Fluent - Q1 2024

Transcript

Operator (participant)

Good afternoon, and welcome. Thank you for joining us to discuss our first quarter 2024 earnings results. With me today are Fluent's CEO, Don Patrick, Interim CFO, Ryan Perfit, and Chief Strategy Officer, Ryan Schulke. On our call today, we'll begin with comments from Don and Ryan Perfit, followed by a question and answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website at www.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, estimates, and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During the call, management will also present certain non-GAAP financial information related to media margin, adjusted EBITDA, and adjusted net income.

Management evaluates the financial performance of our business on a variety of indicators, including these non-GAAP metrics. The definition of these metrics and reconciliations to the most directly comparable GAAP financial measures are provided in the earnings press release issued earlier today. With that, I am pleased to introduce Fluent's CEO, Don Patrick. You may begin.

Don Patrick (CEO)

Good afternoon. Thank you all for joining our call today. I'm here together with Ryan Schulke, our Chief Strategy Officer, Chairman of the Board, and Company Founder, and Ryan Perfit, our Chief Financial Officer. I'll make some brief comments about our first quarter results that reflect the strategic pivot we are making in evolving our 2024 growth strategies, focused on leveraging our leadership position in owned and operated marketplaces as a competitive advantage. In concert, a proprietary technology platform is proving to be an effective springboard from our owned and operated marketplaces into new, high volume, high growth, syndicated performance marketplaces that we believe represent long-term strategic runways that will ultimately be margin accretive to the core.

In the earnings release today, we reported quarterly results that continue to demonstrate meaningful progress in our new performance marketplaces, while also reflecting our post FTC settlement transition with the corresponding impact on our owned and operated marketplaces, business, and financials. Overall, our financial results remain consistent with the roadmap we laid out in previous earnings releases. Our first quarter financial results were as follows: Revenue of $66 million, which represents a 14.6% decline versus Q1 2023. These results, driven primarily by the impact of our FTC settlement and our related strategic and financial decisions to forgo revenue streams that we felt were no longer strategically compelling or did not meet our evolving quality standards in our owned and operated marketplaces. Revenue results were positively offset by the new performance marketplaces, continuing to accelerate with strong double-digit growth, albeit off a smaller base.

Our media margin of $22.1 million was an increase of 1% year-over-year versus Q1 2023. At 33.6% of revenue, we saw media margin increase almost 500 basis points from 28.6 last year, consistent with our strategic plan and a direct reflection of shifting our business mix to a higher margin performance marketplaces. Adjusted EBITDA of $0.7 million represents 1.1% of revenue, reflecting seasonality as well as our continued investment in what we see as a strategically compelling, market-proven, and sustainable growth agenda. As outlined in our last earnings release, we expect to see year-over-year revenue decline in the first half of 2024, given, one, the residual impact of exiting our non-strategic businesses, which won't be fully cycled until the second half.

And two, our new performance marketplaces, which, while still growing aggressively year-over-year, will have sequential quarterly declines based on the high seasonality of the verticals we presently serve. To be clear, we're ahead of expectations on our new performance marketplaces. Our foundational strength in owned and operated marketplaces provides us valuable access to consumers, where we've built meaningful relationships that are very attractive to our world-class brand partners.... Fluent's performance pricing model provides their partners with a differentiated marketplace that meets their customer acquisition growth needs, while being strategically aligned with their goals. The revenue and margin pressure on our owned and operated marketplaces are being driven by three significant headwinds, two ongoing and one new.

In previous earnings releases, we've detailed, one, the impact of our post FTC settlement, and two, continued macroeconomic headwind, that our advertiser clients continue shifting their consumer acquisition strategies to a clear prioritization on return on ad spend, given the consumer volatility in the market. Our strategic adjustments to these headwinds have been grounded in our commitment to enhance the quality of our consumer experiences relative to the engagement and satisfaction with our owned and operated marketplaces, while driving higher quality outcome for advertisers. Our third headwind is that in spite of the fact that Fluent has led the industry in establishing and executing leading-edge protocols, which we believe are the best-in-class model for the entire industry, we are seeing certain competitors accelerate activity via non-compliant marketing practices that violate the FTC Act and guidance.

In the immediate term, these non-compliant competitive practices put us at a market disadvantage in scaling certain media channels. We are not naive, and we certainly expected some competitors to try to financially take advantage of this situation, albeit at their own business and regulatory peril. But we also felt the FTC would more expeditiously and aggressively address the non-compliant marketers across the industry. It remains our view that these practices by our competitors will not continue indefinitely, and the FTC enforcement, along with our regulators at the state and federal level, and a very active class action plaintiff bar, will eventually eliminate the troublesome practices of some of our competitors and level the playing field. Regardless, our strategic resolve remains, as we've seen in the near-term financial impact, as an investment in distinguishing our brand in the market and creating a distinct competitive advantage.

Given the realities of the current market, we will continue to de-emphasize growth of our owned and operated marketplaces and manage expenses over the next several quarters until our competitive set accepts and appropriately responds to the new FTC requirements. The strategic growth engine of our business is grounded in our performance marketplaces, and we're accelerating the Fluent brand into very large marketplace opportunities that unleash our core capabilities in dynamic and growing markets. To date, we've established vertical expertise in health, retail, and ticketing. Those businesses are more seasonal than our owned and operated marketplaces, which have impacted our trend line in the quarter. But we are coming to the stronger season and will continue to grow market share, which will have Fluent enterprise returning to year-over-year growth in the second half of 2024. Our AdFlow and Call Solutions performance marketplaces are both driving strong double-digit revenue growth.

We expect these businesses to continue to scale, become a more meaningful bottom-line contributors, and we're excited by their early success. AdFlow is our media solution we launched in the large and rapidly growing commerce media market, a market that is expected to reach $150 billion by 2030. Currently, 43% of U.S. brands have commerce media budgets, and that is expected to increase to 75% by 2025. We're headed to where the puck is going, and our foundational AdFlow strategies continue to show dramatic year-over-year revenue growth, driven by new partner wins, which are enabled by leveraging our proprietary technology, machine learning, and data platform capabilities that have yielded excellent results in these dynamic marketplaces.

We're excited by these early results, as they represent a new and growing opportunity for world-class brands to reach consumers seeking higher quality engagement at the optimal purchase moment. Year-to-date, we've added new AdFlow partners in both retail and ticketing, while also expanding into the grocery vertical. We expect this growing business will provide us broader brand partners access as we scale. We also see significant breakthrough before us that we'll detail further next quarter, where we are now working with our commerce partners to expand the marketplace via our AdFlow solution to expand beyond post-transaction, to include enhancing consumer engagement, retention, and loyalty across our partners' commerce platforms. In our Call Solutions business, we've proven our operating model and established our financial metrics in our new business extension in the heart of the health vertical, focused on the Affordable Care Act market.

Our business is growing double digits, and we will continue to scale our vertical market expansion by growing existing partners and adding new partners who are already recognizing our competencies. ACA is a high sequential, high-growth opportunity where we believe Fluent can differentiate ourselves within a highly fragmented market. We find this attractive strategy, given the margin potential, exceeds the Fluent core. Importantly, our performance marketplace go-to-market model remains highly differentiated from the competitive set. We're uniquely positioned in the industry to leverage the inherent analytical capabilities we've established over a decade with our owned and operated market platform. So while our market-leading owned and operated marketplaces continue to stabilize. ... It essentially enables and fuels our pivot into higher quality consumer engagement. We are quite enthusiastic regarding the strategic and financial roles that our performance marketplaces are playing in our longer-term growth agenda.

Importantly, as we grow market share, margin accretion will follow. We will continue to make strategic bets and investments, building higher quality digital experiences for our consumers, while creating more effective and sustainable customer acquisition solutions for our clients. Our solution set is dramatically strengthened, and our performance marketplaces are being thoroughly endorsed by our brand partners, the signature of marketplace credibility. We are confident that we're elevating Fluent's brand equity position within the industry. Moving forward, we're targeting growing revenue from our emerging businesses by greater than 50% in 2024, which should have Fluent returning to year-over-year consolidated growth in the second half. Importantly, as we enhance our market position, we are confident that we'll begin growing our total gross profit more rapidly than our revenue in the back half of the year. To date, we are ahead of expectations in our new performance marketplaces.

With that, I'll turn to Ryan Perfit to provide more detail on our financial results.

Ryan Perfit (CFO)

Thank you, Don, and thanks to everyone for joining us today. I'll now provide some additional color on our Q1 earnings. In Q1, we generated $66 million in revenue, down 15% from prior year and down 9% sequentially from Q4. As expected, our owned and operated marketplace business continued to experience the effects of a challenging macroeconomic environment and changes in business practices to reflect regulatory requirements in connection with the FTC consent order. These challenges influenced sequential reductions in spend by key clients in the media and entertainment, retail and consumer, and staffing and recruitment sectors. However, we are optimistic that the owned and operated business will stabilize in the back half of the year as we continue to set a high standard for industry compliance on behalf of our clients.

Our new syndicated performance marketplaces grew exponentially over Q1 of last year, but were down slightly from Q4 2023 due to expected seasonality. The fundamentals are strong in our syndicated performance marketplaces, and we are confident in the prospects for growth in this business as we look to the back half of the year. For the full year, we believe a better macroeconomic environment will allow for moderate sequential growth in our owned and operated marketplaces, and we expect our performance marketplaces to continue to grow at strong double-digit rates year-over-year. In Q1, media margin was $22.1 million, which represents 33.6% of revenue, compared to $22 million, or 28.4% of revenue last year.

We are pleased to see that media margin as a percentage of revenue improved despite decreased revenue in the business, which highlights the growth of our new performance marketplaces. On a GAAP basis, our aggregate operating expenses for Q1 were $20 million, a $2.1 million decrease year-over-year. Of note, our operating expenses in Q1 2024 and Q1 2023 include restructuring and other severance costs of $665,000 and $480,000, respectively. This includes severance related to a reduction in force during the first quarters to better align our cost structure. GNA in the quarter also includes an accrued compensation expense related to the Winopoly, True North, and TAP acquisitions of $782,000 for the three months ended March 31st, 2024, and $623,000 for the three months ended March 31st, 2023.

Q1 2023 also includes $1.4 million of litigation and other related costs. All of these costs fall outside of the normal course of business and thus are excluded from our Adjusted EBITDA calculation. Our Q1 Adjusted EBITDA was $665,000, or 1% of sales, a year-over-year increase of $217,000. In 2024, we expect media margin growth in the second half, driven by our new performance marketplaces, to push Adjusted EBITDA as a percentage of revenue into the high single digits. The company cannot provide a reconciliation to expected net income or net loss in 2024 due to the unknown effect, timing, and potential significance of certain operating costs and expenses, share-based compensation expense, and the provision for or benefit from income taxes.

Interest expense in the first quarter increased to $1.4 million from $698,000 due to higher average interest rates on our Citizens term loan and as an effect of increased amortization of debt financing costs related to the Citizens facility. For the quarter, our income tax expense increased to $908,000, an effective tax rate of 16.9%, from $101,000, an effective tax rate of 0.3% in the first quarter of last year. We reported net loss of $6.3 million and adjusted net loss, a non-GAAP measure, of $4.2 million, equivalent to a loss of $0.30 per share. Moving to the balance sheet, we ended the quarter with $11.7 million in cash and cash equivalents.

...Total debt, as reflected on the balance sheet as of March 31st, 2024, was $31 million, representing a slight increase from $30.5 million as compared to the balance at December 31st, 2023. As a reminder, on April 2nd, we entered into a credit agreement with SLR Credit Solutions that provides for a $20 million term loan and a revolving credit facility of up to $30 million, that matures on April 2nd, 2029. The SLR credit facility had an opening outstanding principal balance of $32.7 million, and we used $30 million of the proceeds to repay our prior credit facility with Citizens Bank. In addition, we just closed a $10 million equity financing from investors, including our founders, our largest shareholder, and our CEO.

The additional liquidity reduces our dependence on the SLR credit facility during our strategic pivot and reflects our confidence in the strategy. Working capital, as defined as current assets minus current liabilities, was -$2.1 million at quarter end. This represents a decline from $29.2 million at December 31st, 2023, due to the required presentation of the entire $31 million debt balance as current, related to potential financial covenant non-compliance under our credit agreement. In Q1, we invested $1.8 million into capitalized product development and technology, as compared to $1.1 million in Q1 2023. As we look into 2024, the management team continues to focus on the stabilization of our owned and operated marketplaces, while we continue to grow the new syndicated performance marketplaces that provide our clients with high-quality customer acquisition opportunities.

We're confident that our growth strategy will produce substantial long-term financial benefit in 2024 and beyond. We appreciate your ongoing support. We will be happy to take questions at this time.

Operator (participant)

Thank you. Ladies and gentlemen, to ask a question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Maria Ripps with Canaccord. Your line is open.

Maria Ripps (Managing Director and Equity Research Analyst)

Great, good afternoon, and thanks for taking my questions. First, I just wanted to ask you about your media margins and which have been pretty strong last couple of quarters, despite sort of revenue softness. Sort of it seems like a big part of that is coming from kind of growth in your emerging businesses. But how should investors think about sort of some of the levers of media margin, maybe expansion going forward? And do you anticipate sort of further improvements from the current levels?

Don Patrick (CEO)

Great. Thanks for the question, Maria. So when you're looking at media margins, there's sort of three pieces that are in play here. The first is revenue, and we've talked about the decline of our owned and operated, that is being partially made up by the new performance marketplaces. And the gross profit margin, specifically, the new performance marketplaces all have higher gross profit margins and are making up for the decline in that business. And then the third piece, which will play a little bit into Q1 and more into Q2, is just the seasonality of these new marketplaces. So, you know, they tend to, they're very based on retail and ticketing and healthcare.

They're more on the second half, and Q1 tends to be a little bit low coming off of Q4. Q2 tends to be the low point before it bounces back at Q3. So those three, in those three trends, we see our GP continuing to increase in the back half of this year, probably, probably equal in, in Q2, slightly down in, in Q2 compared to Q1, just based on the seasonality of those new marketplaces.

Maria Ripps (Managing Director and Equity Research Analyst)

Got it. That's, that's very helpful. And then can you maybe talk about sort of performance of the gaming vertical, just given how important sort of that is for your revenue base? And maybe, maybe more broadly, are there any sort of new functionality or ad products that you, you have or working on to be able to maybe better serve some of their advertisers within this vertical?

Don Patrick (CEO)

Yep. Yep, great question, Maria. So gaming continues to be our largest vertical by far. If you, if you guys remember, in the beginning part of Q3 last year, one of our largest clients pulled back and we were able to replace that demand and also keep it steady as we go. So it has been a solid vertical for us and has been basically at the same revenue margin over revenue rate over the last couple of quarters. The players tend to change a little bit on the top five list based on whether they're leaning into growth or more on return on ad spend, but that continues to be a very strong vertical for us.

We have been working specifically on ad products, both specifically around the syndicated, some of the syndicated performance marketplaces around gaming. We also have been doing some things in the in-app solution that we expect to roll out. And we're really been pushing that demand into the other, into the other marketplaces to continue to serve that market.

Maria Ripps (Managing Director and Equity Research Analyst)

Got it. That, that's very helpful. Thank you, Don.

Don Patrick (CEO)

Thank you, Maria.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Jim Goss with Barrington Research. Your line is open.

Jim Goss (Managing Director)

Good afternoon. I'm wondering if it seems like media and entertainment, which had been a pretty important vertical, has been de-emphasized somewhat, and I'm curious why that would be, given the nature of the streaming wars that are pretty intense?

Don Patrick (CEO)

Yep. Yep, thanks for the question, Jim. In the past, when we broke out verticals, we had a number of things in media and entertainment. And as that scaled, we started to break those things out between, you know, streaming services, gaming, et cetera. So part of that context, Jim, might be just that we lump things in a broader category a couple years ago, and now we're breaking out based on the importance of that. Overall, our brands are still focused on ROAS over growth, but it can be very vertical specific. Year-over-year, there's strong growth in subscription and in health and in loyalty and in retail. Gaming, as I mentioned before, with Maria's question, was basically flat.

There's been some weakness in the streaming services business just around there. They're really focusing on retention and not so much on acquisition.

Jim Goss (Managing Director)

Okay. When you talk about sort of reducing the emphasis on the owned and operated sites in favor of syndicated marketplaces, could you describe that process a little more and talk about the timeframe and just how the execution would take place?

Don Patrick (CEO)

Sure. Well, first of all, Owned and Operated Marketplaces, as you know, Jim, has been with us for 12 years. It is still a foundational piece of our business, and, and it has very distinct competitive advantages for us to, to build off those. So the fact that we have that, is critical in terms of launching us into those new syndicated performance marketplaces that we talked about. Basically, what we have been doing is leveraging the, either the demand or the technology stack that we've developed, or, or around our analytics and data capabilities across owned and operated and launching them into those syndicated marketplaces.

So we're leveraging capabilities that we've built over the years that allow us to go, move faster and, quite honestly, scale at a much, much faster rate than we could if we were launching these into ourselves. Over the last couple of years, you guys have seen, you know, we have done some changing of our headcount. We've reduced headcount, and then we brought back in headcount that have been now more geared towards the new performance marketplaces. We've been doing it in a very measured way based on the performance of that business and where, where it plays. And what we've started consolidating our advertising business across all of those solutions.

So now we have a much broader solution set in which to go out to these great brands that we work with and offer things beyond owned and operated and into AdFlow, into our AdFlow modules and Call Solutions and our Purpose Health. So it's been a sort of gradual transition over the last couple of years as we scale those businesses. But everything starts with a foundational piece of that owned and operated competencies and competitive advantages that we have.

Jim Goss (Managing Director)

Are there certain financial metrics that will shift and adjust based on this transition?

Don Patrick (CEO)

Yes. Yep. A good question. You'll see two things, Jim. One is, as, as the owned and operated marketplace stabilizes, which, as we pointed out, is in the second half of this year, you'll start to see the revenue growth return based on the growth in the new performance marketplaces. So when we say that we're down, you know, close to 14.6%, obviously, the owned and operated marketplaces are down deeper, and our performance marketplaces are growing aggressively, just at a lower pace. So you'll start to see that revenue shift in the second half to be in growth overall for Fluent. And then, and then you'll continue to see the margin improvement. All of these syndicated margins, marketplaces have margins higher than our core, and you'll start to see margin expansion at the same time.

Jim Goss (Managing Director)

Okay. The last question is, excuse me, the $10 million equity investment, excuse me, could you tell me how that was effected? What was the nature of the investment? Did you-

Ryan Perfit (CFO)

Hi, Jim.

Jim Goss (Managing Director)

regain shares or?

Ryan Perfit (CFO)

Yeah. Hi, Jim. This is Ryan Perfit. This is a private placement with five individuals. We sold pre-funded warrants, 2.955 million of them, at a purchase price of $3.384 each. There will be a shareholder approval expected in July.

Jim Goss (Managing Director)

Okay, thank you very much.

Don Patrick (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, that's star one one to ask the question. Please stand by for our next question. Our next question comes from the line of Bill Dezellem with Tieton Capital Management. Your line is open.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Thank you. I came in late, so I apologize if some of these questions are repeats, and if so, just let me know, and we can talk offline. But first of all, would you please discuss how the media margin was up 1% with the revenues being down? I mean, that seems like a

Don Patrick (CEO)

Yeah

Bill Dezellem (Founder, Chief Investment Officer, and President)

... a surprisingly favorable outcome.

Don Patrick (CEO)

Yep. Hi, Bill. Thank, thanks for the question. We did touch on that. Basically, you know, as we talked about, there's sort of three things that are playing into our numbers right now. The revenue on the owned and operated marketplaces are declining greater than that 14%, 14.6%, and partially being made up by the growth in the new performance marketplaces like AdFlow, Call Solutions, and Purpose Health. But all those, the new performance marketplaces have higher gross profit margins than the core. So even though it's not growing as fast as the decline in owned and operated in Q1, the margins, because the business mix at a much higher margin, we're able to keep margins flat to 1% up over a year ago.

Bill Dezellem (Founder, Chief Investment Officer, and President)

So in essence, it's a, it's a mix phenomenon, most specifically?

Don Patrick (CEO)

That's right. The business mix model, which we believe, especially in the second half, will be, will be at a big advantage to us because the new performance marketplaces right now are more seasonal than our core. So you'll see, you'll see that, accelerate in the second half.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Great. That's helpful. Thank you. And talk to us, if you would, please, about the signs that you are seeing that the new initiatives are working. You've mentioned that they're growing rapidly, but presumably, that's off a smaller base. But there's probably some data points that are relevant to the longer-term implications here.

Don Patrick (CEO)

Sure. So I'll focus mostly, Bill, on external. And as you know, everything comes down to the brands and what they choose to interact with. We have had great success in those performance marketplaces with brands coming on board. And equally important, I brought this up in a very narrow way. They're asking us to do more than just what we're the solution, what the solution currently is. For example, AdFlow, until about a quarter ago, was 100% focused on post-transaction. So after you purchase something, before you get the confirmation page, our ad module then serves the most relevant ad to that consumer on a commerce site.

We are now being asked to help use that same technology and the same demand and help bring into loyalty, retention, and engagement across the commerce site. So the brands are speaking, you know, obviously with their wallet and their intent in terms of getting us more aggressively into their business and help them drive a pretty important, you know, opportunity for them. We gave some stats in the earnings release, just that how big this commerce media market is and how it's growing. So I think we're sitting at the right place in the right time with a lot of tailwinds from that market. So ultimately, it comes from the brand side and them leaning in and us winning the new brands.

Internally, Bill, there's lots of operating metrics in terms of, you know, how do we get to what's the right number to get to scale? How are we running, you know, based on either revenue metrics or cost metrics or or engagement metrics? We're fortunate enough to have a very clear model, what we need to go after, and we, we look at that on probably a pretty much a minute-by-minute basis to make sure that we're moving towards, towards those or exceeding those internal metrics.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Great. That's, that's also helpful. And so, let me ask about the restructuring and severance expense in the quarter, the $665,000. Would you kind of dive into that to help us understand what you're doing behind the scenes there, please?

Ryan Perfit (CFO)

Hey, Bill, this is Ryan. Perfect. Yeah, that, that happened in January, and it was a reduction in force, essentially aligned around where we are making our investments. So as kind of mentioned previously by Don, you know, taking resources away from the owned and operated as we focus on building out syndicated performance marketplaces.

Bill Dezellem (Founder, Chief Investment Officer, and President)

And so, no, there was not a reduction in force with these new performance marketplaces?

Don Patrick (CEO)

Not, not with the new ones. No, Bill.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Okay, great. Thank you. And then, income tax, you actually paid or had $900,000 of income tax, even though you had a pre-tax loss. What were the dynamics that led to that?

Ryan Perfit (CFO)

There's a lot of pieces that go into that. Obviously, you know, our tax income is different than the income on our Q. Last year, we had an impairment of goodwill and tax credits from research and development tax credits. So there were a number of things that pushed it down to nearly zero last year as compared to this year. But at 16.9%, we're still below the 21% level for our income rate.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Great. Thank you. And then, do we have time for me to do a couple more?

Don Patrick (CEO)

Sure. Yep.

Bill Dezellem (Founder, Chief Investment Officer, and President)

So, first of all, I guess, what you have referenced that your competitors in the owned and operated market have not been following the FTC guidelines or rules after they were following them earlier, after your settlement. Has there been any change, either more compliance or less compliance here in the first quarter relative to the fourth quarter?

Don Patrick (CEO)

Yep, I would, yeah, just to qualify a couple things, the one is, you know, first of all, the compliance has, and it, it has everything to do with our owned and operated marketplaces, you know, not our new performance marketplaces. So, and secondly, we saw people leaning in, our competitors leaning in to find out what the settlement was and the new rules and the guidelines the FTC was putting in into our best practices, when we settled in May. And we saw them, we saw our competitors leaning in to figure out what it, what we, what we agreed to, how they could work that way.

We never saw them really adapt to our levels, so it wasn't so much they took a step back. They adapted and took a step back. But over the last 4-5 months and since the beginning of the year, we've seen the competitors actually revert back to more non-compliant behavior. We can, you know, make guesses on why that is. Part of it, we believe, is that there's, you know, a lack of a clear further FTC action. And second is the industry headwinds we have, they have. And I think, you know, it creates opportunity for them to economically, in the very short term, have the incentive to run towards the financial part of their business rather than towards compliance. So we don't...

You know, we've, we've been unwavering in our drive and our commitment to quality. We know that in the long term, when the industry levels up, either by the FTC or by, you know, state or federal regulators, that we will be in a great position to accelerate and take back market share. But we did underestimate... We, we thought that the industry would keep moving towards us, but we did not expect people to move back over the last 4-5 months.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Don, have you heard any comments out of the Federal Trade Commission, referencing that firms that demonstrate some increased compliance and then less compliance ultimately become more culpable with that bad behavior? Because they, they essentially showed their hand that they, that they can't claim ignorance, because they-

Yeah

... were actually trying to be, move towards the guidelines and then went backwards, and so ultimately that the FTC views that lack of compliance even less favorably. Have you heard anything like that?

Don Patrick (CEO)

So don't take this the wrong way, but we're really happy that we don't hear from the FTC all the time anymore, because we, for four years, we talked to them pretty much every day. And we are in a, we're not in, obviously, inquiry mode with them now, we're in a reporting mode. So our contacts that we dealt with directly, obviously, the good news is it's more on our just commitment to keep the reporting, and the contact. So in theory, Bill, everything you say makes sense. And I will tell you, when we were going through inquiry, you know, there was a lot of, a lot of, spotlights on, okay, you know, you did this, and then why did you do it this way?

And if there was, you know, for us, there was no lack of, you know, not trying to do the right thing, it was around business side. But if they see that from an economic perspective, I can imagine it would be much harder and a much harder discussion and settlement with them.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Yeah. It'll be fascinating to watch that unfold. So relative to your media margin in the first quarter, it was 33.6, and that was up slightly from the fourth quarter at 33.1, even though Q1 revenues are seasonally lower versus the fourth quarter.

Now, I know before-

Don Patrick (CEO)

Right.

Bill Dezellem (Founder, Chief Investment Officer, and President)

In response to my first question, you referenced the mix as the performance marketplaces have grown, but you've also referenced that there's seasonality with those performance marketplaces that maybe would work against this. So can you address that media margin percentage on a sequential basis in a bit more detail?

Don Patrick (CEO)

Yeah. Yeah, it is always, Bill, very good question. You know, these businesses are scaling, especially the AdFlow business has been scaling, and we've been investing in the technology and analytics. So what you're seeing there is not only even though in Q4 is a big increase in volume, you know, our ability to gain revenue per, what they call session, has continued to increase in Q1, even though the volume has gone down. So you're seeing the monetization increase, which the good news is, you know, from this business model is we have a revenue share with our partners. So the more we make, the more our partners make, so the more successful they are also.

It's around really improving the margin and the monetization of that business.

Bill Dezellem (Founder, Chief Investment Officer, and President)

That should have very favorable implications for the second half of the year when the seasonal strength in the revenues picks up.

Don Patrick (CEO)

Yes, absolutely.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Okay, that is how you are viewing it also then?

Don Patrick (CEO)

Yes. Yep.

Bill Dezellem (Founder, Chief Investment Officer, and President)

Great. Thank you for taking all my questions.

Don Patrick (CEO)

Yep. Thank you, Bill.

Operator (participant)

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Don for closing remarks.

Don Patrick (CEO)

Thank you for joining our Q2 2024 earnings. We remain steadfast in our strategic pivot, leveraging our owned and operated marketplaces' competitive advantage to launch into adjacent high-growth, high-margin performance marketplaces that will enhance Fluent brand equity and also create shareholder value. Thank you for your continued support, and we look forward to giving you an update after Q2.

Operator (participant)

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.