Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “Cardlytics,” “company,” “our,” “us,” and “we” in this prospectus to refer to Cardlytics, Inc. and, where appropriate, our consolidated subsidiaries.CARDLYTICS, INC.
Overview
Cardlytics makes marketing more relevant and measurable through our purchase intelligence platform. With purchase data from more than 2,000 financial institutions, we have a secure view into where and when consumers are spending their money. By applying advanced analytics to this massive aggregation of purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. This collection of debit, credit, ACH, and bill pay data represented approximately $1.3 trillion in U.S. consumer spend in 2016. In 2016, our platform analyzed over 18.0 billion online and in-store transactions across more than 94.0 million accounts in the United States, representing one in five debit and credit card swipes in the United States.
Our founders understood the value of purchase data and have devoted nearly a decade to engineering a purchase intelligence platform. As former bankers, they recognized that banks and credit unions, which we refer to as financial institutions, or FIs, enable and collect the different types of electronic payments (e.g., debit, credit, bill pay) consumers and businesses use. This was especially crucial as electronic payments were becoming an increasing portion of all consumer spending. With this data distributed across approximately 10,000 FIs in the United States alone, it would need to be aggregated and standardized to provide effective foundational data for marketing technology and analytics. Given their deep insight into FIs’ rigorous security, privacy and regulatory concerns, our founders were well positioned to partner with FIs and architected our platform with their requirements in mind. Today, our platform leverages machine learning and a robust set of algorithms to ingest, process and analyze trillions of dollars of raw purchase data from tens of millions of accounts. As of September 30, 2017, we were a partner to 2,041 FIs, including Bank of America, National Association, or Bank of America; PNC Bank, National Association; Lloyds TSB Bank plc, or Lloyds; and Santander UK plc. Additionally, in the first quarter of 2018, we plan to launch a pilot implementation of Cardlytics Direct with Wells Fargo & Company, or Wells Fargo, directed at Wells Fargo customers located in Miami, Florida, Charlotte, North Carolina and San Francisco, California.
As the amount of revenue that we can generate from marketers with respect to Cardlytics Direct is primarily a function of the number of active users on our FI partners’ digital banking platforms, we believe that the number of monthly active users, or FI MAUs, of any FI partner is indicative of our level of dependence on such FI partner. During 2016 and the nine months ended September 30, 2017, our largest FI partner, Bank of America, contributed approximately 47% and 51% of our total FI MAUs. Lloyds, our largest FI partner in the United Kingdom, contributed approximately 10% and 9% of our total FI MAUs in 2016 and the nine months ended September 30, 2017, respectively. As of September 30, 2017, we had direct contractual relationships with 17 of our FI partners, while our other FI partners became part of our network through bank processors and digital banking providers, such as Digital Insight Corporation, a subsidiary of NCR Corporation, or Digital Insight. Digital Insight contributed approximately 13% and 11% of our total FI MAUs in 2016 and the nine months ended September 30, 2017, respectively.
Our platform helps solve fundamental problems for marketers. Marketers increasingly have access to data on the purchase behavior of their customers in their own stores and websites. However, they lack insight into their customers’ purchase behavior outside of their stores and websites, as well as the purchase behavior of individuals who are not yet customers. The reality is, no matter how robust their own customer data, marketers only see a small portion of their customers’ overall spend—both within and across categories. As a result, it is very difficult for businesses to focus their marketing investments on the most valuable customers. Marketers are also challenged to measure the performance of their marketing. This issue is particularly acute with respect to measuring the impact of marketing on in-store sales, where approximately 92% of consumer spending occurs, according to 2016 U.S. Census data. We believe purchase intelligence is the next disruptive opportunity in marketing and can comprehensively address these challenges. Our purchase intelligence platform is designed to enable marketers to identify, reach and influence likely buyers at scale, and precisely measure how marketing drives sales by “closing the loop”—both online and in-store. We have strong relationships with leading marketers across a variety of industries, including 20 of the top 25 U.S. restaurant chains based on the Nation’s Restaurant News 2016 ranking, 23 of the top 50 U.S. retailers based on the National Retail Federation 2016 ranking, as well as three of the five largest U.S. cable and satellite television providers and three of the four largest U.S. wireless carriers based on 2016 U.S. subscriber counts.
We have proven the power of purchase intelligence with our proprietary native advertising channel, Cardlytics Direct. Approximately 83%, 87% and 92% of our revenue in 2015, 2016 and the nine months ended September 30, 2017, respectively, was derived from sales of Cardlytics Direct. We have created a powerful, highly captive native advertising channel that reaches customers when they are thinking about their finances. By consolidating the largely untapped, high growth digital banking channels of more than 2,000 FIs, Cardlytics Direct enables marketers to reach consumers across these FIs through their online and mobile banking accounts, and increasingly through email and various real-time notifications. Using our purchase intelligence, our platform predicts where FI customers are likely to shop next and then presents them with offers to save money in these categories at a time when they are thinking of their finances. Since Cardlytics Direct reaches consumers in a trusted, uncluttered digital environment, we believe we see higher engagement in our channel. On average, bank customers in our channel logged into their mobile banking accounts 7.7 times per month in 2016. Customers are at least nine times more likely to engage with our marketers’ advertisements as compared to worldwide display digital advertisement click rates, as reported by eMarketer in December 2016. Cardlytics Direct offers compelling benefits to both marketers and FIs:
we calculated that monthly customer attrition was 17% lower on average among redeeming credit and debit card customers over the six-month period following a customer’s first redemption in 2016 as compared to average monthly customer attrition over the same comparison period for non-redeeming customers. In conducting this analysis, we deemed customers who do not have active spend in the applicable account within a given month to have attrited. We also calculated that the monthly card spend increased by 11% on average over the six-month period following a customer’s first redemption in 2016 as compared to the monthly average from the preceding three-month period. In contrast, the monthly card spend of non-redeeming customers over the same comparison periods increased by only 2% on average. Since we share a portion of the revenue that we generate from marketers with FIs, we provide an attractive incremental earnings opportunity. We also enable our FI partners to create competitively differentiated offerings that reinforce their broader strategic goals, including marketing their own products with the same precision targeting available to marketers.
We are extending the power of our platform beyond Cardlytics Direct. As we built scale, we recognized a significant opportunity to extend the impact of our purchase intelligence platform, which we refer to as our Other Platform Solutions. For example, we use purchase intelligence to help marketers measure the impact of marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales. As we have in the past, we plan to continue to work in close collaboration with our FI partners to develop new purchase intelligence based analytic solutions.
We have experienced rapid growth in our revenue since inception. Our revenue, which excludes consumer incentives, was $53.8 million, $77.6 million and $112.8 million, for 2014, 2015 and 2016, respectively, representing a compound annual growth rate of 44.8%. Our revenue for the nine months ended September 30, 2017 was $91.1 million. For 2014, 2015, 2016 and the nine months ended September 30, 2017, our net loss was $38.9 million, $40.6 million, $75.7 million and $15.6 million, respectively. Our historical losses have been driven by our substantial investments in our platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. In 2016, our net loss included a $25.9 million one-time non-cash charge related to the termination of our U.K. agreement with Aimia EMEA Limited and a $10.9 million non-cash charge related to the issuance and change in fair value of convertible promissory notes.
Industry Background
Recent Disruptions in the Marketing Industry
The fundamental imperative for marketers is to determine how, when, and where to spend marketing dollars effectively and to measure the efficacy of, and return on, their marketing investments. In the past 20 years, there have been a series of disruptive innovations impacting how marketers reach and influence likely buyers. The rise of internet-enabled online advertising drastically accelerated the pace of innovation across the marketing landscape. As the internet became mainstream, search-driven advertising brought the ability to more precisely connect marketing to consumer intent. The advent of social media provided marketers with a greater opportunity for consumer engagement and a wealth of additional data about consumer preferences. Each of these innovations has made digital marketing increasingly more effective and efficient than traditional media. As a result, digital media spending is expected to reach $202 billion in 2017, an increase of approximately 13% from $178 billion in 2016, according to MAGNA Global. However, like television and other traditional forms of advertising, these new forms of digital advertising still fail to provide marketers with visibility into whether an advertisement ultimately resulted in an in-store purchase. This information gap is particularly acute since approximately 92% of consumer spending continues to occur in-store. Marketers remain unable to close the last mile and comprehensively understand how marketing impacts actual in-store and online consumer purchases.
Challenges to Efficient and Effective Marketing
The fundamental challenges faced by marketers include:
Purchase Intelligence: The Next Disruptive Opportunity
We believe that purchase intelligence is the next disruptive opportunity in marketing. Aggregated consumer spending data analyzed with advanced analytics has the potential to make all marketing more relevant and measurable if it can be effectively analyzed and leveraged to help predict and measure future buying behavior, both in-store and online.
Massive and Fragmented Source of Purchase Data and Consumer Connectivity
We believe that FIs are a crucial source of purchase data and have a valuable, direct touchpoint with consumers. Over the past decade, the volume of consumer purchase data held by FIs has significantly increased. Today, more than 70% of U.S. consumer payments are electronic—debit card, credit card, ACH or bill pay—and this percentage is projected to continue to increase, according to The Nilson Report’s 2016 findings. These electronic transactions produce an immense amount of consumer purchase data, which can provide valuable insights on where and when consumers choose to shop, how frequently they shop at a particular store, and how much they spend within and across retail categories. More importantly, nearly 60% of electronic spending is in the form of debit and other non-credit transactions, and growth of these types of transactions is expected to be significant through 2020, according to The Nilson Report.
For purchase intelligence to be actionable, purchase data must be connected to the consumer through electronic touchpoints. FIs have uniquely reliable consumer touchpoints. Instead of walking into a branch, over 70% of consumers in 2015 managed some or all of their banking via digital channels, according to a 2016 survey by the Federal Reserve Bank. FIs’ touchpoints do not face the same issues as other digital channels. Consumers interact with FIs via authenticated online or mobile applications that are protected with state-of-the-art security.
Market Forces in the Banking Industry
While FIs play an important role in securely maintaining purchase data, market forces have only recently aligned to create incentives for FIs to leverage this data for the benefit of marketers. FIs operate in an increasingly regulated and competitive environment. Further, the rising popularity of alternative banking solutions and the emergence of non-banking players in the areas of lending and electronic payments increasingly threaten to disintermediate traditional FIs from their customers. These trends have keenly focused FIs on finding ways to engage customers and strengthen customer loyalty. Despite these incentives, FIs typically lack the specialized technological expertise, scale and visibility outside of their own customer bases to analyze and effectively leverage purchase data. As such, although purchase data from any single FI and access to that institution’s customer base may be very useful to marketers, aggregated purchase data across a meaningful portion of the fragmented banking landscape from a variety of electronic payment channels holds significantly greater value.
Challenges to Effective Purchase Data Aggregation
The challenges to effective aggregation of purchase data include:
To unlock the value of the FIs’ purchase data, we believe that there is a significant need for a trusted third party to serve as the nexus for purchase data aggregation and analytics.
Market Opportunity
Our platform solves fundamental problems for the marketing industry by utilizing proprietary purchase intelligence. The native bank advertising market was estimated to be approximately $11 billion in the United States in 2016, according to Frost & Sullivan in a study commissioned by us.
We believe that Cardlytics Direct is a leading native bank advertising solution addressing this market.
Key Benefits of Our Platform
We make marketing more relevant and measurable through our purchase intelligence platform while simultaneously driving customer engagement and loyalty for FIs.
Key benefits to marketers:
Key benefits to FIs:
Competitive Strengths
We make marketing more relevant and measurable through our purchase intelligence platform. We believe that the following strengths provide us with competitive advantages:
Our Growth Strategies
The principal components of our strategy include the following:
Selected Risks Affecting Our Business
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:
Corporate Information
Cardlytics, Inc. was initially incorporated under the laws of the State of Delaware in June 2008.
Our principal executive offices are located at 675 Ponce de Leon Avenue NE, Suite 6000, Atlanta, Georgia 30308. Our telephone number is (888) 798-5802. Our website address is www.cardlytics.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.
“Cardlytics,” the Cardlytics logo and other trademarks or service marks of Cardlytics, Inc. appearing in this prospectus are the property of Cardlytics, Inc. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:
We may take advantage of some or all these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer,” under the rules of the U.S. Securities and Exchange Commission, or SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult. We have also elected to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of these elections, which may result in a less active trading market for our common stock and higher volatility in our stock price.
The Offering
The number of shares of our common stock that will be outstanding after this offering is based on shares of common stock outstanding as of September 30, 2017, and excludes:
our Series G preferred stock financing outstanding as of September 30, 2017, at an exercise price of $0.0001 per share, with the actual number of shares issuable upon exercise of such warrants being equal to the product obtained by multiplying 1,385,358 by a fraction, the numerator of which is the difference between $17.2379 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the earlier to occur of the date (i) 180 days following the date of this prospectus and (ii) 10 days prior to a sale of our company;
Unless otherwise indicated, this prospectus reflects and assumes the following:
Summary Consolidated Financial and Other Data
We derived the summary consolidated statements of operations data for the years ended December 31, 2015 and 2016 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the nine months ended September 30, 2016 and 2017 and the summary consolidated balance sheet as of September 30, 2017 from the unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements, and the unaudited financial data include, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in the future and our operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2017.
When you read this summary consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.