what was possible / feared.
And given the outcome has led to much less dilution for CDLX with only a little bit more cash, one could say the dispute ended up working in CDLX’s favor.
These are only my first thoughts on the news. I will add more information as I hear and learn more, such as following the upcoming earnings call.
(#170)
The following was saved off here (removed within the notes to save space)
(#170) 4.27.2023: Updated VWAP Projections (5 Days Remaining of 20) + Additional Bridg Earnout Payment Possibility
(#166 - #169)
The following were saved off here (removed within the notes to save space)
(#169) 4.25.2023: Updated VWAP Projections (7 Days Remaining of 20)
(#168) 4.24.2023: Follow-up Thoughts on the Timing of Q1 Earnings + Announcing the Bridg Resolution
(#167) 4.23.2023: Thoughts on the Timing of Q1 Earnings + Announcing the Bridg Resolution
(#166) 4.22.2023: Updated VWAP Projections (9 Days Remaining of 20)
(#164 - #165)
The following were saved off here (removed within the notes to save space)
(#165) 4.18.2023: Updated VWAP Projections (12 Days Remaining of 20)
(#164) 4.17.2023: Current VWAP for 2nd Bridg Earnout Payment + VWAP (Stock Prices and Volume) Projections
(#163)
The following was saved off here (removed within the notes to save space)
(#163) 4.12.2023: Potential Stock Price After the Bridg Resolution
(#161) 4.7.2023: Interpreting the Possible Timings of Announcements
Bridg Resolution + Q1 Earnings
While this is something I would rather not give too much weight to, especially given all the possible scenarios, I cannot help but consider what the timing of the announcement may mean related to the Bridg announcement.
Or more specifically, if we don’t hear something on a given day, whether that is good or bad.
For instance, if CDLX already knows the outcome the dispute from the judgement of the independent accountant:
Announcing Monday
If CDLX already knows the judgment, I feel it is much better for CDLX not to announce until Monday morning, before opening. This could lead to a better stock price reaction, similar to the announcement related to updated guidance. This of course assumes a favorable resolution.
Announcing Today (Friday)
Compare that instead to CDLX also already knowing the judgement of the dispute, but announcing it sometime today, possibly 4pm CST. I feel that is a little sketchy, given the holiday, almost as if they are trying to hope less people see the news (especially given it is a holiday weekend), and react less on Monday.
However, maybe the resolution is favorable to CDLX, so announcing early / today allows for more time for others to see it and understand it, and react better on Monday. Also gives more time for word to spread and for others to discuss. Given the VWAP is based on the 20 trading days, there isn’t too much time to waste with getting the stock price up, so leveraging the weekend isn’t the worst idea.
So it may be a good sign nothing is announced today, but it is too hard to read too much into it, since it all depends on the actual results.
It is also possible CDLX does not already know the results of the dispute, so these thoughts mean nothing today. But if we heard nothing Monday - Friday morning next week, I will probably have similar thoughts during the day Friday, and wondering if something will be announced after hours.
Again, there is only 20 trading days for the Bridg VWAP, and I believe that started with April 6th, so CDLX is incentivized to get the stock up as much as possible and as soon as possible. However, they likely have no control on when they learn about the judgement of the independent accountant, but they may have some control on when they announce it.
It could also happen that CDLX hears the judgement, then appeals it. If that occurs, I’m guessing we don’t hear about that until the May earnings. And given the VWAP window, maybe then CDLX pushes back the earnings date (maybe later than May 2nd compared to last year).
Related, I think if CDLX announces earnings will be earlier this year (say even before May 1st), that is a positive, as it indicates they are trying to get out good results + announcements earlier to help with the stock price for the VWAP.
On the opposite side, if CDLX hears the judgement and it is favorable to CDLX, but Bridg disputes it, I think CDLX could announce the favorable judgment, but maybe would wait until earnings to say Bridg is appealing it. Again, CDLX needs to do what they can to help the stock price for the VWAP (within what is allowed / possible).
Chase Rolling out the New User Experience
CDLX has yet to publicly announce that Chase is the large bank that moved to the new ad server and is rolling out the new user experience.
I think most know this, but there could still be some positive reaction on the stock if CDLX announces this.
Give we have haven’t heard an announcement yet, despite knowing about this for a while, and users such as in my household have the new user experience, I think CDLX / Chase could be waiting until all users have the new user experience.
In the past, I have seen Chase push through updates on Friday and Saturday nights, so maybe this is the weekend the remaining users get the update, and an announcement follows.
(#160) 4.5.2023: 2025 Convertible Senior Notes + Updated Liquidity Analysis / Share Count / Future Value (with 100% cash for 2nd earnout)
Projection 5: 100% Cash for 2nd Earnout
I wanted to provide another projection (#5) in addition to the 4 provided yesterday (below).
The following is with CDLX paying 100% cash for the 2nd Bridg earnout payment.
I have discussed this possibility in the past, and have used it in my prior analysis as well. The reason CDLX would do this is from having plenty of liquidity to do so, leading to not using stock at the lower prices today, leading to less dilution.
If CDLX wins the dispute, and pays the 1st earnout as expected (the first 4 columns of results) then Chase has plenty of liquidity to do 100% cash for the 2nd (as seen in the row of liquidity following both Bridg earnouts).
This is even more possible this week vs the past, given the updated guidance, leading to less cash burn, so more liquidity. And as seen in column 3 and 4 of results, if the 2nd earnout comes in lower than expected (which is possible, and could be announced soon), it leads to even less cash needed.
If you compare these results to those provided yesterday, it leads to less ending liquidity (given using more cash for the earnouts), but less dilution (where CDLX would not likely need to raise the additional $100M that I assume here, but I keep it in for conservatism).
A few notes:
CDLX’s liquidity before the earnout payments is likely higher than 12/31/2022 cash of $121.9M (which some are assuming), given CDLX already drew down $30M from their line of credit, which is likely more than cash burn in Q1 and Q2 (especially given the updated guidance yesterday)
I’ve ignored the possibility of accounts receivable coming down in Q1, leading to more cash (AR was quite high in Q4, and we sometimes see this come back down in Q1)
There may also be more available to draw down on the $60M LOC (but note, this is a function of 50% of US accounts receivable, so if AR goes down, there would be less to draw down on the LOC, but it also means CDLX likely has more cash from the AR, which is likely more beneficial than only 50% with the LOC)
I also ignore some timing benefits related to when the Bridg earnouts are paid (I have 100% of Q2 burn occurring before the 2nd earnout occurs, when in reality that will likely occur before the end of Q2, meaning there is more liquidity immediately following the Bridg earnouts).
2025 Senior Convertible Notes (over 2 years away)
Some may look at the ending liquidity and think, “that is not enough for the convertible notes!”.
The liquidity analysis above is based on today and the very near term. The coverts are not due until September 2025, or over 2 years from now.
If CDLX doesn't work out as I expect, then we will start to see signs of the lack of improvement. For instance, here in 2023 / early 2024, if we don't see any incremental improvements for Chase, especially as they roll out product-level offers and other offer constructs, then that is more concerning than the converts in late 2025. But if the new products do work and ARPU starts increasing as I expect, CDLX will be in a good position to refi or raise to take care of the converts.
At $3 ARPU by mid year 2025 (where BofA was at $2.30 in 2018 on old tech, old UI, no new offer constructs, less reach, etc.) with 200M MAUs (I expect more by then), then that could lead to about $20 per share. So $230M converts / $20 per share = 11M more shares. While this is a lot, it doesn’t ruin the total returns (to see this, we just have to look at the results above, where instead of raising at $10 today, CDLX waits to raise at $20, and raises the same approx 10M shares assumed above). Or if CDLX is at $5 ARPU by mid year 2025, at 200M MAUs = $77 / share, so $230M / $73 per share = 3M more shares… or nothing to worry about. But given CF positive at this point, CDLX likely can refi the debt, leading to no dilution.
(#159) 4.4.2023: Updated Liquidity Analysis / Share Count / Future Value (Based on higher stock price for VWAP + updated guidance)
Yesterday (included in the next section of notes below) I reposted the 6 possible announcements that could occur before or at Q1 earnings to help increase the stock price for the volume-weighted average price (VWAP) used for the 2nd Bridg earnout payment (reposted from the original update #153, where I discussed all of these possible announcements in much more detail, and why they could occur).
Today, CDLX announced updated guidance for the first quarter results:
This relates to #6 below (and in update #153), regarding the possibility of CDLX announcing better than-expected earnings.
In update #153, I mentioned CDLX could pre-announce earnings, if results where better than most expect or versus previous guidance. Today’s announcement is a little different, given it is not releasing the official earnings, so it would likely not open up insider buying yet, especially with other information not yet announced (like Chase on the new ad server and rolling out the new user experience, and the Bridg resolution and updated expected earnout amounts).
However, I do wonder given CDLX likely has pretty good visibility into earnings for Q1 with it now being 4/4, I wouldn’t be surprised if official results come in towards the high end of the updated guidance. Because again, CDLX is highly motived to increase the stock price in the short term for the 2nd Bridg earnout VWAP. So CDLX could get another little pump from releasing the official earnings with results at the high end (leading to even less cash burn).
Given the updated guidance and higher stock price, I wanted to update the liquidity analysis. I believe the updated projections below show why both the updated guidance from today + higher stock price are quite impactful (where the higher stock price leads to less cash needed for the second earnout, leading to more liquidity, which could lead to further increases in the stock price, improving liquidity further, and so on).
Below I include the following liquidity projections (with dilution estimates and future value per dilution share vs today’s price):
Previous analysis for comparison purposes (assumes higher burn + $3 VWAP)
Updated burn based on updated guidance provided today
Updated VWAP to $6
Updated VWAP to $10
A few things to note with these projections:
Assumptions:
I still assume CDLX raises equity with their $100M shelf, even where CDLX has plenty of liquidity and doesn’t need it. I assume it for conservatism to factor in potential dilution (given many continue to worry about the future potential returns if there is more dilution, without actually doing the calculations)
I also left the first equity raise at $4 for conservatism, and to provide consistency for comparing to the previous analysis.
Ending share count is 33.6M today + 6M for RSUs + the additional shares calculated based on the scenario (depending on the earnouts + raises)
The multiples at the bottom are off of the current stock price.
(Note that the conditional formatting may make the multiples appear strange, but this is simply due to ending share count being the same, leading to the same multiples. But this does not take into consideration the different ending liquidity levels)
For more information on these scenarios and the set up (such as why it is broken out the way that it is), see these notes (where I also included a video walking through the analysis and the reasoning)
I got the most value from clicking and viewing these projections full screen and flipping between the 4 projection sets to see the differences more easily. I would recommend reading what is different between the projections first though.
Or I recommend focusing on one scenarios / column as you scroll down through the 4 projection sets (and even better is focusing on one column as you flip through the full screen pictures)
Projection 1: Previous Analysis (starting point for comparison purposes)
Before today, I was using a $3 VWAP and much higher cash burn. For 23Q1 & Q2 burn, I was using the previous low end of EBITDA guidance of -$17M to get even lower FCF.
These results below (as well as those where I was assuming 100% cash for the second earnout, which is still a very possible and likely scenario) were what got me comfortable to keep buying with leverage (do note, the multiples vs today’s stock price are truly as of today’s close, rather than when I first did this analysis).
Here is the first projection:
Note: Given the significant amount of calculations provided (in this projection and in the following projections), and given these were only updated today, it is possible there are errors or items that were overlooked on my part. I will update this analysis as I find items to fix.
Projection 2: Updated 23Q1 and Q2 Burn
If we update 23Q1 & Q2 cash burn based on updated guidance provided today, where the new low end of the updated EBITDA guidance is -$8M, it leads to quite a bit more liquidity (+$17M in each scenario), and less dilution in some scenarios (from not needing to raise as much).
I do not assume higher VWAP until the next projection set.
Projection 3: Updated VWAP to $6
If the VWAP for the second Bridg earnout payment is instead around $6 (which is even below the current stock price as I write this and assumes no further increases over the VWAP period), then the stock portion covers more of the 2nd earnout payment (double the amount of value vs $3), decreasing the cash used, and increasing liquidity further following the earnout payments and at the end:
This may be one of the better projections to look at, given it reflects today pretty well.
In all scenarios where CDLX wins the dispute, the liquidity after making both earnouts is over $60M, and CDLX is still expected to be FCF+ in Q3 (which was recently reiterated by CDLX) meaning less liquidity needed going forward in the immediate future. Therefore, CDLX really has no need to raise additional equity (at least not for liquidity purposes).
Additionally, even if CDLX lost the dispute, there may not be any need for a liquidity raise (which before today was not necessarily the case, as seen in the first projection, under the scenarios where CDLX lost the dispute, but still may have not been needed given possibly some more liquidity in the LOC).
Note, if I have the correct Bridg earnout VWAP dates (shared and discussed in the next section of notes below), it will either end up being a good or bad thing that today was not a part of the VWAP’s 20 trading days. If it was included, the VWAP would have the possibility of ending up quite close to today’s close, given the volume today was around 70M shares (vs the average of <1M), leading to significant weight given to today’s price. But given the number of additional updates that are possible (also discussed in the next section of notes below), I think it will end up being a good thing that today is not included, leading to a higher VWAP, and therefore less cash needed and less dilution.
Projection 4: Updated VWAP to $10
And if the VWAP gets to $10 (which doesn’t seem unreasonable, given the possible upcoming announcements, like Chase), then CDLX would be even better positioned. This leads to not evening needing to use the max possible dilution on the earnouts (leading to less dilution from the earnouts, and then less dilution in total at the end).
These results above show me that CDLX would have plenty of liquidity following both Bridg earnouts + significant ending liquidity if they raised, and still have the potential for attractive returns following dilution (when looking at the future value per diluted share vs today’s stock price).
And if we project out slightly higher ARPU and MAUs (which are low in relation to what I feel is possible and likely) + using the scenario leading to the most dilution, we get more attractive returns/multiples off of today’s stock price (even after the large increase in the stock price after first doing this analysis):
Again, we may end up seeing CDLX use 100% cash for the 2nd earnout instead of issuing a portion of stock, given they have plenty of liquidity, leading to less dilution. Additionally, we may see no additional equity raises at these low stock prices, leading to even less dilution than assumed above.
If we instead assume $15 and $20 ARPU (and assume higher OpEx for some of that growth), and assume CDLX does not do the $100M raise at $10, leading to 10M less shares:
I still believe MAUs could be higher (especially with international growth) and rev share lower (leading to higher gross profit and FCF, as discussed in these notes). Also the possibility of future FCF used to repurchase shares, decreasing share count, and increase the future value per share and multiple vs today’s price.
Closing
It is possible we see CDLX pull back a little tomorrow after such a large increase in the stock price in one day (80%). But given the many other possible announcements over the next month (discussed below and in detail in update #153), I think we could still see further price increases in the short-term, helping the VWAP for the 2nd Bridg earnout payment.
(#158) 4.3.2023: Dates for 2nd Bridg Earnout Payment VWAP, and Timing of Possible Announcements / Earnings
Today I put together what I believe are the dates that will be used for volume-weighted average price (VWAP) for the 2nd earnout payment (1st column). Given Good Friday, I believe the end dates are April 6th - May 4th, 2023. To see if I am correctly thinking about how the VWAP is calculated, I also calculated the 1st VWAP to see if I matched, and I did.
Where this gets a little interesting is Q1 earnings. 22Q1 was May 2nd, while 21Q1 was May 4th. We have not heard when 23Q1 will be. I wonder if CDLX will announce earnings even earlier than May 2nd.
The reason and benefit of announcing earnings as early as possible is to allow for the most number of trading days at the highest possible price to increase the VWAP.
Why might the stock price increase after the earnings call? The following are possible announcements that I discussed in detail in update #153, that could instead all be shared at earnings.
Chase Live with the New User Experience (and on the New Ad Server)
Announcing Remaining Banks on the New Ad Server
Announcing Favorable Bridg Resolution
Announcing Lower-than-Expected 2nd Bridg Earnout Payment
Announcing New Bank Partners (U.S. or International)
Better-Than-Expected Results
While CDLX could wait until earnings to announce these given it could still be in the VWAP period, I think it would be better and expected of CDLX to announce any of the above as soon as possible, to get the stock price as high as possible for as long as possible for the VWAP. So instead CDLX may and should announce anything they can before earnings.
Where this would get better is if CDLX announced all items possible + earnings, and then insiders started to buy (which would be a very strong signal, and likely have favorable reaction by other investors). This is also where you would need earnings as early as possible, since you need enough days for CDLX insiders to not only buy, but then for their Form 4s to appear, so investors know they are buying and then can react still within the VWAP period. This assumes all MNPI would be then known to the public, allowing insiders to buy.
As I’ve said before, the next month will be interesting.
Q4 2022 Earnings: Notes and Thoughts After the Call
(#153) 3.27.2023: Possible Upcoming Announcements that Could Increase the Stock Price for the 2nd Bridg Earnout
Reminder, if CDLX uses stock to pay for a portion of the 2nd Bridg earnout, the stock price used will be based on the volume-weighted average stock price (VWAP) in April. The higher the price, the more of the earnout that will be covered by stock, so less cash will be needed, increasing CDLX’s ability to afford the payments with current liquidity.
I’ve previously discussed how it is possible Karim is less worried about the volume-weighted average stock price for the 2nd earnout if he does not plan to use stock.
The thought is Karim may have visibility into liquidity and the final amount for the 2nd earnout to be able to do 100% cash instead (so the stock price doesn’t matter since no stock would be used).
The reason I have felt Karim isn’t too worried about the stock price yet is based on CDLX announcing Andy’s departure now, instead of May (given he doesn’t leave until July, so that decision, action, and announcement could have likely waited).
Additionally, I heard CDLX mentioned they want to do an investor day in May. Why not a couple weeks earlier in April to help with the April VWAP…unless you do not care about the VWAP if not planning to use stock.
However, it is also possible Karim has more confidence in paying for the 2nd earnout from not only a lower increase in the ARR for second anniversary clients for the 2nd earnout, but from also knowing there is a good chance of getting the stock price up in April from known upcoming announcements.
Remember, if Karim plans to use stock, he has a very large incentive to increase the stock price as high as possible, and very quickly, and now. Therefore, this could be a catalyst for the stock price increasing in April. And as the stock price increases, the less cash that is needed for the earnout, increasing CDLX’s ability to afford the payments further, which could increase the stock price more (and so on).
Possible upcoming announcements that could increase the stock price include:
Chase Live with the New User Experience (and on the New Ad Server)
This could be any day now, given I now have the new user experience on one of my Chase accounts
Shows Karim executed on his communicated timeline of Q1
Confirms Chase was the 1st large bank to move to the new ad server
Decreases likelihood of Chase leaving anytime soon
Could have some positive impact on engagement / ARPU in Q2
Announcing Remaining Banks on the New Ad Server in Q1
During the 4Q22 call, “We remain on track to connect all of our partners to the new Ad Server and user experience by the end of 2023.”
This matches the previously stated goal for the end of 2023.
But in the 3Q22 call, “We are also rapidly migrating our bank partners to the cloud and made significant progress in the quarter. We believe we can migrate nearly all of our banks by Q1 of next year, which places us well ahead of our Q3 2023 goal.”
Therefore, it is possible this is still the case, and it will be announced soon.
This would be ahead of expectations, leading to a sooner-than-expected positive financial impact.
I think Wells and BofA will want to get to the new ad server and rollout the new user experience quickly with Chase now live with it. So maybe Wells and BofA are already on the new ad server.
Announcing Favorable Bridg Resolution in April
Hearing CDLX won the dispute (and the payment is as expected) would most likely lead to an increase in the stock price, since it is one of the largest worries with investors (if the dispute would lead to too large of a payment compared to current liquidity).
The resolution is expected to be done the end of April.
However, it is possible this is expected to be done before the very end of April, where a positive resolution could be announced during April, leading to a positive impact to the April stock price.
Announcing Lower-than-Expected 2nd Bridg Earnout Payment
The 2nd Bridg earnout is based on the increase in ARR for second anniversary clients only.
If this amount is lower than expected, which sounds possible given Karim and Andy supposedly have told others they were conservative, then it would be positive news if CDLX announced an updated expected 2nd earnout that is lower than everyone is pricing in (leading to less cash used, and showing CDLX is fine from a balance sheet perspective).
Given the payment is based on 15x the increase in ARR for second anniversary clients, a slightly smaller ARR leads to a much lower payment.
Announcing New Bank Partners (U.S. or International)
During the 3Q22 call, “We are in discussions with multiple top 20 U.S. banks and several high upside fintechs. While these conversations are early, our pipeline to increase MAUs over the next 2 years is strong.”
Karim has also mentioned partnering with international banks
There is now a higher probability of signing up a new bank, given Chase is now live with the new user experience, leading to further differentiation for Chase versus others (and growing, as new offer constructs are released)
Or said differently, the value proposition for users and banks have increased, and it has become easier / quicker to integrate, so more likely to partner with CDLX
It is possible one of the new banks has recently signed or will soon sign, and therefore an announcement is coming soon
Announcing even one new top bank would be very positive
Would be on the new ad server immediately, so also comes with little incremental OpEx given now on the cloud
Could have lower rev share
Together it leads to high incremental contributions to operating income
Pre-Announcing Earnings (Better Results + Insider Buying)
This seems less likely, but if the earnings were better than expected (such as even positive CF from bringing accounts receivable down) it could be well received.
And maybe positive CF continues now with Chase on the new user experience rolled out
But there is a bigger reason to do this. I don’t think insiders can buy currently. Insiders buying like Karim would help tremendously with the stock price, but I don’t think they can buy with the end of the quarter and not until after those related earnings are announced. So pre-announcing could allow this. But I’m not sure if this is likely or even possible.
There could be other MNPI preventing them from buying, but maybe if they announce those other things first, it would open up buying.
The next few weeks will be very interesting.
(#147) 3.23.2023 - Updated Bridg Dispute Thoughts (Offsetting Factors, Change in Probability, MNPI)
Offsetting Factors
One thing I never considered until speaking with others was offsetting impacts from changes in how ARR is calculated. Such as, if you change how the Bridg shareholders believe or want it to be calculated, while it may increase ARR one way, it could decrease it another, benefiting CDLX and even a lower payment than expected.
For example, considering the two potential dispute items I’ve considered, maybe if you change how the allocation of say the $25M joint contract is determined, that calculation method that Bridg wants on that single contract actually leads to a decrease in allocation on another contract (or multiple). This could offset some, or all, or more of the differences.
Or considering a dispute on timing and wanting more recognized earlier based on Bridg’s interpretation, maybe that would lead to other currently recognized contracts moving up before the window begins, removing them from both earnout payments.
I don’t think it is quite as simple as I am making it seem, and hope I am more illustrating that this is not as clear cut some consider. This likely explains the longer dispute process and longer time needed by the independent auditor.
However, I believe all that matters is if CDLX calculated the ARR according to GAAP. And if they CDLX did, which seems likely, and seems like Deloitte confirmed, then the actual payments will likely be as expected.
Change in my Probability with Dispute Outcome
In terms of the probability of that occurring, with CDLX winning the dispute and the earnout payments being as expected, I believe the following has led to a significant change in my considered probability of CDLX winning the dispute. I say “my” probability, since others with this background likely already saw it this way, and this was the actuality of the situation.
CDLX IR mentioned in November how the one or so Bridg shareholders leading this dispute are quite litigious. At the time, I did not think too much of it. However, based on speaking with others, it sounds like this is very much the case, increasing the odds of the dispute not being as grounded. Meaning, it is not as if this shareholder has never done a dispute or something similar before, and saw ARR and noticed it was wrong (increasing the odds of the dispute having merit and decreasing odds of CDLX winning). But rather, this appears to be someone who wants to fight and maybe does so often.
But I am only hearing this from one side, so maybe this is not the case. However, it was not just CDLX IR who said this, but instead many others high up at CDLX, including someone from Bridg, which would make it more likely.
MNPI Preventing Insider Buying
I keep forgetting the Bridg dispute is confidential, so this likely could be material non-public information (MNPI), preventing insiders like Karim from buying in the open market.
Along those lines, Chase on the new user experience still has not been officially announced, which also means Chase being the bank on the new ad server also hasn’t been announced, which could also be MNPI.
If these are not the case, and nothing is preventing CDLX from buying more, it is questionable. Not necessarily Karim or even Amit Gupta given their quite significant RSUs, but even seeing someone like Chan or Singer buying would be good, or more from the board. And even Karim just buying a small amount would go a long with for a signal, assuming CDLX plans to use stock for the second earnout where VWAP matters. However, based on comments from CDLX IR, it sounds like CDLX is in a quiet period again, which could explain the no insider buying.
(#144) 3.19.2023: Updated Liquidity Analysis, Future Share Count, Future Value Per Diluted Share
Following the $30M drawdown of the LOC, I wanted to update the liquidity analysis to see how well CDLX can handle the Bridg earnouts and dispute with only that amount of additional cash, then with the remaining LOC, and finally with issuing stock under the $100M shelf. The analysis below breaks out these actions to see the liquidity at each step.
Additionally, I wanted to see the resulting ending shares, and calculate the future value / diluted share under a very modest future state but with the significantly higher share count, to see if CDLX is still worth investing / owning after significant dilution.
I used many of the same scenarios as before, such as winning or losing the Bridg dispute.
Note, I did the calculations assuming 100% cash is used for the 2nd earnout. This has been hinted it, and I’ve used this method in the past.
The reason CDLX would do this is given the very lower VWAP, where you are issuing the max shares possible but getting very little benefit and practically paying near 100% in cash anyways.
So use cash now, have no additional dilution, and then issue shares later to build up a cushion (at which point CDLX should be FCF positive going forward).
I do all these calculations below.
I also made a video going over this section of the notes. This is an exclusive video for those of you with access to the Research Notes.
Directly below, you can watch the video where I go over all the calculations, as well as over each section in detail, explaining what this all means, and why this gives me a lot of comfort.
Full Calculations
These are all the calculations, but I will go over each section separately, describing what is going on and what it means. I included this first so you have an idea of how everything fits together.
1st Earnout Payment , 2nd Earnout Payment , Total Payments (Cash and Stock Used)
In the first section, I broke out each of the earnouts to see the cash vs stock component and even the share counts, and then did a total.
The conditional highlighting show the total cash payments for the two Bridg earnouts, where more green = less cash paid (better outcome), and where more red = more cash paid (worse outcome).
When looking at everything in the first picture with the full calculations, you can see how the outcomes of the cash payment impact the final ending liquidity and dilution after earnouts / after LOC drawdown / after issuing stock (where less cash paid at the earnout = higher ending liquidity + less total shares issued, and more cash paid at the earnout = lower ending liquidity + more total shares issued).
Starting Liquidity - Cash Used for Both Earnouts
I then took the 12/31/2022 cash of $121.91M + $30M drawdown - same 23Q1&Q2 burn of $34M = $117.91M liquidity before earnouts, and then subtracted the earnouts:
Some scenarios are already positive, meaning CDLX can handle some of the outcomes without additional drawdowns of the LOC or raising equity.
Additionally, this is assuming the low end of Q1 guidance for EBITDA and then even more FCF burn, as well as pretty low negative FCF in Q2. On top of that, the Bridg payments could be made before the end of Q2, so liquidity could be higher post earnouts, making it easier to raise if needed.
Drawing Down Remaining Funds from LOC
But given its available, I then added the liquidity from drawing down the remaining $23M of the LOC (from getting a max of $53M under the new covenants, which I shared the calculations elsewhere in these notes).
This results in ending with positive equity in all scenarios.
1st Equity Raise
Following completing the Bridg earnouts and ending with positive equity (proving equity shareholders are not getting wiped out by Bridg / going bankrupt, etc.), I then added in an equity raise.
I assumed CDLX issues stock at $4 (so slightly higher than today, but I could see the stock higher after removing these large fears), to get back to $50M of equity for some cushion.
The point of picking $50M was to show how the scenarios with higher liquidity before the raise need less funds / shares to get to $50M, so they benefit from less dilution by not issuing as much at the $4 price.
The ending additional shares adds the shares from the earnouts + this 1st raise.
2nd Equity Raise
While this might not occur, I did then assume a second raise at $10 (so waiting until the stock rebounds a little more) for the remaining of the $100M shelf. I did this so others could see what the total share count would be under using all of those shares in the $100M shelf, leading to more dilution.
The scenarios that issued the less at the $4 price, still has a lot left on the $100M shelf, which leads to issuing the most shares this round, but also leads to the highest ending liquidity. Additionally, those same scenarios had the least amount of shares issued at the earnout and 1st raise, so they still have the least amount of shares with the highest ending liquidity (i.e., the best scenarios).
This gives us our ending final additional shares (from earnouts + 1st raise + 2nd raise):
For a total share count I took the ending additional shares from above + 33.6M today + 6M from RSUs.
Note: In most of these scenarios CDLX wouldn’t need to raise given they would have plenty of liquidity + FCF positive in Q3+. But I did raises in all scenarios to find more worst case ending share counts for the next calculations.
Resulting Future Value per Diluted Share (Future State of Higher ARPU and MAUs)
Next, under modest future states of ARPU and MAUs, I calculated the future value per diluted share vs today’s price of $3.12, leading to the following return multiples on today’s price.
The more shares outstanding (all originating from higher Bridg earnouts), leads to less value pre share. But even under these larger share counts, it still leads to a very attractive multiple versus today, given how low the current stock price in (given how many assume this is just a $0).
Taking the highest ending diluted share count, and also looking at slightly better but still realistic future states (increasing ARPU from the new ad server + new user experience + new offer constructs, and increasing MAUs from existing banks + signing new US banks + signing new international banks):
Where this could go wrong (but why it may not be likely):
Not able to drawdown more from LOC due to current banking situation
But given the LOC is using CDLX’s $116M of accounts receivable, maybe CDLX could use this elsewhere with one of their many bank partners to get new and better financing
Also may be some timing benefits, where don’t have to pay Bridg right away, and could issue stock first, removing the need to drawing down more from the LOC
5 of the 8 scenarios had positive liquidity after the earnouts and without drawing down more of the LOC
Not able to raise equity
But given the company is improving + Chase is rolling out new UI + statistics proving new products working, it would seem they could raise this relatively small amount, at least in intervals
8 of the 8 scenarios (all) had positive liquidity after the earnouts and after only using the LOC. Given FCF positive in Q3, may not need to raise equity right away
Not able to use this much cash due to new LOC covenants
But the limits that are redacted could have some cushion already + there is language that shows there is flexibility to increase)
3.18.2023: New LOC Covenants Related to the Bridg Earnouts and the Dispute (Related to Partial Drawdown of Line of Credit)
This is a follow up to the initial thoughts on the drawdown of the LOC. If you haven’t read those yet, I would recommend reading them first (posted below this, named “3.14.2023 #1”, “3.14.2023 #2”, and “3.15.2023”), as this is a supplement to that information.
LOC Covenants Related to Bridg Earnouts
I think we can rule out paying additional interest and a lower LOC limit from a lower accounts receivable as the reasons for CDLX not drawing down more from their LOC (as showed and discussed in the past notes below).
Given the 11th amendment to the LOC directly discusses the earnouts, I thought to re-review them in case it explains why CDLX only withdrew $30M from their LOC instead of more, and what other restrictions may exist.
Here is a quick summary of what I discuss below:
Limits for the Bridg earnout payments are likely on the total cash payments made (not just on the LOC funds used)
Limits may have a cushion (given they are redacted, and given there is still uncertainty of where the final earnout numbers end up)
Limits seem to have flexibility to increase (given the language)
Default from losing dispute is only if it ends with a cash payment above limits (where the limits likely have a cushion + could be increased + CDLX could lower cash payments by using debt, etc.)
The first amendment regarding the earnouts:
Modification to Negative Covenants. Section 5.5(xix)
…with respect to the earn-out or deferred purchase price payment that is due under the Bridg Acquisition Agreement in or about May 2022, Borrower shall be permitted to make cash payments of no more than [***] (or such greater amount approved by Agent in writing, in its sole discretion) for the “First Anniversary Payment Amount” as defined in the Bridg Acquisition Agreement;
This limits how much cash CDLX can use for the first earnout payment.
The LOC amendment goes on to say:
provided further, that with respect to the earn-out or deferred purchase price payment that is due under the Bridg Acquisition Agreement in or about May 2023, Borrower shall be permitted to make cash payments of no more than [***] (or such greater amount approved by Agent in writing, in its sole discretion) when combined with the cash amount of the “First Anniversary Payment Amount” paid by Borrower.
I believe this then limits how much cash can be used for both earnouts, given the date is then May 2023 (one year later from that above) and given it says “combined”. But I find it strange they mention the “First Anniversary Payment”, but do not mention the “Second Anniversary Payment” directly or by name.
Between these two parts of the amendment, my first thought was the covenant restricts CDLX from using more than [***] from the LOC for the earnouts. However, given it doesn’t specify it that way, I now believe the LOC is setting a limit including cash used outside of the LOC.
If for instance the LOC actually was limiting how much of the LOC could be used for the earnouts, then it could make sense why CDLX only withdrew $30M, such as if $30M was the limit. But that does not seem to be the case.
Therefore, I am still not sure why CDLX did not withdraw more, to guarantee they had the cash on hand, unless they don’t think they need that much, from the cash earnouts being near the amount they think.
Quick math if CDLX wins and no additional amount is paid:
$121.9M cash at 12/31 - $34M of Q1&Q2 burn - $67.3M expected cash earnout payments = +$20.6M without the LOC
This shows CDLX wouldn’t even need the LOC or the $30M they just drew down
So the $30M drawdown is plenty, since it leads to +$50M in cash and then CF positive thereafter
While CDLX could be too confident of winning the dispute and thinking they do not need more cash from the LOC, CDLX knows the situation and dispute much better than we do.
I just feel even if there is a tiny percentage chance of losing and then you need more of the LOC, why not just draw down more since it is a small price to pay in terms of interest to have that guarantee of cash on hand.
Maybe there is more behind the scenes, with CDLX agreeing to PacWest they will only take half of the LOC now, and not the full amount, to be more flexible with PacWest given the current banking situation, in exchange for more flexibility later, such as with those limits (I discuss this flexibility aspect more below).
There is also a real possibility that CDLX has other methods to handle additional amounts needed for the earnouts / dispute, such as related to the next part of the amendments:
Nothing herein shall prohibit the Borrower from issuing stock of Parent in connection with its earnout obligations so long as such issuances do not violate any other term of this Agreement.”
While this likely just relates to the shares issued to Bridg for the non-cash component of the earnouts under and up to that 19.9%, it does make it seem this still allows CDLX to issue more shares to complete the Bridg earnout if needed (which is another reason I do not think CDLX goes to $0 over the Bridg earnouts, since they would only need to raise a relatively small dollar amount, and the business is improving, so some shareholders may be willing to retain their ownership percentage through a raise at a relatively small cost).
Related, these covenants are all related to a cash payment. I feel the resolution of the dispute opens up the potential for negotiations and the potential to add other elements, such as a debt component with Bridg shareholders. So while Bridg wouldn’t get 100% cash paid today, they still get that cash over time and with interest (could even make it very high interest, and may only need it to be over 1 year or so).
There is also a new default component, which may be the most important aspect, which says:
Modification to Events of Default.
“(q) any resolution of the earn-out dispute with respect to the Bridg Acquisition Agreement (including a resolution pursuant to an arbitration award, negotiation, court order or judgment and regardless of whether such decision is appealable and/or in the process of being appealed) that would require Parent or any other Borrower to make cash payments in excess of the amounts expressly permitted by Section 5.5(xix) above.
I do not interpret the default clause to be if there is any resolution or the dispute period, but rather if the resolution of the dispute leads to more than allowed.
This is why it would be helpful to know how much is allowed, but CDLX / the LOC has this redacted. While the cash limits could be equal to the expected cash payments (~$67M), why redact that info? We already know how much CDLX expects it could be, since they chose to make that public. Therefore, I wonder if there is some cushion, such as = expected + if lower VWAP + even some room for the dispute + if want to do closer to 100% cash for 2nd earnout.
So it is possible the amount allowed is more than CDLX expects, or more than $67M. I actually think there has to be a cushion, since the cash component is unknown due to the VWAP and some elements of the increase in ARR from second anniversary customers. So then I would think CDLX would also add some additional cushion for the dispute, since they know what is being disputed and the associated impact. This would also likely explain why it is redacted, so investors don’t think this means CDLX is for sure paying say an allowed amount of something crazy in total, leading to drawing incorrect conclusions and leading to more fear.
Additionally, in both cases when discussing the limits, it says right after, “(or such greater amount approved by Agent in writing, in its sole discretion)”, which makes me think CDLX could get a higher limit if needed. Meaning these limits are not as set in stone as we think.
If the ending earnout cash payments were still above this limit above what PacWest would increase up to, CDLX still has the underlying collateral of $116M of accounts receivable to be able to get a new loan or factor / securitize.
Additionally, this is where CDLX could even just pay the dispute amount in the form of debt with Bridg, so CDLX can still use the LOC for the cash portion up to the limit. This would seem to meet the covenants. As long as Bridg gets their cash and then some more with interest, I don’t see why this wouldn’t be too hard to get agreed upon, as long as the length is relatively short (compared to paying back over many years).
Based upon this last covenant, one thing we possibly can read into is CDLX, even as of 3/14, still thinks they are going to win the dispute, or it is possible to win, or even if they lost the dispute the amount is still within the limits in the LOC, or they have / know they can get the LOC limit increased, or have other ways to complete the earnouts in conjunction with the LOC. If they already knew they were going to lose or found out the ruling, and led to going over the cash limits in the LOC, and CDLX couldn’t get them to raise the limits and CDLX couldn’t do the other methods I mentioned to still be able to utilize the LOC like a debt component, then there was no reason to draw upon the LOC at 3/14 (assuming the interpretations above are correct).
Note: I have already used this information to update my liquidity analysis. I plan to add that to the notes soon.
3.15.2023: Limit from Accounts Receivable (Related to Partial Drawdown of Line of Credit)
This is a follow up to the initial thoughts on the drawdown of the LOC. If you haven’t read those yet, I would recommend reading them first (posted below this, named “3.14.2023 #1 and #2”), as this is a supplement to that information.
While we can likely rule out CDLX not drawing down their LOC to the max due to interest payments (based on yesterday’s notes), before concluding it is from CDLX not needing any more for the earnouts, I do want to check the accounts receivable.
As a reminder, the amount CDLX can now borrow from their LOC under the new amendments is a function of 50% of the non-UK accounts receivable (before it was 85% and all accounts receivable, but CDLX wanted to ensure they had access to the LOC under a worse macro environment which came with stricter lending).
So backing into that AR that would limit CDLX to the $30M they drew down would be $30M / 50% advance rate / 92% US revenue = ~$65M. So if CDLX’s IR went from $116M at 12/31 to $65M on 3/14, they would likely be limited to drawing down $30M.
To see if $65M is reasonable, looking at historical AR levels below, we see CDLX has previously held around this $65M level (blue line). But as you can see, CDLX’s AR has grown pretty consistently, and was not close to $65M in 2022, and didn’t go below $73M in 2021. This makes me think CDLX likely did not get their AR down to $65M in 1Q23, making me believe this wasn’t limiting them from drawing down more, and making it more likely CDLX just didn’t need more cash for the earnouts.
To look at this an additional way, I wanted to see the largest dollar and percentage decline in the AR QoQ and compare that to if CDLX’s AR truly went down from $116M to $65M since 12/31/2022 to 3/14/2023.
On a percentage basis, the largest decline historically was -37% from 1Q20 to 2Q20. On a dollar basis, the largest decline was -$24M form 4Q19 to 1Q20.
This compares to if CDLX went from $116M to $65M in 4Q22 to 1Q23, which would be -44% and -$51M, or more than any % and $ decline in the past. Therefore, while possible, I do not believe AR has decreased all the way down to $65M. If AR did decline that much this quarter, it would be the largest decline over many quarters.
If AR is not at $65M, and is higher, then CDLX likely could have borrowed more if they needed it. Given they didn’t borrow more, and given it wasn’t a function of not wanting to pay more interest (discussed yesterday), I think it more likely CDLX just doesn’t need more.
However, there could be a reason for not drawing down more related to the new covenants directly related to the earnouts. I will be adding thoughts on that soon, after I think about them a little more.
3.14.2023 #2: Interest on the LOC (Related to Partial Drawdown of Line of Credit)
This is a follow up to the initial thoughts on the drawdown of the LOC. If you haven’t read those yet, I would recommend reading them first (directly below this), as this is a supplement to that information.
Below I stated: It is always possible CDLX did not want to draw down more given the additional interest payments. However, if it was known more cash was going to be needed, why would you risk the entire company over a little bit of interest? Therefore, I do not think this is the reason for not drawing down more.
I wanted to quantify this. Doing so proves to me that additional interest is not the reason CDLX did not draw down more from their LOC. This increases the odds of CDLX only drawing down what they know they need for the earnouts, proving they can handle them.
Below shows the difference between the $30M CDLX drew down today vs the $60M limit. Between today 3/14/2023 and 6/30/2023, the additional interest is only $0.69M. (Technically the max available is even less, possibly around $53M, which means the additional interest from maxing out is even less).
Again, the point is to draw down today to guarantee you have cash for these upcoming earnouts (and other liquidity needs). Therefore, if CDLX thought they needed $10M or $20M more, why wouldn’t they just also draw down that extra amount and pay only $0.69M more to guarantee they have it? My thought is they don’t need that additional cash, since the earnout payments are not as large as some fear (or they have a different way to make the payments).
The reason I chose 6/30 as the ending date to determine the interest is from being the possible ending date of both earnouts and possible dispute being paid. Meaning, if CDLX was thinking of waiting to draw down additional funds right before the earnouts, that may only be a few months away, and consequently only a few months of interest paid if they wanted to guarantee having those funds just a few months from now.
I believe there is a low probability of the second earnout being disputed and extending the time until the payment is paid. Therefore those funds will be needed sooner rather than later. Now it is possible the first earnout resolution gets appealed, delaying payment further. But that appeal may only be a couple months, so assuming resolution 4/30, that would end 6/30.
As stated earlier today, I am continuing to assess this from different angles.
LOC Terms and Interest
In terms of when and how it is paid:
1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the interest rate shown on the Schedule. Accrued interest shall be payable monthly, to Agent for the benefit of Lenders, on the last day of the month, and shall be charged to Borrower’s loan account (and the same shall thereafter bear interest at the same rate as the other Loans).
With regard to the interest rate:
At 9/30: “Interest on advances bears an interest rate equal to the prime rate or 6.25% as of September 30, 2022.”
And 12/31: “Interest on advances under the 2018 Line of Credit bears an interest rate equal to the prime rate minus of 7.50% as of December 31, 2022.”
I was thrown off by this change at 12/31, since I believe the prime rate is 7.75% today, which would lead to way too low of interest if 7.75% - 7.50%. However, I think that is another mistake in the 10-K, given:
last quarter it did not use “minus”
and there is a mistake with saying “minus OF”, which makes no sense.
My guess is “minus” was not supposed to be added, and it should read, “an interest rate equal to the prime rate of 7.50% as of December 31, 2022.”
For now, I assuming it is the prime rate today at 7.75% for a tiny bit of conservatism.
I did calculate the interest above based on the number of days in the month, instead of just dividing my 12. I mostly did this to more accurately capture the interest from 3/14 today to the end of the month on 3/31, and then used that same logic for the next months.
3.14.2023 #1: Initial Thoughts on the Partial Drawdown of Line of Credit
Today CDLX announced they drew down $30M from their LOC from Pacific Western Bank.
"While we are confident in meeting our liquidity and profitability goals, proactively drawing down on our line of credit is prudent given recent uncertainty in the financial sector," said Karim Temsamani
I am very happy to see this, given everything going on related to SVB and the regional banks like Pacific Western Bank.
Before the news today, I felt there may have been an increase in the probability of losing access to the LOC, and then not having as much cash as needed for the upcoming earnouts. But now that risk has went away. Therefore, CDLX drawing down the LOC and actually now having that cash on hand is very good.
It is kind of telling that CDLX didn’t draw down more or the max possible (not necessarily the $60M, but even the estimated max of $53M that I estimated below on 3.6.2023).
Given CDLX knows how much is being disputed by Bridg, and given the earnout payments are likely due soon, if CDLX needed more cash I think they would have drawn down more or even the max possible.
Therefore, I think CDLX only drew down what they needed to handle the earnouts and dispute and some cash burn from operations. This shows CDLX likely now has enough cash for both cash portions of the two earnouts. (It is also possible CDLX is handling some portion of the payments an alternative way, like debt with Bridg, issuing equity to certain shareholders who don’t want diluted, etc.).
It is always possible CDLX did not want to draw down more given the additional interest payments. However, if it was known more cash was going to be needed, why would you risk the entire company over a little bit of interest? Therefore, I do not think this is the reason for not drawing down more.
There also could be some element of CDLX collecting some of their high amount of accounts receivable, which would decrease the max available from the LOC from 12/31/2022. But this would also mean CDLX collected more cash elsewhere, and would have even more cash today then I assume (more than 12/31 cash + $30M).
I will continue to think through whether we can read too much into the amount drawn today.
Also in the press release was the following:
"Additionally, we are utilizing a multi-bank deposit program that allows us to minimize our exposure to any single financial institution and maximize our FDIC insurance. Our strategy remains unchanged, and these are just two of the many ways we are positioning the company for long-term growth and profitability."
I was also happy to hear this. The LOC had some amendments that made it seem like they were requiring CDLX to close other accounts and move them to Pacific Western Bank. Therefore, I did not know if a large portion, or even all, was at Pacific Western. So hearing CDLX has minimized their exposure to any single FI is very good. However, maybe after hearing depositors are safe at SVB, maybe this is much less of a worry now.
Overall, this to me is good news. Some who don’t follow CDLX may see this is bad, such as from believing CDLX must not be in a good position and need more liquidity, but I do not see it that way.
3.11.2023: CDLX’s and Bridg’s Prior Use of SVB, Updated Liquidity Analysis (Under New VWAP + New Possibility)
CDLX’s and Bridg’s Prior Use of SVB
In the past, CDLX used Silicon Valley Bank (SVB) for a line of credit and term loan. Both loan agreements were paid off in full in 2016, and have been terminated (as stated in the 2017 10-K, shared below). Therefore, CDLX looks to no longer be using SVB for any loans.
When reviewing the latest 2022 10-K, the following was within the line of credit amendment:
“All of Bridg Inc.’s deposit accounts outside of Agent (i.e. at Comerica Bank and Silicon Valley Bank) were closed prior to the Eleventh Amendment Effective Date”
Therefore, Bridg also looks to no longer work with SVB. And given Bridg was required to move deposits from SVB, I’m assuming the same would be said for CDLX if they had any there, but I do not see any information that makes it seem they had deposits with SVB.
To determine what the amount at risk would of been for these Bridg deposits, on completion of the acquisition of Bridg on May 5, 2021, Bridg’s total cash equaled $1.6M:
Today, this amount could be higher, especially since Bridg’s ARR increased from around $12.5M at acquisition to $23.129M at 12/31/2022, and given “our subscription contracts are generally 6 to 36 months in duration and are generally billed in advance on a monthly, quarterly or annual basis”.
While this is most likely still a very small amount in relation to CDLX’s cash of $121.9M, it is still nice CDLX / Bridg avoided direct exposure to SVB.
In terms of other impacts, I doubt CDLX’s largest bank partners and associated users will have much or any trouble (such as Chase, BofA, or Wells).
Some may have pulled money from SVB and placed it with someone like Chase. However, this most likely wouldn’t lead to any meaningful uptick in MAUs from the owners of those business accounts. Additionally, there would not be any noticeable difference in new advertisers from these new business accounts, given it’s too early for benefits from the self-service tool for banks. Also, their associated ad spend would likely be minimal anyways. I do wonder though if SVB was one of the “multiple top 20 U.S. banks” Karim mentioned as a potential future bank partner. While maybe unlikely, it would get interesting if Chase took over SVB, possibly leading to the same net impact as an adding them as a partner.
With respect to current CDLX advertisers, most if not all of the advertisers using CDLX are larger advertisers, in spaces like hotels, airlines, quick service restaurants, major coffee chains, gas and convenience, etc., and less tech start ups. CDLX does have some exposure, such as to DTC services. So while some advertisers may be impacted and pause ad spend on CDLX, it would most likely be a smaller percentage of the many total advertisers.
That is another benefit of CDLX’s recent initiatives to decrease customer concentration as well, where they stated in the Q4 earnings call, “Customer concentration improved over the past year as our top 5 customers accounted for 15% of revenue this quarter compared to 23% in Q4 of 2021. This remains a central focus as we continue to organically grow and expand the depth and breadth of our customer base.”
It is left to be seen of whether there are secondary impacts and contagion. I can speculate, and how it could relate to CDLX, but I’d rather even wait through this weekend and see what new information comes out. What I can do though is update the liquidity analysis based on the lower stock prices, which directly impact the VWAP for the second earnout.
Updated Liquidity Analysis (Under New VWAP + New Possibility)
Given the currently lower stock price, which increases the odds of a lower VWAP for the stock price used for the second earnout, I wanted to provide some updated liquidity numbers.
The scenarios below include the main scenarios I have shared over the last few months. I wanted to have them all side-by-side for comparison purposes, as well as add one additional scenario. I describe the scenarios and results below.
About the Scenarios Above
The first three columns are nearly the same as in the notes below on 3.6.2023. Therefore, for all these details on these projections, such as the LOC amount used and the 23Q1-Q3 FCF burn, check out those notes below from 3.6.2023.
I did add to Q2 burn the $3.2M expected shortfall related to the $10M minimum FI partner share commitment that is likely due April 2023.
I also updated the VWAP from $4.00 to $3.50, given the currently lower stock price.
As a reminder, the “Dispute at 25%” is from hearing the dispute was over the $25M two-year joint CDLX / Bridg contract signed, and possibly in relation how much could be allocated to Bridg. For more detail on why 25%, see the notes below on 2.5.2023.
In terms of the two new columns added to the right, “Dispute on Timing” uses September 2022 ARR of the much higher $22.115M. This is from assuming the dispute is regarding the timing and recognition of revenue under GAAP, given we know the dispute is supposedly related to the whether the ARR was calculated under GAAP. Therefore, I have assumed Bridg wants that later revenue (captured by Sept ‘22) moved up to the April ARR calculation. For more detail, see my last full post on 12/23/2022.
New Possibility
The “-$1M ARR for 2nd” is based on hearing the potential of less 2nd anniversary clients or revenue than first assumed.
Supposedly Andy and Karim have been telling investors they feel they have been conservative with their estimates of the second Bridg earnout payments. This is from the potential of a Bridg client (or more) leaving or not growing in the second year, leading to less than expected ARR growth, and therefore a smaller earnout payment.
Small changes do have a big impact, given the second earnout is 15x that increase in ARR. So a decrease of even $1M decreases the earnout payment by $15M.
This actually gets very interesting. Before, the cash component was 30% of the payment, so we could have said a $15M reduction in total earnout is about a $5M reduction in cash (ignoring the brokerage fees). However, given CDLX will likely hit their 19.9% dilution cap and need to pay more in cash, there is some element of a dollar for dollar decrease, which is reflected in the scenarios shared ($15M less cash from a $15M decrease in the total payment). Therefore the impact to cash is more impactful than one would think.
Conclusion
In general, it would seem CDLX can handle all scenarios that I believe are possible and reasonable.
It is even likely we see a VWAP higher than $3.50 or even $4.00, given it seems all but certain it is Chase launching the new user experience soon (which removes doubt of Chase leaving, which could help move the stock). We could also see some insider buying, which would be one of the best signals.
However, for completeness and comparison purposes, I calculated everything under a $3.00 VWAP as well. The difference in ending liquidity is small, given it is only $0.50 less on around 5-6M shares used in the second earnout, leading to about $2.5M - $3.0M more cash (depending on the scenario). For reference, on current share count of 33.6M, $3.00 is a $100M market cap.
There are other scenarios that are possible, but I do not feel they are reasonable nor very likely, such as the 50% allocation to the $25M contract, which I discussed in the notes below on 2.5.2023, called “2.5.2023 Post #2 - Bridg Dispute and Liquidity” (also easy to search that title to find that section in these notes).
While the above results give me a lot of comfort, there is still uncertainty on what is being disputed and the potential impact. This is why the stock has sold off so much, and why so many will not invest or will not invest more to have any recovery in price.
As discussed in the past, where I get my additional comfort is from thinking it seems too unlikely for there not to be another way for CDLX to handle a large Bridg dispute payment.
If for example it is much in excess of what I projected above, I don’t see why through the negotiations CDLX couldn’t pay Bridg back over time with interest, instead of a lump sum. Or why CDLX couldn’t raise equity or debt from existing shareholders or even bank partners who don’t want them to fail, and can see the early signs of the company and offerings improving, and where some investors may want to retain their ownership percentage post Bridg dilution.
3.9.2023: Chase and the New User Experience (on the new ad server), Convertible Senior Notes (a change related to maturity)
Chase and the New User Experience (on the new ad server)
Based on conversations with investors who spoke with CDLX IR following earnings, it seems nearly certain Chase is the bank on the new ad server and launching the new user experience possibly this month (as mentioned at earnings). This matches what we have discussed in the past here in these notes, including the latest clue of it being Chase that I shared in my notes below on 3.3.2023.
While this is maybe less on investors’ minds now given the ongoing Bridg dispute, it is quite the 180 from everyone thinking Chase was dropping CDLX for Figg and the stock quickly selling off, to now Chase being the first and only big bank on the new ad server and now the first to launch the new user experience and product-level offers.
Others will still say Chase could be building out Figg to eventually replace CDLX. However, beyond Chase saying Figg was instead for SMBs (which matches their other acquisitions), with Chase adopting the new user experience, the customer value proposition widens, making it more difficult for Figg to match and surpass CDLX’s offerings. I also think it would confuse users if Chase adopts CDLX’s new user interface, and then switched to something created by Figg. Therefore, I think the switching costs increase with Chase now likely on the new ad server and rolling out the new user experience.
I will be continuing to open my Chase app 100 times a day until I see the new user experience for myself. I will be sure to update everyone as soon as I see it.
Convertible Senior Notes (a change related to maturity)
Under “Sources of Material Cash Requirements” in the 2022 10-K (second set within the picture below), CDLX has the maturity date of the $230M of convertible senior notes as due within 2026-2028, instead of within 2024-2025 to match the expected maturity date of 2025.
It would be great if CDLX got the maturity date pushed back such as via refinancing the notes. This needs to happen sooner rather than later, so if it occurred already, that is wonderful news.
However, it is much more likely that whoever updated this table, they updated the years at the top, but did not shift that payment over to be under the 2nd column now instead of the third.
Now, it is interesting that all years shifted up by one, except for the column 3 ending year, which went from 2026 to 2028 (+2). So it wasn’t just a formula updating each by up one year. This looks to be a manual change.
However, this could relate to the operating leases, which are the only other requirement in that column. But the 10-K states, “We have various non-cancellable operating and finance leases for our office spaces, data centers and operational assets with lease periods expiring between 2023 and 2027”. So if they expire in 2027, and not 2028, why have this change by +2 to 2028 instead of +1 to 2027?
If I go to the when the operating leases mature (included below), the $599K reported above as between 2026-2028 is in fact maturing in 2026. But then why make it 2026-2028, which doesn’t match column 3 last year being a one year window, and everything else this year increasing by just 1 year?
Maybe it relates to the $397K lease that matures “thereafter” (in green above). This could be the lease that matches the statement of when these leases expire ending in 2027. But then why was that not included in the table at the beginning as between 2026-2028? Possibly another reporting error? And if it was included, that payment is likely in 2027, so again, why consciously move the range to 2028, unless it really does relate to a change in the converts?
But as likely confirmation that the maturity date for the notes is still 2025, the 10-K states elsewhere, “$230.0 million bearing an interest rate of 1.00% due in 2025.”
This isn’t a big deal, since it doesn’t change knowing that payment is really due in 2025. But I did get excited for a minute thinking maybe it was refi’d or something else and CDLX got pushed back.
3.8.2023 - Insider Buying, Confirmation of Reporting Mistakes, Confirmation of an Executive Leaving
Insider Buying
Beyond resolving the Bridg dispute with a favorable outcome, one of the best and easiest ways for the stock to rebound and help increase the VWAP for the second earnout is for Karim and other executives to start buying the stock in the open market. This is something we have really never seen by executives in the past at CDLX.
Now that the 22Q4 earnings report is released, it should open up the opportunity for some insider buying.
It is possible some executives like Karim are in possession of material non-public information (MNPI), such as related to the earnouts or new bank partner discussions, restricting him and others from buying. But at least for those two sets of info, both have been shared in general to the market, so it is possible this wouldn’t prevent him and others from buying right now. But even if Karim can’t buy due to MNPI, I would think at least one executive or insider could buy and we would see some buying from someone like the CFO, CPO, CTO, COO, etc.
You would think if inside the company everyone is seeing the progress and success of the new initiatives like the new ad server / new user experience / automation / product-level offers, and if they felt fine with liquidity as it relates to the Bridg earnouts, they would start buying at these all-time-low stock prices.
Seeing insider buying would restore a lot of confidence with investors due to what it signals, and would likely lead to others buying as well.
But the opposite is also true. If insiders are not buying, why not? It doesn’t need to be millions of dollars of purchases, so if we aren’t seeing even a little buy, by at least one insider, why not? Is it from the Bridg dispute being more than we think? Insiders likely have a very good idea of how much CDLX would need to pay if they lost the dispute, and whether they could cover it with current liquidity resources or with other methods.
I’m not surprised we haven’t seen a purchase yet, since the typical trading window for insiders opens up 2-3 trading days after the earnings release, so it may have opened up Monday. And if they bought Monday, it would be another 2 days for SEC Form 4, which would be today after hours we would see it at the earliest. This is something I will be watching closely.
Confirmation of Reporting Mistakes
In my notes on 3.4.2023, I listed a few reporting items that I thought were potential mistakes. I received confirmation coming from CDLX IR that the MAUs and liquidity resources listed were in fact mistakes.
Knowing the MAUs reported for Q4 and FY were in fact flipped around is very good to have confirmation on. This is because it shows a much more positive MAUs trend. Instead of a decrease of 2M MAUs QoQ, it was actually an increase of 2M MAUs. If there was a decrease, you would wonder if the trend would continue, with no more organic growth with the existing bank partners, and limiting growth to new partnerships. So I am glad that is not the case yet.
The liquidity resources mistake was minimal, but I wish it didn’t happen. You never know if some investors only looked at that one table to get their info for CDLX’s liquidity and then drew the wrong conclusions. This matters right now given how important the stock price is at this time (given the VWAP for the second earnout). However, I am guessing most don’t even look at that table, and if they do, they would see the obvious error and confirm the much higher accounts receivable on the balance sheet.
CDLX IR was not aware of the ARPU mistake I mentioned, with including Bridg revenue in the calculation unlike the past, but this isn’t a big deal to me compared to the MAUs, since it doesn’t change the underlying numbers or trends.
Confirmation of an Executive Leaving
I noticed earlier this month that Amit Jain, Founder and CEO of Bridg, was taken off of the CDLX “About” page on their website. This is how I have found about other executives leaving or being laid off from the company. CDLX has always seemed to update this instantly, and it is how I have heard about changes before hearing it from others.
I received confirmation coming from CDLX IR that Jain is no longer with the company. This makes sense, given it has already been about 2 years since the acquisition. Additionally, Amit Gupta was just recently hired as both COO and General Manager of Bridg, and where the press release even made it clear Gupta was essentially Jain’s replacement as Jain “transitions out of the business”.
Only surprise was the press release said the transition would be “over the next several months”, and instead it was just over a month. However, that is not too big of a deal. We already knew he was leaving. And it could make sense with him leaving a little earlier. I’m not sure how much a founder / entrepreneur wants to work directly under someone, likely solely spending months just training your replacement, and especially when they are likely independently wealthy and don’t need to work and would rather focus on their next thing.
3.6.2023 - Changes to the Line of Credit, Bridg Earnouts and Dispute Updates, Liquidity After Bridg Earnouts and Dispute
These notes are more focused on the financial / liquidity side of Q4 and beyond. The order of what is discussed is on purpose, such that each component is used for an updated liquidity analysis that I provide at the end (such as with regard to the Bridg earnout payments + updated liquidity resources + future expected FCF burn).
I will likely update the numbers in this section and modify assumptions as I continue to think about the potential scenarios and continue to speak with others.
Changes to the Line of Credit
The largest worry regarding the LOC was the covenant related to minimum adjusted contribution, which had a minimum growth rate. With the current / possible bad macro environment in 2023, that growth covenant increased the odds of CDLX losing access to their LOC, which is a large addition to liquidity.
This is why it was very good to see in the new 10-K, “On February 16, 2023 we amended our 2018 Loan Facility to remove and replace the former adjusted contribution covenant with a requirement to maintain a minimum level of adjusted EBITDA.”
Specifically, as seen in the twelfth amendment, “For periods after December 31, 2022, the minimum cumulative Adjusted Contribution Margin shall be determined on a trailing twelve month basis and shall reflect 20% growth over the prior trailing twelve month period…is hereby deleted and replaced with the following new Minimum Adjusted EBITDA financial covenant". This was exactly what CDLX said they would do, so it was good to see they followed through.
There was discussion by CDLX that with these new amendments it could lead to a lower amount available to borrow. I thought we may see a lower borrowing limit from the current $60M down to $50M, but it looks like the $60M + the option to increase to $75M remain.
Instead, there are different updates / amendments that have a similar net impact: “On November 29, 2022 we amended our 2018 Loan Facility to modify the eligible account receivable to exclude UK accounts, reduce the ability to borrow up to 85% of the amount of our eligible accounts receivable to 50%.”
So while the total borrowing limit is still $60M with the option to increase to $75M, the amount CDLX can actually borrow at any given time is a function of “Eligible Accounts” and the “Advance Rate”. With these amendments to the LOC, CDLX’s amount they have available to changed QoQ, leading to slightly more liquidity than I expected (the following is based on my interpretations, and may be incorrect):
Calculation Note: In order to exclude the UK accounts, I used the following from the 10-K to make it function of revenue, given I do not know the exact UK amounts:
“During each of 2020, 2021 and 2022, we derived 8% of our revenue outside the U.S., respectively. While substantially all of our operations are located in the U.S., we have an office in the U.K.”
While excluding UK accounts leads to a smaller amount of Eligible Accounts, CDLX offset this decrease from increasing total accounts receivable QoQ (but this gain was offset by the decrease in the Advance Rate).
Although CDLX currently has less available that they can borrow from their LOC compared to at 9/30, the positive is they now have >$0 versus under the previous growth covenant and if that scenario emerged (such as from a bad macro environment). Therefore, CDLX is in a better liquidity position than at 9/30.
One final amendment to the LOC actually relates to the Bridg earnout payments and even the dispute.
“Modification to Negative Covenants. Section 5.5(xix) of the Loan Agreement is hereby amended and restated to read as follows:”
“Borrower shall be permitted to make cash payments of no more than [***] (or such greater amount approved by Agent in writing, in its sole discretion) for the “First Anniversary Payment Amount”
“Borrower shall be permitted to make cash payments of no more than [***] (or such greater amount approved by Agent in writing, in its sole discretion) when combined with the cash amount of the “First Anniversary Payment Amount” paid by Borrower”
“Modification to Events of Default. Section 7.1 of the Loan Agreement is hereby amended by (i) removing the period at the end of clause (p) therein and replacing it with “; or” and (ii) adding a new clause (q) thereafter, to read as follows:
“(q) any resolution of the earn-out dispute with respect to the Bridg Acquisition Agreement (including a resolution pursuant to an arbitration award, negotiation, court order or judgment and regardless of whether such decision is appealable and/or in the process of being appealed) that would require Parent or any other Borrower to make cash payments in excess of the amounts expressly permitted by Section 5.5(xix) above.”
These amendments limit the amount CDLX can use related to the Bridg earnout. Based on the liquidity analysis below, it is likely that CDLX wouldn’t even need to use any portion of their LOC. However, this would lead to low levels of cash. This is why I think instead CDLX will use some mix of cash and the LOC.
Looking at this in a different way, CDLX knows how much liquidity they need. They know the amounts being disputed and possible outcomes. Therefore, if they knew they needed additional funds, they likely would have instead focused on utilizing the accounts receivable via factoring / securitizing, instead of getting all the amendments to the LOC and using their accounts receivable for a loan at 50%.
CDLX consciously made these decisions, and they know the amount being disputed with Bridg. Therefore, I feel they have positioned themselves to be able to handle the amount they needed.
Even if that amount wasn’t known for a while, they likely knew around 22Q3 or around 9/30, and had nearly the last 5-6 months to prepare. Said differently, why waste their time with this LOC and making all these amendments if it doesn’t help them at all? CDLX initiated and agreed to these terms. If it wasn’t sufficient, they should have spent time factoring or pursuing an alternative method.
Obviously there is the chance CDLX thinks they for sure will win the Bridg dispute and they are under preparing.
But, more likely, either:
CDLX knows how much is being disputed and knows the max amount, which they are able to cover with current resources and the new LOC
CDLX knows the max amount from the dispute is larger than they can handle with their cash + new LOC, but there are alternative options to handle the Bridg dispute that CDLX is perusing or has already arranged, such as:
CDLX paying Bridg back over time with interest, instead of a lump sum. This could be negotiated and part of the resolution. Both parties would win.
Raising debt or equity.
Bridg Earnouts and Dispute Updates
It is unfortunate the first Bridg earnout payment was not resolved by the Q4 earnings.
The new supposed resolution date is the end of April, which would be in time for the 23Q1 earnings call (likely beginning of May). I would hope we would get an update as soon as it is resolved, especially with CDLX saying, “and we will provide timely updates to the public once the matter has been resolved”, but I will set my expectations for early May at Q1 earnings.
However, based on the modification to the LOC that discusses the dispute that I included above, I did not previously consider a resolution to occur and then that be appealed. This makes me wonder if it could be even further delayed.
I am a little surprised that CDLX did not try harder to get a resolution before 22Q4 earnings, and increase the odds of an increase in the stock price, leading to less cash needed in the second earnout payment from a higher amount from the stock component.
I did noticed the expected two Bridg earnout cash payments fell from $43.5M and $24.9M to $43.3M and $24.0M, respectively.
Liquidity After Bridg Earnouts and Dispute
I wanted to determine the liquidity under different scenarios / assumptions, that may be more conservative than realistic.
Expected
Expected by CDLX.
Used their low-end of the Q1 guidance for EBITDA at -$17M (therefore this is more on the more conservative side), and then made assumptions for even higher FCF burn.
Used CDLX’s expectation of being FCF positive by Q3 (assumed no positive amount, and instead just assumed no burn).
Used their expectations for the cash component of the earnout payments (as they lay out in the 10-K, and which I included above).
VWAP at $4.00
The VWAP used for the second earnout is still to be determined (the first VWAP is locked in).
While a VWAP of $4.00 is possible, I believe it would be difficult since it needs to be the average through April. With positives like a bank on the new user experience in March / early April, it would seem there are more chances of the stock staying at or above today’s level around $5. However, anything is possible, so $4.00 VWAP is used to measure the impact and to be more conservative.
VWAP at $4.00 + Dispute at 25%
Additionally, the two prior liquidity projections do not account for Bridg winning their dispute and CDLX paying out more for the first earnout (as well as the second). Therefore, another projection is added to account for Bridg winning.
The first earnout payment will impact the second earnout, which is why the second earnout changes further, despite also using the same $4.00 VWAP assumption again. I.e., more shares used in the first payment from the higher total payment decreases the number of shares available for the second payment due to the 19.9% Bridg cap, leading to more cash needed in the second earnout.
The 25% in “Dispute at 25%” is based on the potential of the dispute being related to how much of the $25M two-year joint CDLX / Bridg contract should be allocated to Bridg. For much more detail, such as why 25% and not 50%, see the details in the notes below on 2.5.2023, called “2.5.2023 Post #2 - Bridg Dispute and Liquidity” (also easy to search that title to find that section in these notes).
First, I wanted to provide the liquidity numbers without the LOC as a starting reference point.
This shows why the LOC amendments in Q4 were so important to see and achieve, given it is much more likely now CDLX will in fact have their LOC, and not experience the above ending liquidity amounts.
Here are the numbers with the LOC:
I added the amount I calculated above for what is available to borrow
For how their ending liquidity will be allocated, I retained $25M in cash to satisfy the LOC terms
Ending liquidity is positive (>$0) in all outcomes + ending cash is at the $25M minimum cash needed for the LOC + additional LOC left to borrow.
While intuitive, just to show it to make it easier to think about, I did the same projections with the LOC, leading to the same ending liquidity, but for allocating the ending liquidity I used 100% of the LOC to see the ending cash (which as expected, is equal to ending total liquidity).
I prefer the previous allocation with not using the full LOC, given it more easily shows how much CDLX can still borrow while considering the minimum $25M of restricted cash.
As a reminder, these liquidity projections above ignore the real possibilities of:
CDLX paying for the Bridg dispute under a different method, from negotiations in the resolution, such as paying Bridg back over time with interest (instead of in a lump sum)
CDLX raising equity or debt from investors or banks
Overall, the biggest thing this quarter was seeing the LOC amendments that pretty much ensure CDLX will have access to the LOC for the Bridg payments. While there is still some uncertainty around what the actual payments will be, CDLX looks to be in a very good position now to handle even adverse outcomes (both in terms of the macro and the dispute).
As mentioned at the beginning, I will continue to think and refine these assumptions and projections, even in the very near term.
3.5.2023 - Actual / Guidance vs Expected Financials (MAUs, Billings Margin, Revenue, Gross Profit, EBITDA, FCF)
With CDLX, I generally do not care about the short-term financials. However, there is more importance around these numbers today given the liquidity under different outcomes with the Bridg earnouts and dispute.
Therefore, I find it important today to ensure I update my numbers and refine my assumptions in my projections to ensure CDLX can handle the majority, if not all, outcomes related to Bridg.
This is why today I am focused on comparing the Actual Q4 financials and Q1 guidance to my previous projections, identifying and seeking to understand the differences, and updating my modeling. (Later, I will be providing an update to my liquidity projections).
Hopefully once CDLX is past the Bridg earnouts, more focus can be given to the long-term again.
Actual/Guidance vs Expected Financials
While others may have felt disappointed or surprised, I did not feel there were not too many larger differences with the actual Q4 financials and the Q1 guidance provided at earnings vs my general expectations.
I included the Q4 actual and Q1 guidance versus my expectations under my different projections and scenarios I previously provided, both in my Research Notes on 2.5.2023 and in my last write-up on 12.23.2022. I go into detail on the differences below.
Q4: Explaining Differences in Actual vs Expected
MAUs
As discussed yesterday in the notes, I think CDLX has their MAUs numbers backwards, with actual Q4 MAUs at 186.7M (instead the being the the full year number as reported).
If true, 186.7M is very close to my estimate of 186.97 under all projections, which was based on assuming organic growth consistent with the past and no additional banks added.
Revenue
For nearly all my projections I was assuming the low end of guidance of $80M, which was close to the actual at $82.503M.
Gross Profit Margin (GP%)
GP% in 22Q1 - 22Q4: 38.63%, 35.76%, 35.79%, 40.49%.
Partner share % held relatively flat QoQ, but delivery costs decreased QoQ from 12.55% to 7.98%, increasing the gross profit margin. The increase in the gross profit margin was above 40% for the first time in 2022.
I would expect delivery costs to hold relatively constant through the next 4 quarters, where even CDLX says in their financials “Over time, we expect delivery costs will decline as a percentage of revenue.” We could see the percentage increase going into Q1 with delivery costs holding constant and revenue declining, but YoY I would expect it to decrease from the 10.18% for FY22 down to 7%-8% in FY23.
Given Bridg revenue is at a higher gross profit margin, as Bridg revenue increases, it will lead to higher overall gross profit %. I still believe as product-level offers are introduced in the bank channel, and the banks’ relative contribution of data decreases, it should lead to lower FI share and then higher gross profit, something hinted at by Lynne, but not discussed by Karim yet, so we will see.
Adjusted EBITDA
This was higher than I expected, from much larger SBC (which is added back) in Q4 than I expected.
FCF and Cash
Biggest thing I was not expecting to see was accounts receivable growing as much as it did, leading to less cash collected this quarter and therefore lower FCF than expected and slightly less cash on the balance sheet than expected.
Q1: Explaining Differences in Guidance vs Expected
Revenue
The guided revenue range of $54M to $63M as lower than my best estimate of $66M, but still higher than my more conservative expectations at $47M, and significantly higher than the most conservative numbers at $28M which I was using to account for the large fears by others with the marco (like a March 2020 level).
Adjusted EBITDA
In terms of Q1 guidance, adjusted EBITDA was near my expectations under best estimates, based on past trends with Q1, the market, previous commentary, and not yet getting much benefit from the new ad server, new user experience, etc.
Their guided adjusted EBITDA is higher than I would have expected at those lower revenue end points. This is due to lower-than-expected delivery costs and likely higher SBC (which is added back).
Beyond Q1
Operating Expenses
CDLX provided they expect around $42M per quarter of baseline cash operating expenses.
This will increase in Q2 from annual merit increases and promotions, so likely could assume an additional 10% for a max (merits are usually 3-5%, and could see promotions from 10-20%+ but with a lower percentage of the employees receiving, but there may be less this year or in smaller amounts given the focus on liquidity and expenses).
But not all operating expenses are salaries and comp, so maybe assume 75% of these expenses experience the 10% increase, or 7.5% overall.
This leads to an estimated $45.15M per quarter going forward in 2023, or at $180.6M in total, versus my previous estimate of $180.59M. I would have expected to be close since CDLX has been providing updates on how much they are decreasing expenses, but being this close is just luck, and where actual operating expenses will be different (but still close).
Increases in Billings Margin
“For the quarter, billings margin was down 1.8% year-over-year. Part of this was driven by advertiser mix.”
In 21Q4, revenue / billings = 67.2%.
In 22Q4, revenue / billings = 65.4%.
Differences = -1.80% YoY (matching CDLX’s comments)
“There are some temporary drags on billings margin that will phase out by the middle of the year as we transition our tech stack and automate our operations.”
“Our product enhancements and optimization should provide us with around 2% of additional upside to billings margin for the rest of the year.”
“Our expectations returned to historical levels of billing margin over time.”
2% and returning to historical levels is the same, which is around 67%+ (FY 2021 was 67.8%)
In terms of what the “product enhancements and optimization” that will increase billings margin:
Modern Ad Ranking: “First, we are upgrading our ad decisioning engine to support modern ad ranking models to drive higher monetization and offer relevancy. Based on early results, we believe that these changes can drive a lift in RPM of 10% to 15% in the back half of 2023.”
Serve / Impression Pricing Models: “Second, we are exploring pricing models that are more tied to serve or impression events while still optimizing for advertiser rollout targets. This approach provides better balance between reach and performance goals. It also gives Cardlytics more control of budget management, delivery and ad selection, which helps us capture mobility.”
New Processes: “Third, the processes we have put in place to allow us to better track product performance, overages, adjustments and comping launch delays not only allowed us to immediately save $350,000 on redundant tools but also will increase our overall operational efficiency for the year.”
+2% Billings Margins: “I expect the combined impact of the above improvements to positively impact our full year billing margins by around 2%. These are the first of many initiatives that we're putting in place to improve our operations and products.”
3.4.2023 - Potential Reporting Mistakes (x3): Latest 10-K, Press Release, etc.
I could easily be mistaken, or I am not looking at things correctly, but I think there may be some issues with the reporting this quarter on MAUs, ARPU, and liquidity resources.
Given I have rarely, if ever, came across an error with CDLX reporting before, maybe a few things are slipping through with the recent cuts? I don’t think it is too much of a worry here, given in some cases it is a favorable difference. More than anything it is unfortunate if these mistakes are truly errors in reporting and lead to incorrect assessments by others.
In general, I believe the MAUs trend is better than reported. The higher MAUs naturally leads to lower-than-reported ARPU, but then potentially even lower due to another possible issue with the revenue figures they used this quarter for calculating ARPU. Additionally, liquidity resources are likely higher than reported on the 10-K.
Liquidity Resources
I think the liquidity resources reporting is an obvious error, and may increase the odds of the MAUs and APRU potentials errors are actual mistakes (explained after).
In the 9/30/2022 10-Q on the balance sheet, you can see the accounts receivable at 12/31/2021 and 9/30/2022 (yellow), with the very small amounts of restricted cash (green).
This matches the reported liquidity resources in the same 9/30/2022 10-Q:
In the latest 12/31/2022 10-K, the accounts receivable on the balance sheet increased to $115.6M and restricted cash to $80K.
However, under the reported liquidity resources at 12/31/2022 in the same 10-K, the accounts receivable are set equal to the restricted cash at both year-end 2021 and 2022.
Given the LOC is a function of the accounts receivable, if someone only looked at this figure in the 10-K rather than on the balance sheet, they may think the amount CDLX is able to use of the $60M is much less than in reality, given the likely reporting issue here.
Additionally, this is not a calculation of total liquidity, but rather the list of liquidity resources and their corresponding amounts, so the accounts receivable amount should be listed in full and match the balance sheet, just like previous financials have shown.
MAUs
In terms of MAUs, CDLX reported in their press release:
“Cardlytics MAUs in the quarter were 182.7 million”
“For full year 2022, Cardlytics MAUs were 186.7 million”
The FY MAUs of 186.7M reported in the press release matches the 10-K figure of 186,682,000:
Part of me thinks CDLX has the Q4 and FY MAUs switch around.
Somehow FY 2022 MAUs of the reported 186.7M was higher than any quarter in 2022 (178.5M, 179.9M, 184.7M, 182.7M).
Intuitively, the average can’t be higher than any of the individual numbers. And if you do the calculations, using the Q4 MAUs of 182.7M reported to estimate the FY 2022 MAU vs the reported amount of 186.7M:
Equal-weighted average of the quarters: 181.45M estimated Q4 MAUs (vs 186.7M Q4 MAUs reported)
CDLX only revenue-weighted average: 181.51M estimated Q4 MAUs (vs 186.7M Q4 MAUs reported)
If you reverse the two MAUs numbers, with 186.7M as the Q4 MAUs, and vs 182.7M as the full year MAUs:
Equal-weighted average of the quarters: 182.45M MAUs (vs 182.7M MAUs)
CDLX only revenue-weighted average: 182.62 MAUs (vs 182.7M MAUs)
Given how much closer these are, this to me makes me feel the MAUs numbers should be reversed vs what was reported.
Possible confirmation of the mistake is seen in the Q4 earnings PowerPoint, where when showing the quarterly MAUs they instead use the reported FY MAUs of 186.7M (both in the press release and 10-K) but it is used as the Q4 MAUs (instead of the reported 182.7M for the quarter, which would be a QoQ decrease in MAUs).
You can see the inconsistency as well by comparing which numbers are used at Q4 2021 and 2022 from the latest press release: “Cardlytics MAUs in the quarter were 182.7 million, an increase of 4.2%, compared to 175.4 million in the fourth quarter of 2021. For full year 2022, Cardlytics MAUs were 186.7 million, an increase of 9.2%, compared to 170.9 million in 2021.”
The trend in the PowerPoint vs reported also makes a lot more sense with the 186.7M as the Q4 figure instead of the FY figure. This was the reason I first thought this was an issue was from being surprised to see the QoQ decrease from 184.7M in Q3 to the reported 182.7M in Q4. But then the PowerPoint showed a QoQ increase.
I remember many did not like seeing the QoQ decrease in MAUs from 21Q1 to 21Q2, so maybe this was part of the reason for the early sell off the day after earnings but then the very quick recovery due to learning it was a mistake after speaking with management.
ARPU
While the Q4 and FY ARPU figures would then also be impacted from using the incorrect MAUs, I think there are separate additional issues as well.
The reported $0.45 of Q4 ARPU looks to be from using total revenue, and not CDLX-only revenue, which would not be consistent with previous reporting, such as what you see in the Q4 earnings presentation, and where the press release also specifies it as the Cardlytics revenue.
To verify, I made sure that 21Q1 through 22Q3 used CDLX-only revenue for the calculation of CDLX ARPU (and ignored Bridg revenue and did not instead equal the Total ARPU I have in the last line):
If I continued calculating the Q4 ARPU the same way as I did in all past quarters which matched CDLX, we would have:
CDLX-Only Q4 Revenue / Reported Q4 MAUs = $76,647,000 / 182.7M = $0.42 Q4 ARPU (vs $0.45 reported Q4 ARPU)
If instead I use the Total Q4 Revenue (including Bridg), I match CDLX’s reported Q4 ARPU:
Total Q4 Revenue / Reported Q4 MAUs = $82,503,000 / 182.7M = $0.45 Q4 ARPU (vs $0.45 reported Q4 ARPU)
So this makes me thing CDLX is using total revenue for Q4, instead of CDLX-only (not Bridg), combined with using a lower MAU number that leads to higher ARPU.
I think instead it should be:
CDLX-Only Q4 Revenue / Reported FY MAUs Really Being Q4 MAUs = $76,647,000 / 186.7M = $0.41 Q4 ARPU (vs $0.45 reported Q4 ARPU)
Again, not a huge deal, but you would rather not see any mistakes.
But maybe I am mistaken here and above. You can look at something over and over and keep seeing it incorrectly, so maybe that is happening with me here (e.g. I am just reading it wrong). That is why it is nice being able to share my notes with all of you and see if others agree or disagree.
3.3.2023 - New User Experience, New Ad Server, Product-Level Offers, Category-Level Offers, Engagement Stats, NOLs, Shares Outstanding
I will be adding additional notes on Bridg, revenue / EBITDA / FCF, liquidity and the LOC soon. I mostly wanted to break it up given I have quite a bit of notes, and I didn’t want a few points overshadowed by the focus on Bridg / liquidity.
New User Experience
Regarding the new user experience, we're excited to announce that a major partner is launching a new user experience to its full user base and it should roll out over the next month. As we mentioned in the past, the scale created by having a major bank partner on our new user experience and ad server will allow us to ship new products, which I will discuss in more detail shortly.
This was one of the highlights from the call. I am excited to finally see a large bank on the new user experience.
This will unlock the new spend-stretch offers, category-level offers, and product-level offers, not only in general, but these are the “new offer constructs that will be up in Q1 and Q2”. Therefore we should start slowing seeing some positive impact.
As far as I know, based on what I’ve discussed in the past, I still think it is Chase who is on the new ad server. This is likely how CDLX got to 50%+ MAUs on the new ad server, with just Chase (CDLX mentioned Chase was the easiest path to the 50% goal for this reason).
Interesting enough, I saw that Peter Chan (CDLX CTO) liked a post from a managing director at Chase, discussing the Chase Connected Commerce technology teams where Chase Offers falls under + “the amazing innovations coming from our Personalization team during a live demo” + “cloud” + “data migration”. This is just another data point of Chase being on the new ad server and is likely the bank that will be very soon launching the new user experience.
New Ad Server
As a reminder, the new AWS / cloud ad server is required for the new user experience. One update provided by CDLX was, “Our goal is to have all our banks moved to the cloud by Q3 2023.”
This will limit the amount of growth / impact we see in 2023, especially since the new user experience will have to be rolled out separately afterwards.
However, as CDLX has said, the key thing was getting to 50% and having enough scale to get advertisers to start taking advantage of the new offer constructs, like spend stretch offers, category-level offers, and product-level offers.
Product-Level Offers Success
CDLX shared stats from an early test of product-level offers.
“Receipt level offers which are construct tailored to specific product categories or items.”
“These are the offers we are most excited about and for good reasons. In an early test, 10% of activations came from customers who had never activated an offer before, and 19% of those customers had not shopped at that retailer in 12 months prior to the campaign.”
New users activating offers + proof of shifting customer spend for advertisers is great to see. And both make sense. Product-level offers are more relevant to users + may come with higher cash-back due to different margin profiles + customers may not even know a store sold this item until the offer or thought to buy if from there (e.g., a 10% Panera offer may not be relevant nor attractive, but 50% off Panera coffee is more relevant + higher % cash back + I may not of known they had coffee).
These stats are also great for cross selling CDLX advertisers to become Bridg clients and to start placing product-level offers.
I also think these stats are important as it is an early proof point there will be a positive impact from the new ad server / new user experience / product-level and category level offers that are only just now starting to roll out.
Category-Level Offers Success
Merchant category code offers, which allow bank-funded campaigns that are targeted to specific types of transactions such as gas or grocery purchases.
In a test with a large bank partner, we saw around a 2x increase in redemption dollars of a standard campaign.
A 2x increase in redemptions is very large. So much so, I may need to think about this a little more. Similar to the product-level offers, the success is likely a function of more relevant offers with higher cash back due to different margins in different categories.
Engagement Stats
In the latest call, CDLX provided some specific engagement stats, including one update from a number shared 1 year ago, and others I had not seen before.
“Users activating offers increased 8.6% year-over-year, even with the impact of the large restaurant clients exiting our channel.”
This is in relation to 1 year ago, where CDLX shared, “We had over 51 million unique MAUs activate over 597 million offers in 2021, creating engagement and value for all of our banks.”
Assuming the 8.6% is in relation to the 51M user count in 2021 (and not the engagement rate nor the number of offers activated), that would be 55.4M in 2022.
However, MAUs increased from 170.9M in FY 2021 to 186.7M in FY 2022. In relation to the total MAUs, that would be 29.8% in 2021, and 29.7% in 2022. Therefore, although the number of users activating offers increased, the engagement rate held constant as the number of users increased. This makes sense, since there has not been much changes to the products or offers to users over the last 1 year.
But that will change. Based on early success and stats from the product-level offers, including the related stat of new users activating offers for the first time due to product-level offers, CDLX will likely continue to see the engagement rate increasing from these new offer constructs that are going live very soon.
The other stat is important for banks, and could be a way to know and show banks that CDLX offers work (leading to a lower probability of banks dropping CDLX, and new banks joining).
“Our platform is creating an impact for our banking partners and for retailers. In 2022, our data showed customers engaging with our program spent 1.2x more on the card and made 1.3x more shopping trips than unengaged customers.”
I would hope CDLX, a company focused around data and analytics, would be controlling for other factors at play, similar to how they use randomized controlled testing for advertisers.
New Advertisers
CDLX previously mentioned a strong pipeline of new advertisers. In this latest call, CDLX provided some more detailed numbers:
“We increased the total number of advertisers in the channel by 8% in 2022.”
“Not only that, but we also increased the number of advertisers with billings between $500,000 million and $5 million by 17%, and we increased the number with billings greater than $5 million by 44%.”
More advertisers in general + more advertisers increasing their spend are both great for CDLX and users. One very large driver of future success is getting more advertisers in the channel and in front of more users to increase relevance and attractiveness of offers. So it is good to see these numbers increasing.
It would be nice to have these numbers consistently shared for comparison purposes.
NOLs (Net Operating Losses)
From the latest 10-K: “As of December 31, 2022, we had U.S. federal and state NOLs of $626.5 million and $255.6 million, respectively.” This can be carried forward to deduct and offset future taxable income, making it a very good asset as CDLX will soon be FCF positive.
This is an increase from 2021 where, “As of December 31, 2021, we had U.S. federal and state NOLs of $586.2 million and $243.6 million, respectively.”
There are some rules where if there are enough changes in ownership it can lead to losing some or all of the ability to use these NOLs. Some companies take proactive measures to protect their NOLs, something I kind of wish CDLX would do.
Shares Outstanding
From the latest 10-K, “As of February 28, 2023, there were 33,605,769 shares outstanding”.
This is a small increase from the 9/30 10-Q, “As of October 31, 2022, there were 33,165,847 shares outstanding”.
We will likely see the share count increase quite a bit in the very near future from the two Bridg earnout payments, possibly up to ~8.3M additional shares from using the max 19.9% dilution. There will be about another 6.0M shares from RSUs that vest over the next 0-4 years (1.3M of which is for Karim). Additionally, we could see an equity raise related to Bridg and/or later for additional growth.
I do think that if the future plays out even a small fraction of what I believe, such as from small increases in ARPU relative to other platforms, it will lead to more than enough value to offset this dilution to still lead to very attractive returns. Then, given the operating leverage and corresponding future FCF and hopefully less spend on hiring and acquisitions, some cash could be used to buy back shares, but this would be much later in the future.
Q4 2022 Earnings: Notes and Thoughts Before the Call
2.5.2023 Post #2 - Bridg Dispute and Liquidity
While the Q4 results and guidance (discussed earlier today below) will impact cash burn, they will have less of an impact compared to the Bridg dispute and changes in the liquidity resources. Therefore, updates on this front are what myself and likely others are most eager for with Q4 earnings.
It is impossible to predict market price movements, but there is a real chance of a positive price change upon favorable news related to the Bridg dispute. I know quite a few investors who are waiting to invest until there is clarity on this outcome, something we have never received yet. If you combined that with some favorable news with Chase on the new UI (while CDLX wouldn’t say them by name, maybe there would be visible evidence by earnings), CDLX would then have both the Bridg dispute and Chase fears behind them, leading to quite the decrease in perceived risk for investors. I have no idea what that market price would be. More important to me would be hearing confirmation that CDLX can make it through the Bridg earnouts (like I have believed and continue to believe), as then the focus by both investors and CDLX management can shift again from the short-term to the long-term potential of the business.
I was hoping we would see a press release at some point related to the Bridg dispute or any improvements with liquidity (new LOC, factor / securitizing accounts receivable), but given how close we are to the earnings call and given past updates were only on the calls, I am assuming we will not get an update until the Q4 earnings call, which is fine.
In terms of liquidity, I think there is likely a lower probability of seeing the $97M of accounts receivable factored / securitized and sold, unless CDLX had an unfavorable outcome with the dispute and needed that cash. It is possible though they collected a portion of that from advertisers to increase cash. More likely, given CDLX was actively speaking with Pacific Western Bank, we will see a change in the line of credit, removing the growth covenant and replacing it with covenants related to EBITDA. This may result in a lower line of credit (from the $60M today and removing the possibility of increasing to $75M that was available), but it increases the probability of this liquidity source being available if CDLX isn’t able to offset the macro headwinds (since before, the growth covenant could have resulted in the LOC not being available). These additional sources of liquidity beyond their cash are really only needed as they relate to the Bridg earnouts, and specifically the dispute. And with new scenario I discuss below, neither additional liquidity sources are needed.
In terms of the dispute, I would imagine if it was resolved and if it was material and negative for CDLX, we would have seen a press release, given CDLX mentioned they would provide updates if things became material. Additionally, I would assume it would be required to make it known if the dispute was resolved and there was some very bad outcome for CDLX. I’m not positive, but if CDLX found out they were going bankrupt over this, and found out a month ago, I feel that would be a pretty material thing to not share with investors.
While it is possible there hasn’t been a resolution, there is at least one big piece of evidence that points to CDLX making it through the dispute just fine. That was the hire of Amit Gupta as COO. If liquidity was a concern, why hire an executive at $350K a year right at this moment, increasing cash burn? A COO doesn’t seem like an essential hire if they are going under, but is needed if the focus is shifting towards growing the business. Most telling to me was that Gupta received 350K in RSUs that vest at a later time. I have a feeling this would have been a strong selling point, given the salary wasn’t out-of-this-world high. Given Karim has worked with Gupta in the past, I can’t image Karim hiring and giving Gupta all these RSUs if he knew or thought CDLX was going bankrupt from the Bridg dispute, making the RSUs worthless. Even more simply, if those troubles were a real possibility, why would Gupta leave his good job for this, with the risk of losing his new job quickly? All signs are pointing to CDLX making it through the dispute just fine.
Even before hearing about Gupta, I felt fine about the dispute, even without the additional liquidity sources and possibilities, given all the options at CDLX’s disposal if they were faced with an extremely large and unfavorable outcome. Simplest of all was reaching a deal with Bridg to pay them over time, instead of in a lump sum. Additionally, CDLX could work with their existing bank partners, not only for the possibilities of a loan (given CDLX is about EBITDA and FCF positive and could service a new loan), but also negotiate for a deferral on paying their FI share (possibly even as a quasi-loan, with paying them back later at a higher FI share for a period of time). Or there is the simple answer of doing a rights offering / equity raise to sell shares for cash, but comes at the expense of other sharesholders in the form of large dilution, but it is better than a zero for the stock.
However, the odds of the dispute being so high that current cash and liquidity resources wouldn’t cover it seemed small. In my most recent write-up / video, I went into detail on possible Bridg dispute amounts and macro scenarios impacting cash burn, and how CDLX could make it through them. In those scenarios, I assumed April ARR (which is what the first Bridg earnout is based on, and what is being disputed) did not have Bridg’s portion of the $25M joint deal nor some renewal contracts / increases within the April ARR. Given Bridg revenue was higher and stayed constant for the months after, I then used that later higher revenue contained both the portion of the $25M contract + the renewals and I used that higher revenue to calculate the dispute potential.
One thing I did not consider that was brought to my attention, was the possibility of Bridg’s share of the $25M joint contract being disputed. Funny enough, this was something I was curious about, and had someone ask CDLX IR about, but CDLX wouldn’t provide information on what share / portion / allocation was given to Bridg vs CDLX. While I do not know for certain, I heard Bridg received $2M for the contract, and therefore CDLX was allocated a much higher portion of the $25M contract. Assuming the $2M was included in the April revenue ($2M / 24 months in the contract) and the ARR calculation, then the dispute would be more on the allocation of the $25M (i.e., getting a higher allocation than $2M), rather than timing (vs if the joint contract is not in the April ARR, and therefore that is being disputed, which is what I originally assumed and seemed to match CDLX comments).
If it is true that Bridg got $2M of the $25M+, then you can see where Bridg wants to dispute that, possibly wanting something such as a 50/50 split vs 8% ($2M / $25M). However, when you start comparing numbers to Bridg’s existing business (or Q2 2021 ARR of $12.5M, which is also the number the earnouts are in relation to) and what Bridg is providing, it makes much less sense for Bridg to earn 50%, or even 25% of such as a large contract. This is seen very easily in the numbers:
50% allocation x $25M / 2 years = $6.25M / year = 50% of Bridg’s $12.5M 21Q2 ARR
25% allocation x $25M / 2 years = $3.125M / year = 25% of Bridg’s $12.5M 21Q2 ARR
I think this is good comparison to make to get an idea why 25-50% allocation of the $25M contract doesn’t make too much sense. The resulting revenue would be 25-50% of Bridg’s ARR in 2021. Now, maybe this would make sense, given it sounds like the $25M contract in Dunkin, which could be quite a large client. But we know Bridg’s existing clients were also equally as large: Starbucks, Panera, Taco Bell, Dollar General, and more (Chipotle dropped, so I don’t think they were in the ARR). Therefore I do not see why Dunkin’ would lead to such a high amount of revenue for providing a similar service. To me this instantly rules out 50% allocation of the $25M joint deal.
Maybe a higher allocation would make sense back in 2022 if there were more banks on the new ad server. At that time, in April 2022, it was only US Bank, which is maybe 5% of MAUs. Therefore, it was not likely out of the $25M contract a ton was going to product-level offers. I would argue none were, since I still haven’t even seen a product-level offer within US Bank. And even today, nearly 1 year into the 2 year contract, no product-level offers have been placed, since Chase is still on the old UI (and the new UI is needed for product-level offers). Therefore, what more is being spent on Bridg versus exiting contracts? I would have to imagine at this time that spending levels are more similar to existing contracts, which is why 50% allocation and then 50% of Q2 2021 ARR makes very little sense. Additionally, ARR is recurring revenue, where I am not sure advertiser spending would be counted towards that. Maybe that is part of the dispute, but seems less likely. For Bridg, the recurring revenue is related to the subscriptions to their cloud-based customer-data platform.
Where does that leave us? Assuming the allocation percentage is the dispute item, and assuming Bridg wins the dispute, I do not believe it could be for too much. Using 25% allocation, which still seems high in relation to the contracts for other major Bridg clients, it leads to $2.125M of additional ARR ([$25M * 25% - $2M currently] / 2 years), which multiplied by 20 (earnout multiple) is $42.5M more in the earnout, about $12.75M more in cash, and around 741K more shares (or about $29.75M at the $40.15 VWAP). The additional cash is what matters, and is not too significant. The dispute could also carry its own negotiations, such as being paid back over 1 or 2 years with interest if needed.
This does impact the second earnout, given the max dilution between the two earnouts is 20%, or 33.2M / 80% - 33.2M = 8.3M shares (where 8.3M / 41.5M total new shares = 20%). The first earnout under the higher payment leads to using about 2.81M of those shares, leaving 5.49M additional shares in the second earnout. At today’s market price (but where the VWAP at in April 2023 could be higher) that leads to $46M in stock, leaving $24M in cash to satisfy the total $69.5M second earnout. Therefore there is no additional cash on the second earnout versus what is expected at $24.9M, leaving the only additional amount in the first payment which was equal to about $12.75M.
This leads to $74M in liquidity (while ignoring the accounts receivable and lower cash burn such as from a better Q4 than the low end of guidance):
This shows CDLX wouldn’t even need the line of credit to be okay.
Even if somehow they won for 50% allocation, CDLX still has plenty of liquidity (while once again, ignoring even the $97M of accounts receivable)
One could look at this and say then the risk is if CDLX doesn’t have their LOC then they can’t cover the payments. However, this is why it was so important to hear after the Q3 call that CDLX was being proactive with Pacific Western Bank to work on new covenants to ensure the LOC would be available under even a bad macro scenario. Given PW is a long standing partner with CDLX, and CDLX is one of their largest clients, the possibility of this being worked out is very high. If for some reason it wasn’t, I believe CDLX would have little trouble finding a new bank to provide a similar LOC today, given their size + given their many partnerships with banks. Additionally, this assumes CDLX can’t experience high enough growth in 2023 to retain the LOC, despite 2023 being their largest advertising pipeline + new ad server benefits + ability to optimize pricing and have new monetization methods to offset any macro headwinds.
As a reminder, I went through different macro scenarios impacting cash burn + different Bridg dispute payments scenarios in my last write-up.
There is an alternative situation related to the $25M contract that could be disputed related to the earnouts, that may make more sense, given it also matches CDLX comments. CDLX has mentioned that there has been some debate related to GAAP revenue, since the earnout is based on GAAP.
“The Bridg platform generates revenue through the sale of subscriptions to our cloud-based customer-data platform and the delivery of professional services, such as implementation, onboarding, data analytics and technical support in connection with each subscription. We recognize subscription revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer. For non-recurring services or transactional based fees dependent on system usage, revenue is recognized as services are delivered. Our subscription contracts are generally 6 to 36 months in duration and are generally billed in advance on a monthly, quarterly or annual basis.”
Reading this, you could see where if Bridg collected all $2M in April or even $1M in April for the first year if billed annually, how Bridg could think that amount of revenue should be then multiplied by 12 for the ARR (since this would also match how I heard they were questioning the ARR calculation in addition to questions on GAAP revenue). However, given how simple that is and wrong (since the earnout is based on recurring revenue, which would be $1M annually, not monthly), I feel the dispute would be resolved by now, so I’m guessing this is not what occurred or what is being disputed.
I also thought it could be related to non-recurring revenue that hasn’t occurred yet, but not only is this almost nothing of Bridg’s business (<0.2% based on 9 months ending 22Q3), but once again, the ARR is recurring revenue, and this would not be recurring. I have a feeling “implementation and onboarding” falls into this non-recurring revenue, with the subscription to the CDP being the recurring. Therefore, any additional revenue in that first month of the new client would not be recurring, and therefore not part of the ARR calculation. This also feels too simple for the dispute to still be going on.
Therefore, maybe the allocation of the $25M makes the most sense, or one of the other alternatives I have mentioned in my last write-up. However, under all possibilities, CDLX is still fine, like I have shown.
I would say I am even more comfortable with the CDLX situation now than I was before, given it would seem the possibilities related to the Bridg dispute are much more limited if we know the dispute only relates to the $25M contract. Before, given no information, the possibilities and therefore outcomes are limitless, with the potential for outcomes of the worst magnitude. With those off the table, I think CDLX is in a good position. I still feel there is likely a large possibility the dispute is lost / CDLX wins and pays nothing, or if they pay, it is a very small amount. Otherwise I imagine we would have received more information from CDLX, and we would not have seen the Gupta hire with all the RSUs.
2.5.2023 Post #1 - Macro Ad Market, New Offers, New Ad Server, New Banks
Macro Ad Market
We already heard in the CDLX Q3 earnings call that CDLX was seeing some pullback in budgets and reductions and delays in overall ad spending in Q4. Other channels looked to have experienced much of the same in Q4, based on their earnings calls:
Alphabet: “Our revenues this quarter were impacted by pullbacks in advertiser spend”
From Meta: “Q4 revenue remained under pressure from weak advertising demand which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape”
These headwinds were reflected in CDLX Q4 guidance. Based on Alphabet and Meta, those headwinds likely persisted through the end of the quarter. With only this in mind, you could like assume Q4 results are within the guidance range.
However, CDLX does have quite a bit of areas to still grow to offset this pullback, including new monetization methods, new pricing, improving automation, and having new advertisers and offers. While CDLX said they have a large pipeline for new advertisings, that was for 2023, and therefore will not help with Q4 (but could impact future guidance provided at Q4 earnings).
New Offers in Q4 and Q1
I did not notice a great deal of new offers in Q4, further reinforcing the possibility of no real earnings surprises.
The standout offer for myself and for others (based on online discussion threads on this offer) was the Kohl’s 20% off for a max cash back of $20. This was a Chase Exclusive offer. Beyond this offer being around Black Friday and Christmas, part of the reason for so many users redeeming this offer and getting the full cash back was due to the ability to redeem the offer for gift cards to different stores that are sold in Kohl’s (such as Starbucks, Amazon, restaurants, etc.). I am not positive on the economics for CDLX on this offer, given it was possibly boosted by Chase, given it was an exclusive offer + much higher percentage and cash back than most offers. This offer started November 18. Why this becomes more interesting was the offer returned December 9th, allowing users to use it twice in very short order and all within Q4, given the second offer expired Q4. Therefore, I assume redemption was very high with this offer, but its impact will be a function of the economics to CDLX (given it may be different than other offers).
CDLX also started in November doing 40% off Entertainment subscriptions, which could have lead to signing up more members and increasing some cash for CDLX. I am not expecting too much of an impact from this.
BofA started in November having a large increase in offers with the “Must Use Link” on the logo. Offers included 1 free month of Apple Music, 1 month of Apple News, 7 days of Apple TV+. It is possible this could relate to the new monetization methods Karim mentioned at Q3, which could be related to Cost Per Click, rather than redemption. Note, there are 7 of these “Must Use Link” offers currently in BofA. Also note, there are none of these offers in any other bank, so it may BofA placing these offers, and therefore may be little to no economics for CDLX.
While it won’t impact Q4 earnings, the current trends with offers in Q1 could impact guidance. January offer density dropped pretty significantly. It wasn’t until about February did I start seeing new offers again, and in small quantity. It was nice seeing some new high-back Chase Sapphire Reserve Exclusive Offers again, as well as the new unique offer for Honda ("Earn 10% back on your Honda Dealers purchase, with a $103 back maximum." "Service your vehicle today at your local Honda Dealers."). There have also been quite a bit of travel related offers which is nice to see. All of these have high cash back, and therefore likely have a much higher ARPU impact.
In both Q4 and Q1, there were Chase offers related to $5 back on groceries, and now $5 back on restaurants. These offers can be redeemed anywhere. I have seen these years ago in Chase, and BofA sometimes does something similar. Not sure if CDLX earns anything off of these offers, but it is likely good for engagement.
Overall, the trends in offers seem to match what was guided for. It is hard to know if there were any new price increases, or new pricing methods, or charging for engagement, or other monetization methods, or any improvements in automation. My guess is those will occur, but Q4 was likely too soon for any to be in place. The only real possibility I see for a surprise is with a strong future guidance, possibly from the strong pipeline in 2023 + if CDLX signed new Bridg contracts. I feel these also have a lower probability until Chase is on the new UI, where CDLX could start getting new advertisers excited and start placing product-level offers.
New Ad Server
I hope CDLX made progress with Wells and BofA with moving them to the new ad server. More importantly, I hope CDLX gets Chase on some component of the new UI before earnings. While seeing the full new UI with images and product-level offers would be fantastic and desired, I would at the minimum like to see images within the offers just like US Bank. With still about 1 month until earnings, I think this should be possible.
New Banks
It is possible one new bank partner is announced. I have no insights on this front, but we know CDLX is in talks with multiple top 20 US banks and wants to expand internationally. Signing 1 big new bank would be very beneficial.
Q3 2022 Earnings: Notes and Thoughts After the Call
12.7.2022: Dec 7 Raymond James Conference Notes / Thoughts
Today CDLX presented at the Raymond James Conference.
I would say the highlight from the conference was simply hearing more from Karim. I think he has identified the many areas where CDLX needs to improve, and is actively working to fix them. The big one is related to automation (said nothing was automated before, and I will discuss examples below), but also mentioned different pricing and optimizing campaigns.
I found it interesting Walmart and P&G were used as examples twice, more so since I’ve been wondering if Bridg signed Walmart, given Bridg employees have been liking many Walmart Connect posts on LinkedIn. Using specific companies as examples in the past have usually meant they were soon to be partners. This has happened multiple times. However, this is new management, so maybe nothing can be taken from this.
I did like that Karim brought up the United Airlines offer with higher percentage back the more you spend (I posted about it here). What is interesting is Panera had a similar offer structure in Dosh this week, where the more you spend, the more you save. Maybe they are testing it before rolling out on the banks?
There wasn’t too much different communicated related to near-term ad environment. I expect Q4 to remain within guidance. I will say, although this could persist through 2023, I believe the reason CDLX expects to still hit EBITDA and FCF targets next year is from both the growth of new advertisers (such as brands and CPGs that haven’t been able to use CDLX until now) as well as from the new offer constructs (related to banks on the new ad server).
Sounds like there is a higher possibility to see growth internationally in the medium to long term. Karim mentioned how it currently can take 6-9 months to onboard a new bank, but looking to bring that down to a couple of weeks, as well as with less help given not on-prem anymore and instead on the cloud. I think refocusing on expanding more internationally makes sense, given would be faster and easier to scale with these improvements + given Karim’s more international background at Google + higher CF from more operating leverage (add a large new bank with little incremental costs compared to before using the new ad server).
Self-service for SMB continues to be put on hold. I do like how Karim actually gave reasons, and stated they were his reasons, related to some risks (such as an SMB placing an offer and then going out of business) and that there are larger opportunities elsewhere to spend time and energy (for instance, with larger advertisers, and making it easier for them to buy from CDLX).
I did like hearing that they are working on and will have next year shorter campaigns. Currently CDLX’s incrementality model really only allows 45 day campaigns, but looking to shorten to even daily campaigns (mentioned banks even want this, for say Cyber Monday, or Mother’s day).
Related to quicker aspects in the business, Karim mentioned it currently takes several days to estimate the number of users CDLX can reach for a campaign, and then several more days to book those campaigns. Mentioned it should takes minutes rather than weeks to build and book the campaigns. He said by having more automation in examples like this frees up those resources to hire more machine learning engineers and data scientists.
I get the feeling that the chances of one or more new banks is a higher probability than I originally thought, even with already saying they were in talks with multiple top 20 banks. Seems to be a near-term focus for Karim, who said CDLX needs to expand their network for both “reach and frequency”.
I liked that Karim said they are working on new engagement metrics to provide to investors so investors can see how engagement is going at early states of the new ad server (allow us to extrapolate that out).
There unfortunately were no updates related to the line of credit, securitizing the accounts receivable, or resolving the Bridg dispute. At this point, I’m wondering if we won’t hear anything until Q4 earnings. I hope they would make a press release related to any of these items, but we will see. I would think CDLX would want to get any of this done ASAP to remove risk / uncertainty, and benefit from a likely higher stock price with the second earnout.
More than anything, I continue to believe the probability of achieving the long-term potential of the business continues to increase. It simply is a function of getting to the long-term, which means getting through these two Bridg earnouts. Given the many different possible solutions (amended LOC, securitizing the $97M accounts receivable, working out a deal with Bridg, or simply getting a new loan from a bank partner or some rev share deferral), I think it is more likely than not that CDLX makes it through this, and achieves a higher portion of what is possible given now under Karim.
12.5.2022: Second Bridg Earnout + Upcoming Dec 7 Conference
One aspect of the second Bridg earnout I originally missed was that it is only for “second anniversary customers” (thank you Richard and Poppy for pointing this out to me).
CDLX has also explicitly said that the second earnout is based on the incremental growth on existing clients as of the first earnout date.
Why does this matter? It significantly caps how much CDLX will pay on the second earnout. Not only have I seen others concerned about this, I was even a little worried, given I’ve seen Bridg employees on LinkedIn liking posts such as from Walmart Connect. They would be a great new client, but Bridg signing such a big partner could lead to significantly higher ARR, which gets magnified with the multiples on the earnout. But we now know that even if Bridg does sign a big client in the second earnout period, that new client doesn’t contribute to the earnout and therefore both Bridg and CDLX benefit (i.e., CDLX is not hurt with a potentially larger earnout from new Bridg customers after the first earnout period).
This is also why CDLX had an estimate for the second earnout, because otherwise if it included new Bridg clients that are not yet signed, I’m not sure how you provide an estimate, unless you know the sales process takes 5-6 months and therefore Bridg would not likely have a new contract by April 2023. Therefore, CDLX knows they can base their estimate on customers already in force where the increase on the renewals is likely known or can be reasonably estimated based on other renewals.
We expect the second earnout, inclusive of fees and bonuses, to be $69.5 million, requiring a minimum cash payment of $24.9 million in 2023.
Even with a $70M total payment, some could be worried about the dilution of equity shareholders. We have already discussed that at least the amount of dilution is capped at 19.9% for both Bridg earnouts, as per the Bridg merger agreement. Therefore dilution is less of the issue. Yes, it would have a negative impact on investors’ returns, but it doesn’t kill the investment.
Additionally, either out of necessity (from hitting the cap) or out of desire to reduce dilution, CDLX has enough with their cash + line of credit to be able to pay the entire $69.5M earnout in cash (even accounting for higher-than-expected cash burn in the coming quarter from a worse environment). With $138.5M in cash + $60M LOC (with option to increase to $75M) - $10M cash flow in Q4 - $43.5M first Bridg earnout = $145M. With expectations of being FCF positive in Q3, that means CDLX has $145M for 2 quarters of burn, and plenty of cash for the $69.5M second earnout if they wanted to do 100% cash.
But what if the credit line is taken away, such as from not meeting the growth rate requirements? Well, that was the positive of hearing CDLX is actively working with their bank partner to change the covenants, to be instead a function of adjusted EBITDA. If this leads to a reduced LOC of say $50M, CDLX would likely still have $135M of liquidity in 2023 for Q1 + Q2 FCF burn and 100% second Bridg earnout.
Let’s say for some reason CDLX doesn’t get this amendment to their line of credit AND cannot use their existing line of credit, well CDLX could monetize / securitize their $97M accounts receivable. CDLX even lists this in their liquidity resources. I have heard this mentioned by multiple people now, that it makes me wonder if we will see this occur.
We could even see CDLX getting both the new LOC + securitizing their accounts receivable (would require new covenants on LOC, but those are already working to be changed, so it is possible), which is more liquidity than CDLX needs. Assume 50% received, CDLX would have $183.5M after Q4 burn and after the first Bridg out ($138.5M cash - $10M Q4 burn - $43.5M first Bridg + $50M reduced LOC + 50% of $97M accounts receivable). Subtract $69.5M for 100% cash payment of second earnout, and that is $114M left for Q1 and Q2 burn. So even if 2023 macro is worse, and/or Bridg dispute leads to higher payouts, CDLX has enough liquidity.
But let’s also assume none of these are options….well we are literally talking about $69.5M here. Not $6.95B or some crazy amount. There are literally multiple ways to handle this, avoiding bankruptcy, such as:
Reach a deal with Bridg to spread out the payments over time with some interest
Get a new line of credit or loan from a different bank
CDLX bank partners will likely not want this to fail over such a small amount. This is literally the amount of 1 year of Chase rev share! Therefore, either have a deferral of the rev share and pay back with some interest, or have one / multiple of them provide a new loan.
However, I feel once others realize CDLX is in a better position than most realize from a liquidity and dilution standpoint, such as if CDLX lays this out clearly on Wednesday at the conference, the stock could increase in price, making it easier to pay a portion of the second earnout in stock and then less in cash.
Therefore, while it is possible CDLX could run into liquidity issues, it doesn’t seem very likely.
In addition to just making the liquidity / Bridg earnout situations more clear on Wednesday to possibly lead to a change in current market valuation (e.g., making the 19.9% cap known, second anniversary customers only on second earnout, have LOC, etc.), I feel the following would also help (some much more likely than others):
Resolution on Bridg dispute (remove uncertainty for investors)
Finalized new line of credit (was $60M with option to increase to $75M, but new one may be smaller given new covenants to ensure in place if needed)
Securitized their $97M accounts receivables
Any plans / progress / results of the new monetization methods (could have near-term benefits if related to increasing pricing, or charging for engagement)
Announcing one of the “multiple top 20 U.S. banks” as a new bank partner (USAA, Discover, Capital One, AmEx, etc.)
Sooner-than-expected timelines with the getting Chase on the new UI, or the remaining banks on the new ad server
Bridg updates related to new clients or getting product-level offers on those on the new ad server (since needed 50% of MAUs to have enough scale, which now CDLX has)
I am looking forward to Wednesday. Very possible nothing new is shared or announced, but given all the items currently up in the air and given the stock price, I feel there is a good chance at least one thing is announced or at least made more clear for investors.
12.4.2022: Charging for Engagement to "Better Optimize the Monetization"
On the Q3 call, Karim mentioned:
I believe Cardlytics can better optimize the monetization of its assets to support long-term profitable growth across the business. We are already thinking about various revenue models that better leverage our capabilities, analytics and the idiosyncrasies of the verticals we serve.
I have heard one possibility is charging for engagement, rather than only redemptions.
The obvious area to me is charging at least for users clicking out on links to the external website that are within the offers. This would produce similar metrics to other digital advertising platforms, with Cost per Click (CPC).
I feel it is reasonable for CDLX to charge for this, given maybe the user doesn’t purchase something within the campaign time period, or maybe uses another card to complete the purchase, so to me CDLX should get at least a little something from a user clicking out to view the advertiser’s website (again, similar to other digital advertising platforms).
The new ad server and related capabilities like images within the offers would increase this benefit further. Not only is it intuitive knowing that an image increases understanding and likelihood of clicking the link (think of all the brands advertising in CDLX that a user has never heard of, and doesn’t want to read the description to find out what they sell, but an image instantly tells them this info), but we also know for US Bank click-out rates with these images have increased substantially (from being on the new ad server and therefore able to have the images within the offers). Therefore, as Chase and others get on the new ad server, CDLX would get further benefit from charging for engagement / clicking on links (i.e., if CDLX turned this on today, it would increase revenue, and then would increase further once more users are on the new ad server and the capabilities like images in offers and the new UI are rolled out).
More interesting is on BofA there have been offers telling you to click the links, with “Must Use Link” on the logo. This includes new Apple Music and Apple News offers.
I am not sure if this is something BofA is doing on their end rather than originator by CDLX, similar to their unique “Museums on Us” and “Grubhub” offers. Apple would be a big partner / client if CDLX originated those offers, but I’m not sure that is the case. When you click the Tiqets’ link, it has a unique BofA browser and does not first have the “l.cardlytics” URL that all other offers have, which makes me think it was likely originated by BofA / placed by BofA. Clicking the Apple offers takes you right to the app, so no way to know, but given it is similar to the Tiqets offer and the museum and Grubhub offer, and given these are only on BofA, I think they are originated/placed instead by BofA and not CDLX, so I’m not sure CDLX gets anything from this, but I included since you can easily see where CDLX could look at this structure of these offers and expand this offer construct to the rest of the banks and for more advertisers, and charge for clicking the links.
I don’t have a clear way to estimate what this could lead to, let alone once all MAUs are on the new ad server, but my guess is adding this monetization method could have a meaningful impact (Is an average CPC of $1 reasonable? Is an average of 1 click per user per year reasonable once on the new ad server and with images in the offers and new UI? At roughly 50% gross profit margins and likely no incremental operating expenses, this could be quite impactful).
Maybe we will hear more in the upcoming Dec 7th presentation.
11.18.2022: Revenue Share (Deferring vs Boosting Offers)
There may be an opportunity to work with banks regarding revenue share.
TTM partner share was ~$160.5M. Assuming Chase is nearly 50% of that, that would be near $80M paid just to them.
Thinking just in terms of Chase, Chase doesn’t want to see CDLX fail over <$80M, given they receive ~$80M a year and growing, AND much higher financial benefits from the card spend + lower attrition + more cross selling and more.
If there was a liquidity issue, or if CDLX was currently trying to be proactive (which I think they are), instead of working with their bank partners to secure additional debt, one potential solution would be to reach an agreement to temporarily defer the revenue share paid to the banks. In the case there was a liquidity issue, CDLX likely wouldn’t even need to do this for more than a quarter or two (I don’t see CDLX needing $160M even in the bad scenarios).
But maybe this isn’t likely (such as the banks never agreeing). Well another solution would be to ask the banks to use more / all their rev share during this period to boost offers (increase the cash back). This would benefit the users with more money, benefit advertisers with higher conversions / redemptions, benefit the banks with more card spend / engagement, and benefit CDLX from likely higher revenue.
I was thinking about this idea before, but even more so after getting this Chase offer today.
20% / $20 from Kohl’s is quite the offer. Very attractive. Easy to use for gift giving (which note, this is the first time I’ve seen a logo using an image such as presents). This could lead to any one user then looking at other offers and using more, or even telling others about the offer, leading to higher engagement and redemptions of Chase offers overall.
It is possible this is already a boosted offer by Chase, given it is an “exclusive” offer (possibly like the CSR exclusive offers, which Chase boosted…also this offer has only currently been seen in Chase). If this is, it would show Chase’s willingness to do more of it, and possibly makes it easier to convince the other banks (“Chase is doing it, and it’s is leading to XYZ increases”).
Layer on top the fact that CDLX could look to charge for engagement as a form of additional monetization, you could see some further benefit to CDLX with being able to earn additional revenue from baseline engagement and then even more as engagement increases from the boosting of offers.
If things continue as expected, CDLX will be fine, given they have plenty of liquidity for the Bridg earnouts and a few quarters of burn before FCF positive. If the macro worsens, leading to more burn, CDLX will also still be fine. If you have both a worse macro combined with something unexpected from Bridg and the dispute / earnouts, CDLX is still most likely okay, as long as they get the covenants on their line of credit (which sounds like is already in the works). CDLX could even pay for the second earnout all in cash / with the LOC to avoid dilution. But lets say its even worse than that (such as the dispute leading to an insanely high payout), there are still just too many simple solutions for CDLX to use to get through it that I am just not too concerned (CDLX-bank partner loans, Bridg loan / agreement, rev share deferment / boosting, etc.). There are too many interested parties that don’t want CDLX to fail.
11.16.2022: Chase Offers Section Updates
The last two nights, the Chase Offers section disappeared for a little bit. This has led some to worry upon initial discovery, thinking the CDLX offers were gone for good.
I believe this is from Chase performing updates related to the new ad server.
I actually noticed the same thing on 9.10.2022 and a couple other weekends in September, where the Chase Offers section disappeared for hours to all night. This occurred later in the evening, sometimes after 9pm. At that time, I suspected it was related to migrating to the new ad server. Given the update at Q3, I believe that was the case.
Earlier this week, Chase Offers were gone for maybe an hour in the evening. Last night they were gone for a few hours. Between a longer time being offline + earlier in the evening + being a week night, it led to many more users seeing this compared to the past times this occurred, and led to many people sending me a message (hence this post).
If this is due to Chase making updates, it could be related to integrating some of the different modules of the new ad server. I believe the most important modules are those related to the new user experience (rather than say the learning modules, given Chase is not new, unlike US Bank), which also seems to be the focus and plan for “one of the largest banks”.
The next step for the banks that have moved is to launch the new user experience, and we have already received a firm commitment from one of our largest banks to do this by Q1 of 2023.
As a reminder, banks do have to incorporate the new capabilities into the UX upgrade cycles, but we are working harder than ever to influence this timing to increase the value of their program.
This will allow us to enable new capabilities such as enhanced imagery as well as new product offerings for our partners and advertisers.
The enhanced imagery and new product offerings should include:
Images within offers (like US Bank), which increase understanding and click-out rates
UI similar to Dosh, with better categorization, different offer/logo sizes, featured offers with images on the outside of offers
More local offers since they can have their own tab
Product-level offers
CDLX after the Q3 call mentioned the large bank on their end is working equally as hard to get the new user experience rolled out, given they also want to see the increases in engagement.
I also discovered in Q3, and posted in the Chase Updates write-up, multiple Chase Offers job listings that seemed to be for the new ad server rollouts of the new user experience, which confirms Chase’s intentions.
As a reminder, the following from the Q1 2021 earnings call discussed US Bank on the new ad server and how they must rollout / integrate the new modules:
The ad server offers both API and SDK integrations to enable faster iterations of any user experience module. Together with US Bank, we're taking an iterative approach to their deployment continuously launching with new functionality over the course of the next few quarters. One of our initial modules is focused on educating the consumer about the offers program and how it works in order to drive adoption and engagement.
…
They are rolled out with our new ad server. They are not fully rolled out with the new user experience, that is going to be coming over multiple quarters. Because, as we talked about on the call, they've got modules that are API-based, and they deploy different modules based on where they are in the rollout of (inaudible). Right now they're still very focused on modules that are helping customers find the program, and educate them on how to use them. And then over time, they're going to incorporate more of the modules that are a little bit more focused on different kinds of content, different kinds of experience, so that we slowly try to train these customers from scratch, how to use our program across a wider variety of offer features over time. But that said what you're seeing now is the first module. Over multiple quarters, they will be rolling out more modules to come. So that's on US Bank.
All to say, if you see the Chase Offers section disappear, I wouldn’t be concerned. If anything, it is likely a positive sign. I for one have been getting excited to see the section disappear, knowing it is very possible that once they reappear it could be with some elements of the new user experience and / or new product offerings.
11.12.2022: Increasing Pricing as one method to "Better Optimize the Monetization" (Near-Term Impact/Solution)
(Revenue and adjusted contribution estimates at the end)
Yesterday/below I discussed how there are multiple different offsets to the macro headwinds to reduce cash burn and increase cash flow. One of those offsets was how Karim mentioned on the call that CDLX can better optimize the monetization for profitable growth, and how he is already thinking of various methods.
One method I proposed yesterday that could be possible and likely is CDLX increasing their pricing, or lowering incremental returns delivered, given the certainty in the incremental results of CDLX (from measuring the lift in control vs test groups, utilizing actual purchase data, and not estimating attribution). The way I’ve always thought about it is similar to a risk-free rate vs with a risk-premium, such as with bonds. You are willing to pay more / earn lower returns due to the higher certainty in returns.
Not only would increasing the pricing lead to higher revenue for CDLX, but it could also increase believability of results / returns for advertisers, leading to more confidence in the channel, leading to further ad spend.
Part of the problem with CDLX has been advertisers don’t believe the incremental returns given they are so much higher than other estimated incremental returns from other digital advertising channels. So you have CDLX showing not only higher incremental returns, but returns that are more certain.
Part of this is from CDLX not being able to provide individual level data for the advertisers to test on their own and in their own models (given the data is the banks’ data). Nielsen was brought in for 3rd party validation, and that has helped, but I’m not sure CDLX is all the way there (there have been advertisers who have said Nielsen wasn’t enough, so they did geo-lift testing which then proved CDLX to them, but this is more costly so it is not used by all).
But again, the questioning of CDLX comes from CDLX’s incremental returns being higher than the estimated incremental returns provided by other channels. If CDLX’s returns were less than others, no one would care as much about proving the results and questioning if there are true. I believe it is the fact that that they are higher that leads to the questioning if it is true.
So if CDLX lowered those incremental returns via increasing pricing, you could see more advertisers believing results as an added benefit (i.e. given the returns are closer to others, it becomes more believable).
CDLX has advertised consistently they can provide 5x INCREMENTAL ROAS, or iROAS…not ROAS (which is much higher). For those that do not understand the difference, read the bullets below, otherwise skip ahead
iROAS is incremental return on ad spend…where ROAS also includes non-incremental returns (sales that would have occurred anyway even without spending in that channel).
More specifically, the difference is incremental sales are the sales that are attributable to only CDLX, where the sales would not have occurred anyway without CDLX….where just looking at say FB ROAS you don’t know if some of those sales would have happened anyway, from say a CDLX offer that the customer was aware of and planned to use, and the FB ad was just in the path of progress to that sale. With other channels, advertisers try use MTA or MMM to try to estimate and assign the attribution.
Instead of estimating attribution, CDLX has perfect visibility into their incremental sales from randomized controlled trials / control vs test groups with actual purchase data both online and in-stores, leading to more certainty in the incremental returns vs the estimates in other digital advertising channels.
I.e. both the test and control groups are the same (presumably seeing same TV ads, Google / FB ads, etc.) given they are randomly selected between the groups and sufficiently large, and with CDLX doing testing to ensure the groups are similar, with the only difference being the CDLX offer in the test group, allowing CDLX to measure the incremental spend from those in the test vs control groups.
Incrementality is important since you can known that for every dollar you put into that channel you are producing incremental returns that you otherwise would not be getting. It is in a way a form of arbitrage, where advertisers should likely maximize their spend until the incremental revenue * incremental margin no longer is greater than the ad spend they put in. Most do not do that yet, which will lead to further growth if CDLX can get advertisers to understand this better.
Given IDFA and cookies headwinds faced by other major digital advertising platforms, and not by CDLX, the delta in measurement quality + results between CDLX and others is widening further.
While the following is not verified, it is consistent with what I’ve heard / seen elsewhere, with CDLX producing higher incremental returns, and with more certainty.
To get an idea of the financial benefit increased pricing / lower iROAS would have for CDLX, I attempted to do some estimations. I am sure this isn’t exactly how it would work or be implemented, but it gives an idea of the magnitude a small change could make.
If we use the numbers and percentages from the trailing twelve months:
$450.334M billings
$144.246M consumer incentives (32% of billings)
$306.088M revenue (68% of billings)
Lets assume that $144.246M of consumer incentive (the amount actually going to the consumer to sway their spend) led to 5x iROAS, or 5 * $450.334M or $2.252B of incremental returns (not total returns…incremental). Therefore every dollar of consumer incentive led to $15.61 of incremental returns (On some level this seems crazy high, but some offers are only 5% of the total spent, and where the consumer could be spending considerable more from hitting max cash back. Also makes sense given targeting is based on past purchases, so more efficient use of ad spend. Also makes sense since not just converting new costumers, but also getting existing customers to spend more, where returning customers are more easily swayed and therefore cheaper to return and spend more).
Lets also assume CDLX instead gave iROAS of 3x (which is a way to “increase pricing”). 3x on the same level of billings is $1.351B of incremental returns (IR). Using the same IR-to-CI ratio of $15.61, that means CDLX would need to use $86.548M of CI to drive that 3x incrementality (where you could explain the lower consumer incentive as showing and giving less people offers and therefore driving less incremental spend in total).
If we also assume no change to total billings to get these lower returns (i.e., budgets and spend stay the same, but produce lower returns) and the lower consumer incentives from above, we get:
$450.334M billings (the same)
$86.548M consumer incentives (19% of billings…so lower)
$363.786M revenue (81% of billings…so higher share)
$1.351B of incremental returns on ad spend (3x iROAS…vs 5x before…so lower incremental returns from spending less on the consumer incentives)
This change in pricing (with billings / ad spend staying the same) leads to 19% increase in revenue, or an additional $58M in revenue for CDLX.
Or more importantly from a liquidity and Bridg earnout perspective, the increase in contribution is $27M (revenue - partner share). This is from the partner share % staying constant, but delivery costs $ and operating expenses $ staying relatively fixed from this change in pricing, which is why adjusted contribution is better to look at, as this could technically drop to the bottom line.
It is important to remember that this 3x is still in line with other channels’ ESTIMATED incremental ROAS or attribution-adjusted ROAS, but where CDLX has certainty in their results (as explained earlier). Therefore, not only is CDLX more in line, but CDLX still has the benefit of having more accuracy in those results. You could then make the argument CDLX should charge even more!
For completeness, CDLX could actually charge higher prices more explicitly. Instead of lowering the consumer incentives, CDLX could charge more to drive the same level of incremental returns (same CI to drive same IR, but more billings). From above, we could take the same $2.252B but apply a 3x iROAS, leading to:
$750.557M billings (higher total ad spend for the same $2.252B of incremental returns)
$144.246M consumer incentives (same $ as today, but lower % of billings at 19%)
$606.311M revenue (higher $ and higher % of billings at 81%)
This leads to $300M more in billings, where all the increase goes straight to revenue, so $300M increase in revenue (double today!). At the same partner share %, that is an additional $143M in adjusted contribution. If anything, this highlights what is possible with just changing pricing on existing advertisers.
So in total, CDLX would not also get higher revenue, but would bring incremental returns more in line with other platforms, increasing believability of results, potential leading to further increases in ad spend (which would lead to further revenue).
I’m sure I don’t have the specifics / nuances correct here. However, some form of this should be possible. And given Karim explicitly mentioned looking at optimizing monetization, we may be more likely to see a version of this in the near term to increase profitability, possibly with 2023 ad budgets.
11.11.2022: Incorrect Cash Burn Assumptions/Concerns (Related to Macro / Lower Advertising Spend)
Some have worried that if the macro doesn’t improve and existing advertisers pull back their spend that CDLX will face more cash burn throughout 2023 and lead to a liquidity issue.
First, even if CDLX does have higher cash burn, CDLX still have plenty of liquidly even post Bridg earnout payments. With $138.5M in cash - $43.5M 1st earnout - $24.9M 2nd earnout, CDLX has $70.1M of liquidity….ignoring their line of credit! Layer on that CDLX still is planning to be CF positive by Q3 2023, CDLX has more than enough liquidity to handle a few quarters of cash burn. And given CDLX is guiding “a low to mid-single-digit adjusted EBITDA loss” by Q4, if we assume -$10M FCF burn, you are left with $60.1M + their line of credit for two quarters of cash burn.
Some may say, “but what if 2023 is worse than expected and existing advertisers pull back further?” Well beyond the fact CDLX still has plenty of liquidity to handle this additional burn, many are ignoring several offsetting factors:
#1: Reduced Operating Expenses
CDLX will have reduced operating expenses going forward. This comes from the remaining cost savings from the $15M annualized savings and the additional $20M+ announced on the Q3 call.
The $15M included a first round of reductions of in force. This included US, UK, and India operations. Given the Indian office isn’t planned to be closed until the end of 2022, some of this $15M in savings won’t show up until 2023.
In addition, this week we saw there was a second round of layoffs, which was related to that $20M (confirmed by CDLX).
So extrapolating Q3 OpEx would be too conservative given it doesn’t include all of the $15M and completely ignores the $20M+ of additional savings.
Therefore if you assume lower ad spend but the same OpEx, your cash burn assumptions will be too high. These reduced operating expenses is why CDLX still plans to be EBITDA positive by Q2 2023 and FCF positive by Q3 2023 even in a more challenging market:
“Our goal of delivering sustainable positive adjusted EBITDA by Q2 2023 and positive free cash flow by Q3 2023 will be more challenging in a difficult end market. But we are committed to remain on track by making the necessary steps to lower our cost.” - Q3 2022 call
#2: More MAUs
Adding additional MAUs won’t have as big of an impact, but it could help.
CDLX had nice growth in Q3, adding 4.8M MAUs.
We also know CDLX mentioned there are multiple top 20 banks in the pipeline. However, even a large bank won’t help too much in the near-term, since it will take time to discover offers (which is why we have historically seen ARPU decrease from an increase in MAUs, due to the denominator impact). But signing a large bank who has an existing offer program where users are more likely to find CDLX offers, and where existing advertisers could be easily add spend on CDLX’s other banks, you could see some near-term benefits.
#3: New Advertisers
While existing (or even all advertisers in general) could pull back their ad spend in 2023, if CDLX adds new advertisers even at reduced ad spend levels, it will still have a positive impact, and help offset decreases with existing advertisers.
We heard on the call CDLX has a “strong pipeline” of new advertisers for 2023, so the odds of this are at least higher. It sounds like its CDLX’s largest pipeline they have ever had.
#4: Enabling of Product-Level Offers and Adding CPG / Brands Clients
CDLX got one of their largest banks (presumably Chase) on the new ad server, and soon the new UI, which will unlock product-level offers at a large scale (CDLX needed more MAUs to make it worth it and attractive for placing product-level offers).
In addition to existing CDLX clients now being able to add product-level offers, this unlocks all the CPGs / brands who previously could not use CDLX. There are many of these at existing agencies using CDLX, so adding them to place offers should be easy.
You also have existing Bridg clients (where I have listed many I suspect in my notes, like Dollar General) that could start spending in CDLX, with some who likely have very large budgets (like the home improvement store, which I am guessing is Lowe’s).
Further benefit will come from the rest of the major banks moving to the new ad server and new UI, which are all ahead of schedule, and therefore could have a positive impact in 2023 from larger reach for advertisers for product-level offers.
#5: Additional New Ad Server Benefits
Beyond unlocking product-level offers, the new ad server unlocks the new UI, which should increase understanding of offers by users, leading to higher engagement and redemptions. Similarly, it could slightly change how advertisers view the channel, since it goes from a simple logo to now being able to use images.
The new ad server + new UI + adding product-level offers + more local offers could lead to more engagement and redemptions by users. For one, we heard that the US Bank on the new ad server with just adding images within the offers increased click-out rates dramatically (likely from a pic worth a 1000 words…and given most won’t read what the company sells, but will know in 1 second from an image). Then you layer on an easier way to find relevant offers with the new UI, increased understanding from images on the outside of offers, and then more relevance from product-level and local offers, I think engagement and redemptions increase. This increased feedback could lead to advertisers leaning more into the channel, accelerating the virtuous cycle. While that will take some time, we should still see higher engagement and redemptions from these benefits in the near-term.
If CDLX can increase / add new push notifications, such as adding real-time notifications, combined with time-of-day offers that advertisers like McDonalds have explicitly expressed interest in (a feature of the new ad server), you could see additional spend and redemptions.
The new ad server should also open up the new ads marketplace, that should allow for real-time adjustments based on inventory and allow for auction-based or dynamic pricing. Despite the layoffs, CDLX is still hiring for the ads marketplace, showing its importance and likelihood of occurring in 2023.
Additionally, CDLX said they need cloud to unlock machine learning, such as for targeting. Given this cloud migration is occurring, we could see further benefit from this in 2023. This is also likely, given it is another role CDLX is still hiring for.
#6: Better Optimization of Monetization
On the Q3 call, it was mentioned:
I believe Cardlytics can better optimize the monetization of its assets to support long-term profitable growth across the business. We are already thinking about various revenue models that better leverage our capabilities, analytics and the idiosyncrasies of the verticals we serve.
This could be where CDLX sees a large positive impact.
I can only speculate on what CDLX could do and its impact.
For one, given the certainty in results of CDLX from incrementality from control vs test groups, you could increase pricing.
Given CDLX mentioned “idiosyncrasies of the verticals”, maybe CDLX charges on an LTV / CAC basis for subscription, given CDLX can even see the continuing payments.
Analytics cannot be sold since they are the banks’ data, so CDLX uses a tier model, where if you spend over a certain amount, you unlock this data. Maybe there is a better way to do this? Maybe CDLX can do more with the analytics than we think, even though it is the banks’ data, such as selling analysis of the data, and not selling the actual data (similar to the reports CDLX puts out that others quote)?
Regardless of what they do, it can only help.
#7: Increase Understanding and Believability of Incrementality
This has not been discussed by CDLX, but I’ve noticed CDLX is doing more webinars on incrementality. I would assume there would also be an increase then from the CDLX sales team with pushing this and getting advertisers to understand this more.
I am still quite convinced that if CDLX can increase this understanding for advertisers, and why incremental ROAS is different than the ROAS or the adjusted ROAS they estimate (given CDLX iROAS is certain and the other is just an estimate), CDLX should see significantly higher ad spend. This becomes even more valuable given the headwinds faced by other advertising channels, such as related to IDFA and cookies.
For the advertisers that understand incrementality but maybe don’t trust the results given how good they are, we know Nielsen has helped, but maybe Bridg which gives more view into the clients data will be what pushes some advertisers to believe the incremental results and spend more.
#8: 30% Growth When Adjusting for SBUX
I do just want to point out that in Q3 call, CDLX mentioned that, “And excluding the large client mentioned over the past 2 quarters, our core Cardlytics revenue growth was 30% year-over-year.”
I think this is important to note, if you are only looking at the numbers and do not know what explains the change.
Summary
Overall there is a misconception that CDLX is most likely to have a very bad FY 2023 from a revenue and cash flow perspective.
While possible, it is easy to only focus on the negatives and give them too much weight. I believe CDLX can and will offset most of the macro concerns from:
lowering operating expenses
+ more MAUs
+ adding new advertisers even at reduced rates
+ enabling product-level offers and adding CPG / brand clients
+ additional new ad server benefits
+ better optimization of monetization
+ increase understanding and believability of incrementality
CDLX even mentioned after the call they could see growth in 2023.
I think most focus more on the negatives (and possibly ignore the positives) when the stock is already down significantly and continues to decline, especially when other similar companies are facing headwinds. CDLX benefits from being relatively small and still having a long runway, and I think we will see most of these offsetting benefits play out in 2023. And even if we don’t, CDLX has plenty of liquidity to handle it.
11.10.2022
I have quite a bit of notes to add from the last 1 week. I was waiting to release them all until I had all the information and some questions answered, which I got today. I didn’t want to risk spreading any misinformation or incomplete information.
My plan is to release more important info first and quickly, and then release all my detailed analysis soon after.
It is very possible I still have some small nuances wrong, or something changes, but I’ve have done my best to be as detailed and specific as possible here, and have spoke with many others, including those who have spoke with CDLX after earnings (which cleared up my few remaining questions, and I will discuss some of them below).
If things are as I expect, and if things work out as I expect, today’s prices are incredible, and I have been adding accordingly.
Liquidity / Dilution / Line of Credit
Many investors have worried about CDLX’s liquidity position for the Bridg earnouts and 2023 CF with a poor macro environment, as well as the dilution from the Bridg earnouts. I’ll provide my detailed numbers soon (and likely even more detailed explanations of everything), but I wanted to make sure a couple thing were clear and known first, as I have seen incorrect / incomplete information.
First, CDLX expects to pay $43.5M in cash for the first earnout, and $24.9M for the second. With $138.5M in cash today, that leaves CDLX with $70.1M. With CDLX expecting to be EBITDA positive in Q2 2023 and free cash flow positive by Q3 2023 even with the more challenging environment (such as from new advertisers and lower expenses), CDLX has plenty of liquidity to handle a few more quarters of relatively small burn. (Again, I will provide more detailed numbers soon, under multiple scenarios).
But here is the thing…CDLX does not just have the $138.5M in cash. Some investors are ignoring CDLX’s $60M line of credit (with an option to increase to $75M) with Pacific Western Bank. While this may seem like a small amount, we are dealing with smaller numbers here, and therefore it becomes very important. This cash + line of credit gives CDLX plenty of liquidity. And as I will share later, this could give CDLX the ability to pay for the second Bridg earnout in full to avoid any and all dilution if that was desired.
Some investors seem to be ignoring this line of credit from possibly not even knowing it exists. I think this is due to CDLX not currently using the line of credit, so it doesn’t show up in the numbers or as an addition to the current cash balance.
Others more correctly ignored / assumed the line of credit may not be available if CDLX doesn’t hit certain covenants related to adjusted contribution with a growth component. This could be an issue, given CDLX could need the line of credit in a bad scenario, but that is exactly when it may not be available based on the covenants (e.g., bad macro leading to lower revenue / lower adj contribution / higher cash burn, so less cash, and then lower or no access to the line of credit and then having a shortfall for the second earnout especially if needed to pay a higher portion in cash).
Given this, the most obvious and very easy solution would be if CDLX made an amendment to the loan to ensure it would be available to use, or even get a new line of credit (CDLX literally partners with banks, who do not want them to fail, especially over such a small amount…could even just defer rev share if needed). It would likely have less favorable terms than the existing line, but an amended loan / new loan that will be more sure to be in place removes significant downside risk. Then CDLX could make an announcement, removing the fear / uncertainty for investors regarding liquidity and even dilution. You would think we would see this sooner rather than later, given the declining stock price (because if people are worried about a death spiral, a more certain line of credit would remove this possibility since could technically pay the second earnout in cash / with the line of credit and avoid any and all dilution).
This is why what I found out today was important (from others who spoke with CDLX today). CDLX is in fact working on this with the line of credit. It sounds like they are working to change the covenants to ensure it would be accessible even under a bad scenario, such as not having the growth component, and adding a component related to EBITDA. It may lead to a lower available limit, but this would likely cover what CDLX could need in a bad situation (which may not even occur and may not even be needed, but the presence of it removes risk).
I was extremely pleased to hear this. I hope once this is finalized CDLX makes an announcement. It should reduce the fears for many. For those who are short CDLX from thinking CDLX will not have this loan / enough liquidity or who think a death spiral will occur from dilution, these shorts may need to cover. While it is not yet finalized, it is probably extremely likely to happen given: CDLX is already thinking / working on it, sounds like already talking with the bank on the new covenants, and sounds like the bank has been a long term partner and CDLX is one of their largest clients so more likely to work with them to get this done and work for CDLX.
Dilution From Bridg Earnout
I also want to make sure it is clear and known that Bridg dilution can’t get as bad as some think.
For one, the stock price for the first Bridg earnout dilution is already locked in. The stock priced used is based on the month of April 2022, locking in a volume-weighted average price (VWAP) of $40.15, leading to around 2M shares of dilution. It is not based on the stock price today like some have thought.
For the second Bridg earnout, while the stock price is left to be determined (based on April 2023 stock prices), the Bridg merger agreement does have a cap on the dilution at 19.9%:
Therefore, CDLX cannot face a situation where Bridg owns CDLX or where there is insane dilution, something many have thought / still think.
I couldn’t tell if it was 19.9% per earnout payment, but CDLX said today it is 19.9% in total. Another strong positive thing to hear and know.
So if this stock was insanely low, this cap would force CDLX to pay the rest in cash. Which brings us to why the line of credit is so important to have, since not only could CDLX make the payment, but they could just instead pay 100% in cash and have no dilution (since must at least pay 30%, but I assume can just pay 100% if desired).
I think the stock is only at where it is today from others having incorrect or incomplete information, such as related to the line of credit or dilution. Therefore as this becomes better known (maybe via a press release), where liquidity isn’t an issue and where dilution can’t get as bad as some think and might not even happen, I don’t think the stock will stay at where it is today.
(I will discuss the Bridg dispute and implications soon, but as with everything else, it doesn’t seem like it will be as bad as people think, and may lead to nothing.)
11.2.2022
Well, you can see the market sure didn’t view the earnings the same as me from my notes last night!
The first thing this has all reminded of is Peter Lynch saying, “there is always something to worry about”. The market has went from worrying about BofA not renewing (to then BofA renewing), to then worrying Chase would leave (to then Chase moving to the new ad server), and now to liquidity / dilution fears.
I recognize both the liquidity and dilution concerns.
The liquidity I feel is less of an issue here:
CDLX is cutting $15M of annualized expenses and then an additional $20M, which likely come from both headcount and offices closing, as discussed on 10.27.2022 below. This will help them stay on track for cash flow positive in 2023, reducing the burn, even with lower potential ad spend in this environment.
If CDLX can start leveraging Bridg and product-level offers within Chase for instance, this should help, especially if Bridg has signed the likes of Lowe’s (which I believe they did, since they signed a “large home improvement retailer” and Bridg employees on LinkedIn keep linking Lowe’s posts).
Layer on top more engagement, activations, and redemptions from users on the new ad server and new UI, CDLX should see further benefits.
Then you add in Karim improving monetization, I just don’t think revenue is too big of a concern, but I could be wrong.
The convertible preferred will likely not be converted, but CDLX could refinance rather than needing to pay back the full amount, so that is less of a worry.
Now, Bridg earnouts do not help the situation, but luckily only a smaller portion need to be in cash.
I will try to go through a detailed analysis later, but quick math shows CDLX is likely okay. Let alone with an additional $60M unused credit line that can increase to $75M, which would give CDLX plenty of time.
I would be much more concerned if CDLX wasn’t on the clear path to cash flow positive, and didn’t have Chase on the new ad server and the other banks soon to follow.
Dilution is another calcuation I will update soon. However, once again, doing very quick math shows this is still a worthwhile investment. Yes, the dilution dramatically reduces the returns that would otherwise be possible, but still a much better return that I see elsewhere. $10B company ($10 ARPU at 200M MAUS) at 100M shares (vs 33M today) is $100 / share, or 15x today. I don’t think dilution will come anywhere near that, and I think ARPU & MAUs will likely be higher in the long run (with the odds higher now with Karim). You also have the potential for CDLX to buy back shares with cash flow further in the future.
With Chase on the new ad server and soon new UI, rest of the banks in Q1, more banks likely to partner with CDLX, increased monetization methods, 30% growth this quarter controlling for SBUX, still on track for cash flow positive, and a good new CEO, there just seems more to be happy with than not.
11.1.2022
“We truly have a large opportunity in front of us.” - Karim
High-Level Thoughts
At a high-level, this was one of the better earnings calls by CDLX. Yes, short-term earnings are not what most want to see, and neither is losing SBUX, but boy, the long-term potential of CDLX that everyone is aware of seems to have increased dramatically in being realized.
The bank / new ad server updates were way better than I was anticipating. And hearing Karim saying he wants to obsess on the bank relationships and has identified improvements such as with monetization were great.
I will need to reassess tomorrow with fresh eyes and being less excited from the news, but overall, I am very pleased. I need to spend more time on Bridg earnout, shares outstanding now and in the future, and if overlooking short-term numbers from focusing too much on long-term. I would love for this to trade down tomorrow and over some time from those who focus on the short-term small numbers, given how much more likely it seems that the long-term potential will be achieved. But again, I don’t want to get too ahead of myself, despite overall, some decent updates this quarter.
Banks / New Ad Server / New UI
“We are proud to announce that 4 banks are connected to new ad Server, including one of our largest banks. We now have connected greater than 50% of our MAUs to the newer server, which surfaces the goal we set for the year.”
This was the biggest thing I was hoping to hear.
Given Chase has shown signs of migrating (CDLX comments, Chase comments, etc.) and Chase was scheduled to launch in Q4 2022, my guess is this is Chase. Which is big, given it greatly reduces any fears of Chase leaving. Why spend the resources / time / money to move to the new ad server (and then the new UI) if you plan to leave soon after? Maybe you want to learn as much as you can to then replicate with Figg, but I still think Figg is more for the fears of Stripe and Block / Square for SMBs, like Chase said, matching Chase’s other acquisitions.
I noticed the following change QoQ within the presentations before the CDLX call. Thought it either meant Chase was already on the new ad server so they updated the goal, or Chase was going to be delayed again. Great news to hear it was from hitting the 50% MAU goal!
“We believe we can migrate nearly all of our banks by Q1 of next year, which places us well ahead of our Q3 2023 goal”
I never even heard Q3 2023, and only thought the goal was by Q4 2023, so this was a big surprise. I am not sure how CDLX was able to accomplish this so far ahead of schedule. Was it from the original goal being too conservative to give CDLX breathing room? Was it Karim? Was it Chase moving to the new ad server? Regardless, great news.
Product-level offers unlocked (and agency self-service offers) will be a major positive (as well as the new UI and enhanced imagery within the offers).
“The next step for the banks that have moved is to launch the new user experience, and we have already received a firm commitment from one of our largest banks to do this by Q1 of 2023”
We heard in the June 2021 investor day that Chase was schedule to launch the new ad server AND the new UI in Q4 2021. This shows that Chase wanted to launch the new UI with the new ad server. Therefore, this only increases the odds of Chase being that bank. This is great news, given I have always thought if you give the new UI to a bank and get users to learn / understand / and enjoy it, it becomes very hard to roll that back (and deal with the associated emails, messages, and calls wondering where it went).
New Bank Partners
“On a related note, we are taking steps to increase our MAU banks by signing new partners. We are in discussions with multiple top 20 U.S. banks and several high upside fintechs. While these conversations are early, our pipeline to increase MAUs over the next 2 years is strong. Expanding these relationships will further diversify our partner situation while providing advertisers with further scale to accomplish their marketing goals.”
Given the increase QoQ from 179 to 184 without new bank partners, and given the above, the path to over 200M+ MAUs seems very clear
FCF
Our goal of delivering sustainable positive adjusted EBITDA by Q2 2023 and positive free cash flow by Q3 2023 will be more challenging in a difficult end market. But we are committed to remain on track by making the necessary steps to lower our cost.
Glad to see still on track.
“A key priority in my first 2 months has been to evaluate the status of our current cost structure in a challenging environment. And we have already identified several areas of additional cost savings. Andy will provide more details in his remarks.” with Andy saying, “Like Karim said, given the weakening digital advertising market, we have been evaluating areas of additional cost savings beyond the $15 million of annualized savings we discussed last quarter. We've expanded this program to reduce annualized operating expenses by at least an additional $20 million. We are moving rapidly to realize these savings, and expect them to begin positively impacting results early next year.
I didn’t even realize during the call that the $20M was on top of the $15M. That is large increase in annualized cost savings from what I originally expected.
As stated in my notes before the call on 10.27.2022 below, I noticed both decreased in headcount, as well possible closing of offices, which could be where the additional savings are from.
I think CDLX is making faster progress than I expected (but slower than others want). Getting banks on new ad server, then rolling out new UI, are big first steps for FCF positive. Then adding product-level offers (where Bridg has signed big clients) will help (which is mentioned and planned by CDLX). But the real significant increases won’t occur until CDLX gets advertisers to not view CDLX as affiliate advertising and instead gets them to understand the INCREMENTAL ROAS (not just ROAS) that CDLX can provide with certainty via RCT (and not just an estimate like via MTA). The increase in webinars on this will help, but CDLX will need to do more.
“My #1 priority in the short term is to protect our balance sheet against the possibility of a long-term recession. With a more resilient expense base and responsible internal investments, the good news is that through hard work, these key areas are firmly within our control to change.” - Karim
“As we mentioned last quarter, we did not expect the cost savings announced last quarter to have an immediate impact on adjusted EBITDA. We're able to realize some of our cost savings in Q3, and we'll be able to fully realize the benefits by Q1 of 2023.” - Andy
Obsessing Over Banks
“We are good partners to banks, but we must obsess over achieving their goals and providing value to their customers. Banks are the most important assets of our business. The only way to create strong outcomes for Cardlytics is to create stronger outcomes for our partners.”
This was a major highlight of the call. It has been as if in the past CDLX did not appreciate their relationship with the banks, by not giving them what they wanted to sooner (which lead them to consider and test alternatives). This is similar to focusing on the customer, where the bank is likely the most important customer at this time to CDLX, to be able to retain their relationship and get more of their buy-in.
New / Optimized Monetization Methods
“I believe Cardlytics can better optimize the monetization of its assets to support long-term profitable growth across the business. We are already thinking about various revenue models that better leverage our capabilities, analytics and the idiosyncrasies of the verticals we serve.”
I can only speculate here, but this should lead to higher revenue
One is focusing more on iROAS, and even LTV / CAC since it can be measured and tracked via the purchases, and is very related to the subscriptions vertical.
While CDLX can’t sell the analytics, since its the banks data, CDLX currently uses a tier method, where if you spend above a certain amount you unlock more analytics. Maybe there is a better way to do this, and take advantage of how valuable this is to companies?
Bridg / Dosh
“Bridg, DOSH and these segments are great assets, and we must integrate, invest and scale them faster. Our combined value proposition is much more powerful than just showing up as Cardlytics alone. By doing this, we'll become more important to current and future bank partners, open the doors to new offer constructs, enhance the measurement capabilities and deliver more content from the longer tail of advertisers.”
This is likely more in reference to Bridg, since it will add product-level offers to the banks which they want, it is a new offer construct, and adds more measurement.
I thought it was interesting to hear Dosh added in this. It is possible he just means invest and scale Dosh more, but I would love to see them also integrated with CDLX, where offers from CDLX also go to the neobanks (such as via self-service…like on other social media self-service platforms). We have heard ad agencies liked this about Figg (who had Acorns).
“Regarding the Bridg earnout, the amount for 2022 is being disputed. It is currently in the resolution process outlined in the merger agreement, and it will remain unpaid until it's resolved. While the dispute is unfortunate, we are confident in our position, and we'll vigorously defend it. We still expect the first earn-out inclusive of broker fees and transaction bonuses to be $126.4 million, acquiring a minimum cash payment of $43.5 million. We expect the second earn-out, inclusive of fees and bonuses, to be $69.5 million, requiring a minimum cash payment of $24.9 million in 2023.”
This is something I need to spend more time looking into.
SBUX
“Outside of the impact of the large restaurant clients exiting our channel”
“So from a growth perspective, so the largest headwind that we're facing is certainly the loss of the large restaurant rolling out the platform….But we do normalize for the loss of that large client. We grew 30% in this quarter.”
“So we knew from -- all the way from Q1 of this year, that, that large client was going to be exiting a channel.”
This coincides when Howard Shultz took back over for SBUX, who is known for being against advertising. Therefore I am less worried of this being a function of CDLX. I do hope when the new CEO takes over, and if CDLX can improve their offer + increase understanding of the certainty in results, that SBUX returns next year.
Q3 2022 Earnings: Notes and Thoughts Before the Call
10.27.2022 - Cost Cutting: Closing Multiple Offices
Earlier today (below) I discussed CDLX’s reduction in employee headcount that is most likely related to their cost cutting initiatives. I noticed that my estimate of annualized cost savings was not very close to the $15M CDLX has planned.
While looking around, I noticed CDLX’s latest post (updated today) regarding the timing of Q3 earnings had a change vs Q2 related to their listed offices:
Q2 (Aug 2, 2022): “Headquartered in Atlanta, Cardlytics has offices in London, New York, Los Angeles, San Francisco, Austin, Detroit and Visakhapatnam.”.
Q3 (Oct 27, 2022): “Headquartered in Atlanta, Cardlytics has offices in Palo Alto, Los Angeles, New York, and London.”
Therefore, still have Atlanta, London, New York, Los Angeles, Palo Alto / San Francisco.
However, no longer have listed Visakhapatnam in India, nor Austin (Dosh HQ), nor Detroit (Entertainment HQ).
I believe this was a conscious change. Given the India office is no longer listed and was rumored to be closing, it makes we wonder if the Dosh and Entertainment offices are also being closed. Maybe they are having more work from home? Maybe they are asking some to relocate. Or maybe this is where some of the additional cost savings will come from related to headcount reduction.
10.27.2022 - Cost Cutting: Employee Headcount
During the Q2 call on Aug 2, 2022:
We are taking steps that will immediately reduce our cost structure and ensure a path to sustain positive adjusted EBITDA by Q2 of 2023 and positive free cash flow by Q3 of 2023.
…
We are pausing our hiring activity which will have a positive impact on our operating leverage in the back half of the year. Second, we are immediately active on a plan that contains $15 million of annualized cost savings. This plan does not place our strategic goals at risk and will allow us to achieve sustained positive adjusted EBITDA by Q2 of 2023 and positive free cash flow by Q3 of 2023.
…
We looked everywhere. And like any company with over 600 employees, there's opportunities for efficiency. There's opportunities to reduce vendor costs. There's opportunities to reduce the focus on some of the longer-term growth initiatives, things like open banking, et cetera. So we've identified. We've already booked $15 million, and there's more out there, which is why we're confident.
As I will show below, it does look like Cardlytics lowered their employee count. I discussed a month ago on 9.25.2022 how it sounded like CDLX possibly closed the India office with 50+ employees (however, the website for the India office is still active). I believe there were some additional lay offs at the home office as well (based on what I heard on LinkedIn, with some who joined and were let go very soon after). We also saw the exit of some executives, which while that could have been more their own decision to leave, it would still lead to lower expenses.
According to LinkedIn (which is not perfect, given some may not be on LinkedIn, or may not quickly update their profiles), the employee counts by month have been..
For Cardlytics:
June: 609
July: 612 (+3) - With 16 hires, therefore 13 left
Aug: 576 (-36) - With 9 hires, therefore 45 left - Hired Sr. Director of Engineering based in CA (Previously 9 years at Yahoo as Sr. Principal Software Engineer / Team Lead / Architect)
Sep: 564 (-12) - With 13 hires, therefore 25 left - Hired CEO Karim Temsamani + Hired VP of Product Management based in CA (Previously Twilio and Yahoo)
Oct: 547 (-17) - With 1 hire, therefore 18 left
Total of 101 that have left / been laid off since June 2022, but 39 new hires, for a total headcount reduction of 62.
I am not sure how much (if any) of the Q3 reduction in headcount was further reduction from “cloud hosting improving data management efficiencies”:
“During the three months ended June 30, 2022, we began a strategic shift within our organization to migrate certain data and applications to a cloud computing environment. This transition resulted in severance and medical benefits totaling $1.0 million, as a result of a headcount reduction because cloud hosting improved data management efficiencies. This expense is included in Delivery costs on our Consolidated Statement of Operations.”
For Dosh:
June: 66
July: 65 (-1)
Aug: 65 (-0)
Sep: 65 (-0)
Oct: 66 (+1)
No change in total.
For Bridg:
June: 58
July: 58 (-0)
Aug: 56 (-2)
Sep: 54 (-2)
Oct: 55 (+1) - Hired the VP, Sales Engineering (Previously 7 years as Regional VP of Quotient)
Total headcount reduction of 3 employees.
For Entertainment:
June: 466
July: 466 (-0)
Aug: 467 (+1)
Sep: 468 (+1)
Oct: 468 (-0)
In total, net added 2 employees since June.
I am still surprised when I see this total employee count for Entertainment, given only $7Mish in revenue. 117 in sales, 65 in support, and 212 in other (with remaining in media / communication and marketing). Median tenure is 12.9 years! In line with CDLX saying “Management and content acquisition team with nearly 20 years’ experience”.
Conclusion
Across all 4 businesses, there was a total headcount reduction of 63. If we assumed $125K as the average saving per employee (including salary, benefits, and knowing at least 2 executives at higher pay), that leads to $7.875M annualized cost savings, which is below the $15M target.
The difference could be explained by any combination of the following:
The savings per employee is more than $125K
There are likely additional employees who do not use LinkedIn, or who have not updated LinkedIn, such that the 63 reduction number is not completely accurate
CDLX could have plans to reduce the headcount more through Q4
The additional cost savings could come from elsewhere, such as from the vendor costs that CDLX mentioned
While it could be from filling existing openings or replacing needed roles, given the 22 hires seen post Q2 (21 excluding Karim) doesn’t match the planned hiring freeze mentioned by CDLX at Q2:
Q3 could have been better than expected, such that CDLX pivoted to not lay off as many as originally planned, and even hired
Karim could have different plans
Overall it looks like CDLX is at least doing as they said, with reducing expenses via lowering their headcount, and looks to be closing in on the $15M in annualized cost savings they targeted.
10.25.2022 - Insider Actions, Chase/Figg , Gain/Loss of Bank Partners
I have found it interesting we haven’t seen more insider buying over this last quarter, given where the share price is at.
We know previous executives were net sellers and not net buyers, so maybe this shouldn’t be too surprising with them. However, what about new executives, such as the new CEO, CPO, CTO?
The blackout period before earnings would prevent some insider buying, but I would have thought there would have been some window to buy.
Maybe they all have so much in stock options that it isn’t a thought to buy more on the open market.
The only other two thoughts are:
Insiders are not currently as optimistic about CDLX’s future
Insiders are not able to trade due to possessing material non-public information (MNPI)
The latter could be both good or bad.
I wouldn’t think CDLX is getting acquired, given I can’t imagine Karim would want this after just taking over and first time as a public CEO + large shareholders having their future returns truncated.
Losing a bank or gaining a bank would be MNPI.
Most would think that would indicate losing Chase, but I think it is more likely we hear Chase is on or nearly on the new ad server. I also wouldn’t be surprised if there was an update related to Chase, either regarding more info with Chase’s intentions with Figg, or a contract extension with Chase (to give a stronger signal that Chase is committed to CDLX).
It is also possible a new bank was signed. The obvious is existing Figg banks like USAA. However, I have seen no sign of Chase dropping existing CLO partners (which could mean they are leaving Figg as a backup, or plan to sell Figg again and keep some employees and tech they need for their other operations related to SMBs).
It is also possible it is another bank. We know CDLX made some progress with AmEx with giving them Entertainment offers (but only through a free subscription, and not in their offer wall). CDLX also tweeted the following yesterday. The tweet could mean absolutely nothing. However, it is possible it is a clue CDLX signed Discover, or is in talks. CDLX has previously mentioned a neobank before it was officially announced. Either way, I’m looking forward to the earnings call next week.
10/20/2022 - Notes from “How Marketers are Achieving Measurement Confidence in a Time of Performance Pressure”
On 10/18/2022 CDLX and Nielsen gave a presentation on “How Marketers are Achieving Measurement Confidence in a Time of Performance Pressure”.
Overall, I would say this is the type of conversation / presentation with advertisers CDLX needs to be doing to see increased ad spend.
I was a little skeptical before watching, thinking it could be similar to past presentations / webinars where the key benefits of CDLX (certainty in results from incrementality from test vs control testing) were not even mentioned. However, I had more hope given Nielsen was in the webinar. Luckily, the right things were discussed.
I chose to include these notes in my notes / thoughts before the Q3 earnings call given there were discussions in this presentation related to the environment today, and how marketers are thinking and acting differently (such as from more cost pressures). I believe this could have some impact on Q3 numbers, but more likely to impact Q4 and therefore possibly the Q4 guidance (if one is provided).
Even if it does not have an impact in Q4, these are the right types of conversation, highlighting CDLX’s actual advantages compared to other advertising channels, and is exactly what CDLX needs to be doing to see increases in ad spend and therefore revenue. Therefore CDLX is moving in the right direction.
Below are some notes from watching:
Comments That Could Relate to Q3 Earnings and Q4 Guidance
Right away, they discuss how advertisers in this market are focusing more on profitable ad spend, more performance marketing over brand, where the advertising is measurable, etc. This benefits CDLX, and is exactly what I would have expected in this environment.
However, while I expected this to be the case, I wasn’t sure if CDLX specifically has been seeing much of this (and therefore no real change in ad spend in Q3 / Q4). And it is possible they aren’t! It could be why CDLX is doing this presentation, to get more advertisers to think of them in this light, rather than just an affiliate marketing site.
But then again, the positive is CDLX is doing this presentation and this is likely the conversation CDLX’s sales teams are having with advertisers, so we could see a positive impact from this, given CDLX is communicating the right message in this environment.
CDLX also mentioned they are seeing more advertisers focus on incremental revenue during these economic times. Again, while that makes rational sense, maybe CDLX is just saying that to get other advertisers to think that way. But maybe CDLX is truly seeing that (which you would expect) which would lead to a good Q3, or really a better Q4 guide.
Specifically, CDLX said / recommended:
“…back to one of my earlier answers about understanding the space, understanding especially from a Performance Marketing perspective what channels and tactics are available to you at any given time.
We do see advertisers that have the ability to potentially redirect rather than cut right. So if you already have a strong kind of varied mix of different places you're putting your budget, you might have some that have more clear kind of visibility and results into, ‘hey this is exactly what this channel drove for the business in those situations’. It's possible to be in a scenario where you can ask to redirect budget to more trackable measurable channels rather than cut completely.
But you know if nothing else. if that budget cut happens, well okay now use this cycle as your chance to set yourself up well for the future so that you're you're better established for the next one right and even with your more limited budget now you're going and investing in channels that can drive provable outcomes in cross-channel tools like mixed modeling and other things that will enable you to better support and better defend your spend in the future.
I really like the mention of “provable outcomes” and “hey this is exactly what this channel drove for the business”.
Incrementality
While less of a impact for Q3 earnings, I did like they continued to talk about incrementality.
This may be the number one way CDLX will see near-term increases in ad spend and therefore revenue / ARPU for CDLX.
If you get marketers to view CDLX as arbitrage given the certainty in incremental returns that are 100% attributable to CDLX (given doing randomized control trials to see the difference in spend between the test vs control), there is no reason those marketers shouldn’t maximize every dollar where the incremental revenue x incremental margin > ad spend. Otherwise they are leaving free money on the table. Therefore if you get advertisers to understand / view CDLX in this light, you should see significantly higher ad spend by existing advertisers and new. That is why incrementality and test vs. control discussions by CDLX are a positive.
Measurement Confidence
I was extremely pleased to see CDLX discuss test vs control. This is discussed way too little by CDLX, given it is such a competitive advantage of CDLX, so I love seeing this more.
I love they mentioned it is the “gold standard for marketing” and “not possible in every channel”.
CDLX:
“but especially as you get more towards Performance Marketing it's thankfully becoming more and more common right as marketers are pushing vendors to be able to support this type of thing.
So to me it's about working with vendors and channels that can maintain true hold out control groups to measure against your test cells that again ideally mirror who's seeing your advertising in every way except the only difference is they're not seeing the advertising. And then we can kind of measure the business impact from there, whether you're measuring how many new customers you acquired, whether you're measuring the increase in spend that you're advertising brought into the business, being able to do that against again a true well-maintained control group as a real robust statistical marketing experiment to me is again kind of the gold standard of where possible what marketers should be looking
Nielsen:
“The only thing I would I would add is that yes testing control is expensive, but there is efficient ways to do this these days so that's one of the the items we partner with Trevor and Cardlytics on, who is really kind of empowering or powering this type of analysis so that they can they can do that in a very efficient and cost effective way customers”
Obviously I would have liked CDLX to specifically mention why the other advertising channels and attribution models (like MTA) are way less accurate and certain, but at least CDLX was directing advertisers to start thinking down that path.
I would have also liked to see more talk about how it is almost arbitrage, when the incremental revenue x incremental margins > ad spend, and given it is certain, you should be spending down until where this is not longer the case. But maybe that is to technical, and will require features with CDLX self-service to report the numbers and with using Bridg to advertise to specific SKUs with specific and known incremental margins (but I guess certain business should know the incremental returns without Bridg, such as with limited products or subscription offers, etc.).
Mistakes by Marketers
I liked CDLX calling out the mistakes by marketers (which if they changed, would benefit CDLX). It seems CDLX does understand the issue and what needs to change, highlighted by the 3rd paragraph below.
Some of the themes we've been talking about before, just the importance of experimentation and and that sort of thing, I guess a common mistake is just not seeing marketers lean enough into that.
It's an easier thing to say now than maybe even five years ago right. It's becoming much more ubiquitous and frankly cheaper to run these effective true real marketing experiments which wasn't always the case. We're seeing it across more channels now, across more tactics, where this types of things available to measure success.
But a common state mistake we see is marketers not leaning quickly enough into that and sticking with what might be a more kind of already baked into the business, just kind of straightforward dashboard approach, rather than really thinking about “well how do we truly effectively measure what's working and what's not”
Other Notes:
Discussed benefits of CDLX outside of measurement:
I can identify the customers or the baskets associated with it. I can go in and understand what types of things they were buying and what types of customers they were. So I think not just thinking about measurability but also visibility and I guess trackability is a good word too
Nielsen more discussed these slides. Less so CDLX.
The underinvestment was discussed more in-depth earlier on this slide:
Conclusion
Until only recently, I have not heard enough about CDLX’s benefits compared to other advertising channels, with CDLX rarely discussing their better measurement / incrementality / control vs test ability. Maybe something has shifted internally, coinciding with Karim taking over.
Overall, I was happy with this presentation. Could see some of this help with Q3 / Q4 earnings. It only takes one large marketer or ad agency to have a positive impact on CDLX’s current small revenue base. But more importantly it is the right conversation to be having to lead to higher ad spend for CDLX long term.
9/25/2022 Post #2 - Details on layoffs, and employee comments on new CEO
I saw a post by a CDLX employee as of 9/3/2022 that said “India UK offices are completely lifted so company will no longer exists in India and uk…The decisions taken by management are silly like due to cost cutting they are lifted India office with head count of 50+.” I saw a second employee posted on 9/5/2022 that “Hiring and firing. They closed india office completely.” This makes be feel confident that the India office is closed / is closing. The UK office is more surprising given the operations out there (but Peter Gleason, Chief Administrative Officer & President International Operations, is no longer listed on the CDLX about page as of this month). Additionally, I not only see UK employees still listing as working at CDLX in the UK, but there was at least one person hired in September 2022 in the UK office (VP of Advertising Partnerships). This makes me wonder if the first person was wrong about the UK office, but the India office seems likely. The India office could also be the large number of CDLX employees that I heard were laid off.
In terms of new comments about the new CEO Karim Temsamani by employees (apart from what I’ve communicated in the past), so far there are two ratings on him for a total of 100% approval online, but more importantly I’ve seen a comment as of 9/20 saying “New CEO seems to be doing all the right things” by a CDLX CPA in the GA office. Much better than hearing something negative in the first month.
9/25/2022 Post #1 - Summary of Q3 Observations Related to Advertisers and Ad Spend
I have observed a noticeable increase in the number of offers / logos / advertisers using Cardlytics this quarter (Q3). I have had between 90-100 in my Chase account for quite some time, more than I’ve ever had before (likely would be over 100 at one time if I didn’t continue to redeem offers). My other cards have also had more than ever before. I even saw someone with 139 offers within BofA. A portion of this was due to local offers, likely from Rewards Network, where I have had zero local offers contributing to the 90-100 offers in Chase.
Overall, I see this as a positive, especially in the current environment. As companies have laid off employees, it does not seem that CDLX has been a similar cost to cut. On some level this makes a lot of sense (only pay for the CDLX offers when people buy from them, has measurable impact unlike spending money to increase brand awareness which is likely cut first, if customers are shopping or eating out less frequently now then it is now more important to shift that wallet share to you, more important to get new customers to increase sales and profit, etc.). From the other side, customers are likely more receptive to offers in this environment (checking bank account more so see offers more, want to save money when buying gas/food/essentials, etc.).
Now it is possible that some of these campaigns were set earlier in Q3, such that maybe ad spend will cut back in Q4. However, Q4 has historically been the highest ad spend given seasonality. But we will see shortly if the seasonality increase is offset by the macro.
However, even if some advertisers cut back, we could start seeing some positive offsetting benefits from the new ad server + new UI + some product-level offers + local offers from Entertainment if Chase launches the new ad server in Q4 as scheduled (and it seems they are on schedule based on other observations and CDLX comments, such as those discussed below under the 9.20.2022 “Chase Updates” notes). Therefore, based on what we are seeing in Q3 and based on what may occur in Q4, I don’t see ad spend dropping significantly. Maybe this was all baked into the updated H2 2022 guidance (including losing Starbucks, which I’ll discuss below).
One things most do not give enough weight to is the benefit of CDLX essentially having a non-existent market share of US advertising spend. Even if the total US ad spend decreases from some large macro-related event, CDLX can still grow their market share of that smaller pie. More importantly, it would not take that much of an increase from existing advertisers or that many new advertisers to see significant growth from CDLX’s small base today. New CEO Karim Temsamani + Chase on the new ad server unlocking Bridg and product-level offers at scale could be the catalysts.
Some of the highlights of the quarter so far (with only one week of Q3 remaining):
Lowes / Home Depot: Both are placing offers. Home Depot has never ramped up, given they want product-level, since marketing is at the department level. I’m guessing Lowes is the same. Lowes was one of the largest advertisers on CDLX in 2019 and 2020, but decreased significantly in 2021. So seeing a recent offer from Lowes was good. I do wonder if one is the Bridg client that was signed in 2021, or if one will become one here shortly. This could have a large positive impact going forward if one or both become a Bridg client. The cash back and ARPU would likely be meaningful on these product-level offers within these two stores. One important note regarding the product-level offer aspect is I have only seen the Home Depot and Lowes offers in Chase, who is suppose to launch the new ad server in Q4.
Q2 2021: “Bridg integration…is also progressing as planned. Recently, we closed a large home improvement client…”
Q3 2021: “We expect Bridg to exceed the first year ARR that we initially forecasted in our acquisition thesis. This is partially driven by recent wins at a large home improvement retailer...”
Dell / Best Buy: I found it very interesting to see Dell highlighting a specific set of products (those with an AMD processor) within their logo. Similar to above, I wonder if this is a clue that they would be more open to product-level offers. Like above, Dell would also have higher cash back and ARPU. Maybe with Best Buy still using CDLX (and I’ve personally only seen them in Chase), we will see Dell product-level offers for AMD products available to buy at Best Buy.
Walmart.com: Walmart has used CDLX before, but only for things such as Walmart+ or Pickup & Delivery only. This is the first one I’ve seen for online purchases. Maybe it is isn’t too different than the Pickup & Delivery only offers, but it shows Walmart continues to spend with CDLX and try new things. This compares to Target where I haven’t seen a Target offer in CDLX in one year and Target has not tried different types of offers like Walmart. Therefore, Walmart may be more open to trying product-level offers first, and possibly in the near future.
Fuel & Convenience: There has been a significant number of fuel & convenience offers this quarter. Could be from some of the new hires I’ve seen on LinkedIn for this division, where I see possibly 3 that started this year specifically for this division.
Logos: Chevron (pump only), Kroger (fuel only), Exxon Mobil (pump only), Kwik Star, Casey’s (online only, and pump only), BP (fuel only)
As you can see, given the commodity like nature of fuel offers (I don’t care too much where I get my gas, so will happily go across the street to save 5-10% back), I like using these offers, and I’m guessing so do others.
Travel: Nice to see the uptick in travel this quarter, given the higher ARPU potential. Hilton had a unique offer where there was different % cash back depending on the city you stayed. Many different logos this quarter for hotels from the same parent brand.
Logos: Marriott Owned (TownePlace Suites, Springhill Suites, Fairfield, Westin), IHG Owned (Holiday Inn, Crowne Plaza), Hyatt Owned (Hyatt Place, Hyatt House), Hilton
Local: There has been an increase in local. BofA still shows location-specific, and Chase has added more local as well this quarter (as seen below).
Location-specific offers in BofA (likely Rewards Network):
I believe there are also Rewards Network local offers in Chase. The following are likely Rewards Network given the same offers are in Dosh when you sort by location.
I also believe some of the local offers in Chase are from the Chase / Eureka partnership discussed at investor day, since it dealt with small businesses, where majority are minority owned, but not all. These offers have a unique tag, where the local offers say “Shop Local” on the offer, and the other say “minority-owned” and “black-owned”.
Chase Sapphire Reserve Exclusive Offer: First time seeing a new CSR exclusive offer in a while. Looks like Solo Brands has a credit agreement with Chase, maybe unrelated, but I was looking given sometimes these exclusive offers deal with an upcoming IPO with the bank like Chase. I assume we will see more of these exclusive offers on the other banks when they take the new ad server and use the self-service for banks. Given the higher cash back, even if not higher ARPU for CDLX, it increases differentiation for the banks and increases engagement and word-of-mouth for the offer section in general.
Logo: $70 back at Solo Stove
Panera Subscription Offer: I was happy to see this given Panera has expressed interest in doing this exact offer 1 year ago. It was also matched the highest cash back % I’ve seen (50%), which leads to higher attractiveness for users. Given Panera already spends a lot with CDLX, and is a Bridg client, I thought this may be a product-level offer, but no longer believe so (the statement description changed to have a unique description, such that this is likely how they know I made this specific purchase at Panera).
Starbucks: Given the commentary by CDLX at Q2 earnings, most assumed Starbucks will no longer be using CDLX. However, the commentary only mentioned decreases in ad spend, not dropping from the channel. Starbucks has continued to place offers with new campaigns in Q3, but possibly given to less users. They have an active offer that looks to expire this week at the end of Q3, so we will know if they place another campaign following this current one and continue to use CDLX throughout the remainder of the year.
9/20/2022 - Chase Updates
Q2 2022 Earnings: Notes and Thoughts After the Call
9.6.2022 - Self-Service Development. New Ad Server. Chase Migration.
Update 2 on this section (9.7.2022): Reviewing notes from an investor who spoke with CDLX mid-May, there was another important comment, essentially confirming Chase is the bank scheduled to launch the new ad server in Q4 2022. The first time I saw it in May I would have thought little of it given it was before all the other information below and before Chase acquired Figg. See updated item #3 “Mid-May” below.
Update on this Section (9.6.2022): Tonight after posting, I found another date-related data point that matches the timeline of Chase moving to the ad server as well as all the other data points. See item #5 below called “Q2 earnings comment of migration to the cloud beginning in Q2”.
I came across something very interesting regarding the development of the self-service platform. (I chose to include this information in this section, given I previously provided an update and thoughts on the development of the self-service platform following Q2 earnings.)
While researching something separate, I came across a note from an investor who spoke with CDLX management in May after Q1 2022 earnings. Their notes said CDLX pivoted some tech resources from self-service to the new ad server. At the time, I thought nothing of this.
This is very interesting for two different reasons.
The first reason this is interesting is due to the timing of this comment in mid-May matches the timing of CDLX possible migrating Chase to the new ad server based on multiple different date-related data points (listed below). This strengthens the idea that Chase has been in progress of moving to the new ad server.
April 2022: CDLX job description (posted by Indra on Twitter) that mentions migration to a new platform for a bank that is likely Chase (see reasoning below) starting in April.
Indra pointed out the 45% of CDLX users looks to be based on the $34M in revenue they quoted divided by Q2 revenue of $75M, which equals 45%, and therefore the 45% of MAUs is simply based on 45% of revenue. This independently matches Richard’s Chu’s latest CDLX write-up where he mentions “As of Q2’22, their top three banking partners, Chase, BofA, and Wells Fargo, formed over 75% of their partner share. Chase and BofA formed >20% each and Wells Fargo formed >10%. Cardlytics stopped disclosing exact splits in Q1’20 but at that point, Chase had already surpassed BofA. Therefore, Chase forms up to 44% of Cardlytics’ revenue today.” This makes me believe this job description and migration of a bank to a new platform is related to Chase. Also note, 100% of campaigns are already on the new ads manager, and therefore I do not believe this “new campaign platform” is related to the new ads manager, but instead the new ad server.
Around May 6: New CDLX job listing for a “senior integration consultant” for the “technical onboarding” of a “financial institutions onto the CDLX platform” who has “experience with AWS or other cloud platforms”.
FYI, this is different than the current job listing on CDLX’s website related to Dosh.
Mid-May: CDLX management said they pivoted tech resources from self-service to the new ad server AND said when discussing the new ad server CDLX said that a major bank is scheduled to launch in Q4 2022 who was scheduled to launch in Q4 2021.
That second point is key. We know with certainty that the bank that was scheduled to launch in Q4 2021 was Chase (confirmed by CDLX IR and discussed during CDLX Investor Day). This then shows Chase is scheduled to launch in Q4 2022.
If they are scheduled to launch in Q4 2022, it would make sense they are the bank currently in migration, starting as soon as April to begin the process.
This would then explain the new comment in early July, where CDLX IR said CDLX is still on track to hit 50% MAU goal by YE 2022, and why they mentioned this in response to questions about Chase acquiring Figg (since the bank who was moving to the new ad server was Chase).
Early July: CDLX IR says CDLX is on track to hit 50% MAU goal by YE 2022 (where CDLX has previous mentioned Chase is the easiest path).
Matches that Chase would be in progress during July.
Matches Mid-May comment of Chase scheduled to launch the new ad server in Q4 2022.
Q2 earnings comment of migration to the cloud beginning in Q2: “During Q2, we began the migration of certain internal data and applications for the cloud. We expect a fairly long migration given the need to work with an administrative and technical processes of our FI partners.”
Not only does this fit given it is a migration of an FI partner to the cloud that begun in Q2 (matching April and May points above), but this statement also shows it is a long migration that would not yet be completed, which matches the fact that Chase’s migration would still be in progress (since no definitive observations showing it is complete, like product-level, local, new UI, pics in offers, etc.), and
Having so many different independent data points with the timing matching up, combined with the rumor that Chase is already in progress of moving to the new ad server, it seems extremely likely.
The other reason this comment of CDLX pivoting tech resources from self-service to the new ad server is interesting is due to us now having an actual stated reason by CDLX for pausing / slowing development of the self-service platform.
Without the reason, I before thought it was simply related to the Q2 cost cutting initiatives (as discussed in my last write-up related to Q2 earnings), and others thought it was simply dropped forever (which even if Lynne said that was the case, Karim would likely independently reassess the decision and make the rational decision at a later time when appropriate).
It is possible CDLX slowed development of the new self service platform even further, or even completely paused it as Q2 unfolded (or even up through today) and is now also a part of the cost cutting initiatives. However, we now know at least the beginning of this pause was instead related to the new ad server.
The pausing / pivoting self-service development to focus on the new ad server makes complete sense. The new ad server is more important to complete first given self-service offers only work on the new ad server. Additionally, getting Chase on the new ad server is more important given the Chase situation (having Chase on the new ad server increases Chase’s opportunuity costs and switching costs by then having a new UI, local offers, product-level offers, and more).
I am confident that even if the pausing of self-service development continues past the banks moving to the new ad server, that we will see Karim eventually resume development. It is one of the more important areas for right-tail returns, and one of the few areas for reinvestment.
8.3.2022
A few follow-up thoughts from my notes yesterday.
New Ad Server (Chase, BofA, and Large Restaurant Client)
Chase Update
New Ad Server (Chase, BofA, and Large Restaurant Client)
Regarding the following quote from the call that I touched on yesterday, and specifically the statement in bold, I feel even more strongly that the proposal to Starbucks with Chase and BofA has to be in regards to the new ad server.
I think many people probably know who it is, but I won't call them out by name, but there's been a massive CEO change there. And so they're reevaluating everything and their core strategy. We have, with several of our bank partners, including Chase and Bank of America, put a best fit forward on a pretty meaningful proposal for them. I don't know if we'll get that over the line. But we certainly haven't given up. We are, however, modeling absolute worst-case scenario for that relationship.
(Note: I thought the transcript might of been wrong, with best “fit” forward, instead of “foot”, but relistening to the call it sure sounds like fit, so I left it as-is)
I was trying to think what Chase and BofA could offer with a proposal that did not involve the new ad server. The only thing I can think of is boosting the offers with Chase / BofA rev share, making their offers more attractive without Starbucks spending any more. But that makes me wonder, why wouldn’t Wells Fargo be a part of this? Assuming Wells is not expected to be on the new ad server this year, this could be why only Chase / BofA were a part of the proposal, which could be a clue they both are expected to be on the new ad server this year (with Chase possibly in progress like discussed yesterday, and BofA soon given the recent renewal with Cloud).
Instead, if it involves the new ad server, Chase and BofA would be able to not only boost the Starbucks offers, but could also have:
Premium placement (such as having Starbucks in the featured section in the new UI, possibly always first)
Hero imagery on the offer and in the offer (featured section offers could have images outside the offer, and then different images within the offer once clicked on like US Bank)
Product-level offers since Starbucks is a Bridg client
Push notifications to specific drinks or food items
I could make the argument though that US Bank is on the new ad server and wasn’t included with the proposal, therefore the proposal to Starbucks could have nothing to due to Chase and BofA moving to the new ad server soon. However, the difference is US Bank is much smaller than Chase and BofA, and would be less impactful for Starbucks in a proposal.
Chase Update
One thing that is interesting is CDLX chose to focus on the SMB aspect of Chase acquiring Figg, rather than mentioning anything regarding first party data to improve offer placement and targeting.
Chase has actually approved to me saying the following: they remain focused on continuing our partnership period. So nothing has changed at all. There are a bunch of reasons why it makes sense for Chase to own Figg and not impact our relationship with them primarily to go focus on the SMB space. But absolutely nothing has changed. We maintain huge momentum with them like we always have. They've always been a fantastic standout partner of ours, and they continue to be. So I see no reason at all for -- the Street to read anything into this other than Chase wanted to focus on SMB.
Maybe there is nothing to read into this, with CDLX just trying to keep their comment short and simple. Maybe they know investors understand Figg was more focused on local offers, and that would reduce the amount of questions and confusion if CDLX brought up the first party data aspects. But then again, CDLX IR was the one who first brought up first party data. Actually, in the two different statements I’ve seen from CDLX IR, first party data is mentioned in both of them as the reason for Chase acquiring Figg, and SMB is only mentioned in one. Very hard to read into this.
As a reminder, in regards to the SMB aspect of the acquisition, I don’t think it has to do with getting Figg’s SMB / local offers. This is due to Figg primarily using aggregators that Chase could get without acquiring Figg. Specifically, Figg was using Rewards Network with the BofA test (from my understanding). Chase could even get these same offers directly from CDLX, who mentioned they are pushing Rewards Network for one of their major banks. In fact, Chase already has some local offers, which looks to be Rewards Network offers (they are the same restaurant by location, same logo, and same offer amount). It could be Chase is the bank CDLX is already pushing Rewards Network local content to (since CDLX said they can do that without the new ad server). To top it off, given Figg’s local offers are not exclusive to Figg, then this acquisition would not help Chase with locking up that local content to have more differentiation with the other banks.
If that is the correct line of thinking, then I believe Figg is more to help with Chase’s own merchants. I have already discussed this at length in other sections, but as a quick summary, Figg could be used for their employees to help + Augeo had a local self-service platform Ampre that Figg may now own that Chase acquired + Chase has job posting for helping their 4-5M SMB Chase-only merchants place offers and have a merchant facing experience (where the Ampre could possibly help). Additionally we discussed how Chase acquired Bloomspot in 2012-2013 that was for local card-linked offers and failed. Therefore, while it is possible there are new Chase executives who do not recall this experience with Bloomspot, I don’t think Chase would repeat, and therefore Figg is to help Chase’s own SMBs (matching the other aspects). All of this is regarding the SMB side, and not the first party data aspect which I think relates more to retaining and obtaining higher value users like high spending travel users (as discussed in detail elsewhere) or to get these users to also have mortgages or loans with Chase.
8.2.2022
The following are my quick notes and first thoughts following today’s earnings call. I will be adding more notes over the next few days.
New Ad Server (noticed multiple very interesting items, including one I originally missed)
Chase Update
Activation Rates
Bridg (including discussion on net income and future EBITDA/FCF positive)
Open Banking
New Ad Server (Chase, BofA, and Large Restaurant Client)
I was pleased to see the goal of 50% MAUs on the new ad sever by 2022 still in the decks and mentioned by CDLX:
More broadly across our bank partners, we're still on track to connect 50% of MAUs to the new Ad Server by the end of '22. While we're dependent on banks sticking to agree upon time lines, we are laser-focused on supporting them and ramping up our new technology platform.
One interesting note was the following, where it almost makes it sound like CDLX expects migration of FIs to the new AWS ad server would be completed by Q3 2023 (in line with 100% by YE 2023 stated goal):
During Q2, we began the migration of certain internal data and applications for the cloud. We expect a fairly long migration given the need to work with an administrative and technical processes of our FI partners. We continue to estimate total incremental hosting costs of $7 million to $10 million during the migration which we expect to be completed by Q3 of 2023.
Chase
Additionally, given it was stated by CDLX IR that CDLX is still on track to hit 50% MAUs by year end, and given CDLX IR said the same thing when asked specifically about Chase, and given CDLX said today “During Q2, we began the migration of certain internal data and applications for the cloud”, I have a strong feeling Chase is in migration to the cloud.
They were suppose to migrate YE 2021, but that was pushed back on Chase’s side. Therefore given Chase already agreed and was planning to move to the new ad server and given CDLX has said Chase is the easiest way to get to 50% MAU goal, I think they are more likely the one in progress than Wells or BofA. BofA is less likely to have began the migration in Q2, given the contract was not officially signed until after Q2. Wells is also less likely, given we have never had any indication they would move in 2022. Also less likely it is a new bank, given I’m not sure they would refer to that as migration + I think they would have had to announce if the new bank partner was officially signed.
BofA
While it wasn't mentioned on the call, but based on the new CDLX / BofA General Services Agreement (GSA) that was linked at the end of the latest 10-Q, looks like there is cloud (which is needed for the new AWS ad server). I've heard this from others, but it is nice to see cloud within the new contract.
"Cloud" is mentioned 109 times in the new GSA. 0 times in the original GSA.
Lynne also mentioned this was something they were after, and that she is pleased with the new contract with BofA.
Large Restaurant Client
One interesting element was hearing about the large restaurant client, who is likely Starbucks (given recent CEO change this year + most known CDLX restaurant client).
What is more interesting was the comment I bolded below:
Our success in the verticals was partially offset by a major restaurant client decreasing their ad spending, a situation that we mentioned and planned for at the beginning of the year. This client remains in the channel, but they scale back the size of their campaigns in Q2. And we expect lower ad spending on our platform in Q3 as well. Excluding this client, our restaurant vertical grew 31.6% year-over-year, which is more in line with our expectations. While certainly a headwind, this decrease, combined with our efforts to diversify revenue will make the business much less susceptible to revenue risk and individual customers in the future.
…
I think many people probably know who it is, but I won't call them out by name, but there's been a massive CEO change there. And so they're reevaluating everything and their core strategy. We have, with several of our bank partners, including Chase and Bank of America, put a best fit forward on a pretty meaningful proposal for them. I don't know if we'll get that over the line. But we certainly haven't given up. We are, however, modeling absolute worst-case scenario for that relationship.
I did not even catch this when I listened live on the call. I have a feeling that given Starbucks is also a Bridg client (CDLX has confirmed this) + Chase could be moving to the new ad server (as discussed in the section and elsewhere) + BofA has cloud in their contract so they are also likely moving to the new ad server, this proposal could be related to product-level offers, benefiting everyone. Would also have the capability of doing richer imagery with the new UI on the new ad server, which would benefit Starbucks.
Chase Update
In addition to Chase possibly being the one already migrating to the new ad server (and therefore at lower risk of leaving any time soon), CDLX mentioned:
Chase has actually approved to me saying the following: they remain focused on continuing our partnership period. So nothing has changed at all. There are a bunch of reasons why it makes sense for Chase to own Figg and not impact our relationship with them primarily to go focus on the SMB space. But absolutely nothing has changed. We maintain huge momentum with them like we always have. They've always been a fantastic standout partner of ours, and they continue to be. So I see no reason at all for -- the Street to read anything into this other than Chase wanted to focus on SMB.
I will say you, I find it hard for CDLX to say “absolutely nothing has changed. We maintain huge momentum with them like we always have…” unless they knew something else to reaffirm this belief, such as Chase already being in progress of moving to the new ad server. Essentially, if nothing truly had change with Chase, then that gives CDLX no information or indication their relationship is still fine. However if Chase is moving to the new ad server, that would give CDLX much more confidence and hence the statement (including regarding momentum).
Activation Rates
Many have called out that activation rates are down YoY. While possible this is related to decreasing engagement with offers, I think it could be related to the substantial increase in total offers but activations not increasing proportionally.
It was discussed in Q1 2022 how a significant number of new logos have been added to the platform:
In the first quarter, we began piloting local content from a partner with one of our major banks. This is an exciting development and allowed us to test the scalability of our new Ads Manager. In this pilot, we included over 300 hyper-local advertisers from a third-party content provider. In addition, our newly formed mid-market group sold and republished 200 mid-market advertisers in Q1, bringing our total advertiser count for the quarter to over 600 advertisers. We are well on our way towards reaching our goal of having over 1,000 advertisers running simultaneously on the platform in 2022.
Q4 had 505 logos, so there was an increase in Q1 to a total of 600+ which is about a 19% increase for the denominator of activation rates.
Additionally, in the latest quarter, I have more offers in my Chase account than ever. I have heard the same with others, who now have over 100 offers in their Chase account.
Here is the definition for offer activations:
Offer activation rate: We define offer activation rate as the total number of offers activated by MAUs divided by the total number of offers served to MAUs in the applicable period.
Also, given we know CDLX was pushing Rewards Network content from their comments at the January conference, we know that this would explain a larger increase in restaurant offers versus other categories, which could explain the larger decrease in restaurant activations (larger denominator effect). Additionally, you will likely have lower activation with these offers give worse looking logos + smaller in cash back percentage + less familiar to users.
Bridg (including discussion on net income and future EBITDA/FCF positive)
There was quite a bit about Bridg this quarter.
CDLX bought back $40M worth of shares, or about 1.4M shares as a form of arbitrage with the Bridg payment. This was something already known and shared when the buyback was announced.
Bridg was largely responsible for the negative net income this quarter. There was an $83.1M expense / write-down related to Bridg’s carrying value:
we determined that the carrying value of the Bridg Platform reporting unit exceeded its fair value, and consequently, we recognized a goodwill impairment of $83.1 million.
There are two earnout payments, seen on the balance sheet with the “Current contingent consideration” and the “Long-term contingent consideration”. The long-term contingent consideration was also marked down QoQ from $38.3M down to $0. This makes me believe that at this time CDLX expects no second earnout payment with Bridg next year. This could be beneficial. If nothing has changed with the long-term potential of Bridg, lower performance today is allowing for less paid for the asset. This could related in some part to CDLX saying they still expect positive EBITDA and FCF in 2023 under their adjusted more conservative assumptions, given they could now have significantly less outflows.
On a more positive note with Bridg, they signed 2 new deals, one worth $25M over 2 years.
We closed 2 joint Cardlytics and Bridg deals in the quarter. One is worth nearly $2 million and another is worth over $25 million in a 2-year period.
Open Banking
One thing that was a little disappointing to me is CDLX is looking at Open Banking as an area for cost savings.
There's opportunities to reduce the focus on some of the longer-term growth initiatives, things like open banking.
I don’t love this, given the first mover advantage + long runway + near 100% gross profit margins (since 0% rev share). I understand this isn’t needed for CDLX to be a successful investment, and actually it may be needed to pause for the sake of staying on track to hit positive EBITDA and FCF goals in 2023 (avoiding liquidity issues), but given the opportunity, I do not like seeing it paused.
Q2 2022 Earnings: Notes and Thoughts Before the Call
7.29.2022
Likelihood of Announcing New Bank Partners
There is a decent chance that CDLX could sign one of the banks that previously used Figg. The reasons are those banks may no longer have Figg as an option after Chase acquired Figg (Chase may want to dedicate 100% of Figg employees to Chase), or the other banks may not want to work with Figg anymore (given it would benefit Chase who is a competitor, knowing Chase would get priority, etc.).
There have been many different statements on who are the actual banks that partnered with Figg. The only one that I’ve heard consistently is USAA. Citi is possible, but I’m not certain. Some reputable sources have said Citi used Figg, while employees at Citi within the offers division have said they used Rewards Network (no mention of Figg). Where that gets confusing is some banks have used Figg where Figg used Rewards Network. Therefore it is hard to know whether Citi used Figg to get Rewards Network, or if Citi used Rewards Network directly.
If there is a new CDLX bank partner, it is possible the announcement would occur at earnings.
Chase was announced 2 days before earnings and discussed at earnings. Wells looks to have been announced at the same time as earnings. US Bank was not mentioned at earnings, but the official announcement occurred a couple weeks later via the 8-K. Given how soon after earnings US Bank was announced, it is possible something came up (possibly Covid related, change in CDLX CEO, etc.) that led to a slight delay, where maybe the original intention was to announce US Bank at Q4 2019 earnings, but it got pushed back slightly. I do not know for sure. Also could be US Bank was a smaller bank, so announcing at earnings was less important.
Here is a quick summary of the bank announcements from what I can find:
JPM:
5.8.2018 (filing date): Official 8-K
5.10.2018: Q1 2018 Results
“We are pleased to announce the signing of an agreement for a national launch with JPMorgan Chase”
Wells Fargo:
8.14.2018: Q2 2018 Results
“We are happy to announce the signing of an agreement with Wells Fargo to launch Cardlytics Direct nationally and across all digital channels”
US Bank:
3.2.2020: Q4 2019 Results - No mention of US Bank
3.10.2020: Official 8-K Announcement
“announcing that it entered into a five-year agreement with U.S. Bank to begin a phased launch of its Cardlytics Direct program.”
5.11.2020: Q1 2020 Results - First mention of US Bank during an earnings call
“We also recently announced a new 5-year agreement with U.S. Bank to begin a phase launch for customers.”
This makes me believe it is at least possible if CDLX signed a new bank from the Figg situation that it could be announced at this next earnings.
It is also possible there is no new bank that signs up with CDLX after they lose Figg. However, I think the odds favor CDLX signing at least one new bank.
Likelihood of Announcing Banks on the New Ad Server
I have a feeling that if any bank is moving to the new ad server, we might not hear about it at earnings.
This sounds strange, given:
How much the new ad server has been talked about
How important it is for CDLX
How open CDLX has been regarding US Bank being on the new ad server
How CDLX disclosed they were negotiating with BofA on moving to it
How CDLX has said Chase going on the new ad server is the easiest way to 50% MAU goal in 2022
The reason that I believe there is a chance that CDLX will not let us know when any of the banks move to the new ad server is based on CDLX IR not commenting or responding to questions regarding whether BofA moved to the new ad server with the new contract. When they have been asked, CDLX IR has responded:
“We do not talk about banks individually”
And separately:
“We have never really discussed specifics around individual bank contracts outside of the past year for the renewal. Given out partners’ sensitives around their strategies and initiatives, it’s not wise for us to talk specifics around renewals, as well as the timing and extent to which out partners adopt out technology or our cloud offerings.
Therefore, it is possible CDLX will be vocal about what could happen or what they want to happen, but not say what actually happens.
Where this gets interesting though, or conflicts CDLX IR comments, is CDLX has in fact talked about specifics with individual banks. Not only do they discuss US Bank being on the new ad server, but CDLX has discussed very specific statistics regarding US Bank that relate to the new ad server.
CDLX IR mentioned parts of the BofA agreement will be redacted when they are released with the new 10-Q. I’m sure the redacted sections will include the rev share, but I’m not sure about other aspects, like the new ad server. If CDLX IR can’t comment on the new ad server for a specific bank at this time, then I would guess it would be redacted too.
Also, I’m still puzzled by the last 8-K referencing BofA and the GSA. I even messaged IR, but had no luck with a response.
I still believe BofA will be moving to the new ad server and that it was in the new agreement. Not only do I not seeing CDLX signing otherwise, and not only does BofA want the new ad server and the associated benefits, but I have even heard from those who spoke with CDLX that BofA will be moving to the new ad server. If true, I would hope it gets announced.
In terms of Chase, I still think there is a high chance Chase stays (as discussed next) and are in the process of moving Chase to the new ad server as we speak. This would match the job listings and hiring for Sr. Integration Consultants related to AWS cloud, it would match that Chase was supposed to move YE 2021, and most importantly it would match CDLX IR saying CDLX is still on track to hit the goal of 50% MAUs on the new ad sever by 2022 (where Chase has been mentioned elsewhere as the easiest way to get there). But again, even if Chase is in the process of moving to the new ad server, it may be like BofA where CDLX does not mention it.
I have included this in my notes given I think no announcement may lead some to believe BofA or even Chase isn’t moving to the new ad server, even if they actually are but CDLX doesn’t comment on it.
Likelihood of Providing an Update on Chase
Given how important Chase is to CDLX, given how worried investors are, and given CDLX IR said “we are working with Chase to see what we can do. We hope to have an additional update for investors in the near term”, I think we may hear an update on Chase at earnings.
If there is an update, the best would be from CDLX saying that not only is Chase staying, but they are moving to the new ad server (which would remove many worries for some investors, but not all, given most CDLX investors seem to want absolute certainty where it is even not possible, which leads to price inefficiencies).
I still think the likelihood of Chase leaving is low:
Lose Certainty of CDLX Working: Chase would likely not want to drop CDLX today with the certainty of CDLX working, and take the gamble with Figg in terms of replacing CDLX and risk Figg not working or being able to do everything Chase needs (which could be a higher probability given BofA tested Figg and did not end up using them). Instead, Chase would build along side of still using CDLX and see if Figg could work first, and then if Figg was successful, drop CDLX. Therefore, you would keep CDLX today, which gives CDLX time to improve more.
Decreases Customer Engagement: There is a chance Chase doesn’t want to match CDLX’s capabilities first before dropping CDLX. Maybe Chase just wants to take Figg as-is with Rewards Network offers, then add more offers with Chase-only merchants, similar to AmEx’s model (minus the local offers). From a user perspective, I feel this would be going backwards for Chase. I have 84 offers right now from CDLX within Chase, with the possibility of a new UI + more offers from self-service that only works on new ad server + product level offers + the same Rewards Network offers + additional local offers from Entertainment and self-service + the same Chase merchants via the new CDLX self-service for banks “Engage”. So to taking that away could lead to lower engagement and lower use of my Chase cards. I’ve redeemed $193, $75, and $15 on my Chase cards, and that will likely increase dramatically if they move to the new ad server to unlock all these other offers. Therefore I feel Chase would not go backwards with user benefits with the risk of upsetting their customers. Chase specifically in March 2020 in a Tegus call even mentioned that once you give users something, it is not worth taking away or moving it, since it can upset them and even lead to getting calls wondering where they went. Also, unless there is something within the contracts regarding the tech / UI, I think if you get Chase users to the new UI, you would not want to roll that back. Instead, you would keep CDLX to have that new UI and place your Figg / Chase offers within there, and then also benefit from CDLX rev share + CDLX national offers.
Lose Rev Share: I also don’t think Chase would drop CDLX and lose that rev share. The rev share is small to Chase relative to their total business, however, this rev share is likely near pure profit to Chase. TTM rev for CDLX is $280M, say 50% is rev share, and then say 50% is Chase, that is $70M. That likely covers the Figg acquisition price and ongoing expenses/salaries/tech. Meaning, Chase might as well keep CDLX to pay for related endeavors and be cost neutral, rather than going from $70M+ with just CDLX, to $0 with CDLX + Figg, to then negative expenses with just Figg (no CDLX). Seems irrational. I would guess Chase would at least keep CDLX around to pay for their other tests, which then gives CDLX more time to improve and become more valuable to Chase.
High Probability of Chase Moving to the New Ad Server: The largest reason we could still see Chase moving to the new ad server, and may even be in the process as we speak, is given CDLX IR has said CDLX is still on track to hit the goal of 50% MAUs on the new ad sever by 2022, where CDLX has been mentioned elsewhere Chase is the easiest way to get there. We also know Chase was suppose to move to the new ad server YE 2021, so this shows they had the intention of moving. There are also job listings and hiring for Sr. Integration Consultants related to AWS cloud (but this could be for new banks or even BofA). Additionally, if you keep CDLX while you are testing or building out Figg, you might as well continue with their intentions of moving to the new ad server and get all the advantages for both users and for Chase. And if Chase plans to copy CDLX with Figg, Chase might as well see what the new ad server does first hand to then copy it.
Chase Sharing News of Figg Acquisition with CDLX: Chase proactively shared with CDLX that they would be acquiring Figg according to CDLX IR. Therefore it wasn’t something Chase was hiding from CDLX. For instance, if Chase’s intention was to acquire Figg to replace CDLX, you wouldn’t share that with CDLX with the risk of CDLX acquiring Figg or CDLX finding a way for someone else to acquire Figg.
Chase Communicated Intentions of Staying with CDLX: Chase has communicated with CDLX and made it seem they will be continuing to work with CDLX. CDLX said they see no reason of Chase lying.
Chase is Using Figg is For Utilizing 1st Party Data + SMB Efforts: Chase told CDLX they acquired Figg to own technology to use their own proprietary data that they cannot share with CDLX to improve targeting and offer presentation, as well as to accelerate SMB efforts. Others in the industry that worked at Chase has said the same thing. And Chase’s investor day matched this as well.
Therefore, I think Chase staying with CDLX is high, and we could have an update at earnings.
7.16.2022
New Ad Server and Bank Partners
I discussed this in part today (in the Qualitative Research Notes in the section “Company Risks: Chase Acquiring Figg” posted 7.16.2022) how there are two positions actively listed by Cardlytics (one as of one day ago and the other I do not have a date, and there was another that is now expired that was from May) for a Sr. Integration Consultant. The following are in the the job description:
Help create our core Integration Consulting team. This team is responsible for the technical onboarding of new Financial Institutions onto the Cardlytics platform.
Experience with AWS or other cloud platforms
These opening could be related to either moving an existing bank to the new ad server, or a new banks to the new ad server.
With CDLX saying “new Financial Institutions” and given at least one of these two listings is as of this week (after the Figg / Chase announcement), I would lean on the side of thinking it was related to new banks like USAA coming onto CDLX, given Figg may no longer be an option after Chase acquiring Figg. Therefore new FIs could be announced at the next earnings.
However, it could also be related to moving someone like Chase to the new ad server. The big reason being CDLX had the same role for a Senior Integration Consultant posted in May. Maybe Chase has been in progress of moving to the new ad server as we speak (which was discussed in more detail in the section described at the beginning of this note). And now maybe given the fear around Chase not sticking with CDLX, maybe CDLX is trying to ensure they are on the new ad server by next earnings call, hiring additional help to accelerate the timeline. This would in part match how CDLX IR said Cardlytics is working with Chase on a statement for the investor community, but has yet to release one. Knowing one of the strongest ways to ease the CDLX investor community is not with words but with actions, maybe this is what CDLX is trying to finalize to be able to announce at the next earnings.
Or it could be unrelated to new banks or Chase.
Or both are occurring and both will be announced.
Either would be okay with me to be announced at the next earnings. However, I think most other investors do not care if other banks like USAA are added without Chase.
Q1 2022 Earnings: Notes and Thoughts After the Call
5/6/2022 - Detailed Notes and Analysis Following Earnings (I updated my original 5/2/2022 Notes)
Given Substack limits space, and given this information was used to create the full-write-up on Q1, I removed the contents here, since it can be read here now.
Q1 2022 Earnings: Thoughts Before the Call
4/26/2022
Numbers: Sounds like Southwest returned in March (an update from my 4/22 comment below), as well as a pickup from others. CDLX will have seasonality in their results QoQ, but I am guessing this will just be a normal quarter in terms of numbers. Short term stock price impacts will likely be a function of news/updates, such as those discussed on 4/18 below (and the follow up thoughts on 4/20, 4/22, and 4/24). Those updates are what matter in the long term, and are what I will be listening closely to.
Management Changes: Based on the following Glassdoor reviews (which have a bias, given most employees that leave on good terms will not leave a review, employees not fired / let go are still working there, those that left on bad terms have a feeling that leaving a bad review is a way to “get back” at the company, those newer to the company may have a higher tendency to switch jobs more often for either not fitting well such as from personality, strong opinions, or for other reasons - all of which are based on my own experience of working for a company and seeing the corresponding Glassdoor reviews), it may be possible that CTO Peter Chan has been more active than I originally thought. Therefore it is very likely he had a say in getting the new CPO Jose Singer (which was already a high probability given existing work relations), but it may also be that he had a say in the change of management to help execute his vision. Again, many possibilities, all of which I have been listing out below. The following were sent to be on Twitter (also make note of the number of years of employment):
Also, based on this article on the Gemini native ad network, which both CTO Peter Chan and new CPO Jose Singer were working on (based on LinkedIn), I believe the fast environment explains the fast changes by Peter Chan that I’ve heard about, such as switching possibly too quickly to machine learning targeting, rather than the existing more hands on approach, which I’ve heard they since have switched back to due to issues and moving so quick. While hard to get too much from the article, it seems Gemini was quite successful, and while hard to know current numbers, on a combined basis with other platforms it seems to be generating quite high ad spend in relation to the numbers shared in the article. Therefore, Chan and Singer may be the right people for CDLX, where similar changes and updates are much needed to meet ad agencies standards and eventually allow more SMB self-service spending, and get the new ads marketplace up and running.
Sounds like product is only 40 employees, compared to CTO / tech department which is maybe 5 to 6x larger. Therefore, possibly less impactful area for the change.
BofA Renewal: Higher probability of renewal given CDLX has added the double cash back offers that we have seen on Chase and Dosh. Why would CDLX actively do new things on BofA if they thought they wouldn’t renew? Also, I think this is the first type of in-bank advertising I’ve seen for offers (increases awareness and then usage of offers):
4/24/2022
Management Changes:
As I’ve been thinking about the change in CPO more, I had some additional thoughts.
Given CTO Peter Chan and new CPO Jose Singer at least likely knew of each other from Yahoo since they both worked on the Gemini native ad network (gathered from their LinkedIns), I would think if there was a difficult or concerning situation happening in the product area at CDLX, Chan would likely let Singer know before coming on board. If I had a friend or previous coworker I knew that was considering joining my company where I knew of a difficult situation in that exact area, I would likely say something. Instead, given the possibly existing relationship, it almost makes more sense that Chan recommended Singer, or helped bring on Singer.
Also, Akkerman has been with the company for a least a good period of time. To me it would be more concerning with someone such as Chan leaving who is much more recent, where he has a higher chance of walking into an unexpected difficult situation, rather than someone who has been there for at least a little bit, and where if there was a problem, Akkerman would have left a long time ago.
One of my previous thoughts was if Akkerman left due to changes with the self-service platform were not happening as fast as he wanted, due to the banks, and therefore that was the reason for the lack of upgrades and reason for the ad agencies complaining. While the self-service may only be working with the new ad servers, which only one bank is on (and therefore related to slowed progress due to the banks), there has still been issues mentioned by ad agencies with the self-service platform that is used on the new ad server. Therefore, the main issues brought up my ad agencies would likely not be due the slow progress of banks. This makes me believe that it will be a good thing if the new CPO Jose Singer can help speed up the progress of the new self-service platform for ad agencies and SMBs. Given his experience with being in charge of large departments, and working on the yahoo ad platform for SMBs and enterprise clients, it should be a good fit, with the additional possible chemistry between Chan and Singer (who look to also both be based in San Francisco)
Also could simply be Akkerman got a better offer elsewhere or wants to do something different, and the decision has nothing to do with CDLX. Given I’ve heard he is staying on to help with the transition, I feel the odds of being unexpectedly let go or some internal issue are small.
I think for most the first instinct with changes in a company is bad news, likely given it feels safer to assume such. However, I like to think past my first instincts, and try to find facts and find what makes the most sense. But at the end of the day, I don’t have all the information, and could be missing something.
4/22/2022
Numbers: On 4/18, I mentioned travel returning, based on January numbers. Sounds like some, such as Southwest, dropped spending in February. Therefore it is possible others did the same (possibly from not needing to give incentives with travel returning). It is possible earnings this quarter will not be anything too special. Also possible some cut back ad spending due to macro factors.
Management Changes: We now have had official confirmation of the CPO change, and that the replacement is Jose Singer. Based on his LinkedIn and Peter Chan’s LinkedIn (CTO) they may have worked together in some capacity at Yahoo on the Gemini native ad network.
It is easy to come up with many different reasons for the change in CPO (as I’ve done below), but I think the right way to think about it is will this be better or worse for the company going forward, regardless of what has been happening or could have happened that led to the change. I believe it should be a net positive, given the possibly existing relationship between Singer and Chan. I also think given certain aspects of the self-service platform were behind schedule (based on comments from ad agencies), or at least not to the level agencies wanted it, I think there could now be a higher probability that gets addressed quicker, leading to faster increases in ad spend, and more adoption.
4/20/2022
Management Changes: I have now had multiple confirmations that have come from CDLX that Akkerman will be replaced. Sounds like the replacement will be announced next week. Sounds like Akkerman will be staying on as a consultant for the transition. This makes me believe it was his decision to leave. As said below, this could be due to not being able to make changes as fast as he wants due to the banks, or more likely he simply got a better offer to work elsewhere. Or he could simply be done working, wanting to be consultant and have more time, or being doing something on his own. I think if there were serious issues (such as problems, not updates taking a long time), he would simply distance himself, and not stay on during the transition to help. So likely not a big deal here. There is still a chance it was mutual or initiated by CDLX, and that Akkerman was understanding of the situation, leading him to stay on to help with the transition. Too hard to know.
4/18/2022
Numbers: I do not except anything surprising. Since the beginning of the year, the number of offers I have in Chase, U.S. Bank, And Wells Fargo are all at all time highs (around 70, 50, and 40 respectively). However, none of the offers are new or that attractive. I believe there were quite a few travel related offers at the beginning of the year that may show up in Q1 earnings (Hyatt, Southwest, Away Travel).
Dosh: There have been a ton of new Dosh partners, the largest of which is likely Crypto.com. Be nice to hear some commentary and numbers around these partners. I do not believe we will hear anything regarding the marquee partner, since I still think it is Affirm with the Debit+ and that card is not officially live (which is what CDLX sounds like they are waiting for).
New Ad Server: It would be great to hear a new bank on the new ad server. The Chase app had a major update with their UI. Not sure if that would coincide with CDLX at all. Wells Fargo offers were down for a little bit, but that could of just been technical issues, rather than from updates.
BofA: I would think we would have to hear an update on finalizing the BofA contract. While CDLX has said they think it will be done by the end of the first half of the year, which gives them 2 more months, I would think they could have the new agreement done by now.
Open Banking: Any additional detail on the new program with TopCashback would be great to hear. Also would be nice if Cardlytics continued to sign up more Open Banking programs.
Bridg: There was some mention of some possible big named partners with Bridg that could get announced. At the last earnings, we heard, “Bridg pipeline remains extremely strong and includes three late-stage opportunities in CPG and grocery” . Also, at one point there was a hint that CDLX was going to be partnering with someone, possibly for product-level offers. Given the new potential Dosh partner of Petal (See the Qualitative Research Notes and Dosh Partners list), and the terms and conditions mentioning both Dosh and Collinson, maybe this is the partnership. Or they are just competing. However, I had some old workers from Linkable Networks comment on my Bridg video. Linkable Networks was acquired by Collinson. So maybe there is an active partnership, and those old employees / owners wanted to know more about Bridg. This is speculation. Likely a coincidence and they are competing.
New Banks: Given Entertainment was acquired to help penetrate the banks that did not want to share their data, maybe CDLX made some progress and gave some other banks Entertainment local offers.
Possible Management Changes: Michael Akkerman, Chief Product & Strategy Officer, is no longer on the CDLX “About Page” under “Our Leadership Team”. I see that this change was made today. Maybe some information will be provided at Q1 earnings. While there could be an external replacement, one guess is Amit Jain is taking over that area as well, given the focus on Bridg, and the importance of integrating it with core CDLX. Maybe things were behind schedule and required trying something new. There have been quite a few Tegus calls regarding the new self-service platform and being behind. I personally very much like Akkerman based on investor day, podcasts, and what I heard from employees. I also like Jain based on investor day and from former employees. It would be interesting if Jain took over, given it would increase the odds of a successful Bridg integration, and it sounds like he is very product focused. One issue in that situation could be if employee sentiment changed and more reflected Bridg’s reviews, which were not great. There would likely be a layer of a management team such that it would not matter as much (i.e., a buffer with younger and newer employees). Overall, I believe if that change was an active decision by Lynne, it is likely positive, given she would not make this decision if she did not think it would lead to an overall improvement for Cardlytics. The other side of the possibilities is if it was instead a decision by Akkerman, which could be a signal of possible issues. Or he simply got a better job offer. More information may be given at Q1.
Third-Party Content Providers: We recently had an update regarding CDLX pushing Rewards Network content. We also know CDLX mentioned leveraging APIs to work with these third-party content providers of local offers. It is possible we will hear more of these partnerships announced.
“In Q4, for the first time ever, we took third party local content, and ingested it, and started displaying it to one of our largest banks in the network, through third party content provider called Rewards Network. So that happened in I think December of Q4 with frankly one of our largest banks.
So even if we’re not ingesting it through self-service, we’ve now built enough technology, APIs, even without the new ad server, that we can start to work with some of those local content providers that are out there, and ingest their content.”
-Lynne Laube, Co-Founder and CEO, Cardlytics, January 2022 Needham Growth Conference
“We certainly have plans to introduce SMB in the platform, but that’s really probably going to be more a 2023 exercise, and not 2022, but we have already started with pushing some local offers for one of bank partners.”
“One of the things we may end up doing in SMB right is utilizing a lot of channel partners. We’ve built into the new ads manager an ability to connect through APIs to be able to partner with other people and bring that content. And over time if it ends up being a lucrative business you could certainly see us you know maybe building out our own team, but certainly seems like the first natural starting point would be to test and learn, bring in that content from an outside source, and probably in 2023.”
– Andy Christiansen, CFO, Cardlytics, December 2021 Raymond James Technology Investors Conference
Q4 2021 Earnings
3/11/2022 (updated notes from 3/2/2022 and 3/8/2022)
Notes From After the Call
As a quick summary:
Core CDLX: Adding more ad agencies with more than 90 advertisers + existing ad agencies doubling spend + acquisition for local & mid-market content + strategic plan to get new banks + potential BofA progress
Dosh: Adding more neobanks and fintechs, and upcoming launch with marquee partner
Open Banking: Adding an additional program with possibly no revenue share, and interest from other programs
Bridg: Three late-stage opportunities in CPG / Grocery
Entertainment Acquisition
One highlight (and surprise) of the earnings call was the Entertainment acquisition, which was purchased for $15M in cash and stock at less than two times revenue.
This acquisition will add more local and mid-market content to the channel. In terms of some numbers, according to their site: 500K+ coupons, 10K+ cities served, 40K+ local merchants.
The plan for Cardlytics is to use these offers on the CDLX platform:
“With our scale, we see an opportunity to materially grow this business. Our plan is to use Entertainment's content on the Cardlytics platform once our bank partners launch our new ad server and roll out the new user experience.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
Where this gets better, were the two different mentions of using the Entertainment acquisition to sign new banks, with my guess being AmEx.
Specifically:
“Additionally, we think this content will help us penetrate other banks who are hesitant to show their data but still want local content.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
and
“And one last point I'll make, and I know I said this in the script, but I do think it's an interesting way for us to penetrate banks that are not quite yet comfortable giving us their data. But let's give you some of our content, let’s give you some of our technology and then but slowly work our way into getting your data, I think could be an interesting Trojan horse for us as well.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
Why this most likely relates to AmEx is the following comment in January:
“So, you know, we’re watching those. They are definitely opportunities. Certainly the one we would love to have is AmEx, which is a home-grown program. Not sure we’ll ever get them quite frankly, because they have this religious thing, as they should, about they don’t want to give their data to anyone. And we need data. So we’ll see.” -Lynne Laube, Co-Founder and CEO, Cardlytics, January 2022 Needham Growth Conference
This shows AmEx is a bank CDLX wants, that also currently has a data hurdle. Therefore, CDLX could give AmEx these local offers first, and worry about the data later.
Where this gets even more interesting is the comment regarding “But let's give you some of our content, let’s give you some of our technology and then but slowly work our way into getting your data…”
We know the ad server and new user experience is needed first based on the comment, “Our plan is to use Entertainment's content on the Cardlytics platform once our bank partners launch our new ad server and roll out the new user experience.”
The ad server would also give the ability for product-level offers and the new bank self-service (“Engage”), and therefore could also be a part of the technology they would be giving AmEx.
In the “Self-Service for Banks” write-up, I mention how the technology of the self-service for banks would also increase the probability of other banks partnering. Even stronger, I specifically mention AmEx, and using the new self-service for banks as an additional way to help AmEx get over the data hurdle.
Altogether you have local + self-service for banks + SKU. Therefore, I think it is now more likely than ever that CDLX could partner with AmEx, a bank many have thought was impossible to get (even despite AmEx wanting to work with CDLX, but just came down to sharing data).
An additional reason AmEx is a big deal is they have a large user base that is also likely more engaged, with $180M statement credits in 2020.
$180M in statement credits from AmEx in 2020 compares to $76M of consumer incentives by CDLX in 2020 and $127M in 2021. Given they have a smaller user base than Cardlytics (I’ve seen online around 63M cardholders, which would be even less MAUs), the higher statement credits is likely a combination of more engaged users + long-running program + higher offer amounts given all billings goes to customer incentives from what I’ve heard. Given the last point, even if we take 1/3rd of their $180M to covert it to consumer incentives as of it was in CDLX for a better comparison, that’s still $60M (compared to $76M in CDLX).
If CDLX came into the picture, I think worst case would be CDLX would not get the share of any of the offers that were originated from AmEx.
However, any offers from marketers that Cardlytics brings in such as from ad agencies using the new self-service component of the new ads manger, or from Bridg / product-level offers (which have lower rev share) or SMB / local from Entertainment (which is what they are after), would likely earn Cardlytics revenue.
And it’s still possible CDLX would get a cut of the existing offers if AmEx moves to the new ad server and UI, and given the “minimum percentage” in the 10-K language above.
A lot of uncertainty, but if we assume CDLX could double the offers and redemption in AmEx through product-level offers, self-service used by agencies, and local/SMB, that could be an additional $180M in billings (since assume that equals statement credits in AmEx), or $126M in revenue (70% conversion), or around $50-$60M in gross profit (but could be higher with lower rev share on product-level data and offers).
Assuming this is achieved at the end of 2023 when core CDLX is supposed to be CF positive, then this could drop to the bottom line (since likely minimal incremental operating expenses based on knowing adding Wells Fargo took little additional costs, the tech is already created, self-service is used, etc.), and at a 20x multiple it would be another $1-$1.2B of value (great in relation to the $15M required to achieve this via the Entertainment acquisition).
However, that is only in the short term. It doesn’t take into account secondary impacts like larger reach with AmEx leading to more advertisers and better and more offers, which then increases engagement and redemptions further. Could also have AmEx existing advertisers start placing offers in the rest of the Cardlytics’ banks.
It also doesn’t take into account the decreased risk of failure for CDLX, or rather the validation / confirmation of their competitive advantages. How many people would continue worrying about other banks doing it in-house if the largest in-house program for many years all of sudden started using CDLX as well?
Ad Agencies
“Speaking of agency and our self-service initiatives, we secured our largest annual agency agreement to date in Q4. This multimillion-dollar contract brings 90-plus potential advertisers to the table for Cardlytics and is indicative of the broader trend we're seeing.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
90 is extremely large and significant when you put it in relation to the “505 logos on the Cardlytics platform”.
“In Q4, agencies more than doubled their ad budgets with us year over year.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
This seems to be in line with advertising agencies saying they would continue to increase their spend, despite their comments of not being fully self-service. Therefore, as said before, this shows that further benefit is still to come as it becomes fully self-service, and it shows not being fully self-service is accepted and an improvement from before, leading to this increase in ad spend. This is even without fully unlocking all the brands and CPGs who will eventually be able to place offers.
“Throughout 2021, we added over 30 advertisers through more than 10 new agency relationships.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
30 more advertisers is great. Given the large agency was signed in Q4 2021, it is hard to know if any of these 30 are from that single large agency.
Altogether, Cardlytics seems on track to match the December 2021 quote of 2022 being a massive growth year for agency spend and mid-market spend:
"We believe 2022 is going to be a massive growth year for us in terms of agency spend in billings and mid-market spend in billings"
-Lynne Laube, Co-Founder and CEO, Cardlytics, December 2021 Raymond James Technology Investors Conference
If Cardlytics can get more MAUs on the new ad server + sign up more Bridg clients to accept CPG ad spend (as discussed next) + partner with AmEx, 2022 could be an even bigger year than most assume.
Bridg
“Bridg pipeline remains extremely strong and includes three late-stage opportunities in CPG and grocery” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
This got me excited, given it shows Cardlytics may soon show a significant unlock in billings and substantially increase the quality of the channel in terms of more offers and more relevant offers.
This could also go together with the new ad agencies who likely have a large number of CPG clients where they would need to be redeemed at grocery stores or supermarkets.
In terms of who the three could be, my thought is the comment on “pipeline” makes it seem that they are not a Bridg client yet. For grocery, Kroger looked to ramp up offers in Q4. I am not sure if they are a Bridg client, but if maybe they plan to be this could be why they started increasing their offers in Q4, by doing more testing before product-level offers go live.
The only other physical evidence for who one of the three in the pipeline could be is Rite Aid, given the offers in Dosh. (I have not seen or heard anyone else besides one individual who has had these product-level offers in Dosh. I really hope we see a rollout across all Dosh partners, including Venmo, and Open Banking.)
The only other large client that could fit is Walmart. This could explain why Walmart, and specifically Walmart Grocery, was shown more than any other company in the updated investor presentation.
Walmart is a client of CDLX and Dosh, but I have never heard anything on them also being a Bridg client.
Now the comment regarding the Bridg pipeline makes it seem more a function of adding new Bridg clients. This could be separate, but a client of Cardlytics (who started advertising in Q4) and who has been rumored as a Bridg client, is Target. Target would also allow for grocery and CPG opportunities. I would think Cardlytics would focus more on clients of both Cardlytics + Bridg first, and where their ad agencies with CPG clients can spend the most money. Target seems like a logical fit.
The odds of seeing product-level offers in the bank channel from Target are pretty high, given they are now advertising in Chase as of Q4.
This to me showed Target would soon be placing product-level offers (or from the new ad agencies with CPG clients), even before the information supplied at Q4 earnings. The reason is I wouldn’t think we would see someone like Target ever place an offer without product-level offers, so maybe they know it is coming soon and are testing offers in general. In terms of numbers, I think having Target on the platform to allow product-level offers will have a significant positive impact on its own (as discussed next).
There are a few important ideas related to Target that Cardlytics should take note of.
One is the “Target Circle” app and loyalty program. Speaking with my wife, she said, “I always look at the Target Circle offers before I go into the store”. This should be a goal of Cardlytics, getting users to think like that for all shopping. My wife redeemed offers totaling $23.17 in 2021 and $10.49 in less than 3 months through 2022. I believe these high amounts show what will be possible with Cardlytics when they add product-level offers and more stores that are relevant to the users, such as with grocery or supermarkets. This is why I got excited with the Bridg update of the three late-stage opportunity in CPG and grocery.
If this was in Cardlytics, and if the $2 of revenue / $1 of consumer incentive continues to hold up (which through 2021, it has, and we will discuss this more later in the section on numbers), then that implies about $46 of ARPU in 2021. If you annualized the $10.49 in 2022, you get about $55 in consumer incentives, or $110 in ARPU. Average of those two years is $78. This is from a single store, and without better targeting with purchase data from outside of Target. Therefore ARPU could even be higher with Cardlytics from better data, and then benefit from additional ARPU from other stores.
Imagine Cardlytics replicating this across all major stores, and aggregating all these offers in one central location of your bank app, rather than several loyalty program apps, increasing the odds of users seeing and engaging with the offers. Then you also have the benefit of more users, not limiting yourself to those who have Target Circle or any given loyalty program PLUS the benefit of having transaction outside your store for better targeting. With those two factors, it becomes easier to see why Starbucks is a client of both, and why it should be easy for Cardlytics to convince others (including Target). I will discuss social proof in the open banking section, where the logic applies here as well, that as Cardlytics signs the biggest and most well-known loyalty programs, more will do the same, as they realize a loyalty program is not enough on its own due to its limitation in users and data.
I believe there are relevant offers out there for all 175M MAUs, and given you have the purchase data, it should be easy to match the offers in the right amount with the right users to get redemptions. The problem up until this point is having enough advertisers and offers to accomplish this. Therefore, the progress of adding all the new ad agencies with CPG clients and now adding more Bridg clients in areas like grocery, it’s hard to think Cardlytics cannot get the right offers to the right people and have similar results to my wife at Target, but across multiple stores and possibly with better results from better data.
Additionally, other investors say, “how often do people go in their banks apps or spend time there?” Beyond the point of not needing to spend much time in a bank app for these offers since users are choosing to look at the ads which are in an aggregated and organized location that only takes seconds to view, if you have more offers + higher in amount offers + relevant to the user in both location and product, there is the opportunity to create a thought similar to my wife at Target, where “I always look at the Target Circle offers before I go into the store”. Then it doesn’t matter even if the bank’s hide the Cardlytics offers. If the offers are that good and relevant, leading to users actually earnings / saving money, they will find it and use it. (“Be so good they can’t ignore you”)
There is simply such a massive opportunity here that I hope Cardlytics takes advantage of.
For more detail on Bridg, see the following write-up.
For a product-level offers update, see the following write-up.
Local / Mid-Market + Ad Agencies + Bridg
These three updates alone show the overall progress Cardlytics has been making towards significantly increasing the number of offers and billings in the bank channel. I believe some get too focused on quarterly numbers, such as comparing ARPU, and miss what is going on with the business.
When you start combining these together (local + ad agencies + product-level offers), I feel we will start to see some compounding positive benefits. In the simplest form, more offers increase the odds of an offer being relevant to a user, increasing odds of making a qualifying purchase, and Cardlytics earning revenue. You also have CDLX adding more ad agencies with CPG clients who can then also place product-level offers with the new Bridg clients. When you layer on lower revenue share with SKU, and then lower incremental operating expenses (tech already created, not much additional employees needed, self-service platform, etc.), I feel it is easy to see how Cardlytics will get to cash flow positive by the end of 2023 (as management has targeted) through just these new additions.
As a reminder, the local and product-level offers require the new ad server. This is why it is imperative Cardlytics gets all bank partners on the new ad server as soon as possible (hence the management goals of 50% of MAUs on the new ad server by the end of 2022, and the rest by the end of 2023).
Open Banking
“The year-over-year growth in the U.K. was aided by our open banking solution. The Nectar Connect program now has nearly 0.5 million members, making it one of the largest open banking initiatives in Europe.
Due to the success of this program, we've seen strong interest from other large U.K. brands, and we're on track to launch a second open banking initiative in Q2. We will be running a pilot with TopCashback, one of the largest traditional affiliate publishers in Europe with over 15 million U.K. members.”
- Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
One thought I had before this update provided at Q4 was that we could possibly see a similar pattern unfold with open banking, regarding social proof. We have seen this in other areas of the business, where Venmo was the social proof for Dosh to get more neobanks/ fintechs, and you could even say BofA was that for the rest of the banks.
My thought was Nectar Connect could be that same catalyst that leads to other programs using CDLX. The reasoning is due to the first mover advantage and being a larger program. If you add in Cardlytics experience with analyzing and advertising based on purchase data, and then layer on their trust from even the banks, I thought combined it could lead to more programs using Cardlytics for their open banking initiatives (this could also happen with loyalty programs in the U.S., given Starbucks is using both Cardlytics and Bridg).
This is why this update was big. We now know this social proof is actually occurring, based on the news of the next pilot with TopCashback (which should just add to the social proof, and have a snowball effect).
Beyond the single new program, we heard, "due to the success of this program, we've seen strong interest from other large U.K. brands". This shows the new interest is a function of the success of Nectar Connect + being one of the largest open banking initiatives.
As CDLX signs more open banking partners, advertising reach also increases, leading to more advertisers and more attractive offers, which increases engagement with the existing loyalty programs, which then attracts even more programs, increasing the reach further and so on. As a reminder, there has been outsize ad demand in the U.K., where CDLX has not reached enough scale to meet that demand. Open banking could be that answer.
Additionally, the increase in Nectar Connect members from 65K to now 500K users is quite impressive. Given these users have to opt-in, unlike the banks, these users are much more aware of the offers and likely to be more engaged. This to me is a key insight that should not be ignored. When you combined that with 0% rev share and near 100% gross profit margins, it will not take much to produce significant cash flow from this business. On top of that, as mentioned before, as Cardlytics grows and adds more partners, it increases the advertising reach, which attracts more advertisers and more offers. This should lead to increasing opt-ins and engagement in the existing programs like Nectar Connect.
After thinking through the details and numbers, there are some reasonable scenarios where the current market cap could be covered by open banking initiatives within the next 10 years, even in scenarios where the revenue from the other lines of business all go zero. That’s the benefit of a low market cap and a company with so many different ways to win. In order to increase the probability of this occurring, Cardlytics needs to continue to have focus on open banking, add more programs, and leverage Bridg.
Note: I’m currently working on a full write-up / video on CDLX and Open Banking. I believe there is a significant opportunity here, and the odds of that occurring have dramatically increased with this news shared at Q4. My plan is to release it soon. If you would like access to my current notes and work on this now rather than later, see here:
Cardlytics Quantitative Research Notes (Notes on TAM, How Good Could it Get?, FI Share: When 0% and When 100%, Reverse DCF)
Neobanks / Fintechs
“Additionally, despite a delay, the marquee partner we mentioned last year is scheduled to launch the Dosh program in Q2”. - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
My heart started pounding when Lynne started saying this! I thought for sure the name was finally going to be revealed. I still think it is Affirm, as discussed in the following write-up. Affirm and their Debit+ card is still not fully live. It is on a waitlist. Someone else mentioned CDLX is waiting until this unnamed partner’s debit card goes live. That does not guarantee its Affirm, but combined with the points made in the write-up linked above, I still think it’s Affirm.
"With Dosh, now have 13 publishers live with the program and 19 publishers under contract and scheduled to launch later this year." - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
These numbers took me by surprise. I have recorded 16 Dosh partners confirmed, and 18 when including suspected partners.
Does that mean 14 or so unknown new CDLX/Dosh partners? (The 14 comes from 13 live + 19 under contract = 32 total - 18 suspected = 14 unknown).
However, it could be 19 total instead of 32. If Lynne stopped at “19 under contract” I would more likely think 19 total, but the other comment of “and scheduled to launch this year” makes it seem like a separate 19 partners. Also, if it was 19 total, I think CDLX would have said "With Dosh, now have 13 publishers live with the program and 6 more publishers under contract and scheduled to launch later this year."
Although Dosh is more an insurance policy in the situation where primary transactions shift away from traditional banks and move to neobanks and fintechs, there is still some value in the scenario that does not occur. I still believe there is a way to get users to redeem rewards in these channels, leading to additional revenue with higher gross profit margins (since lower revenue share, as per CDLX investor day). I will discuss more on this front in the next section.
For more information, and to see my continually updated list of Dosh partners:
Open Banking + Dosh Opportunity
I believe Open Banking has the potential to be a cash cow for Cardlytics, and that there is still untapped value with the neobanks / fintechs even if primary transactions stay with the banks.
In order to realize that value, it will mostly be a function of increasing the number of offers and relevance of offers. That is where there are further crossover benefits with the progress discussed at the beginning.
At least with the neobanks and fintechs, Cardlytics needs to leverage the advertisers placing offers in the bank channel and also place them in the neobanks / fintechs. Given you may not have the same level of purchase data for targeting, possibly make them only 5% cash back, or even less to match other Dosh offers.
Additionally, add the local offers from Entertainment and product-level offers from Bridg (which I have already seen in Dosh, but is not on everyone’s account, nor in other partners like Venmo).
We have heard open banking can add product-level offers via Bridg, so that will help. However, given there is much less scale to meet the ad demand in the U.K., Cardlytics needs to continue doing what they are doing, and add more programs to increase the advertising reach to attract more advertisers.
Further benefits could come from giving the open banking partners “Engage”, the self-service for banks, and adding self-service within partners like Venmo for Venmo Business Accounts who accept their payments through Venmo.
It only takes one high value and relevant offer for each user in these channels to produce significant revenue / gross profit / cash flow, and make it all worth it.
This is simply another substantial opportunity available for Cardlytics.
BofA Renewal
“Our BofA contract renewal is going well, and both parties are confident that our mutually beneficial relationship will continue for years to come. Both parties are working hard to get this done so that we can launch the new ad server and the experience it enables.” - Lynne Laube, Co-Founder and CEO, Q4 2021 Earnings
The comment regarding the new ad server and experience makes it seem as though BofA already agreed to take it. On the other hand, it is also possible BofA has not agreed to taking the new ad server yet, and this is what Cardlytics is holding out for (since CDLX is the one holding out, as will be discussed later). However, it could be more a function of ensuring Cardlytics is the one hosting the tech and allowed to put it in the cloud, given CDLX has mentioned how banks have been hesitant on the cloud aspect, and knowing that these were negotiating items. If that is the case, it likely means progress has been made with the negotiations, with BofA at least agreeing to the new ad server.
In the 10-K, there was an update on the BofA contract:
“The GSA has been extended through August 31, 2022 and, if not extended again, will automatically renew for one-month periods thereafter unless terminated earlier in accordance with the terms of the GSA.”
This shows that the contract was extended through August 31, 2022, and even if not extended again after that, that is still okay, given they can still go month-to-month.
Remember, CDLX is the one holding out! This is such a key point that I feel goes ignored. This comes from the following quote, saying “We’re holding out…”:
“I am 100% confident we’re going to get this thing signed. We’re holding out, to get the right things into that contract.
We are effectively operating on a contract that was signed by BofA and us in 2010. So we’re trying to make sure we get things like, ‘we want to host for you, it’s going to be in the cloud, you need to adopt the new ad server’, those types of things are what we are negotiating right now.
The contract auto-renewed as expected. Both parties signed it at the end of the year. We’re exchanging redlines, with great conversations with them just last week. I think it’s sort of on us to give back the next set of redlines that we are hoping to do quite soon.”
-Lynne Laube, Co-Founder and CEO, Cardlytics, January 2022 Needham Growth Conference
One may think that CDLX is simply just saying that. However, recall CDLX has even more leverage now following the Figg / Rewards Network situation (if we have all the correct information).
For more information on the BofA renewal, and discussions on leverage and what is happening, see the following:
Chase on New Ad Server
As discussed in the last post on “Self-Service for Banks”, I was quite sure it was going to be announced that Chase was already on the new ad server.
The biggest piece I kept going on was the investor day comment of:
"Chase is also, as Michael mentioned, on track to take the new Cardlytics ad server and UI by the end of the year, which will continue their engagement growth trajectory." - Farrell Hudzik, Executive Vice President, Financial Institutions, Cardlytics Investor Day Presentation
However, it is likely that it simply got delayed.
Maybe something will transpire during 2022 to help hit the goal of 50% of MAUs on the new ad server by the end of 2022.
Q4 and Full Year Numbers
I do not want to get too in the weeds on the numbers surrounding Q4 and year-end 2021, as I feel it is more important to focus on the updates that will impact the business long term, rather than short-term results. However, I will focus on the numbers that relate to how the business could look in the end state.
Summary
Here is a summary from the CDLX Quantitative Research Notes:
MAUs
MAUs continue to increase. We could see a significant increase with the signing of a new bank, like AmEx or USAA (as discussed in the Entertainment acquisition section). Today, there are around 175M MAUs.
One change quarter over quarter was adding Venmo to the list of bank partners. I would be curious to know of Venmo is included in the 175M. If they are, they would only be including the small number with a Venmo debit card, and not include the now 83M using Venmo and who likely all had access to the Dosh QR Code offers.
Gross Profit %
Gross Profit % is the highest in four years. This is likely a function of the following from the 10-K: “Partner Share and other third-party costs increased by $32.0 million during 2021 compared to 2020 primarily due to increase in billings partially offset by an increase in Consumer Incentives funded by partner through a reduction of Partner Share.” I think it could be another year or so until we see the increasing overall gross profit margin from the lower revenue share with Bridg.
Operating Expenses %
OpEx as a percentage of revenue (tracking for operating leverage) increased in 2021. This is likely a function of the Dosh and Bridg acquisition. I expect this will decrease significantly over time.
ARPU
ARPU increased even with the increase in the MAUs. This is impressive since it makes it more difficult to achieve ARPU growth with an increasing denominator / MAU base.
Rev / CI
Revenue / Consumer Incentive (Rev / CI) held above 2. I track this to see if I can still use this assumption when doing bottom-up analysis (such as in the earlier section on Bridg and Target).
CPS vs CPR
Cost per Served Sale (CPS) % decreased, with more share of CDLX platform revenue going to Cost Per Redemption (CPR), and reaching the highest percentage in four years.
Engagement
An interesting stat is now knowing how many unique MAUs are activating offers.
The important numbers are:
Engagement Rate of 29.84% (=51M / 170.925M)
Average Revenue per Engaged User at $5.24 (=$267.12 / 51M)
Average Consumer Incentive per Engaged User at $2.49 (=$126.96 / 51M)
Now it is still possible CDLX gets paid when an offer is not activated but where there was an offer and the user makes a qualifying purchase under the CPS pricing model. Therefore, there is likely a portion of revenue not attributable to the activated offers and engaged users. However, I would assume this is likely minimal. Additionally, I would even assume that in these cases that the user who made the qualifying purchase was someone who activates offers and simply did not activate that particular one. Therefore, the Average Revenue for Engaged Users at $5.24 is still helpful to know.
However, I feel the more accurate and important number is the Average Consumer Incentive per Engaged User, which is $2.49. A user only gets the consumer incentive if they activate the offer, so this number should be more accurate given we are basing engaged user off of the MAUs activating offers.
This is also why it is helpful to know if the ratio of Rev / CI is holding constant. We can then take these two assumptions and see what revenue would like with higher engagement rates (higher than the current 30%). And I believe we will see that percentage of unique MAUs activating offers increase as CDLX sends more emails and push notifications following the rollout of more offers from self-service + product-level offers + SMBs / local from the Entertainment acquisition + new ad server and new UI and more. CDLX has mentioned waiting to “activate” these users, and I think that is the right decision. You do not want a bad first impression with the offer section.
Closing
One way I like to tie all the above points together and think about it from an investment perspective is by thinking of individual paths with their own scenarios and probabilities, and adjusting those probabilities based on new information (Bayesian inference).
Essentially we have the core CDLX business, Bridg, Dosh, and Open Banking. Each have their own value from how much cash flow they can help generate. For any given one of those scenarios, there is a corresponding probability, leading to the expected value today. (Note: I may do a more in-depth write-up on this topic in the future, but for now, just know I am thinking in terms of each line of business separately and what they could produce in terms of cash flow if completely independent, which leads to some fun lines of thinking, since can support the entire market cap of CDLX today from any one line of business under certain scenarios, leading to a large margin of safety today).
Based on the updates from Q4 that were discussed in this post, it looks like overall Cardlytics’ business continues to improve, with the probability of each good scenario increasing. Specifically, the probability of each increases from:
Core CDLX: Adding more ad agencies with more than 90 advertisers + existing ad agencies doubling spend + acquisition for local & mid-market content + strategic plan to get AmEx + potential BofA progress
Dosh: Adding more neobanks and fintechs, and upcoming launch with marquee partner
Open Banking: Adding an additional program with possibly no revenue share, and interest from other programs
Bridg: Three late-stage opportunities in CPG / Grocery
Therefore, as the business and each line of businesses continues to improve, the probability of one of the great scenarios occurring increases as well, which leads to higher expected values today.
I also added these updates (in purple) to the flywheel I’ve shared previously, to get an idea of how all this can work together (only a rough thought process):
I look forward to seeing what occurs throughout 2022.
2/28/2022
My Notes and Thoughts Before Q4 2021 Earnings Call
Other possible announcements:
Launching the new ads marketplace with auction-based pricing (may wait until more banks on the new ad server, but possible if Chase is on, as discussed below)
Venmo adding Dosh offers to their credit card (based on updated investor slides updated at Q3 earnings call date)
A bigger possibility: On 2/25/2022 below, I mentioned the “Low likelihood” announcement of a new bank partnership, based on the Horizon Media’s comment saying they think CDLX signed a new bank in Q4.
While working on my latest write-up (that I will post tomorrow morning), I realized there could be a higher likelihood of that occurring than I originally considered. One is it could be CDLX is using the self-service for banks to convince others.
AmEx at one time was even interested in working with Cardlytics. From comments by Lynne, it came down to sharing data. Maybe this new self-service platform for banks will be the extra push AmEx needs to get over the data hurdle, since they can continue doing what they are doing in a similar capacity but then get all the other benefits of Cardlytics.
Or it could be that this new self-service for banks + SKU and more, it makes it easier to convince Figg bank partners to switch to you CDLX, like USAA. However, I believe USAA is smaller, not matching the comment of a “big bank” made by Horizon Media. However, maybe USAA is bigger in the sense of being more digitally engaged. With around 13M members as of YE 2020, maybe still could be considered a big bank. Additionally, I’ve heard from others that when asking management how they will hit the 50% MAU goal, banks such as US Bank, Chase, and a small bank were specifically mentioned, with possibilities of BofA and Truist. The small bank unnamed could be USAA (given US Bank and Truist were mentioned separately).
My last thought is it could be instead that a new bank wasn’t signed, but the advertising reach via MAUs that could now receive SKU offers increased significantly. This would come from a large bank adopting the new ad server. If they do that, it would allow for product-level offers, and would lead to a large increase the MAUs that an ad agency with their brands and CPGs could advertise to. Therefore, is is possible this is due to Chase adopting the new ad server. This would also explain why Horizon Media, with a large number of brand and CPG clients, would get a hint of this. Also explains CDLX mentioning Chase as one of the banks to help get to 50% MAUs on the new ad server by YE 2022. Also matches investor day comments and more clues (that will be discussed in my write-up that I will post tomorrow).
Or maybe, we will get both: Chase on the new ad server + a new bank partnership!
2/27/2022
My Notes and Thoughts Before Q4 2021 Earnings Call
Extremely exciting point:
In that December conference, it was said when discussing the self-service for banks that "not only does this new ads server...but it also opens the ability for you, bank, to customize your program..."
This makes it seem that the only way to get or use the new self-service for banks is if you take the new ads server. This is in line with Lynne calling the self-service for banks the “carrot” for BofA. Therefore, it may not necessarily be that the new ad server is needed as a technology requirement for the new self-service for banks, but rather banks will not be given the new self-service platform unless they take the new ad server.
Could it be Chase has already adopted the new ad server?!
Combining the four clues below in the 2/26/2022 notes (investor day comment + 50% MAU goal + stronger clue + weaker clue) + bank self-service also requiring the new ad server makes it seem like there is at least a decent chance Chase has already adopted the new ad server and also received the new self-service for banks. This could be announced at Q4 earnings.
Seems hard to think this is not the case given all the clues, but nothing is certain.
For those curious, this is a big deal for many reasons.
One is it shows execution on areas that everyone has been worried about: differentiation, banks doing it themselves, and management executing!
For more details on the differentiation and decreased risk of banks doing it themselves, see the related section on the “How CDLX Banks with Differentiate: Bank Self-Service” here (if the footnote changes, such as viewing this section some time after this was originally written, see the section in the Qualitative notes and reference the Table of Contents).
Additionally, if Chase is on the new ad server, there are the extra benefits of:
SKU / Product-Level Offers (see past write-up on Bridg and Quant Notes for valuations with the current specific section here)
New User Experience and Higher Engagement (like the minimum 200% increase in click rates discussed during Jan 2022 conference, which can be found in the Qual Notes, with the current specific section here)
Push Notifications like US Banks
and more
2/26/2022
My Notes and Thoughts Before Q4 2021 Earnings Call
Chase and the New Ad Server
There were two different comments during the Cardlytics investor day presentation regarding Chase adopting the new ad server by the end of 2021. For more detail, see the related section here (if the footnote changes, see the investor day section in the Qualitative notes).
This could be why Cardlytics had the goal of 50% of MAUs by the end of 2022, knowing they would be getting large portion from Chase right away. This could also be why they broke up the goal in two years, knowing they would be getting Chase soon and hitting that goal.
Two clues other that Chase may have already taken the new ad server (beyond the explicit mention at Investor Day and saying by year end 2021, and the goal of 50% of MAUs by end of 2022):
Strong Clue: Given Target now is advertising in Chase, it could be product-level offers are starting soon, where the new ad server is needed first. The reason being I wouldn’t think we would see someone like Target ever place an offer without product-level offers, so maybe they know it is coming soon and are testing offers in general.
Weaker Clue: I have noticed a few offers that are always in the entry offers (the first three you see before seeing all the offers), such as ESPN (since their logo used stands out to me). While this may be a coincidence, and maybe seems like nothing even if it’s not a coincidence, US Bank, who is on the new ad server always shows the same first offers in the same order. This may be a function of the new ad sever, possibly related to premium paid placement. Therefore, this similarity may show Chase is also on the ad server.
2/25/2022
Thoughts on Possible Results and What Could be Released / Discussed / Announced
In addition to the items discussed on 2/9/2022, the following are possible announcements:
Higher likelihood: I think we may hear a positive update on product-level offers. Not only have I heard Bridg is a priority in CDLX, but very recently there have been new advertisers on Cardlytics that I wouldn’t think they would ever advertise without SKU. My thought is maybe they knew SKU / product-level offers is coming, so they testing out the platform. These include both Target and Best Buy. Best Buy may have been advertising throughout 2021, but in increasing amounts. Target only started in December 2021 it sounds like, with possible one campaign ending Jan 10 2022.
Medium likelihood: Given the increase in Chase Sapphire Reserve Exclusive offers, it is possible Chase already has the bank self-service and is placing offers. Or maybe it is in testing phase with Chase. The reason this is more possible is CDLX said the bank self-service will allow banks to do what CDLX has been helping Chase do, but on their own. Therefore, it is likely in relation to the exclusive offers. And given in the sudden increase in exclusive offers, it’s possible it’s due to Chase doing more on their own.
Low likelihood: A new bank partnership. This was a rumor by one of the ad agencies. The only reason I still think there is a chance is why would they think this, unless they had a reason to do so? Maybe they heard something? If I recall correctly, their guess was Capital One.
2/9/2022
Thoughts on Possible Results and What Could be Released / Discussed / Announced
In terms of numbers, I feel CDLX likely had a good quarter
We already heard from management that results should be near the high end
There was a significant ramp up in the number of offers and new offers in Q4
I heard AT&T increased their offers significantly (I saw offers on most cards and Dosh, and all in high amounts)
Travel started returning
Possible Allbirds offer results will show up in Q4
Possible mentions of IDFA tailwinds (not headwinds), which could have contributed to higher than expected results
Could hear an update on the new bank self-service, where they use Allbirds a recent example of what someone like Chase could start doing on their own
Possible good BofA Update or announcing the renewal (Truist renewal was announced on same day of Q3 2021 earnings)
Possible announcement of the neobanks / fintechs, given they have been announced individually throughout the last couple of months
Possible announcement of the new innovative fintech partner. I still believe it is Affirm. Funny, when BNPL was all the talk last year, everyone was paranoid about it for Cardlytics. If CDLX and Affirm partner, I wonder if people will even react? I feel they should, due to previous concerns of BNPL, and also given Affirm would be a significant partner, both in size and brand
Could mention Target now advertising, which could possibly be related to product-level offers
Could get an update on Chase and the new ad server. At investor day it was mentioned Chase was on track to take the new ad server by the end of the year. Since then, it has never been mentioned, so it could be a nice surprise to others.
2/6/2022
IDFA, CDLX, FB, and More
Cardlytics could benefit from the IDFA tailwind. Seems like FB has been seeing more of the negative impact of IDFA, based on Facebook's last earnings call, where they discussed the decreased ability for targeting and measurement, such as saying "we expect the overall targeting and measurement headwinds to moderately increase from Apple's changes and from regulatory changes in Q1 and throughout 2022"). This could widen the gap of targeting and measurement capabilities between Cardlytics and Facebook / others.
Further benefits could been seen over the future of more privacy concerns / regulations and having less targeting nd measurements ability. This was confirmed by Sheryl Sandberg's Q4 comments saying "Over the longer term, we need to develop privacy-enhancing tech to help minimize the amount of personal information we learn and we use".
Q3 2021 Earnings Call
11/2/2021 - Q3 Earnings
Quick Notes While First Listening
99% of campaigns are built on new ad manager
Ad server
Will allow product level, time specific,
US bank - will soon have product level offers!
50% MAU by end of 2022
BofA may not be renewed until next year, due to ad server
Fully expect to reach a deal
Dosh will not be a separate company
Bridg signed cinema client
400% increase from a restaurant, due to combined insight between Bridg and CDLX
Thinks IDFA will be a tailwind, but hard to say
Highlights
Product-Level Offers
US Bank will soon have product level offers. This is due to being on the new ad server. While no exact date was given, "soon" is still earlier than I was expecting. I am curious if they will upgrade to the new UI at the same time.
Venmo
Some pages were updated QoQ in the Investor Presentation. Looks like there is a planned update to the Venmo Rewards UI. This is a good sign of them not leaving for 100% Honey (if expected, likely would not update). Also interesting to see a gas offer of "$0.25 / gal Cash Back". (Using Chipotle in the pic could also be the significant restaurant that renewed)
BofA Resigning
In terms of BofA resigning, although it may be delayed (sounds like due to the integration requirements of the new ad server), it sounds like it is fully expected that BofA will resign. Between that, and Lynne's comments on the "competition", it should put some worries to rest.
400% Increase in Ad Spend
I believe the 400% increase in ad spend by a restaurant client (due to the combined insights provided by being a CDLX & Bridg client) is Panera (they mentioned more than doubling ad spend, and are a client of both).
Seems like a good signal, as more may start to use both.
Although the exact restaurant client doesn’t matter as much, it is also very possible the restaurant client is someone else, such as Chipotle, who may not have been spending much in the channel previously, and a 400% increase is coming from a smaller base. And also based on the updated picture above
Better Quotes
“We're working very closely with our major banks to launch the new ad server and have received significant positive interest thus far. While we expect the full adoption process to be a two-year journey, we aim to have greater than 50% of our MAUs connected to the new ad server by the end of 2022.”
- Lynne Laube, Co-Founder and CEO, Cardlytics, Q3 2021 Earnings Call
"And now really the focus of 2022 is about getting that new ad server installed into all of our other banks. We have publicly said we're shooting for more than half of MAUs to be installed by the end of the year. That is an aggressive goal, but one we are very committed to doing, because it is so important for future growth."
- Lynne Laube, Chief Executive Officer, Cardlytics, Q3 2021 Earnings Call
My Notes and Thoughts Before Q3 Earnings Call
Notes taken as of 10/10/2021
Higher probability of an announcement and work on better results (given Lynne has mentioned staff is paid with stocks, and could have turn over with prolonged underperformance)
Could of simply notified more users of the offers via emails to get better results this quarter (even though waiting to turn this up until new UI / more offers / more relevant offers)
Large number of possible announcements
Haven't officially announced any partners beyond Zolve…and only via a blog post, not an official SEC 8K release
Possibly more neobanks / fintechs signed up, in addition to the 14 announced last quarter (maybe Revolut, a large neobank, since they look to be updating their rewards section…currently one offer, instead of many before)
Possible other traditional banks signed and will be announced (hasn't happened in a while, but increased possibility given self-service and more offers, new UI results are promising, SKU possibilities)
Announcing more banks planning to go to new ad server, such as Chase / Wells / BofA (matching up with resigning)
Possible announcement of BofA resigning (some may be nervous they will not resign, given more are thinking about worst case scenarios at these depressed prices)
Possible news on integration of Bridg timeline (some may assume this might not happen on time or not at all)
Announcing push notifications are live at US Bank (some investors thought it would never happen)…occurred in August, so Q3 related.
Announcing self service agency results…I believe they were supposed to start Q3
Announcing more agencies using self-service. Went from 2 to 27 I believe, so more would be very good
Announcing self-service billing numbers in Q3. Was this simply not broken out, or were numbers treated as zero? Given increase in number of offers in September, seems like self service usage had to of increased. If going from zero to full amounts (instead of previously reporting and only showing an small gain), it could lead to a surprise in results…but I feel this is doubtful this is the case, since should be reflected in Q3 guidance given (ie, they would know they are going to be reporting on it…and therefore it is more likely it has always been included, but now will be broken out).
Given Tegus interview with Panera and increasing ad spend, could see an announcement regarding increases in ad spend
Could have announcement on more advertising resuming ad spend (not just travel related) but people like McDonalds, with their large offer for app only.
Announcing new advertisers due to self-service and success, like Gas!
Given more time with iOS14.5, could see increase in ad spend due to lower returns results on FB than CDLX
Could have announcements related to previously announced issues (no chicken, no travel offers…both of which I have seen and used)
Could simply announce better results than expected (the previous items are more qualitative than quantitative). Even if small redemption of Venmo Panda at $10, Uber Eats at $16, or Travel related, since higher ad spend…wouldn't take much to get to first $100M revenue quarter, when estimate is around $60M. Also, starting in September, I started getting more offers than I ever had before. Also heard from others started to see local offers like Dosh, matching affiliate marketers using CDLX
Early success of Chase Exclusive expansion, such as Allbirds (friend just used, and people on twitter seemed to think it was very good)…also proves that the better the offers, the more people will use
Could be announcement related to this that banks are putting more into the program, or using their revenue share for this purpose! Also could mention Venmo promoting offers.
Sentiment by Other Investors Over Time
2/8/2022
See some others who are reflecting on CDLX, and assuming they have made incorrect assessments about the company. However, this thoughts looks to be a function of the current price decline. It’s as if the price was reversed, they wouldn’t be reflecting on this, and would not be thinking an error. Which I don’t agree with as a way to think about whether you are right.
10/12/2021
Multiple DMs from people on twitter. Almost all are pointing out negative stuff
Management missing guidance and thinking they are lying
Questioning if this even works for advertisers (it does, based on interviews with companies like Panera and Dunkin)
Fear of neobanks taking over (Despite Dosh and making good progress)
Fear of Venmo leaving for Honey (they read a second level source…where the earnings transcript never said this.)
BNPL fears
BofA not resigning
Not sure there is any optimism in the current stock price!
5/10/2021
Other investors later this day started messaging me, starting to question everything.
Someone question if CDLX actually works
Need to be greedy when others are fearful!
Thoughts on Market Price Over Time / My Actions
(#154) 3.28.2023: $2.60 / share * 33.6M Shares ~ $87M Market Cap
With CDLX under $3 / share and under a $100M market cap, I’ve been trying to buy as much as possible. So much so, that I couldn’t sleep for a while last night, while trying to think of how to buy more.
I don’t lose sleep over stock prices being lower in terms of worrying about the unrealized losses or if I’m wrong or if this goes to zero, given I instead focus on the business, not the stock price (Note, the stock price being lower does impact CDLX with the earnout. I discussed why I am less worried in my last notes, at the end of this post.).
I do lose sleep though from the stock prices being so low and feeling I am not doing enough to take advantage of the opportunity (at least for this specific situation with CDLX).
I can live with an investment not working as expected and learning and building back up, but I can’t live with an investment working as expected and not taking full advantage of the situation and living in regret. Maybe I’ve heard Munger’s Belridge Oil story of regret too many times?
But while I was driving this morning, I came up with some unique terms for another private loan with someone I have been in discussions with, which led to them agreeing (the last two loans were about finding what was causing them some hesitation, and addressing that in the deal terms…no different than when I negotiated for real estate).
I was able to use this private loan today to purchase a significant number of shares in relation to my current share count, and bring my average purchase price / cost basis down as well.
I will likely share more details on all my loans in the future, especially given some are quite unique. For now know:
I only use leverage for my personal portfolio (not for others)
No margin / callability (so no rug pull, which would of hurt me in the recent past, so I’m glad I always avoid it)
If all holdings go to zero, the loan amounts are reasonable in relation to future income with me being able to pay back quickly given an opportunity with my job (and if that doesn’t occur, I still have my current job to pay back, and if that goes away I feel confident in my ability to get another job given my experience and credentials and my line of work)
Nearly all backed by collateral (so high protection if all else fails)
The purpose of this section is really for my own records, and to be able to reflect on later, especially if this investment does not go as I expect, or if one of the lower probability outcomes occurs.
I do think that statement highlights an important aspects for how I have been thinking about CDLX, or even investing in general. I know where this investment can go wrong, or rather, where CDLX can fail. I also recognize things can change and the unexpected can occur. So for things like how others fear the Bridg earnout, I recognize this can lead to a bad outcome, but I also I see a much higher probability of CDLX being able to afford those earnouts, and get past this short-term fear and start realizing the long-term potential.
This reminds me of Buffett’s GEICO investment:
“This is risky,” he [Buffett] told Don Graham. “It could go completely out of business. But in insurance it’s very hard to get an edge, and they have an edge. If they got the right person in to run it, I think he could turn it around.”
For Buffett, “the question was whether Byrne really was cool, unflappable, and professional, or whether he just didn’t know what was going on.” He decided that Byrne “understood insurance very well and had the analytical abilities. And he was a leader and a promoter. GEICO needed an analytical leader to figure out how to solve its problem and it needed a promoter to make that sale to all the constituencies that were involved.”
...
“It’s pretty uncharacteristic of me, but today I bought some stock that really might be worthless tomorrow.” - He [Buffett] had just called Bill Scott back in the office and placed an order for half a million shares of GEICO for Berkshire, leaving another order to buy millions more as stock became available. Scott put together a huge block trade, buying $4 million worth of GEICO for him.
This ended up being one of Buffett’s best investments.
The similarities to CDLX’s current situation are quite large, especially with a new CEO coming in as well, but I’d argue the probability of CDLX being “worthless tomorrow” are much lower.
I do find it interesting how more investors do not think this way, for the few rare opportunities were the upside is so many multiples more than the offering price given the long-term potential, as long as the company makes it through the short-term (where with CDLX, the current information makes it seem very likely). But I guess most do not want to lose anything, and are averse to loss, which is understandable (especially for funds with LPs).
But that is likely why this opportunity exists. With many not investing, or even selling, given the fear of CDLX going to zero (even if it is a very low probability, with it much more likely CDLX does not fail from the Bridg earnouts).
(More notes regarding Buffett’s GEICO investment are in my General Research Notes, when discussing Jack Byrne)
10.16.2022: $7.23 / share * 32.9M Shares ~ $238M Market Cap
The current CDLX market cap of approx. $238M is quite interesting. If you would have told me a year ago Chase was 100% going to leave, I wouldn’t have expected the company to trade even this low.
If you remove the 65M+ of Chase and assume 110M MAUs, and even just assume $10 ARPU 10 years from now, that is $1.1B in rev (possible with current clients and agencies), $440M GP (assuming 40% GP margin), $240 operating income (assuming $200M OpEx), and about $200M in cash flow (assuming 17% effective tax rate to match Google and FB). At 20x, that’s a $4B company. Then you have further upside if CDLX could sign more banks, have higher ARPU especially with product-level offers and as more understand the actual incremental returns, see higher gross profit margins from Bridg, grow & monetize Dosh and the neobanks (Venmo with 83M users and Credit Karma with 110M), take advantage of Open Banking, and more. Therefore I don’t think this market cap even makes sense if we knew for certain Chase was gone today (when in reality, they are most likely staying).
For instance, according to the 2017 10-K, “Since shares of our common stock were sold in our IPO in February 2018 at a price of $13.00 per share, our stock price has ranged from an intraday low of $11.10 to an intraday high of $20.99 through of February 28, 2018”. At 20M shares outstanding at the time, that was a market cap between $222M to $420M, vs. $238M today.
So then why does CDLX trade today at a price at nearly the low end and almost half of the high in early 2018… before CDLX signed both Chase and Wells + before Dosh / Bridg / Entertainment + before new ad server and related tech + before new CEO / CPO / CTO?
Some say it is due to the higher bankruptcy risk with losing Chase and the associated revenue. As of 12/31/2017, CDLX had $25M in lines of credit used and another $32M in term loans, for a total of $57M in long-term debt. Today, CDLX has $60M of an unused line of credit. One difference though is on September 22, 2020, CDLX issued $230M of convertible senior notes, that mature September 15, 2025. There are certain conditions where bankruptcy could occur with these notes, but given maturity is not until 2025, the larger issue is the interest payments payable semiannual on March 15 and September 15 of each year. The interest rate on the note is 1%, for $2.3M annually (matching the $575K quarterly interest expense in the financial statements, or the $1.15M semiannual). This is a very small amount. For perspective, the interest expense is less than 1% and 2% of CDLX’s TTM revenue and gross profit respectively. Additionally, CDLX still has Chase today, so they likely easily covered the Sep 15 interest payment. So if Chase dropped CDLX tomorrow, CDLX would have 5 months to meet the relatively small interest payment of $1.15M, and then another 6 months after to meet the next small payment. Therefore, bankruptcy risk doesn’t seem to be an issue.
Some fear the loss of Chase would lead to losing a substantial portion of revenue, which could instead lead to an equity raise, leading to further dilution. However, when going through the math of what would need to be raised to handle the burn, the dilution is not horrible even at today’s incredibly low prices. For example, if CDLX needed to replace the lost gross profit of Chase for 1 year (where after 1 year CDLX could offset the loss of revenue from increased revenue from the remaining banks and on the new ad server) that would be approx. $53M needed ($300M TTM rev * 45% Chase * 39% GP margin). At $7 / share, that’s about 8M shares. If we said the intrinsic value was $4B, we go from $122 / share (at 32.9M shares ignoring RSUs) to $98 / share (41M shares), vs $7 today. Therefore, while the dilution leads to a lower expected value per share, the expected return is still attractive vs today’s price. Additionally, future cash flow could be used to buy back shares.
Another option is CDLX could use their untapped credit line in the interim to avoid dilution, and pay back after getting increased revenue once the remaining banks are on the new ad server.
But raising equity or using the credit line ignores the option CDLX is already pursuing, which is scaling back operating expenses. It sounds like CDLX closed the India office with 50 employees post Q2 numbers + paused Open Banking initiatives, which may together be the $15M in annual cost savings CDLX mentioned at Q2 (and already 28% of Chase’s associated gross profit). Additionally, CDLX’s annual OpEx run rate based on Q2 is about $55.9M more than full year 2021! Part of this increase is from adding Dosh and Bridg. Therefore, comparing annualized Q4 2021 to Q2 2022 (to see the increase in only 2022, and not from the acquisitions), it is an increase of still $34.6M, nearly still offsetting the loss of Chase. This to me shows CDLX can scale back OpEx to cover the loss of Chase. Additionally, we know Karim has closed offices in the past, and is able to make hard decisions if needed.
CDLX could also see increased revenue from getting the remaining banks on the new ad server to offset the loss of Chase. It would only take about $1.25 of additional ARPU on the remaining 110 MAUs to offset the loss of Chase today. I believe this could be achieved even without the new ad server, and therefore more likely once BofA and Wells are on the new ad server (expected in 2023). Or if Karim can get an ad agency to understand the certainty with the incremental returns, and be less viewed as another affiliate site and more as an arbitrage opportunity, then it would only take one ad agency to increase their ad spend and make up for Chase.
So beyond possible overblown fears of bankruptcy / dilution / lost revenue from losing Chase, what else explains the irrationally low market cap?
One is the company is less followed given how small it is (micro cap status now!) Also, how many investors sold and stopped following the company after hearing about Figg? These only add to less liquidity. Therefore as others look to sell, such as from the fears above, it can lead to having to sell at pretty low prices to find a buyer, even below intrinsic value.
You also have general fears with the macro environment, and other selling to move to higher yielding bonds or even cash. What is interesting with the macro, you would think advertisers would favor CDLX given they only pay when a corresponding purchase occurs and given it provides incremental returns to help in this environment. Although one issue is CDLX is still viewed more as an affiliate marking site, but I still think brand advertising would likely be cut first. Also, CDLX should benefit from users looking to save money with higher prices, and therefore using offers more. And CDLX mostly has large enterprise clients that are less impacted compared to SMBs, so their ad spend shouldn’t dip too much. If anything, they would be smart to increase ad spend to take share from others (which they can track via CDLX’s share of wallet analysis). This was even a thought by the founder of Four Seasons, Isadore Sharp:
It’s tempting during recession to cut back on consumer advertising. At the start of each of the last three recessions, the growth of spending on such advertising had slowed by an average of 27 percent. But consumer studies of those recessions had showed that companies that didn’t cut their ads had, in the recovery, captured the most market share. So we didn’t cut our ad budget. In fact, we raised it modestly to gain brand recognition, which continued advertising sustains. As studies show, it’s much easier to sustain momentum than restart it.
The other fear is if Chase left, it may be disconfirming evidence, such that the CDLX platform doesn’t work for banks, increasing the odds of other banks leaving or the expected future revenue not materializing (ad spend or ARPU not materializing). If Chase leaves, I do not believe it is from the CDLX platform not working for the banks, or not producing the results they want. If so, would your thought be as a bank to build it internally and think you can do better than CDLX who has 600 dedicated employees + years of development + the tech already created + larger scale for advertisers? Maybe you think you can do better, but Chase has already acquired a CLO company and it did not work out (which is why they then used CDLX). Also, would your thought be do build this out with someone BofA tested and ended up not using, and where Figg’s own Senior Software Engineer is saying publicly that the “software platforms are dated and the technology is not useful to new / younger generation developers”? If it is a function of performance, why not move to the new ad server first and see the results of the new UI, product-level, local, agency offers, and more? CDLX is already integrated, the tech is already created, and Chase is supposed to launch the new ad server in Q4 2022. Given Chase hasn’t dropped CDLX yet, why not wait to test this out first, if the reason for leaving is CDLX on the old ad platform wasn’t meeting expectations? Sounds like the solution is right there for you. Some will say it is from CDLX not moving fast enough, but Chase was supposed to move to the new ad server Q4 2021 and Chase, not CDLX, was the reason for delaying migrating to the new ad server. Therefore, I do not think Chase would be going in-house for reasons related to CDLX not working or moving too slow. This then lowers the probability of CDLX not working. Additionally, it doesn’t increase the odds of the other banks going in-house. If anything, those odds are now lower with Figg as an option likely gone (or at least it doesn’t seem high probability BofA or WFC will help their competitor, or face the risk of Chase being Figg’s focus and not them), and not other significant CLO players available to partner or acquire.
Related, the loss of Chase could lead to losing needed scale for advertisers, leading to less ad spend and less offers, leading to less effectiveness for the banks, and therefore other banks drop. But why drop CDLX? 110M MAUs via CDLX is still more scale than the other banks can achieve on their own. And again, with Figg no longer an option, what will the banks use? Additionally, this ignores the possibility of CDLX signing additional banks to add scale.
You also have others who think Chase leaving is a “thesis-breaker” from proving the banks can do it on their own. I disagree. We know banks can do offers on their own. AmEx has been for years! My thought is the banks in the long run will need to use CDLX as it will become the new table stakes, with advertisers wanting to take advantage of the incremental returns and users redeeming so much such that they on average save 5-10% on purchases, significantly more than the 1-2% funded by interchange fees and too much for the banks to want to fund when they could simply use CDLX and have the advertisers fund it. Therefore, while Chase could leave in the interim given CDLX is not there today, I don’t know if Chase could continue to not use CDLX in the long term. But anything is possible. Chase could make the decision to remove CDLX, and want to stick to that decision, even if irrational.
Okay, but if this is accurate, why aren’t CDLX insiders buying? I agree, I would like to see this. We know previous executives were selling and never buying, even at low prices, so that isn’t as surprising. But what about new executives? Part of it could be it is a black-out period with earnings coming up. Or they could be in possession of MNPI, such as with new banks signed, or related to Chase, or maybe CDLX is getting acquired (although I wouldn’t think a new CEO with the first time being a public CEO would like this, nor would large shareholders who understand the opportunity, nor all the employees with stock and options underwater).
In all, while CDLX could keep being attractive all the way to zero, I don’t see how CDLX is a zero (besides the reasons that have always existed like a data leak, such as with Bridg Bureau and possible PII). I also don’t see how this isn’t worth significantly more even with Chase gone. Maybe CDLX gets bought out, but it would likely be at higher prices than $7. Therefore I feel CDLX remains attractive, and I will likely continue to buy, even if it was announced Chase was gone.
7.17.2022: $13.6 / Share * 34.1M Shares ~ $464M Market Cap
The morning of Friday, July 8th when I found out Chase acquired Figg and had very little information (in relation to what I know now), I immediately sold some of my CDLX shares, before any significant price movement (I don’t believe many knew about the acquisition at that time. I had not heard anything about the acquisition beforehand. It wasn’t announced beyond one site. I didn’t see anyone discuss it until after I shared it on Twitter). At the time I only had two positions with very high concentration in CDLX. I sold some, but retained a fairly large position. Like some others, I assumed there was now a much higher probability of losing Chase, which could then have cascading negative impacts. However, possibly unlike some others, I also thought through what it would look like if Chase was gone, rather assuming this was simply a zero. In the Qualitative Notes on July 10th I discussed a couple of conservative scenarios and corresponding valuations leading to an expected value of $4.25B, or 6x that day’s price (again, with both scenarios assuming Chase was gone). This was a reason for retaining a large allocation. (Note, it was not about the exact expected value, but rather how under very conservative assumptions and assuming worst case scenarios, CDLX was still attractive, and then you had the optionality with Dosh + Open Banking + Chase.)
By Tuesday, July 12th I had significantly more time to think and collect information. There was more evidence to point towards this acquisition being for Chase’s merchants, rather than to replace CDLX, and improve on CDLX offers (added those notes on July 11). Therefore, between the price becoming even more attractive in relation to scenarios without Chase and given the higher likelihood of Chase staying, I added to my position during the day.
After hours it was then announced that BofA renewed, giving certainty of BofA staying, improving the overall situation. However, the price continued to decline, given some possibly worried about the terms of the renewal being impacted by the Chase acquisition. I discussed my findings and thoughts regarding the terms over multiple days in the Qualitative Notes in the section “Update on BofA Renewal and Terms”.
Yesterday, July 16th, I detailed additional thoughts and information on Chase. While it was already a thought that we could see banks like USAA join CDLX given Figg may no longer be used or an option, there has since been a higher probability of that occurring, as well as sooner than expected, given the new job listings for Sr Integration Consultants for “the technical onboarding of new Financial Institutions onto the Cardlytics platform” and with “Experience with AWS or other cloud platforms”. This could also be related to a bank moving to the cloud, which leads me to my next point.
In that same section yesterday I discussed the evidence of Chase still planning on moving to the new ad server, if not already in progress. This all gives higher likelihood of Chase staying on for at least a year or two, which gives CDLX a chance to improve more, have Chase users used to the new UI and lower the chance of taking that away along with CDLX’s local + product-level offers + national offers, and for any possible second attempt at in house to fail again.
Today, July 17th, I detailed additional pieces of evidence that confirms Chase’s stated motives to CDLX, that more show Chase wants to use and improve CDLX offers and give more support to Chase’s SMBs, rather than indicate different motives related to dropping CDLX.
Together you have:
Declining price, increasing attractiveness
Low price in relation to expected value without Chase
BofA renewing with high chance of cloud / moving to the new ad server
New banks like USAA possibly in progress of joining CDLX
Evidence of Chase not dropping and what their intentions are with Figg
Evidence of Chase moving to the new ad server this year, if not already in progress
Some confirmation of Chase’s stated motives with Figg that were shared to CDLX
Therefore, I plan to buy more and increase my allocation, pending no major announcements tomorrow morning before opening. The current market cap is attractive given it could imply not only Chase leaving, but that other banks do as well (or assumes extremely low future ARPU on the remaining banks). Not only do I think non-Chase banks stay (such as from seeing BofA just renewing, no longer having Figg as an option, needing to be more competitive versus Chase so need CDLX, etc.) but that CDLX will get even more banks like USAA. Additionally, I believe there is a higher chance Chase will not leave, and will adopt the new ad server this year, if not sooner than most expect. This leads to a very large difference in what others assume or is implicit in the market price versus what could actually occur, making for an attractive buying opportunity.
Additionally, if Chase does what they say and what the evidence confirms, then this will be a strong positive for CDLX. If Chase improves the offer section with more offers, more relevant offers, better targeting, and more local offers, it will improve engagement and ARPU overall.
The multiple reallocations are not something I typically do, nor want to do. I try to remove all emotion from my decision making and base it on what made sense and the information I gathered. I invest based on my conservative subjective probabilities that I adjust for new information. I like to keep an open mind that changes based on what I learn. Additionally, like the unexpected Chase acquisition illustrates, you can make the right bet based on your probabilities, but the lower probability or unknown scenarios can still occur. Therefore I will not be allocating 100% to CDLX at this time, but will be holding a very large allocation, and it will be my largest position.
5/6/2022
$31.46 / Share * 34.1M Shares = $1.1B Market Cap
Thoughts on Current Price Decline
In total, based on the commentary during the earnings call, the business seems to be in a very good place, with the offerings improving, and evidence of users, banks, and advertisers taking more advantage of it.
At the same exact time, the stock price of Cardlytics continues to decline. This is why one should be looking at the business to see what is going on and likely to happen, and not look to the changes in the stock price to make that judgement.
The next two sections will look at how the business is doing based on the updates provided during the earnings call, as well as how they relate to parts of the short thesis.
Thoughts Following the Earnings Call
The value proposition Cardlytics can offer to users, banks, and advertisers only continues to grow, as made evident by the improvements shared and the actions the taken by users, banks, and advertisers.
Banks are leaning more into the program, from doubling their spend (possibly to the new self-service for banks, “Engage” allowing them to boost offers and increase their differentiation among other banks) and from increasing the visibility of the program (which doubled activations).
The value proposition for end users increases from these actions. The odds of users now finding the section have increased form the increased visibility by banks, and the attractiveness of offers increased from the larger cashback from boosting offers. As the users benefit from now finding these offers and saving more money, the banks benefit as well from more engagement, more spend, and less attrition.
Those updates are only on the existing platform. The value proportion for users is on track to increase exponentially, and remains on track based on the updates we heard at earning. From the banks committing to getting on the new ad server (with Chase likely this year), it will allow for product-level offers, local offers, more offers from the self-service platform, new user experience with premium hero imagery, and more. This will increase the understanding, attractiveness, and relevance of offers, increasing how much money users save, leading to more engagement for the banks, and more revenue for Cardlytics.
The value for advertisers continues to increase as well, which will benefit users with more offers and higher value offers, which then also benefit the banks as mentioned above. We heard at earnings that more advertisers are using Cardlytics and renewing due to the unique insights that Cardlytics can provide, and at higher ad spend tiers to unlock these insights. Existing advertisers could start increasing their ad spend from gaining more trust with the platform from Bridg helping solve the attribution problem. This will also lead to more advertisers using Cardlytics who have not before for this reason. Self-service continues to improve, with additional reporting. Finally, these advertisers will soon benefit more from being able to place product-level offers, and now have images of their offers (which have been shown to increase click out rates to their external websites by 2x - 4x from before).
And while there has not been a new signed contract with BofA, we received clues that it is very close, with simply finishing up getting approval for the cloud.
Addressing the Short Thesis
An even strong point than the business improving, is the evidence shared that is disconfirming to parts of the short thesis.
Banks are not deprioritizing Cardlytics, but instead giving more priority to the Cardlytics platform by increasing the visibility, leading to more engagement seen by the double in activation of offers.
Banks are not cutting back or moving to an in-house solution, but instead doubling their investment into the platform .
Advertisers will now be able to solve the attribution problem via Bridg by giving them more view into their own data, leading to more trusting the results, which should lead to higher ad spend and new advertisers in the channel.
Cardlytics is continuing to improve the self-service platform to address the deficiencies raised by ad agencies, such as related to reporting.
Engagement of users (which has never been a problem) will only continue to increase from the benefits of the new ad server, with strong data points from US Bank who already has the new ad server and seen dramatic increases from the hero imagery. Additionally, the engagement will increase further from more advertisers using self-service, increases in cashback from banks boosting offers, higher ad spend from solving the attribution problem, higher ad spend to unlock insights, and more relevant offers from product-level offers and local offers.
BofA will renew. It is just a matter of when the approval for moving to the cloud is finalized.
High-Level Conclusion
What will it take for the price of Cardlytics to change? Based on the current market and its reactions, it will not be the evidence of the business improving or disconfirming evidence of the short thesis. It won’t be even a now 95% chance of BofA renewing.
In this current point in time with the market sentiment, it will have to be results that are seen and therefore have 100% certainty.
We could see some adjustment in the market price with the official announcement of BofA renewing. Where we will see much more material changes in the market price is from cash flow materializing. Luckily Cardlytics is still on track to be cash flow positive by the “second half of 2023” (moved up this quarter from the “end of 2023”). If Cardlytics continues executing like they have been, and banks + users + advertisings continue to respond like they have been, we should see cash flow start to materialize. If Cardlytics continues to grow Open Banking operation as well, cash flow generation could be quite significant in relation to the approximate $1B market cap today (such as the base case levels I discuss in the Open Banking write-up). I think it will be hard for anyone to justify a market price that is a conservative multiple of cash flow when the business has a long runway for growth, improving gross profit margins from Bridg, strong operating leverage, and competitive advantages for longevity.
4/22/2022
~$38 / share * 33.7M shares = ~1.3B market cap
I did not think we would see the price get this low unless BofA was lost as a partner, which has not happened. As stated multiple times, CDLX is the one holding out. I only hope CDLX doesn’t feel pressured by the market price to get something signed quicker than they wanted, just to please the market at Q1 earnings. I’d rather management get the best deal possible, leading to the best long term outcome for the business and the shareholders.
If there were not so many other companies going through similar 70%+ drawdowns, I would be a little more concerned with CDLX that something was happening or happened that I was not aware of that was leading to this price decline and current market price. However, I think here it is more industry wide, rather than company specific. It does not help there was a change in CPO. As I said in the Q1 2022 earnings expectation section above, I think it will be a net positive, given the self-service platform being behind and the possibly existing relation between Peter Chan (CTO) and the new CPO Jose Singer.
It is possible there is some withdraws occurring with funds that own CDLX, leading to further price declines.
Overall, I am not concerned, since when looking at the business itself, there are many aspects where the business is the best it has ever been. I believe many look at the stock price to determine how the business is doing and whether something is going wrong, instead to actually looking at the business itself.
As of right now, based on the information I have and my own assessment, I simply continue to reallocate and weight more towards CDLX, as my expectation of the future value remains constant but the price declines, leading to a large expected return.
2/8/2022
The previous price increases could be looked at as multiple expansion of current / point-in-time revenue, but I also think a reason for those increases in market cap was changes in assumptions by others. Instead of the multiple doubling, could of been the same multiple but on a assumed higher cash flow amount in the future, such as from unlocking SKU, making progress on self-service, new UI, notifications, opening banking, etc. Given those have only just started, and have yet to make real progress, hard to say those won’t happen, just because the price is down (when also everything else is also down, and it’s not company specific)
10/4/2021
Current price even simply ignores what is possible with HALF the current MAUs with none of the improvements discussed below. If more use the channel for LTV/CAC (vs ROAS) and for optimization (Starbucks with App only or promoting payment types like QR code)
Uber eats $16 first purchase (Emma and I both used)
Panda Venmo QR code $10 if spend $10 (Myself and Dad used, Emma will later this week)
If 2.16 of Rev / CI holds
And if only half of 167M use the offers or are around (lose banks for instance,
Then valuation = (167*.5*(16+10)*2.16*.5-200)*.85*30=54,689.34 $55B (50% rev share, 2000M OpEx, 15% taxes, 30 P/FCF)… 55/2.8=19.6429 … nearly 20x today's price…existing offers and platform…ignoring everything below… NO BRAINER.
No one patient to wait for ad budgets to increase for this simple action to occur. (this lack of patience is discussed more below)
Current price of 2.8B is approximately where the company was trading 1 year ago, in oct 2020. This was before:
iOS14.5 announced around April 2021, which is leading to less data and tracking on FB, leading to more use of MMM which can incorporate CDLX data, leading to higher probability of ad spend
Acquiring Dosh with Venmo
Acquiring Bridg for SKU level items
Adding 14 new neobanks / fintechs
Taking advantage of open banking with Nectar Connect
Rolling out new self service platform from 2 beta agencies to 27
Showing and rolling out new UI platform with US Bank, and Chase by end of year
Announcing use of push notifications
New CTO from Amazon Advertising
New board member from Microsoft Cloud
Also possible new neobanks and banks. 14 announced new, not all shared. Some found on Dosh’s website via term pages. Chime was mentioned by CDLX investor relation when making a comment regarding not all users are MAUs. Revolut no longer showing any offers or offer section…maybe moving to Dosh? Possibly other banks will switch from internal or external solution. Know Lynne wants AmEx. She also used to work at Capital One. Discover and Citi each have offers but smaller user base so not as large of access to better / more offers, increasing odds of switching. Market has implied via reverse DCF that no new banks will be added at a small ARPU level, so if any occur, market should adjust. AmEx would likely be the best, since most assume it would never happen, since cdlx has wanted it forever and everyone says they can do it internally. Would prove cannot, leading to other banks to switch, and change investors minds.
8/6/2021
5/17/2021
(The following notes were used to make this official post)
Potential Scare from Loss of Airbnb
At last quarter’s earnings, the updated investor presentation had Airbnb removed from the list of advertisers. From other investors, it sounds as if Airbnb did not like using the Cost Per Served Sale (CPS) pricing model. The reason was due to them not knowing whether on a non-activated offer, if the final purchase made by the customer was from seeing the offer on Cardlytics, or from seeing another advertisement such as on Google or Facebook. They did not like this, since under CPS, Airbnb still has to pay Cardlytics for serving an offer where a purchase was made, regardless of whether the offer was activated.
The simple answer seems to be that Airbnb should use the Cost Per Redemption (CPR) pricing model, where they only pay based on offers activated and redeemed, not just served. However, it sounds like Airbnb did not understand this nuance between CPS and CPR, where they assumed for the duration of being an advertiser with Cardlytics that customers were required to activate the offer for Cardlytics to get paid, even under CPS. I do not have a direct source of that statement, but if true, and if due to actions from the management of Cardlytics, this may be something to monitor closely.
If we started to see more advertisers stop advertising on the platform, it would be of concern. Currently, I have not seen this, and instead have seen past advertisers continue to send offers, and new advertisers join the platform. Last quarter, CEO Lynne Laube mentioned how one advertiser left the platform last year, only to return after noticing their loss in share of customer spending.
Impact of Macroeconomic Factors
Explanations such as fear of increasing interest rates and inflation are ones mentioned by others to explain the recent price declines.
Both increasing interest rates and higher inflation are reasonable assumptions for the future, given the current historically lower interest rates in relation to historical averages, and given the fed's actions over the last year.
My previous assumption was to assume average long term interest rates would increase closer to the higher historical averages, for discounting purposes. I detailed out in the last write-up how if one assumes a long term average risk free rate of 5%, equity risk premium of 3% for a mature company in 10 years, and cash flow growth of 3%, we get a cash flow multiple of 20 ( 1 / ( 5% + 3% - 3%)). At the high end of our valuation calculations, I showed how CF of $2.8B was possible 5-10 years from now, giving a valuation of $56B under 20x CF. If the increase in interest rates assumed by other investors was actually much higher, say 8%, we get a CF multiple of 12.5 ( 1 / ( 8% + 3% - 3%)), cutting our valuation to $35B. Therefore, this may explain part of the decrease in valuations. However, due to the offsetting decline in prices, this still allows for the same payoff today, where before would of been a return of 12.4x ($56B/$4.5B), and now where today and under higher assumed interest rates it would be approximately the same return at 12.1x ($35B/$2.9B). In addition, given $35B is still considerable higher than today’s market cap, given most investors assume cash flow will not increase to the levels I assume, it allows for an attractive purchase prices. In addition, if interest rates do not increase to those high levels, it allows for even higher return payoffs at these lower stock prices.
In terms of inflation, I felt this would have a lesser impact on prices today, given talks regarding the threat of increasing inflation rates have been going on for a year, following the fed's actions during COVID. Therefore, this should not of been a surprise, unless on average, investors either wait for the facts to arise, or are very short term thinking, or both. Either way, Cardlytics should not be too adversely impacted by inflation, in comparison to other companies, such as those with high ongoing maintenance capital expenditures that will also increase due to inflation, and take away from any benefit in increase in revenue.
Previously Too High of Market Price
It may be true that stocks, including Cardlytics, were previously expensive in relation to current revenue, earnings, sales, etc. However, the value of a business is based on the future cash flows it generates. Even though the price of Cardlytics may of looked expensive while looking at current point-in-time statistics, the market price was cheap in relation to future expected cash flow. Even assigning a low probability to that outcome, yielded an expected value greater than the previous market cap.
Therefore, this sell off could be from the large portion of investors who are thinking and valuing based on short term numbers, which allows for opportunity for the long term investor.
Risk of Going to Zero
The probability of Cardlytics going to zero seems low, given the scale of 168M MAUs, making it an attractive platform for advertisers to use, combined with the transactional data for targeting purposes. Combine that with low levels of overall liabilities and debt, the probability of going to zero seems low, but not zero.
Current Market Cap
To get an idea of what the current market cap of $2.9B represents, I will back into the average consumer incentive (CI) per monthly active user (MAU).
I will assume the following:
$2.16 of Revenue per CI (where revenue is the average revenue per monthly active user, or ARPU)
168M MAU
36% gross profit margin
$200M in OpEx
21% Tax
20x CF multiple
(Additional info on these assumptions can be found in the last Substack write-up from 4/2021)
Reversing it based on the current market cap (approx. $2.9B), essentially a reverse DCF, using the assumptions from above, backs you into an average redemption of $2.94/MAU.
Assuming users on average are redeeming a 10% offer, on a $10 item, this is less than 1 offer redeemed per quarter.
Another way to put $2.94 of consumer incentive in perspective, is to look at my redeemed offers within the last 90 days. This data sample is very biased and skewed, but shows that it would be easy for one MAU, over the course of an entire year (compared to my last 3 months), to use a single offer, like Chili’s, and hit the $2.94.
Final Thoughts
If this current sell-off was not industry wide across most technology focused companies, this price decline would be more of a concern. Overall, it seems the facts remain the same, and the investment thesis is still intact. Therefore, the recent price decline widens the margin of safety, and improves the overall return potential for this investment under most scenarios.
5/10/2021
There are plenty of smarter people than me investing in CDLX. It’s very possible they know something I do not. This is why I’m never 100% concentrated in one company. However, this sell off isn’t quite concentrated to CDLX, and it’s similar (not as extreme) in other tech names, which comes some comfort of not being a CDLX specific issue. In addition, earnings revealed no concerning news, beyond Airbnb. And maybe if their reason for leaving will be the same for all companies, then maybe the market is correct. But boy, even if I assign a 90% probability of going to 0, and 10% of a decent scenario occurring, then the market price is mispricing that bet.