$CDLX Q1 Results and The Question

If you’ve been following the CDLX story for >2 quarters this is the 2nd 40% drawdown you’ve seen, which while not particularly fun, isn’t particularly surprising. A natural consequence of investing into opaque small caps with leverage and no near term earnings is that the entirety of the value is in the future and it’s hard to tell the future even for insiders. We’re selling 30-45 day niche ad campaigns at subscale budgets, not providing mission critical goods or infrastructure, so lumpiness will inevitably occur.

None of that is to excuse the performance following Q1, losing money is not the goal after all, especially when it’s somewhat avoidable. If you lost money, my condolences, I think you’ll make it back and more of course, but I can’t guarantee anything so act accordingly.

Onto the results:

Q1 Results: Why it imploded

CDLX reported something the following:

• $105m Billings (+10% YoY)

• $67.6m Revenue (+5% YoY)

• $37.1m Adjusted Contribution (+20% YoY)

This compares to guidance from 3/14, with two weeks left in Q1

• $105-109m Billings

• $70m-73m Revenue

• $37-39m Adjusted Contribution

This is of course a horrendous miss of about 3.5% on revenue vs the low end of the guide which was given only 2 weeks before quarter end. This is typically not conducive to positive stock price reactions, believe it or not. On the call they called out something like campaigns not coming through they expected to come through near the end of the quarter. Unfortunate, but it can certainly happen. As mentioned CDLX is still a niche advertising platform with some effort required to determine and validate ROAS. Their customer satisfaction seems quite correlated with advertiser sophistication and disruptions in their clients marketing departments can cause churn, so bumpiness isn’t out of the ordinary.

That being said I find the results quite interesting. Revenue obviously missed rather substantially, yet billings and adjusted contribution fell within the guide albeit the low end of the range. We can use this occurrence as a learning opportunity:

1. Billings is defined in a basic sense as CDLX share + bank share + consumer share of any given offer. Historically this has hovered vaguely around 33% each plus or minus depending on the quarter, but isn’t quite that simple.

   

2. Revenue is defined as the bank share plus CDLX’s share

3. Adjusted Contribution is the pure CDLX share

4. Essentially advertisers only care about Billings, that’s just how much they pay. The split between each bucket is rather irrelevant to them, so the best metric to gauge CDLX’s success with expanding budgets is Billings.

5. The only relevant metric for calculating CDLX’s bottom line is Adjusted Contribution.

6. As a result, we can see how “revenue” may not be a particularly meaningful metric for CDLX given it includes a partner share that was pre-negotiated to never be theirs to begin within, and is clearly quite volatile (data pre 2021 is somewhat complicated by a myriad of adjustments and covid budget drops)

7. For some simple math, in Q1 of 2023 the split of Billings was as follows:

   1. Adj Contribution: 28.5%

   2. Consumer Incentive: 34.7%

   3. Partner Share: 36.8%

8. Q1 of 2024 saw the following:

   1. Adj Contribution: 31.9%

   2. Consumer Incentive: 37.7%

   3. Partner Share: 30.5%

9. As a result “Revenue” went from 65.4% to 62.3% of Billings. Given $105m of Billings in Q1, that is about $3.3m of revenue headwind from Partner Share going down to fund higher Consumer Incentive.

10. At the same time, the Adjusted Contribution share being up from 28.5% to 31.9% represents a $3.6m benefit to CDLX gross profit

11. Summary: Due to the definition of revenue, it faced a ~5% headwind from a shift in Billings allocation even though the outcome for CDLX saw a 10% increase in gross profit. Generally increasing gross profit 10% is a pretty good idea!

Hopefully that line of logic illuminates both part of why a violent stock reaction might occur, and part of why it isn’t necessarily meaningful that “ARPU” or “Revenue” are down. The guide for Q2 implies 0.5% revenue growth at the midpoint, however the actual advertiser spend on the platform would be up 10% YoY at the midpoint and gross profit up >14%.

In my experience these types of situations with headline revenue moving in totally the wrong direction on a levered asset generally leads to a dismissal of the investment case at the surface, irrespective of actual investability. Pitching a non-growing levered shitco with a history of extreme value destructive behavior (much of this precedes current management) typically doesn’t go well.

That isn’t to say of course the results were not disappointing. Coming in at the low end of the guide for Billings and Adjusted Contribution is obviously not preferrable. I’m also a bit confused as to how revenue missed so drastically while Billings and Adjusted Contribution came in at the low end. Using the ratios from the quarter to achieve even the minimum $70m revenue would have required Billings to hit the high end of the guide at $109m and Adjusted Contribution would have come in a bit above the midpoint. It perplexes me that you give a guide 2 weeks before the quarter that implies a drastically different mix than the quarter overall.

A possible explanation is that there were some campaigns towards the end that were heavily boosted by partners forgoing share to fund the consumer incentive, yet the Q2 guide implies pretty similar QoQ shares of Billings per bucket to Q1 overall, so that behavior doesn’t seem to be occurring in Q2 which would be strange. Also billings coming in at the low end of the range makes it appear unlikely to me there was a large campaign skewing ratios towards the end of the quarter.

In simple terms, without further context, it really seems like they just arbitrarily guided overly aggressively on revenue while keeping the other metrics conservative? This doesn’t make a whole lot of sense. Maybe they don’t even know how their quarter is going! Hard to say considering the lack of commentary.

To be clear this significant communication problem on guidance, as well as the immediate market stuffing of a convert following the Q4 report is definitely a negative mark against the current management team. I have said previously and will continue to say I don’t expect nor need them to be capital market geniuses, but the string of avoidable errors here is somewhat worrying as generally incompetence is correlated across disciplines.

I do still own shares however and purchase more, so who’s the real sucker? (I jest)

In sum, the Q1 results really aren’t that bad if we ignore the weirdness around guidance. This was the first quarter of double digit billings growth since 3Q22 without any adjustments. Including adjustments over the past 18 months it isn’t super sexy, but I do believe it would be acceleration versus 3Q23 and 4Q23 which is nice to see. Chase seems to be going really well and ADE banks being +30% vs non-ADE after 6 months or so is rather in line with previous expectations. I’d imagine Chase is up more than that 30% as well given they have ADE+images+bank lean in. WFC and BofA are lagging expectations, but that is more than made up for by signing AmEx

Q2 Guide:

A rather amusing quote on the Q2 guide I heard is that one could rather comfortably park an 18 wheeler between it. It is as follows:

• Billings $115-$126m (+5-15% YoY)

• Revenue $73-$81m (-5-+6% YoY)

• Adjusted Contribution $40-$45m (+7-20% YoY)

Toss in like ~+2% for each if we exclude Entertainment

This is a somewhat unworkable range in all honesty. By that I mean the top end of the range would be insanely good, and the bottom end rather mediocre.

Some quick math is that if we can be growing Billings 17% YoY in Q2 with easy arguments for acceleration in H2 due to WFC/BofA rollouts, investments in Bridg/core biz (sales teams/tech improvements), Chase moving offers up in the app, continued partner share negotiations, etc, the outcome skew gets insanely positive. We have AmEx and Rippl call options in 2025 that could more than justify the current market cap, as well as a business that will be vaguely close to breakeven and imminently adding tens of millions per year to the bottom line on an EV of like $600m depending on the day. It isn’t hard to pencil out >$150m of EBITDA even prior to AmEx in 5 years or so if growth is accelerating towards 20%.

On the flip side if growth is decelerating to 7% despite Chase investing heavily and the company loading up more OpEx expense, the business is probably approximately fair valued with a call option in AmEx and a put option in business execution, management communication, management capital allocation, etc. While I am highly bullish on AmEx, I would prefer if my investment outcome wasn’t entirely reliant on a contract we know practically no details of besides the fact it doesn’t have a revenue share.

It is also possible of course that Q2 comes in light and marks a low as they seemingly expect to accelerate in H2 and especially 2025 given the OpEx step up. The bear view is that if they can’t predict revenue 2 weeks out, how will they predict it 6-12 months out? A rather valid question given the inexplicable Q1 guide.

I’m being somewhat hyperbolic to the downside both as amusing commentary after losing 40% in a day, as well as balancing the fact I think AmEx could be worth >$1b on its own. There is an acceptable amount of being the patsy in investing and I’d prefer to remain somewhat on edge when I get rug pulled 3 times in a little over 6 months.

This sentiment is not unique to me, and is part of why the stock is once again single digits, so if AmEx is indeed worth something a purchase at current prices is insanely high IRR.

Summary:

I do not think the results warranted the negative stock price move based on numbers. Much of the move is likely explainable by confusion around metrics such as revenue definition as well as a more subjective loss of faith in current management’s ability to predict the business.

In reality the results that they are going to post are going to happen irrespective of the market’s current opinion on management, so the question is if those results will be good or not. Intuitively I believe they will be given the high ROAS for advertisers, the free money for consumers, and the consumer loyalty generated for banks. Chase seems to agree given they are continually investing in the platform. AmEx seems to agree given they are revamping their offer system to incorporate CDLX. BofA and WFC are too technologically incompetent to know if they agree or disagree.

I’d like to think betting with my intuition that is aligned with the best consumer bank in the history of the world and a card originator that has carved out a niche from the behemoths of V and MA purely from offers is a good bet. That framing however can be dangerous in the repeated absence of business results, so CDLX is getting a perpetually shorter leash even if I love the stock.

A Note On Clarity:

For those that follow me on Twitter you may have seen my recent post regarding Q1 predictions here. In short, my followers have outperformed sell side analysts thus far! Great job everyone, you are particularly good at analyzing CVNA and TSLA and far too bullish on CDLX (wonder how that happened?).

Rewards won’t be paid out until NVDA reports in a couple weeks, but you will see the site updated to support Q2 and Q3 estimates around that time as we try it out again. For updates you can follow my main Twitter here or the newly created Clarity twitter here

Additionally, if there’s a question you have about a stock or market that you’d like more opinions on, feel free to reach out. Clarity will start supporting user sponsored questions soon, so if you’re curious what CPI will be for May, or how many units CVNA will sell in Q2, feel free to reach out. All rewards budgets currently will go straight to users, so consider it a charity donation to aspiring analysts?

Anyways, cheers and hope the article was helpful. Hopefully the next update is a bit more upbeat as reality matches theory.