CEO Q&A: IDI Discusses Company’s ‘Transformational’ M&A, Addition Of Dr. Phillip Frost To BoardNovember 23, 2015 | By Fluent
Publication date 11/23/15
In a “transformational transaction” earlier this week, IDI, Inc. (NYSEMKT:IDI) acquired digital marketing and customer acquisition firm Fluent.
As part of the deal, US Billionaire Dr. Frost increased his investment in IDI and joined the board of directors chaired by Mike Brauser.
Yesterday I spoke to IDI CEO Derek Dubner.
A transcript of our discussion can be found below.
I’ve highlighted key comments for those unable to read in its entirety.
Q: Congratulations on the Fluent acquisition! How does it feel?
Derek Dubner (CEO): Thank you. We’re very excited about this acquisition.
Q: Tell me about Fluent. How long have you known these guys? How long have they been on your radar?
CEO: We met Fluent a couple of months ago.
We’re always in an acquisitive mode in looking to build the company.
We’re certainly seeking to build organically much in the way we have in the past.
We of course made our small acquisition of Interactive Data which was a very deliberate platform acquisition for us to advance our interests.
So, we had looked at some acquisitions along the way until we found Fluent.
Once we met Fluent we knew Fluent was the one.
Q: Why is Fluent such a good fit?
CEO: We have always maintained when we formed this company that we would take our core competency our data analytics and we would bring it to 3 addressable markets.
The first market was risk management where we’ve had prior successes, the founders and management being involved in previous companies Seisint ultimately sold to Reed-Elsevier’s Lexis Nexus, and TLO which was sold to TransUnion.
Our first “prong” was to move into the risk management industry.
The second “prong” where we’ve always wanted to open up our systems to because we have the ability to ingest massive data sets – both structured and unstructured – and to fuse that data together to bring actionable intelligence.
A logical next step for us was to open it up into the marketing industry consumer marketing.
We know it’s a much larger addressable market than just a few billion dollars, orders of magnitude larger.
And so we knew that that would be Phase 2 and we would execute on that plan.
Ultimately, Phase 3 would be to bring our data analytics and our technology and to layer our technology over massive data sets of end users for custom analytics.
So rather than layering it over our database going over to Fortune 500 or public sector and layering it over their databases which are disparate databases to connect them and permit those end users with an interface to glean intelligence from their own data.
Q: So you were always planning to focus on this area. The question was always to build organically or through acquisition?
CEO: Well, we could certainly, as we develop and intend to release shortly our IDI Core platform. Certainly, our intention to open up Core with unregulated data or demographic data, behavioral data, ethnographic data.
So we would load it with those data sets and open it up to the marketing industry.
But we knew we could take our time and develop it internally OR if we came upon the right circumstance and we identified the right target and it had the relationships in place, had data, had the cultural fit, we would make that leap.
We bumped into Fluent and we knew right away — of course after due diligence — that this was the organization that moves us years ahead and this was a perfect fit.
Q: Fluent’s financials you disclosed are impressive. Why are they selling? They’re seemingly growing very quickly.
CEO: There are 2 primary reasons.
First of all, the founders of Fluent are just brilliant in their industry.
So when we met them and we talked about how they started this business 5 years ago and how they’ve become a leader in their space we knew these were the type of gentlemen we could work with and grow together.
And while they’ve built an amazing organization in the consumer marketing industry they always knew they wanted to have greater analytics so they could conduct such analytics against their advertisers’ consumer databases and the consumer data they bring in internally to increase customer acquisition and ROI.
So when they saw what the founders and management had done in the data fusion industry and what we’re building here at IDI it was a marriage made in heaven.
They have significant penetration across the consumer marketing industry and we bring massive scale big data analytics. For them and for us that was very exciting.
As for why do they need to sell….
Well, it was also attractive that we’re a public company and our management and founders have had great success in the public markets so they perceived and we also perceived that together this takes us to the next level and allows us to grow into that multi-billion dollar organization.
As you can tell, the way the transaction is structured the sellers are taking stock and they’re very excited about growing the business for years to come.
We’re all locked in and holding hands on this transaction.
They have significant equity portions and there are also incentives for them to stay.
We LOVE the founders of the company and we want them to stay.
So we structured this transaction around continuity and building this business to be a very large organization.
Q: And since they’re already generating significant revenue this jumpstarts your ability to generate significant revenue? You’re going to start generating significant revenue a lot faster than you anticipated?
CEO: Absolutely. No question about that.
Not only are we gearing up to release IDI Core which we expect to ramp significantly for IDI but they’re already a sizable business in their industry, they have a significant product roadmap in front of them to grow their business and we have massive synergies between the 2 organizations that we feel are 1+1=10. So it makes us even more excited about the combination.
Q: Why is mobile so significant here?
CEO: We know mobile is a key driver of any modern tech company.
For example, Google’s earnings recently announced that consumer mobile search was for the first time exceeding desktop search.
We know Facebook Mobile is a differentiator for Facebook.
So when we saw that the consumer interactions coming through Fluent are 70% mobile we knew they’re definitely onto something — that they’re building an organization that can thrive in modern day.
Q: Can you provide a real-world example to illustrate why this combination makes sense?
CEO: One of the exciting synergies arising out of this transaction is IDI’s ability to maintain in its repository massive data sets in a secure environment.
By combining with Fluent, Fluent can now go to consumer packaged goods advertisers and financial services advertisers they have and they can have those advertisers deliver their consumer database to us. So that now Fluent has the infrastructure in place and the analytical expertise to run our analytics across that customer database with machine learning to identify and segment the ideal customer within that customer database so that Fluent can then model it against its 100 million deep consumer profiles and identify the new customers for that advertiser.
So that’s a simple example.
As well, with our analytics we’re able to have in-the-market triggers or events in peoples’ lives that we know will educate Fluent as for another way to monetize that consumer.
Another opportunity for us immediately…
We’ve always had the plan to take IDI Core and ingest marketing data as opposed to regulated data and then opening up our system which is the real time search of fused data and present that to the marketing world.
So the ability to load Fluent’s consumer profiles into our database with unregulated data so that the P&Gs of the world consider it its desktop and search via whatever demographic or ethnographic data and pull up in real-time a list of the perfect consumers for the advertiser.
We truly provide liftoff to each other, into our missions here.
Q: Remind us the difference between regulated and unregulated data?
CEO: Regulated data.
We go out there and we collect public record data – bankruptcies or liens or judgments. You can go to courthouses and find these things.
But there’s also regulated data from either credit bureaus or DMVs or other data where they’re regulated by federal guidelines or laws restricting the use of that data to only permitted purposes by credentialed businesses.
That’s our core business.
Fluent drives with scale massive amounts of consumers to its own proprietary websites and through various other opportunities whether that be surveys or job opportunities etc. They collect self-reported data from the consumer.
The consumer opted-in and provided that data.
Fluent is able to do better than others out there…
They model that consumer. They know right away that that consumer is the perfect consumer for a given advertiser.
There are no companies out there OR few companies out there that can deliver the scale of real-time in-the-market consumers to an advertiser.
Q: Who are the other companies who can do this?
CEO: There are a few companies out there.
The most prominent private company is probably Zeta Interactive.
(NOTE: Zeta Interactive achieved a $1B valuation this summer on not much more revenue than Fluent. You can see from the business description that this is right in Fluent/IDI’s “sweet spot”.)
They’re claiming to be doing much of the analytics and the business of Fluent. It’s a much larger organization.
Fluent is driving the same success financially with a much smaller organization with only 71 employees.
Fluent is doing an incredible job with their business.
Advertisers are consistently spending more with Fluent.
There’s a very high retention rate.
And again there are very few if any companies that can drive consumers at scale to the advertisers.
You’ll see them with Western Union, Shoe Carnival and Smart Balance – very prominent brands. They have an incredible customer base.
Q: Switching gears, why is Dr. Frost now joining the board?
Dr. Frost is a founder of this company.
Dr. Frost recognized the incredible work we’ve done in this industry building industry leaders and he recognizes the enormous value in this industry.
We’re thrilled to have him as a founder and equally as important as a vote of confidence in what we’re doing in building this organization.
He has made the decision to come aboard as Vice Chairman of the Board.
As you can imagine he’s a very busy gentleman with his current endeavors including Opko Health (OPK).
Q: Should shareholders be pleased with the way this deal was structured?
CEO: Yes. We believe we bought this company at a very fair price for the growth in this business.
We believe the structure is very important in that it aligns continuity of management and of the key founders of the organization to continue to grow this business to a billion dollar company in short order.
Q: Should investors be concerned about future dilutive acquisitions?
CEO: No. We’re very mindful of that.
Again, we’ll explore acquisitions. But we’ll only make that decision if it increases the technology of what we’ve built OR if it adds customers at scale and there’s the ability to have a cross selling function across various verticals and/or companies and/or if the acquisition advances us further along into our 3-pronged approach.
While we may make some small bolt-on acquisitions to support the businesses we’ll be very mindful solely to increase shareholder value.
Q: Is it fair to assume this will be the largest acquisition for some time?
CEO: I think that’s fair to assume – but given our past successes and the growth rate at which those successes occur there’s no telling what we’ll look like a year from now and what a large acquisition how it’ll be measured whether it’s large or not.
Q: Acquisition closes between December 1st and 15th?
CEO: Our goal is to close by the 1st but could extend to the 15th.
Q: Can we expect future earnings calls, timely reporting, conference presentations?
CEO: Yes. We will continue to tell our story. We’ll continue to let the public know who we are and what we’re building.
Yes. Timely reporting and ultimately earnings calls.
Q: Do you anticipate more open market insider purchases once quiet period ends?
CEO: Yes. Anything is possible. Certainly, myself I was a buyer not much lower than the current price. That speaks for what it is.
Dr. Frost’s significant contribution to the purchase price here speaks volumes as well.
Q: Are you surprised by the market reaction to the deal?
CEO: Not really. It’s on low volume. There are still legacy shareholders from the pre-merger days. So we will have days like that.
We’re still early in our maturity and making a pretty sizable acquisition.
I’m not worried about the stock today or this month.
We just need to continue on our plan to build this business and if we do our job we believe it’ll reflect shareholder value.
Q: Are there any other updates you’d like to share?
CEO: We’re very excited we’re in alpha testing for IDI Core.
We’ve made significant developments building out our cloud infrastructure and we continue to ingest massive data sets into IDI Core.
We’re very excited. That is the platform we’ll bring to the risk management industry, a massive industry.
Q: You remain optimistic there’ll be a positive resolution to the TransUnion litigation?
CEO: Yes we do.
I might add again, whatever the resolution, it has no effect on the independent system that we’re building today.
This is a dispute over IP arising out of the sale of TLO and it has nothing to do with independent technology being built by our company today.
Q: Your product is cloud-based as opposed to server-based. Why is that so important?
CEO: The point we’ve made there is that with the previous 2 companies – in order to establish yourself with those 2 companies traditionally you had to spend tens of millions of dollars to build out a massive server room.
So you would have thousands of servers, a raised floor, enormous cooling systems to maintain the temperature, an IT infrastructure, and personnel to maintain that.
Very heavy on capital expenditures.
This time we’ve built it in the cloud.
That reduces personnel, capital expenditures. We have elasticity with our operations. So if we need to ramp up servers being used either in development or production we can do that easily – and bring that back down when not needed.
So you have elasticity in costs. It’s very manageable. We’d have spent millions to be where we are today if we’d built it the way we used to.
Q: So margins will be significantly higher than in previous businesses?
Q: Can you update us on Chief Science Officer Ole Poulsen?
CEO: There are only 2 individuals who built the legacy systems of those 2 previous companies.
Those were the brilliant Hank Asher and his dear friend Ole Poulsen.
As we know Hank passed away in 2013. It was a pleasure to work with him for the many years that I did. But we lost him.
Ole Poulsen is the only individual who has the technological wherewithal in my opinion to build the data fusion technology necessary to run these systems.
Q: Finally, how quickly do you anticipate generating significant revenue from the product you’re rolling out in Q4?
CEO: We’ve already on-boarded hundreds of customers during the year in anticipation of the product as we add them to our current platform of Interactive Data.
So as we release the Core product it ramps VERY significantly. That’s all I’ll say. It’s very high adoption of the product and the usage moves up very quickly.
Q: And your team is all ready to go?
We’ve built out our organization here.
Everything is in place.
We’re ready to go.
Q: Is there anything that worries you about any of this?
My only worry a good worry is can we ramp up fast enough once we actually turn it on.