$CDLX - Pre Earnings Notes

Great Deal?

Let’s get right to it.

Context:

Expected growth rates for Q4 are probably around 8.5% given we were given a pre-report back in January. As a result the actual results don’t particularly matter here and what’s important is more so Q1 2024 guidance (that is basically a pre-report given we’re 80% done with the quarter) and business commentary.

As a reminder this is a business that is marginally cash flow positive and will need to refinance or equity raise their way out of a ~$200-250m hole in late 2025. This makes the current equity potentially worth very little given a $337m market cap. The company needs to either generate enough cash to make a refinance a breeze, get the stock up, or both. Preferably both.

The result is a high focus on future guidance. Q4 of 2023 was particularly disappointing in terms of growth rate as despite launching Chase on the new ad UI in Q3 and some resulting out performance in growth, performance inexplicably stumbled in Q4 which was blamed on a combination of macro/poor sales execution/not enough time to scale. If growth continues in the single digits through 2025, refinancing may be iffy on terms given the interest coverage ratio would be relatively close to 1. Not a fun spot to be by any means as the stock would be trading at maybe like 20x 2025 earnings, ignoring stock comp, with a coverage ratio close to 1-2. Not something worth a whole lot essentially.

Naturally as I own a significant amount of the stock, I expect growth rates to not be in the single digits through 2024 and here’s why:

1. The new ad UI that was launched at Chase SHOULD be rolled out at WFC/BofA in H1 2024 according to prior guidance. This is a pushback from “by the end of 2023” as was previously guided. The benefit of this rollout would be a consolidated GTM opportunity with 80-90%+ of advertising stock on a new UI that performs better. The result would be higher margins and revenue with potentially better contracts at the banks themselves, similar to what happened with Chase. Too much to say really on the benefits.

   1. Naturally I wouldn’t be surprised if this is delayed. I do truly believe it is somewhat out of their hands, but the delays are certainly a negative if rollouts aren’t done by early Q3 of 2024. Q4 is a seasonally massive quarter and will likely represent the majority of cash they generate until the debt is due. The earlier all bank partners are on the new UI, the earlier CDLX can sell those impressions to advertisers at better rates. Call it tentatively optimistic that these rollouts are done in Q2, and if guidance is redirected to Q3 it’s fine, but Q4 is not great.

2. I do believe Q4 had some poor macro weighing on results. The product is materially better than in Q1-Q3 of 2023 wherein revenue growth excluding the SBUX headwind was in the double digits. It doesn’t make a whole lot of sense for advertiser opinion to suddenly swap for fundamental reasons given better product performance. Additionally, many other advertisers that already reported were guiding to accelerated growth in Q1 from Q4.

   1. One would thus expect CDLX to guide to low teens growth in Q1 2024 at the minimum. This is further reinforced by the next point.

3. Many new/returning large advertisers have entered the channel in Q1 including LULU/CMG/Taco Bell/SBUX/TGT/LUV/etc. SBUX alone was something like ~20% of revenue prior to their exit when the CEO changed in 2022. If SBUX scaled back to their level of spend in 2022, CDLX would easily be able to refinance any debt and be trading at ~10x 2025 EV/AEBITDA while growing topline 20%+ and bottom line >50%. Rather compelling. Of course these partnerships are new and that level of scale is by no means guaranteed again, perhaps they even simply cancel after running their current campaigns. These new advertisers may also not be material for Q1 given they popped up later in the quarter and the offers are thus far constrained to exclusively Chase as many use new offer constructs. This makes point 1 even more important.

   1. CDLX functions mostly as a large “whale hunting” business in terms of clients. While they are working on updating the product, it is very white glove currently and not easy to plug and play given the sensitivity of the platform. For large advertisers like a Walmart having a rep handle millions of dollars of spend on CDLX as well as figuring out how to factor in attribution isn’t a huge ask. For medium sized advertisers the time and effort investment can not be worth the scale. It’s also hard to get confidence in the incremental nature of CDLX offers as it does not plug into existing attribution models cleanly, so just higher effort. If Q4 2023 was light on contract lands due to macro, the current environment may be far more fruitful for getting large clients.

4. On the Q3 2024 call it was noted that there are large potential clients in the pipeline including a top 20 US bank. There are a couple possibilities here:

   1. As noted by

      Austin Swanson
      web traffic has shown some connection between CDLX and Capital One. I have also seen this when perusing myself. It’s hard to say if that means anything, but given the pending acquisition of Discover as well, that is potentially a very large card holder network that would immediately launch with the new ad UI. The net result would likely be a >10% tailwind to revenue from more eyeballs. COF currently uses an in house offering that relies on referral links instead of card links (basically can only shop online through a link, no in store offers). That is strictly inferior to CDLX, but no guarantee they put in the effort to swap. Hard to say if this data is meaningful at all or simply a quirk.

   2. In a similar vein there has been recent popups linking web traffic between CDLX and Citi. Citi used to be a client but the relationship was mutually terminated due to headaches with heavy implementation regarding the on-prem CDLX offering. Now that everything is AWS hosted and connected via API, in theory that solves a lot of Citi’s issues and may make them a natural partner. This would also be >10% tailwind to revenue from more eyeballs I would guess. Once again no guarantee of a linkage, could simply be a data quirk.

   3. CDLX was going to partner with Discover, but Discover is now being acquired by COF who has their own in-house program and may not be interested in partnering with CDLX. As a result no new large bank partner in Q1. This would be the somewhat hilarious but also very tragic outcome. I doubt this is the case, but noting the possibility.

   4. A new partner that isn’t one of the 3 above and thus not particularly relevant in scale. AmEx is the only other larger card issuer and they seem to be fine with their own platform.

   5. Karim has experience in a few countries and with the new ad server CDLX implementation is in theory much quicker and lighter. The goal was always to be multinational, so perhaps we start seeing some international launches this year. No idea where they would start, but expanding beyond the UK would probably be a plus. Economics would likely be worse initially for international given they’d probably need externally sourced offers to start out. Call it a call option with totally unforeseeable value.

So in short, new bank launches, improving product with current banks, new ad partners. Lots of potential opportunity combined with continued contract expansion of existing partners. The theory makes a lot of sense, so why isn’t the stock $20+ or 100% of my portfolio if it’s so cheap?

Limitations:

CDLX is naturally a business that is very hard to analyze. Frankly we have no idea what Q1 numbers will be, yet alone what numbers will be in 18 months. There aren’t great metrics on what kind of uplift Chase has seen from the new UI. There aren’t great metrics on churn/spend of advertisers such as NRR. The product and bank launch road map isn’t entirely in their hands and gets pushed back frequently, etc.

As a result, despite the theory being quite sound, it’s entirely possible it doesn’t materialize due to unforeseen reasons. Maybe BofA just gets bored and finds a new advertising partner which drops revenue by 15-20% and coverage ratio goes sub 1. Maybe WMT decides they don’t like digital advertising (similar to SBUX/ABNB) which drops revenue by 10-15% and coverage ratio goes sub 1. Maybe I’m a dummy and the product just isn’t compelling and doesn’t grow. Lots of potential pain points from known and potentially unknown critical areas.

Additionally, I have been bullish on the company for quite awhile with not a whole lot to show for it. While returns from purchases a year ago are extremely positive, the stock dropped substantially when Q3 results were reported due to a lower than expected Q4 guide. If such trends continue then as noted above the stock may not work out too well. On the other hand if it works out I believe the upside is at a minimum 3-4x within the next 18 months. The joys of leveraged businesses with minimal cash flow.

The stock is currently some 40% of my personal account and 30 something percent of the portfolio I manage. Let’s have some fun!

Edit: I also forgot to mention that this earnings report is delayed from when typically announced. They do have a new CFO so perhaps it was just giving them some time, but I’d guess it is related to a bank partner contract being finalized or some other such development. Hopefully positive!