PREVIEW
The following Management's Discussion and Analysis ("MD&A") is intended to
assist in an understanding of our financial condition and results of operations.
This MD&A is provided as a supplement to, should be read in conjunction with,
and is qualified in its entirety by reference to, our Consolidated Financial
Statements (Unaudited) and accompanying Notes appearing elsewhere in this
Quarterly Report (the "Notes"). In addition, reference should be made to our
Audited Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements and Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our 2021 Form 10-K.
Except for the historical information contained herein, the discussions in this
MD&A contain forward-looking statements that involve risks and uncertainties.
Our future results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below in this MD&A under "Forward-Looking Statements and
Factors that May Affect Future Results".
On August 16, 2021 , we announced our decision to evaluate potential strategic
alternatives to maximize shareholder value. We intend to evaluate a full range
of strategic, operational and financial alternatives. We have retained Goldman
Sachs & Co LLC and Canaccord Genuity as our financial advisors to assist with
the strategic review process. There can be no assurance that the strategic
review process will result in any strategic alternative, or any assurance as to
its outcome or timing.
RESULTS OF OPERATIONS
The following table presents our consolidated results of operations as a
percentage of net revenue:
Three Months Ended March
31,
2022 2021
Revenue by type:
Customer acquisition 96.4 % 94.4 %
Managed services 2.9 % 4.1 %
Software services 0.7 % 1.5 %
Total net revenue 100.0 % 100.0 %
Revenue by segment:
Brand Direct 56.1 % 58.0 %
Marketplace 53.9 % 50.9 %
Technology Solutions 2.1 % 2.1 %
Intercompany eliminations (12.1) % (11.0) %
Net revenue 100.0 % 100.0 %
Cost of revenue 71.3 % 71.5 %
Gross profit 28.7 % 28.5 %
Salaries and related costs 12.5 % 10.6 %
General and administrative 10.2 % 7.2 %
Depreciation and amortization 6.5 % 5.6 %
Acquisition costs - % 1.5 %
Change in fair value of contingent consideration 2.4 % - %
(Loss) income from operations (2.9) % 3.6 %
Interest expense 3.4 % 3.4 %
Change in fair value of warrant liabilities (1.7) % 0.3 %
Net loss before income taxes (4.6) % (0.1) %
Income tax expense 0.3 % 0.1 %
Net loss (4.9) % (0.2) %
Net loss attributable to non-controlling interest (2.0) % (0.1) %
Net loss attributable to Digital Media Solutions, Inc. (2.9) % (0.1) %
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Results of operations for the three months ended
The following table presents the consolidated results of operations for the three months endedMarch 31, 2022 and 2021 and the changes from the prior period (in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Net revenue$ 109,110 $ 96,803 $ 12,307 12.7 % Cost of revenue 77,834 69,182 8,652 12.5 % Gross profit$ 31,276 $ 27,621 $ 3,655 13.2 % Salaries and related costs 13,705 10,269 3,436 33.5 % General and administrative 11,107 6,962 4,145 - 59.5 % Depreciation and amortization 7,060 5,419 1,641 30.3 % Acquisition costs 13 1,494 (1,481) (99.1) % Change in fair value of contingent consideration 2,591 - 2,591 100.0 % (Loss) income from operations$ (3,200) $ 3,477 $ (6,677) (192.0) % Interest expense 3,687 3,257 430 13.2 % Change in fair value of warrant liabilities (1,840) 315 (2,155) - (684.1) % Net loss before income taxes$ (5,047) $ (95) $ (4,952) 5212.6 % Income tax expense 310 117 193 165.0 % Net loss$ (5,357) $ (212) $ (5,145) 2426.9 % Net loss attributable to non-controlling interest (2,223) (93) (2,130) 2290.3 % Net loss attributable to Digital Media Solutions, Inc.$ (3,134) $ (119) $ (3,015) 2533.6 % Net revenue. Our business generates revenue primarily through the delivery of a variety of performance-based marketing services, including customer acquisition, managed services and software services.
The following table shows revenue by type for each segment and changes from the prior period:
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Three Months Ended March 31,
2022 2021 $ Change % Change
Brand Direct
Customer acquisition $ 59,619 $ 52,901 $ 6,718 13 %
Managed services 1,609 3,278 (1,669) (51) %
Total Brand Direct 61,228 56,179 5,049 9 %
Marketplace
Customer acquisition 58,806 49,101 9,705 20 %
Managed services - 158 (158) (100) %
Total Marketplace 58,806 49,259 9,547 19 %
Technology Solutions
Managed services 1,510 510 1,000 196 %
Software services 826 1,507 (681) (45) %
Total Technology Solutions 2,336 2,017 319 16 %
Corporate and Other
Customer acquisition (13,260) (10,652) (2,608) 24 %
Total Corporate and Other (13,260) (10,652) (2,608) 24 %
Total Customer acquisition 105,165 91,350 13,815 15 %
Total Managed services 3,119 3,946 (827) (21) %
Total Software services 826 1,507 (681) (45) %
Total Net revenue $ 109,110 $ 96,803 $ 12,307 13 %
Customer Acquisition Revenue. Customer acquisition contracts deliver potential
consumers or leads (i.e. number of clicks, emails, calls and applications) to
the customer in real-time based on predefined qualifying characteristics
specified by our customer.
Our Brand Direct segment experienced an increase in Customer acquisition revenue
of $6.7 million or 13% during the three months ended March 31, 2022 . Customer
acquisition revenue for Marketplace increased by $9.7 million or 20% for the
three months ended March 31, 2022 . The increases in both the Brand Direct and
Marketplace segments were primarily due to the migration of consumers to the
online shopping experience, especially in the auto and health insurance
verticals, as well as two acquisitions the Company completed in the first half
of 2021.
Managed Services Revenue. Managed services contracts provide continuous service
of managing the customer's media spend for the purpose of generating leads
through a third-party supplier of leads, as requested by our customer. Managed
services revenue experienced a decrease of $0.8 million or 21% during the three
months ended March 31, 2022 . The decrease was primarily driven by decreased
media activity resulting in lower agency fees.
Software Services Revenue. Software services contracts provide the customer with
continuous, daily access to the Company's proprietary software. Software
services revenue is considered insignificant during the three months ended March
31, 2022 .
Cost of revenue and gross profit. Cost of revenue primarily includes media and
other related costs, such as the cost to acquire user traffic through the
purchase of impressions, clicks or actions from publishers or third-party
intermediaries, including advertising exchanges, and technology costs that
enable media acquisition. These media costs are used primarily to drive user
traffic to the Company's and our customers' media properties. Cost of revenue
also includes indirect costs such as data verification, hosting and fulfillment
costs.
The following table shows the gross margin percentage (gross margin as a percentage of total revenue) by segment and the variations compared to the previous period:
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Three Months Ended March 31,
2022 2021 PPTS Change
Brand Direct 20.9 % 26.9 % -6.0
Marketplace 27.9 % 25.7 % 2.2
Technology Solutions 88.6 % 79.4 % 9.2
Total gross profit percentage 28.7 % 28.5 % 0.2
Brand Direct’s gross profit declined for the three months ended
Marketplace gross profit increased for the quarter ended
Gross profit for Technology Solutions increased for the three months endedMarch 31, 2022 , driven by the optimization of media purchasing activity which lead to larger budgets and resulted in increased fees.
Total gross profit increased for the three months ended
Salaries and related costs. Total compensation includes salaries, commissions, bonuses, payroll taxes and retirement benefits. Salaries and related costs increased by$3.4 million or 33.5% for the three months endedMarch 31, 2022 , which was primarily driven by stock-based compensation and headcount as a result of required expansion of our workforce to support the Company's growth, as well as the addition of FTEs from the Crisp Results and Aimtell/Aramis/PushPros ("AAP") acquisitions. General and administrative. General and administrative consist of expenses incurred in our normal course of business relating to office supplies, computer and technology, rent and utilities, insurance, legal and professional fees, state and local taxes and licenses, penalties and settlements and bad debt expense, as well as sales and marketing expenses relating to advertising and promotion. We also include other expenses such as investment banking expenses, fundraising costs and costs related to the advancement of our corporate social responsibility program.
General and administrative expenses increased
Acquisition costs. Acquisition-related costs are not considered part of acquisition consideration and are expensed as incurred. This includes acquisition incentive compensation and other transaction-related costs.
Acquisition costs decreased by$1.5 million or 99.1%, during the three months endedMarch 31, 2022 . The decrease was primarily due to higher prior year acquisition costs related to Crisp Results and Aimtell/Aramis/PushPros ("AAP") acquisitions.
Depreciation and amortization. Property, plant and equipment include computers and office equipment, furniture and fixtures, leasehold improvements and the costs of internally developed software. Intangible assets subject to amortization include technology, customer relationships, brand and non-competition agreements.
Depreciation and amortization increased
Interest expense. Interest expense for three months endedMarch 31, 2022 was related primarily to our debt, which carries a variable interest rate based on multiple options at either LIBOR plus 5% or an alternate base rate, plus an agreed upon margin withTruist Bank , the Company's financial institution sinceMay 25, 2021 (see Note 5. Debt). Interest expense increased by$0.4 million or 13.2%, during the three months endedMarch 31, 2022 . The increase for the three months endedMarch 31, 2022 , was primarily due to comparatively higher outstanding debt balance.
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Table of Contents Income tax expense. The Company recorded income tax expense of$0.3 million for the three months endedMarch 31, 2022 . The blended effective tax rate for the three months endedMarch 31, 2022 was (6)%, which varies from our statutoryU.S. tax rate due to taxable income or loss that is allocated to the non-controlling interest and impact of the valuation allowance on DMS, Inc.
NON-GAAP FINANCIAL MEASURES
In addition to providing financial measurements based on accounting principles generally accepted inthe United States of America ("GAAP"), this Quarterly Report includes additional financial measures that are not prepared in accordance with GAAP ("non-GAAP"), including adjusted EBITDA, unlevered free cash flow, adjusted net income and adjusted EPS. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures can be found below. As explained further below, we use these financial measures internally to review the performance of our business units without regard to certain accounting treatments, non-operational, extraordinary or non-recurring items. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results of operations. Because of these limitations, management relies primarily on its GAAP results and uses non-GAAP measures only as a supplement. Adjusted EBITDA, Unlevered Free Cash Flow and Unlevered Free Cash Flow Conversion We use the non-GAAP measures of Adjusted EBITDA and Unlevered Free Cash Flow to assess operating performance. Management believes that these measures provide useful information to investors regarding DMS's operating performance and its capacity to incur and service debt and fund capital expenditures. DMS believes that these measures are used by many investors, analysts and rating agencies as a measure of performance. By reporting these measures, DMS provides a basis for comparison of our business operations between current, past and future periods by excluding items that DMS does not believe are indicative of our core operating performance. Financial measures that are non-GAAP should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, DMS relies primarily on its GAAP results and uses Adjusted EBITDA and Unlevered Free Cash Flow only as a supplement. Adjusted EBITDA is defined as net loss, excluding (a) interest expense, (b) income tax expense, (c) depreciation and amortization, (d) change in fair value of warrant liabilities, (e) debt extinguishment, (f) stock-based compensation, (g) change in tax receivable agreement liability, (h) restructuring costs, (i) acquisition costs, and (j) other expense. In addition, we adjust to take into account estimated cost synergies related to our acquisitions. These adjustments are estimated based on cost-savings that are expected to be realized within our acquisitions over time as these acquisitions are fully integrated into DMS. These cost-savings result from the removal of cost and or service redundancies that already exist within DMS, technology synergies as systems are consolidated and centralized, headcount reductions based on redundancies, right-sized cost structure of media and service costs utilizing the most beneficial contracts within DMS and the acquired companies with external media and service providers. We believe that these non-synergized costs tend to overstate our expenses during the periods in which such synergies are still being realized. Furthermore, in order to review the performance of the combined business over periods that extend prior to our ownership of the acquired businesses, we include the pre-acquisition performance of the businesses acquired. Management believes that doing so helps to understand the combined operating performance and potential of the business as a whole and makes it easier to compare performance of the combined business over different periods.
Unleveraged free cash flow is defined as Adjusted EBITDA less capital expenditures, and unleveraged free cash flow conversion is defined as unleveraged free cash flow divided by adjusted EBITDA.
The following table provides a reconciliation between Adjusted net income and Adjusted EBITDA, and Unlevered Free Cash Flow, from Net loss, the most directly comparable GAAP measure (in thousands):
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Three Months Ended March 31,
2022 2021
Net loss $ (5,357) $ (212)
Adjustments
Interest expense 3,687 3,257
Income tax expense 310 117
Depreciation and amortization 7,060 5,419
Change in fair value of warrant liabilities (1) (1,840) 315
Stock-based compensation expense 1,842 1,257
Restructuring costs 394 (351)
Acquisition costs (2) 2,604 1,494
Other expense (3) 1,793 1,513
Adjusted net income $ 10,493 $ 12,809
Additional adjustments
Pro forma cost savings - Reorganization (4) $ - $ 31
Pro forma cost savings - Acquisitions (5) - 769
Acquisitions EBITDA (6) - 2,711
Adjusted EBITDA $ 10,493 $ 16,320
Less: Capital Expenditures 1,617 2,391
Unlevered free cash flow $ 8,876 $ 13,929
Unlevered free cash flow conversion 84.6 % 85.3 %
______________
(1) Adjustments to warrant liability at market value.
(2) The balance includes transaction costs related to the business combination, acquisition inducement payments, contingent consideration accretion, earn-out payments and pre-acquisition expenses.
(3) The balance includes legal fees associated with acquisitions and other extraordinary matters, costs related to philanthropic initiatives and costs related to private mandate transactions.
(4)Cost savings resulting from the reorganization of the company initiated in the second quarter of 2020.
(5) Cost synergies expected following the full integration of acquisitions.
(6) Pre-acquisition adjusted EBITDA results from the acquisitions of AAP and Crisp Results during the three months ended
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A reconciliation of Unlevered Free Cash Flow to net cash provided by operating
activities, the most directly comparable GAAP measure, is presented below (in
thousands):
Three months completed
2022 2021 Unlevered free cash flow $ 8,876$ 13,929 Capital expenditures 1,617 2,391 Adjusted EBITDA $
10,493
Acquisitions EBITDA (1) - 2,711 Pro forma cost savings - Reorganization (2) - 31 Pro forma cost savings - Acquisitions (3) - 769 Adjusted net income$ 10,493 $ 12,809 Acquisition costs (4) 2,604 1,494 Other expenses (5) 1,793 1,513 Stock-based compensation 1,842 1,257 Restructuring costs 394 (351) Change in fair value of warrant liabilities (6) (1,840) 315 Subtotal before additional adjustments $ 5,700$ 8,581 Less: Interest expense 3,687 3,257 Less: Income tax expense 310 117 Provision for bad debt 532 410 Lease restructuring charges (126) (303) Stock-based compensation, net of amounts capitalized 1,842 1,257 Amortization of debt issuance costs 453 233 Deferred income tax provision, net (392) (1,016) Change in fair value of contingent consideration 2,591 382 Change in fair value of warrant liability (1,840) 315 Change in income tax receivable and payable 732 1,133 Change in accounts receivable (7,368) (1,069) Change in prepaid expenses and other current assets 1,150 367 Change in accounts payable and accrued expenses (1,263) (5,703) Change in other liabilities 38 (24) Net cash (used in) provided by operating activities$ (1,948) $ 1,189 ______________
(1) Adjusted EBITDA results before acquisition of AAP and Crisp results, and acquisitions during the three months ended
(2) Cost savings resulting from the reorganization of the company initiated in the second quarter of 2020.
(3) Expected cost synergies due to the full integration of acquisitions.
(4) The balance includes transaction costs related to the business combination, acquisition inducement payments, contingent consideration accretion, earn-out payments and pre-acquisition expenses.
(5) The balance includes legal fees associated with acquisitions and other extraordinary matters, costs related to philanthropic initiatives and costs related to private mandate transactions.
(6) Adjustments to warrant liability at market value.
Adjusted net profit and adjusted EPS
We use the non-GAAP measures Adjusted Net Income and Adjusted EPS to assess operating performance. Management believes that these measures provide investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial and operating performance. Management also believes these non-GAAP financial measures are useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to
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Table of Contents overall operating performance. We define Adjusted Net Income (Loss) as net loss attributable toDigital Media Solutions, Inc. adjusted for (x) costs associated with the change in fair value of warrant liabilities, debt extinguishment, Business Combination, acquisition-related costs, equity based compensation and lease restructuring charges and (y) the reallocation of net income (loss) attributable to non-controlling interests from the assumed acquisition byDigital Media Solutions, Inc. of all units ofDigital Media Solutions Holdings, LLC ("DMSH LLC ") (other than units held by subsidiaries ofDigital Media Solutions, Inc. ) for newly-issued shares of Class A Common Stock ofDigital Media Solutions, Inc. on a one-to-one basis. We define adjusted pro forma net loss per share as adjusted pro forma net loss divided by the weighted-average shares of Class A Common Stock outstanding, assuming the acquisition byDigital Media Solutions, Inc. of all outstandingDMSH LLC units (other than units held by subsidiaries ofDigital Media Solutions, Inc. ) for newly-issued shares of Class A Common Stock on a one-to-one-basis. The following table presents a reconciliation between GAAP Earnings Per Share and Non-GAAP Adjusted Net Income and Adjusted EPS (In thousands, except per share data): Three Months Ended March 31, 2022 2021 Numerator: Net loss$ (5,357) $ (212) Net loss attributable to non-controlling interest (2,223) (93) Net loss attributable toDigital Media Solutions, Inc. - basic and diluted$ (3,134) $ (119) Denominator: Weighted average shares - basic and diluted 35,576 33,241
Net earnings (loss) per common share:
Basic and diluted$ (0.09) $ - Three Months Ended March 31, 2022 2021 Numerator:
Net loss attributable to
$
(3,134)
Add adjustments:
Change in fair value of warrant liabilities (1,840) 315
Acquisition and related costs 2,604 1,494
Restructuring costs 394 (351)
Business combination expenses - 769
Stock-based compensation expense 1,842 1,257
$ 3,000 $ 3,484
Net income tax expense based on conversion of units - 144
Adjusted net income (loss) attributable to
$
(134)
Denominator:
Weighted-average shares outstanding - basic and diluted 35,576 33,241 Weighted-average LLC Units ofDMSH, LLC that are convertible into Class A common stock 25,728 26,306 61,304 59,547 Adjusted EPS - basic and diluted $ -$ 0.06
CASH AND CAPITAL RESOURCES
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The following table summarizes certain key measures of our liquidity and capital
resources (in thousands):
March 31, December 31,
2022 2021 $ Change % Change
Cash $ 21,703 $ 26,394 $ (4,691) (18) %
Availability under revolving credit facility $ 50,000 $ 50,000 $ - - %
Total Debt $ 217,533 $ 217,755 $ (222) - %
Our capital sources are focused on investments in our technology solutions,
corporate infrastructure and strategic acquisitions to further expand into new
business sectors and/or expand sales in existing sectors. We generate sufficient
cash flows for working capital and expect to do so for the foreseeable future.
Our principal sources of liquidity on a short-term basis are cash and cash
equivalents, and cash flows provided by operations. Our primary use of cash is
compensation to our employees and payments for general operating expenses and
interest expense.
Borrowings under the Revolving Facility bear interest, at our option, at either
(i) adjusted LIBOR plus 4.25% or (ii) a base rate (which is equal to the highest
of (a) the administrative agent's prime rate, (b) the federal funds rate, as in
effect from time to time, plus 0.50%, (c) one-month LIBOR plus 1.00%, and (d)
1.75% (the "Base Rate")), plus 3.25%. The Term Loan bears interest at our
option, at either (i) adjusted LIBOR plus 5.00% or (ii) the Base Rate plus
4.00%. Under the Revolving Facility, DMS LLC will pay a 0.50% per annum
commitment fee in arrears on the undrawn portion of the revolving commitments.
For the three months ended March 31, 2022 , the effective interest rate was
6.29%. Since May 25, 2021 our interest rate is based on LIBOR plus 5%.
The term loan, which was issued at an initial issue discount of 1.80% or
Cash flows from operating activities Net cash (used in) provided by operating activities was$(1.9) million for the three months endedMarch 31, 2022 as compared to$1.2 million provided by operating activities in the three months endedMarch 31, 2021 . The decrease is primarily attributable to an increase in accounts receivable due to timing of customer payments, and a slight decrease in accounts payable and current accrued expenses due to timing of vendor payments. Cash flows from investing activities Net cash used in investing activities for the three months endedMarch 31, 2022 decreased by$5.2 million or 76% to$1.6 million from$6.8 million for the three months endedMarch 31, 2021 primarily due to the timing of the acquisition of AAP made during the first quarter of 2021. Cash flows from financing activities Net cash used in financing activities for the three months endedMarch 31, 2022 was$1.1 million , reflecting a decrease of$0.7 million or 40%, as compared to$1.9 million for the three months endedMarch 31, 2021 . This decrease was due to higher required repayments of borrowings of long-term debt and notes payable in the prior year under the Monroe Credit Facility and Insurance Premium Financial Service arrangements. For the three months endedMarch 31, 2022 and 2021, our Unlevered Free Cash Flow conversion rate was 84.6% and 85.3%, respectively. The slight decrease was due to higher business performance.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, we do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to Section 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Form 10-K for more information about our critical accounting policies and other significant accounting policies.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements (Unaudited), included in Item 1: Financial Statements of this Quarterly Report, for a more detailed discussion on recent accounting pronouncements and the related impact on our consolidated financial statements.
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