$CDLX - The Q2 Conundrum

I said late last week, instead it’s Monday. I tend to prefer publishing on Monday’s if I get pushed to the weekend and I’ve been pouring more effort into Clarity over the past few days with the goal of joining the YC F24 batch. We’ll see how that progresses but I’m hopeful we can provide retail investors with far better alt data insights, as well as building a unique platform for pro investors. Happy to discuss in DM’s with anyone curious (Twitter DM’s are easier than Substack).

Anyways, onto CDLX.

Intro:

CDLX Q2 results clearly sucked. The stock fell around 60% the next day to $3 and has since rebounded to ~$4. I opted to wait both on publishing and purchasing any which I felt was prudent to gather as much info as possible to understand clearly puzzling results. In hindsight a purchase at $3 would have been quite accretive and perhaps it was a mistake to wait, but such is life.

The short version is that I believe CDLX represents a much better r/r now at $4 than it did previously, as I believe the company is being overtly punished due to the opaque nature of the business. I would avoid saying it is unfairly punished as I can understand the hesitancy to stay involved or get involved with such a volatile and opaque stock. This of course makes it either a phenomenal long opportunity, or a total capital incinerator. I lean towards opportunity and I outline why below.

Catalysts:

There are two ways to view CDLX from here. One is the more in-depth long-term view that requires some underlying beliefs and all. The other is the short-term catalyst version.

In my experience when stocks become priced for increasingly binary outcomes (bankrupt or not) catalysts and info advantage become much more valuable. I’d like to think I have an info advantage here, however it’s much less guaranteed than something more transparent like CVNA.

The primary catalyst is of course AmEx. On the Q2 call CDLX mentioned they expect a “large bank partner” to go live in the “near future”. For contractual reasons, CDLX cannot use the AmEx name without AmEx permission, so we get the classic “large bank partner” disclosure. In terms of date, I believe the target for AmEx to release a pilot is in Q4 2024. My belief is that the market is a mix of expecting this to launch in Q1 2025/Q2 2024 or not at all after the exit of Karim (more on that later). While an initial pilot would likely be similar to Chase with a limited F&F launch, the qualitative benefits of seeing AmEx on the new platform, with what I believe will be a much more CDLX centric architecture than the market expects, should be a nice boon for the company. This may even happen prior to the Q3 report, which provides a nice benefit.

The second catalyst is the Q3 guide and implications. We can dive further into mechanics later, but I’d expect the Q3 guide to be much more conservative than Q1 and Q2 after the significant sequential misses. This would explain how negative it looks, as they said it is “not baking in any improvements on ad delivery”, which should realistically see some benefit in Q3. I would as a result expect to not get kneecapped 50% again on the Q3 results. The guide in Q3 would then be for Q4, which is seasonally just a much stronger quarter and may include some disclosures about AmEx given the platform should be live in Q4.

The third catalyst is simply the lack of a negative catalyst (hopefully). This is a business that is currently priced like it will not grow again despite AmEx being a confirmed partner in the pipeline. Naturally as we get closer to a live and scaled AmEx, the stock should better reflect that partnership. Now that near term liquidity is not an issue and raises shouldn’t be necessary, it should in theory be hard for a new negative catalyst to emerge. This of course can always surprise like Q2, but should be far less likely.

The fourth catalyst is continued shifts in the underlying business that should emerge over time. BofA used to be 40-50% of consumer incentive volumes and is now 20%. As a result the negative impact of BofA on growth rates should lessen as we go forward, with other banks like Chase/WFC/Lloyd’s consistently growing. Rippl is also starting to monetize via DSP partnerships which should see some acceleration on the Bridg/Rippl side of the business as the past 12 months have been rather stale as they prepped that offering.

Overall, even without taking a long term view I believe CDLX has a solid R/R over the next 12 months due to business developments skewing positive. Not guaranteed of course, but not a bad bet. I believe this framing helps with de-risking the longer term thesis as well which is a nice benefit even if not looking for short-term trades.

Fundamentals:

For those looking for a more cohesive view, let’s dig into the fundmentals. First we can go over the Q2 results.

The primary negative drivers from Q2 were:

1. Q2 results miss and Q3 guide miss

2. Karim exit

3. Continued lack of definitive AmEx guidance

We can go over each.

Q2 and Q3 results

For the results miss and guide miss, a full understanding requires a grasp on the mechanics of their ad platform. The primary limited for CDLX is that once an offer is placed, banks do not want the offer pulled. This sounds reasonable from a consumer experience perspective, but it also causes significant headache for CDLX. Since you cannot pull offers, you have to try and predict user redemption rates PRIOR to offer delivery. CDLX only has a set budget commitment from an advertiser, so if redemptions are too high via the offer being delivered too widely, CDLX has to pay the additional consumer incentives out of pocket. If redemptions are too low via the offer not being delivered widely enough, CDLX has to return the budget to the advertiser and explain they could not fill the volume.

Both of these outcomes are clear negatives and occurred in Q2. Over delivery is beneficial for advertisers in the sense that they get additional ROAS, but CDLX clearly loses out monetarily. It can be beneficial in a sense for future quarters by convincing advertisers there is additional consumer willingness to spend at a performant ROAS, but causes margin issues in the near term. There is additional risk however that advertisers aren’t a fan of campaigns not performing as expected.

Under delivery is almost explicitly negative. Advertisers commit a budget, but CDLX fails to fill it. This causes weakness in billings/revenue vs expected numbers, that historically isn’t visible until 60+ days after the campaign is started. This is due to delays in transaction data, combined with historically having analytics and updates only delivered post campaign. Beyond number impacts, it’s quite bad for advertiser relationships to go back to them and say you missed budget by say 50%.

When CDLX rolled out the new ADE, it was over-delivering high performing offers, and under-delivering poorly performing offers. Thus consumer incentives were much higher than expected, lowering margin, as well as revenue and billings coming in weaker relative to committed budgets than expected. This causes very ugly near term results that are hard to immediately fix due to the fact that:

1. You can’t pull offers to fix over delivery

2. You are heavily incentivized to avoid under delivery

3. You have no idea if a campaign is over or under delivering for 2-8 weeks

4. Advertisers without established data have no basis to calibrate (new/returning advertisers)

I believe this is a very good explanatory variable for CDLX’s high churn rate. Without historical data, it is hard to calibrate an advertisers campaign. The results can easily come out differing from expected numbers, and you wouldn’t even know til 6+ weeks later!

CDLX clearly realizes this is a problem and has worked tirelessly to reduce delays, but not all are in their control. My understanding is that they’re doing better at providing in flight updates to advertisers to better tailor expectations, but will always face delays from transaction data (need the transaction to clear and be sent). Thus they wish to shift to a new pricing model based on engagement with more floating budgets, similar to Facebook/Google/etc.

To me this makes total sense how they could have some issues causing the poor Q2 results and Q3 guide. ADE is supposed to automate much of ad delivery, and it did, with clear benefits to consumer spend on the platform (Consumer Incentives up 25%). The platform was explicitly better in Q2 at converting users into paying, but that conversion was not matched with advertiser budgets.

In theory if CDLX has performant ROAS, advertiser spend should follow consumer willingness to spend, similar to other platforms. This makes their targeted shift in business model a natural best choice.

So while the results did suck, the fact management owned the results, is expressing logically sound reasoning for the results and how to alleviate, and have other developments in AmEx/Rippl, I’m inclined to believe the issues can be transitory with execution.

Hopefully that makes sense for why I still believe in the fundamental business despite what is optically a rather opaque and decelerating business.

Karim Exit

Karim’s exit of course is very bad optics for a significant miss of a levered company. Those typically don’t go well, so understandably some concern.

I personally have soured a bit on Karim as we’ve entered 2024. His stock sales, while tax related, were certainly poorly timed given the AmEx announcement soon after. He seemingly was not adept at piloting a public company with all that entails. The equity raises likely could have been done better if AmEx goes as expected and the Bridg payout timings are certainly suspect given AmEx was surely in final stages at the time. Funnily enough, he also personally DM’d me on Twitter about his stock sales,

From what I’ve gathered, Karim’s exit was likely more related to his personal unhappiness in the position, ranging from the public scrutiny to the comp being tied to a stock he had to make perform. We don’t yet know what his next opportunity is, but I’d guess its an exec position with more guaranteed comp and less oversight.

By this logic, Karim leaving has less to do with the business being “unfixable” and more to do with personal circumstance. I could obviously be wrong as I don’t know everything about the day to day at CDLX, but it seems like a logical conclusion.

Additionally, Amit seems like a clear upgrade. His background is more tech side of the product instead of sales. This is a natural fit if the business is focused around better execution on product and tech over the next few years. It’s hard for Karim to sell much if they need to fix the product first. This likely also contributed to his exit.

All in all, I view the management change as likely an upgrade. While it does come with less performant tech than expected as an explanatory variable, the change here I view as positive.

Lack of AmEx Guidance:

While this is a negative, I don’t view it as their fault per se. They simply cannot share good information about AmEx prior to launch. My research has indicated the relationship will be quite substantial will CDLX powering a significant number of offers through the AmEx platform. They will obviously need to convince advertisers to expand billings which isn’t a given, but the relationship should be highly accretive.

We should start getting more public info on this soon as they pilot, which will alleviate this issue.

I view AmEx as a near and long term benefit to the stock and company.

Overall:

I have not yet changed my CDLX exposure. It is the 2nd largest position in my accounts given CVNA appreciation and CDLX underperformance. I may increase my position by ~20% in the coming days as my research has indicated improved R/R as opposed to meaningful business degradation.

I do believe tail risk has increased, so invest to your own risk tolerance as always.

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