Cardlytics, the banking-centric advertising platform, recently announced strong Q1 2024 results, with a 12% billings increase and a historic first: positive adjusted EBITDA in a seasonally weak quarter. However, a closer look reveals a potential issue: exploding redemption rates.

CEO Karim Temsamani celebrated the 20% jump in redemptions as positive engagement, but the associated costs raise concerns. Consumer incentives, directly reflecting redemption costs, reached 35% of billings, surpassing the historical 25-30% range.

Driving Engagement, Increasing Costs

Cardlytics attributes the higher redemption rate to its Ad Decisioning Engine (ADE), which delivers more relevant offers, leading to increased consumer engagement and redemptions. The company admits it cannot currently bill for all the added value due to existing campaign budgets. Essentially, Cardlytics is providing more rewards than it can presently monetize.

While this appears to be a temporary obstacle on the path to greater profitability, Cardlytics is intentionally shifting its business model towards an engagement-centric approach, mirroring its successful international operations. This signifies a permanent rise in redemption rates and, consequently, higher consumer incentive costs.

The Crucial Question: Revenue Share Agreements

Can Cardlytics negotiate favorable revenue share agreements with its banking partners to counterbalance these increased costs? The company claims it is working towards this, emphasizing the value these higher redemptions create for banks through increased card spending. However, the success of these negotiations is uncertain and holds the key to Cardlytics' long-term profitability.

Analyzing the Numbers

Adjusted contribution margin, the revenue retained after paying customer rewards and bank shares, increased by a significant 27%. However, approximately half of this leverage comes from renegotiated partner share agreements that will be fully annualized in June 2024. This suggests a potential margin compression in the latter half of the year as the benefit of these renegotiations lessens.

The U.K. business, already operating on a cost-per-redemption model, achieved a remarkable 56% revenue growth. This highlights the potential of this model for the U.S. market, but also hints at the possible scale of redemption-driven costs.

Charting the Course: U.S. Transition to Cost-Per-Redemption

Cardlytics plans to transition its U.S. business to a similar cost-per-redemption model by year-end, though on a much larger scale. This could significantly magnify the effect of redemptions on profitability.

The success of this transition depends on several factors. Cardlytics must effectively communicate the value of higher engagement to advertisers, justifying larger budgets to cover increased redemption costs. Simultaneously, they must navigate complex negotiations with banking partners, balancing rewards for banks for increased card spending with ensuring sufficient revenue share for Cardlytics. Failure on either front could result in a profit squeeze, jeopardizing the company's long-term success.

Navigating Growth and Investment

Further complicating matters are Cardlytics' ambitious growth plans. The company is investing heavily in new technology and sales teams, aiming for double-digit billings growth in 2024. These investments are likely to cause short-term expense increases, placing additional pressure on profitability.

The Bridg Question

Cardlytics' Bridg business, specializing in first-party data solutions, raises questions. While the recently introduced Rippl retail media network appears promising, aiming to onboard 100 million shopper profiles by year-end, Bridg's total revenue growth was a minimal 1%. The loss of a single existing customer countered the expansion of current contracts, raising doubts about Bridg's ability to attract and retain clients.

A Strategic Crossroads

Cardlytics finds itself at a crucial juncture. Their push for higher engagement via ADE is yielding impressive outcomes, but the company is balancing top-line growth with managing the escalating cost of redemptions. Their new business model's success rests on a delicate equilibrium: securing advantageous revenue share agreements with banking partners while persuading advertisers to commit to bigger budgets.

The coming quarters will be decisive, revealing if Cardlytics can translate this engagement surge into lasting profitability or if they will be overwhelmed by the very force they are unleashing.

"Cardlytics faces a strategic challenge: balancing engagement-driven growth with rising redemption costs. The success of their cost-per-redemption model hinges on favorable revenue share agreements with banks and increased advertiser budgets. The coming quarters will determine if Cardlytics can achieve sustainable profitability or face a profit squeeze."

"Cardlytics was founded by a former banker and a former engineer, combining financial and technological expertise to create their innovative advertising platform. The company collaborates with major financial institutions like Bank of America, Chase, and Wells Fargo, reaching millions of consumers through banking apps and online platforms. Cardlytics' data insights provide marketers with a detailed understanding of consumer spending habits across diverse categories."