$CDLX Post Earnings Recap

To get it out of the way, the price action from the Q3 report sucked. Many dollars lost going down 55% in a day. It’s life, we’ll all live. Invest responsibly, etc. To most of you I am a Hindu god themed internet persona, not a financial advisor, so keep that in mind when making your own decisions.

I will also pretty much always have my own money in something if I believe it’s a good investment and priorities will be managing the money I oversee, then my own money, then Twitter posts. Not intentionally going dark by any means, but if I miss a dm or Twitter notification it’s not personal and I’ll hopefully get around to it eventually.

Anyways, enough time spent on disclaimers.

What Happened?

Quick summary is basically CDLX reported a decent Q3 with ~9% YoY revenue growth and guided to ~4% growth in Q4 on relatively flat billings (aka total advertiser spend). They also noted Bridg shareholders filed a new dispute, and changed how they disclosed MAU’s, revising the number down.

As I tweeted previously I believe the majority of the share price decline was due to the revenue guide for Q4, but exacerbated by misunderstandings with MAU disclosures and the like.

As context for the Q4 guide driving the share price down, it’s good to frame expectations.

The hope with CDLX was that the new Chase UI would drive such high idiosyncratic growth that they would be very profitable going into 2024. This is highly important as they have >$200m of debt due in 2025. Not an easy situation with breakeven FCF. The business is largely fixed costs, so generating earnings by cutting out spend is rather infeasible to achieve the level necessary, they need to grow gross profit.

When expectations are high and the guide is ~4% YoY growth in a levered company with near term debt maturities, that’s going to kill your stock price, apparently by up to 55%.

Going Forward

Sucks or not, it’s in the past.

Effectively as I tweeted out previously the key question with CDLX is what kind of AEBITDA they can post by 2025. Many will balk at AEBITDA and adding back SBC, etc. Generally I agree, but in levered scenarios with near term debt maturities nobody gives a shit about D&A and SBC and other non-cash items. Liquidity is all that really matters so the main focus here will be to establish that liquidity is solid in most cases, and determine what potential upside on P/E is on the other side. We won’t get too specific, but let’s paint a picture of numbers and narratives.

First off, despite the price action Q3 results actually had a quite meaningful positive surprise. Namely the significant growth of gross profit both QoQ and YoY. Despite revenue growth of 3% QoQ and 9% YoY, gross profit grew 17% QoQ and 38% YoY. If we slice it down to only the core US business it was probably like +45% YoY gp growth vs 10% or so revenue growth. That is a rather substantial improvement by any metric.

The reasoning for this is rather simple.

Essentially JPM Chase decided to take a lower share of advertiser spend and opted to give it to CDLX instead, bringing bank share of billings to an all time low and CDLX share to an all time high.

Now why would they do that? The key to the CDLX thesis is that banks actually really like the platform. Chase for example is likely doing some $200m+ in billings which would represent about $150m of revenue being split between them and CDLX. Let’s assume the average discount is 10% and advertisers want a 5x ROAS.

Then advertisers are spending 10% on consumers, 10% on Partner Share, and 10% on CDLX roughly. Thus 30% of revenue on an individual purchase being spent on CDLX, CDLX needs to drive 1.5 sales of a “thing” to achieve 5x ROAS. Thus if Chase is driving $200m+ in billings which is 1/5th of actual spend, CDLX is driving >$1b of purchasing through Chase cards.

Assuming the average user spends maybe $100? through CDLX, that implies >10m Chase card holders are engaging in their card linked offers.

I think it’s safe to say Chase is quite happy with a partner giving them a free $75m in annual earnings as well as card holder benefits for >10m card holders.

An interesting thought experiment is what if Chase was to acquire CDLX? In such a scenario if we assume all other bank relationships halt, the core company would likely have a similar revenue/gross profit pool as of now, but be able to cut out redundant back office cost. I wouldn’t be surprised if it could quickly be doing $50m+ of earnings in addition to card holder benefits, for the low price of a ~$400-500m EV and plenty of upside potential.

The point being not that Chase can or would acquire CDLX, simply the value the platform provides. It’s perfectly logical for Chase to throw CDLX a bone and continue to work with them, and the concession of a lower partner share is an indication of that belief being reality.

I’ll likely do a follow up post here digging more in depth on the dynamics, but to keep it short and sweet the gross profit improvements were a massive win and set CDLX up nicely for AEBITDA in 2024 of $20-40m before any growth. Not enough to make 2025 debt maturities comfortable, but enough to not cause imminent liquidity risk barring significant ad market degradation.

So Why Does Guidance Suck and Will Revenue Suck?

Great question!

The quoted reason for the decelerating guidance is a mix of the following:

1. Underperforming sales teams in QSR/Retail that have been replaced

2. Business focus was on product and right sizing cost structure, not growth. (This is a lesson I’ve learned, things simply take more time than you’d think as multitasking with hundreds of employees is very very hard)

3. Poor macro going into Q4 - This has been called out by a couple other advertisers and TTD saw a rather significant hit to their stock price after missing guidance expectations, so not totally unique in direction, but perhaps unique in scale.

4. Chase product is rather new and the mix of tech at different banks causes sales friction.

All seem fair to me. I would be suspicious if any didn’t make sense, but they all do and I’ve not had a reason to distrust management thus far.

One could potentially argue that guidance is conservative given a new CFO for the first full quarter, but I’m not sure if that’s the case. It would be nice if they did beat, but there has been no commentary that guidance is explicitly conservative as there was in say Q2. Unfortunately revenue may actually just suck.

To be clear this sucks. It isn’t thesis breaking by any means as the thesis is longer term than needing immediate billings uplift, but it opens up the possibility to being wrong. In a situation where CDLX immediately drove idiosyncratic growth, liquidity is solved and valuation becomes extremely attractive in 1-2 years. That scenario unfortunately did NOT play out, and the expectation of it being possible no longer existing hurt the stock price, but the end game opportunity hasn’t changed much in my view.

A way it could have changed is if I am wrong and the revenue deceleration is some kind of structural issue with the business. Given Chase seems to be growing quite well, I’m not sure what that would be, but it is possible.

To summarize thus far - there are logical reasons the guidance would be worse than expected, some I likely didn’t give enough waiting such as time required and sales friction. This sucks but isn’t a huge deal if they execute longer term. That being said, liquidity risk remains on the table if you don’t believe in the product value over the next 24 months.

What’s The Overall Picture:

Q4 2023 revenue will likely be mediocre growth YoY, however the AEBITDA base going in 2024 is quite decent due to the Chase partner share wins as well as some new bank launches in 1H23. Future bank launches will be on the new ad server and UI and WFC and BofA launches of the new UI are still scheduled for 1H23. This gives CDLX plenty of time to ramp revenues on a consolidated platform for >90% of their users prior to any debt in 2025. I see no reason why they CAN’T grow double digits once again in such a scenario.

That being said the Q4 guidance is still puzzling. I can believe all their explanations and still think that in theory more revenue should be getting driven through the platform. It is curious that Chase appears to be leaning in while Santander left earlier this year. WMT seems to be spending >$10m on ads while SBUX drops them. It’s very different outcomes by parties with supposedly the same incentives. Puzzling, but not thesis breaking yet. Hopefully the investor day prior to Q4 earnings sheds some light on the confusion and provides some info on how the new UI is performing.

Overall I’m a touch more incrementally negative on CDLX given the opened up chance for liquidity risk, however the significant share price declines more than make up for it. Say fair value was ~$40 previously, maybe its $30 now but the stock was cut in half. As a result I purchase quite a large sum in my PA at $6 or so bringing my total exposure to something like 65% CDLX 15% CVNA 20% AMZN/META/GOOGL+BLND

I do not recommend similar exposures at all to anyone else and do not follow similar levels of concentration in my OPM accounts. With personal money I can be much more flexible than you can if you rely on my posts, hence the age old adage of DYOR.

I will likely follow up this post in the coming days with an in depth post on how CDLX actually works, since it seems to be rather confusing. Stay tuned.