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Digital Media Solutions, Inc. Announces Q3 2021 Results

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·19-min read
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  • Record quarterly revenue of $107.4 million and also record adjusted revenue of $111.8 million

  • Revenue growth of 30% and organic revenue growth of 11% from the year-ago period

  • Net income of $5.4 million and adjusted EBITDA of $11 million

  • Variable marketing margin (VMM) of $37.9 million, or 35%

  • Reiterating prior 2021 guidance on revenues, EBITDA, gross margins and VMM margins

CLEARWATER, Fla., November 09, 2021--(BUSINESS WIRE)--Digital Media Solutions, Inc. (NYSE: DMS), a leading provider of technology-enabled digital performance advertising solutions connecting consumers and advertisers, today announced record third quarter revenue of $107.4 million and adjusted revenue of $111.8 million.

"We are pleased to have reported a record revenue quarter for DMS," stated Joe Marinucci, CEO of DMS. "And, I’m happy to say that diversification helped us continue to deliver top-line growth in this quarter, especially in our largest sector of insurance. In fact, total revenue was up 30% on a reported basis over the year-ago quarter."

Q3 2021 Performance:

Total revenue was $107.4 million, up 30% over the same quarter last year. Adjusted revenue was $111.8 million, an increase of 31% year over year. Gross profit was $31 million, with a 29% margin, compared to 32% in Q2 and 30% in the year-ago quarter. VMM of 35% in Q3, compares to 38% in Q2 2021 and 35% in Q3 2020.

Operating expenses totaled $26 million in the third quarter, a decrease of $3 million from Q2 2021 and an increase of $2 million year over year. Net income was $5.4 million, up from $4.1 million in the same quarter last year. EPS came in at $0.10 as compared to $0.09 in Q3 of the prior year.

On a segment basis, excluding intracompany revenue, Brand-Direct Solutions generated revenue of $65 million, up 32% over the same quarter last year. Gross margin was 23%, down from 26% in Q2 2021, and flat versus the same quarter last year.

Marketplace Solutions generated Q3 revenue of $58 million, up 47% over the same quarter last year. Gross margin was 25%, down from 29% in Q2 2021, and down from 30% in the year ago quarter.

The Other Solutions segment generated revenue of $2 million, down 22% compared to Q3 2020. Gross margin was 72%, compared to 76% in the prior quarter and 64% in Q3 of the prior year.

We ended the quarter with $18.7 million in cash, cash equivalents and marketable securities, flat from the end of Q2, reflecting normal shifts in working capital. Our total debt at quarter end was $224 million, and net of issuance costs, it was $218 million, and we had an available balance on our revolving credit facility of $50 million. Lastly, Q3 ended with a total headcount of 600 FTEs.

Fourth Quarter and Full-Year 2021 Guidance:

Thanks to the diversification, vertical integration and culture of continuous innovation, the Company believes it is well positioned for Q4. DMS currently anticipates revenue, adjusted revenue, gross margin, variable marketing margin, and adjusted EBITDA ranges as follows:

Fourth Quarter 2021:

  • Revenue: $112-$122 million

  • Adjusted Revenue: $116-$126 million

  • Gross Margin: 28-31%

  • Variable Marketing Margin: 32-36%.

  • Adjusted EBITDA: $16.5-$19.5 million

Full-Year 2021:

  • Revenue: $421 - $431 million

  • Adjusted Revenue: $437 - $447 million

  • Adjusted EBITDA: $60 - $63 million

Third-Quarter Earnings Call Details

The Company will hold a conference call to discuss these results at 8:30 a.m. (Eastern Time) today, November 9, 2021.

The U.S. toll free dial-in for the conference call is 1-844-200-6205, and the international dial-in number is 1-929-526-1599. The access code is 898038. A live webcast of the conference call will be available on the investor relations page of the Company's website at https://investors.digitalmediasolutions.com.

A replay will be available after the conclusion of the call through November 16, 2021. The U.S. toll-free replay dial-in number is 1-866-813-9403, and the international replay dial-in number is 1-929-458-6194. The replay access code is 688744.

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. DMS’s actual results may differ from its expectations, estimates and projections and consequently, you should not rely on these forward-looking statements as predictions of future events. These forward statements are often identified by words such as "expect," "estimate," "project," "budget," "forecast," "anticipate," "intend," "plan," "may," "will," "could," "should," "believes," "predicts," "potential," "continue," and similar expressions. These forward-looking statements include, without limitation, DMS’s expectations with respect to its future performance and its ability to implement its strategy, and are based on the beliefs and expectations of our management team from the information available at the time such statements are made. These forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from the expected results. Most of these factors are outside DMS’s control and are difficult to predict. Factors that may cause such differences include, but are not limited to: (1) our ability to identify, evaluate, and complete any strategic alternative in connection with our review of strategic alternatives; (2) the possibility that DMS may not be able to realize higher value for its business through a strategic alternative and therefore retains its current corporate and business structure; (3) the possibility that DMS may decide not to undertake a strategic alternative or that it is not able to consummate any proposed strategic alternative due to, among other things, market, regulatory and other factors; (4) the potential for disruption to DMS’s business, including, among other things, attracting and retaining customers, suppliers, key personnel; (5) any potential adverse effects on DMS’s stock price resulting from the announcement of the process to review potential strategic alternatives or the results of that review; (6) the COVID-19 pandemic or other public health crises; (7) changes in client demand for our services and our ability to adapt to such changes; (8) the entry of new competitors in the market; (9) the ability to maintain and attract consumers and advertisers and successfully grow and operate our new health insurance agency business, in the face of changing economic or competitive conditions; (10) the ability to maintain, grow and protect the data DMS obtains from consumers and advertisers; (11) the performance of DMS’s technology infrastructure; (12) the ability to protect DMS’s intellectual property rights; (13) the ability to successfully source and complete acquisitions and to integrate the operations of companies DMS acquires, including the Crisp Results assets and Aimtell, PushPros and Aramis Interactive; (14) the ability to improve and maintain adequate internal controls over financial and management systems, and remediate the identified material weakness; (15) changes in applicable laws or regulations and the ability to maintain compliance; (16) our substantial levels of indebtedness; (17) volatility in the trading price on the NYSE of our common stock and warrants; (18) fluctuations in value of our private placement warrants; and (19) other risks and uncertainties indicated from time to time in DMS’s filings with the SEC, including those under "Risk Factors" in DMS’s Annual Report on Form 10-K/A and its subsequent filings with the SEC. There may be additional risks that we consider immaterial or which are unknown, and it is not possible to predict or identify all such risks. DMS cautions that the foregoing list of factors is not exclusive. DMS cautions readers not to place undue reliance upon any forward-looking statements, which speak only as of the date made. DMS does not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based.

DIGITAL MEDIA SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share data)

September 30, 2021

December 31, 2020

As Restated

ASSETS

Current assets:

Cash and cash equivalents

$

18,732

$

31,397

Accounts receivable, net of allowances of $4,459 and $3,121, respectively

54,386

42,085

Prepaid and other current assets

5,326

2,943

Income tax receivable

2,013

474

Total current assets

80,457

76,899

Property and equipment, net

19,719

15,016

Goodwill

67,127

44,904

Intangible assets, net

80,914

46,447

Deferred tax assets

18,682

18,948

Other assets

965

206

Total assets

$

267,864

$

202,420

LIABILITIES AND DEFICIT

Current liabilities:

Accounts payable

$

42,289

$

37,191

Accrued expenses and other current liabilities

8,542

9,886

Current portion of long-term debt

2,250

7,967

Income tax payable

160

1,413

Short-term Tax Receivable Agreement liability

1,551

510

Contingent consideration payable - current

6,166

Total current liabilities

60,958

56,967

Long-term debt

215,767

193,591

Long-term Tax Receivable Agreement liability

15,295

15,760

Deferred tax liability

6,170

7,024

Private Placement Warrant liabilities

8,240

22,080

Contingent consideration payable - non-current

997

Deferred acquisition consideration payable

4,713

Other non-current liabilities

1,970

2,683

Total liabilities

314,110

298,105

Stockholders' deficit:

Preferred stock, $0.0001 par value, 100,000 shares authorized; none issued and outstanding at September 30, 2021

Class A common stock, $0.0001 par value, 500,000 shares authorized; 36,168 issued and outstanding at September 30, 2021

4

3

Class B common stock, $0.0001 par value, 60,000 shares authorized; 25,999 issued and 25,699 outstanding at September 30, 2021

3

3

Class C common stock, $0.0001 par value, 40,000 authorized; none issued and outstanding at September 30, 2021

Additional paid-in capital

$

(27,717

)

$

(48,027

)

Retained earnings

2,799

(3,146

)

Total stockholders' deficit

(24,911

)

(51,167

)

Non-controlling interest

$

(21,335

)

$

(44,518

)

Total deficit

(46,246

)

(95,685

)

Total liabilities and deficit

$

267,864

$

202,420

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

DIGITAL MEDIA SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020 As
Restated

2021

2020 As
Restated

Net revenue

$

107,399

$

82,829

$

309,281

$

230,753

Cost of revenue

76,139

57,777

216,680

160,338

Salaries and related costs

12,449

7,882

34,426

24,114

General and administrative expenses

11,161

6,807

28,675

16,756

Acquisition costs

(2,665

)

3,248

(705

)

3,322

Depreciation and amortization

7,186

4,636

19,649

13,307

Income from operations

$

3,129

$

2,479

$

10,556

$

12,916

Interest expense

3,756

3,421

10,635

10,702

Change in fair value of warrant liabilities

(6,400

)

(3,840

)

(13,835

)

(3,840

)

Debt extinguishment

2,108

Net income before income taxes

$

5,773

$

2,898

$

11,648

$

6,054

Income tax expense

379

1,636

1,527

1,901

Net income

$

5,394

$

1,262

$

10,121

$

4,153

Net income attributable to non-controlling interest

1,858

2,463

4,217

2,463

Net income (loss) attributable to Digital Media Solutions, Inc.

$

3,536

$

(1,201

)

$

5,904

$

1,690

Weighted-average shares outstanding - basic

36,511

32,294

35,050

32,294

Weighted-average shares outstanding - diluted

63,321

32,294

61,988

32,294

Earnings per share attributable to Digital Media Solutions, Inc.:

Basic earnings per common shares

$

0.10

$

0.09

$

0.17

$

0.09

Diluted earnings per common shares

$

0.09

$

0.09

$

0.16

$

0.09

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

DIGITAL MEDIA SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

Nine Months Ended September 30,

2021

2020 As
Restated

Cash flows from operating activities

Net income

$

10,121

$

4,153

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

19,649

13,307

Lease restructuring charges

(81

)

Debt extinguishment

2,108

Provision for bad debt

1,384

800

Stock-based compensation, net of amounts capitalized

3,976

Payment of contingent consideration

(1,000

)

Amortization of debt issuance costs

1,006

699

Deferred income tax provision, net

(856

)

(1,261

)

Other

400

Change in fair value of contingent consideration

(2,525

)

Change in fair value of warrant liability

(13,835

)

(3,840

)

Change in income tax receivable and payable

(728

)

Change in accounts receivable

(7,324

)

(8,486

)

Change in prepaid expenses and other current assets

(2,121

)

(495

)

Change in accounts payable and accrued expenses

(2,367

)

3,210

Change in other liabilities

(516

)

(136

)

Net cash provided by operating activities

$

7,891

$

7,351

Cash flows from investing activities

Additions to property and equipment

$

(7,875

)

$

(7,481

)

Acquisition of businesses, net of cash acquired

(24,830

)

(2,799

)

Net cash used in investing activities

$

(32,705

)

$

(10,280

)

Cash flows from financing activities

Proceeds from Business Combination

29,278

Proceeds from issuance of long-term debt

220,840

Payments of long-term debt and notes payable

(200,414

)

(3,423

)

Proceeds from borrowings on revolving credit facilities

11,000

10,000

Payments of borrowings on revolving credit facilities

(15,000

)

(11,000

)

Payment of debt issuance costs

(3,565

)

(264

)

Payment of equity issuance

(475

)

Payment of early termination

(188

)

Proceeds from warrants exercised

11

Other

(60

)

(170

)

Net cash provided by financing activities

$

12,149

$

24,421

Net change in cash

$

(12,665

)

$

21,492

Cash, beginning of period

31,397

3,008

Cash, end of period

$

18,732

$

24,500

Supplemental Disclosure of Cash Flow Information

Cash Paid During the Period For:

Interest

$

10,908

$

10,070

Income taxes, net

$

3,837

$

1,570

Non-Cash Investing and Financing Transactions:

Contingent and deferred acquisition consideration

$

11,877

$

Issuance of equity for Aimtell/PushPros/Aramis, Crisp Results and SmarterChaos

$

35,000

$

3,000

Stock based compensation capitalized in Internally Developed Software

$

366

$

Capital expenditures included in accounts payable

$

550

$

138

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NON-GAAP FINANCIAL MEASURES

In addition to providing financial measurements based on accounting principles generally accepted in the United States of America ("GAAP"), this Quarterly Report includes additional financial measures that are not prepared in accordance with GAAP ("non-GAAP"), including adjusted revenue, 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 and 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 Revenue

Adjusted revenue is a non-GAAP financial measure presented as an alternative method for assessing the Company’s operating results in a manner that is focused on the performance of our underlying operations. Management believes this measure provides useful information because, while the majority of our business consists of lead generation contracts which are accounted for on a gross basis, a portion of our agency managed services contracts are accounted for on a net basis. In light of these considerations, management believes that adjusted revenue provides useful information regarding operating performance across our business, without regard to the accounting treatment of individual contracts, and allows management to build forecasts on a consistent basis across the business. Management further uses adjusted revenue to compare the performance of divisions within the Company against each other and to isolate our core operating performance. Moreover, management expects that over time we will transition all of our services to a principal relationship and as our contracts are either amended or new agreements are executed, this measure will help provide a basis for comparison of our business operations between different periods over time as we transition these services and related accounting for these contracts.

Adjusted revenue is defined as revenue as reported under GAAP, without regard to netting of costs applicable to revenues earned under contracts that are deemed to be entered into on an agency basis.

The following table provides a reconciliation of Adjusted Revenue to revenue, the most directly comparable GAAP measure (in thousands):

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

Reported
(GAAP)

Adjustments
(1)

Adjusted
(Non-GAAP)

Reported
(GAAP)

Adjustments
(1)

Adjusted
(Non-GAAP)

Net revenue

$

107,399

$

4,402

$

111,801

$

309,281

$

11,313

$

320,594

Cost of revenue

76,139

4,402

80,541

216,680

11,313

227,993

Gross profit

$

31,260

$

$

31,260

$

92,601

$

$

92,601

Gross profit margin

29.1

%

%

28.0

%

29.9

%

%

28.9

%

(1) Includes the gross up for certain Managed services contracts that are presented net of costs under GAAP for the three and nine months ended September 30, 2021.

Variable Marketing Margin

Variable Marketing Margin is a measure of the efficiency of the Company’s revenue generation efforts, measuring revenue after subtracting the variable marketing and direct media costs that are directly associated with revenue generation. Variable Marketing Margin and Variable Marketing Margin % of revenue are key reporting metrics by which the Company measures the efficacy of its marketing and media acquisition efforts.

Variable Marketing Margin is defined as revenue less variable marketing expense. Variable marketing expense is defined as the expense attributable to variable costs paid for direct marketing and media acquisition costs, and includes only the portion of cost of revenue attributable to costs paid for this direct marketing activity and advertising acquired for resale to the Company’s customers, and excludes overhead, fixed costs and personnel-related expenses. The majority of these variable advertising costs are expressly intended to drive traffic to our websites and to our customers’ websites, and these variable advertising costs are included in cost of revenue on the company's condensed consolidated statements of operations.

Below is a reconciliation of net income (loss) from continuing operations to Variable Marketing Margin and net income (loss) from continuing operation % of revenue to Variable Marketing Margin % of revenue.

The following table provides a reconciliation of Variable Marketing Margin to net income, the most directly comparable GAAP measure (in thousands, except percentages):

Three Months Ended

Nine Months Ended

September 30,
2021

September 30,
2020

September 30,
2021

September 30,
2020

Net income from continuing operations

$

5,394

$

1,262

$

10,121

$

4,153

Net income (loss) from continuing operations % of revenue

5

%

2

%

3

%

2

%

Adjustments to reconcile to variable marketing margin:

Cost of revenue adjustment (1)

6,603

3,940

16,308

10,150

Salaries and related costs

12,449

7,882

34,426

24,114

General and administrative expense

14,246

6,807

31,200

16,756

Acquisition costs

(2,665

)

3,248

(705

)

3,322

Depreciation and amortization

7,186

4,636

19,649

13,307

Change in fair value of contingent consideration

(3,085

)

(2,525

)

Change in fair value of warrant liabilities

(6,400

)

(3,840

)

(13,835

)

(3,840

)

Debt extinguishment

2,108

Interest expense, net

3,756

3,421

10,635

10,702

Income tax expense

379

1,636

1,527

1,901

Variable marketing margin

$

37,863

$

28,992

$

108,909

$

80,565

Variable marketing margin % of revenue

35

%

35

%

35

%

35

%

(1) Represents amounts reported as cost of revenue that are not direct media costs associated with lead sales, which were added back for the purpose of the Variable Marketing Margin ("VMM").

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 income (loss), excluding (1) interest expense, (2) income tax expense, (3) depreciation and amortization, (4) change in fair value of warrant liabilities, (5) debt extinguishment, (6) stock-based compensation, (7) restructuring, (8) acquisition costs, (9) other expenses, (10) cost savings expected as a result of a company reorganization, (11) cost synergies expected as a result of full integration of our acquisitions, and (12) pre-acquisition cost savings resulting from current year’s acquisition and comparable to same period last year.

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.

Unlevered free cash flow is defined as adjusted EBITDA, less capital expenditures, and unlevered free cash flow conversion is defined as unlevered free cash flow divided by adjusted EBITDA.

The following table provides a reconciliation of Adjusted EBITDA and Unlevered Free Cash Flow from net income the most directly comparable GAAP measure (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020 (As
restated)

2021

2020 (As
restated

Net income

$

5,394

$

1,262

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