PARTS iD, Inc. Class A

Thank you for joining us today to discuss PartsID's first quarter 2022 financial results. On today's call are Nino Chapina, Chief Executive Officer, and Kalash Agrawal, Chief Financial Officer. I'd like to point out that certain statements made during this presentation are forward-looking statements. These forward-looking statements reflect management's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting PartsID's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first quarter 2022 earnings release. which was furnished to the SCC today on Form 8K, as well as the company's most recent annual report on Form 10K and its other filings with the SCC. The company does not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company plans to refer to certain adjusted non-GAAP metrics on this call. Explanation of those metrics and reconciliations of GAAP metrics to those non-GAAP metrics can be found in the earnings release issued earlier today, which is also posted on the press releases page of our website at www.partsidinc.com. Finally, as a reminder, a slide presentation is accompanying today's prepared remarks. The presentation is viewable through the webcast link located at www.partsidinc.com. With that, I'll turn the call over to Nino Trepina, Chief Executive Officer of PartsID. Nino?

Good afternoon and thank you for joining us today to review PartsID's first quarter 2022 results. Before we begin, I want to spend a moment to acknowledge our colleagues in Ukraine. As many of you know, PartsID has strong ties to Ukraine. It is home to many of our independent contractors who are in the affected areas. On behalf of the entire PartsID organization, I want to express our concern for the safety and well-being of our teammates in Ukraine and our sympathy for everyone who has been personally impacted. Our colleagues have demonstrated perseverance, courage, and devotion to our company despite these difficult circumstances. They continue to inspire us. Our thoughts are with them during this challenging time. Having gone public in late 2020, the Parts ID story is still relatively new to many investors. And because our business is highly differentiated from what the street categorizes as our peer group, I think it makes sense to start with an overview of the company, our technology platform and operating model, and of course, our vision and mission. ParseID is a technology-driven digital commerce company on a mission to transform the $400 billion-plus U.S. auto aftermarket and the $100 billion-plus adjacent complex parts markets by focusing on the consumer's needs and using purpose-built technology and data to create custom infrastructure and unique user experiences where customers can quickly and easily find all the parts and accessories they need, get customer support by highly trained agents, and be so satisfied with their experience shopping this category with us that not only will they come back in the future, but they will tell their friends and families too. We work to achieve this through our platform business model, which brings together over 1,000 industry suppliers, more than 5,000 brands, approximately 18 million product SKUs, and over 14 billion product and fitment data points. The technology platform integrates software engineering with catalog management, data intelligence, mining and analytics, along with user interface development, which utilizes distinctive rules-based parts fitment software capabilities. To handle the ever-growing need for accurate product and parts data, we utilize cutting-edge computational and software engineering techniques, including Bayesian classification, to enhance and improve data records and product information, and ultimately to contribute to the overall development of a rich and engaging user experience. Furthermore, the technology is architected to support more than just car parts and accessories. we demonstrated the flexibility and scalability of the technology by launching seven adjacent verticals, including BoatID.com, MotorcycleID.com, CamperID.com, and others in August 2018, all of which leverage the same proprietary technology platform and data architecture, and with a unified shopping cart, enabling customers to shop across all eight verticals and check out seamlessly using one cart. There are several key points that highlight the attractiveness of our platform business model and underscore how PartsID is distinguished from the competition. One, our distinctive technology provides accurate fitment data, which enables a successful experience for the auto parts consumer and supplier. Unlike any other consumer product category, the success or failure of selling auto parts and aftermarket accessories comes down to rich and comprehensive fitment data that sellers like us add to our product offerings. Two, our product catalog of approximately 18 million SKUs and over 5,000 brands is unrivaled. This comprehensive catalog is enriched with nearly 14 billion data points, advanced 3D imagery, in-depth product descriptions, customer reviews, installation and fitment guides, as well as other rich custom content specifically catering to the needs of the automotive aftermarket industry and is further complemented by highly trained and specialized customer service agents. Three, our proprietary and asset light fulfillment model has enabled us to grow organically without the need for external capital. This platform model is enabled by a network of over 1,000 product vendors, which we have cultivated relationships with and integrated over the last 10 plus years. This has enabled us to scale our catalog size quickly and to add adjacent verticals, unlike most of our competitors, which have very capital-intensive businesses and have therefore been limited to offering very few product lines, such as just replacement parts and or just hard parts. Furthermore, our geo-sourcing fulfillment algorithm factors in real-time inventory, customer proximity, shipping cost, and profitability to optimize product sourcing. This algorithmic approach allows us to increase fill rate and delivery speed. Four, our enhanced customer experience is a result of rich content, wide product range with ease of selection, proprietary fitment data, and highly trained customer service representatives, providing a data-driven engagement platform for discovery and inspiration. This is demonstrated by, first, our catalog size, which contains approximately 18 million product SKUs, Second, despite the supply chain disruptions that began in 2021 and continue today, our net promoter score continues to stay near 70. Third, our overall product return rate across all eight verticals continues to be approximately just 5% versus industry averages of more than 20%. In a category as complex as parts and accessories, this is truly incredible and underscores just how effective our technology is and Fitment data are. Fourth, but certainly not least, repeat customer revenue, which is defined on this slide, represented 41.6% of total revenue this quarter. This is up from 38.4% last quarter and another new record for the company. We have invested over 10 years building our platform, and it's not easy to replicate. In fact, our investment in technology and data is arguably the deepest competitive moat around our business, and it has allowed us to expand into adjacent verticals, leveraging a capital-efficient, just-in-time inventory model to offer the consumer an extensive selection and background. With that background, I'll walk through the details of our first quarter top-line results, and then I'll turn it over to Kalash for a review of the financials. After Kalash finishes, I will cover the opportunities we're laser-focused on, to drive growth and the strategic initiatives we're executing against to capture that growth. After that, we'll open the line to questions. Turning now to slide five, as you can see, we were up against a very difficult comparison from last year when record stimulus fueled outsized consumer discretionary spending. In addition to the lack of stimulus this year, our growth was also impacted by the delayed issuance of income tax refunds. which historically have benefited our performance early in the year. When compared to the more normal first quarter of 2020, you can see we grew revenue over 34%. Looking at our key performance indicators, you can see the impact that stimulus had last year or the lack of stimulus this year had on traffic and conversion, with 2022 traffic levels also being hampered by the rising cost of performance marketing rates. The year-over-year declines in traffic and conversion were partially offset by an increase in average order value. Despite the volatility over the past two years, we have consistently increased our number of repeat customers. These loyal customers who return to our sites have been largely organic to this point. They represented 32% of our total base in Q1 of this year and generated nearly 42% of revenue. up 440 basis points compared with the same period last year, and up 620 basis points versus the first quarter of 2020. As we continue to take steps to diversify our business beyond our core DIY automotive accessories category, I am pleased to share that repair parts, including original equipment, grew year over year, as did our adjacent verticals. It's clear our strategic initiatives are working even in the face of some challenging operating conditions. Turning now to slide six. As we outlined during our Q4 call in March, the operating environment in early 2022 has been made more difficult by several external factors. Over the past two months, conditions have remained largely the same and visibility into when some of these headwinds will abate is still limited. That said, our teams are doing a great job navigating these challenges in order to best mitigate their impact on our business. Supply chain disruptions continue to impact economies everywhere, due in part to continued factory closures and poor backlogs around the world. These have cascaded into global inventory shortages and widespread inflation. By adjusting our sourcing logic to alternative vendors with better inventory positions, we've been able to hold down cost increases to the extent possible. and where necessary, pass some of these increases on to retail prices. To that point, this quarter we were able to hold our cost of goods sold to an increase of only 140 basis points despite widespread inflation. One notable and clear advantage of our platform business model is the breadth of similar products available to a consumer to trade down the product value spectrum as prices increase. By offering customers options down the value spectrum during times like this, we can capture sales which competitors with a stock and ship only model may lose due to their limited product assortment and options. We are leaning into this on the platform and with our call center sales representatives. With respect to the war in Ukraine, our thoughts continue to be with our teammates there and all those impacted by Russia's invasion of the country. We are in regular contact with the team, many of whom initially fled to safer regions in Ukraine or to other countries. Some of them have since returned home, while the rest continue to work remotely. Fortunately, we haven't experienced any material disruption to regular business activities to date. We are closely monitoring the situation, both the safety of our team members and the need to maintain operations. As the situation continues to evolve, we'll adapt with any needed temporary or longer-term adjustments as appropriate. With that, I'll turn it over to Kalash for a review of the financials.

Good afternoon to everyone. Since Nino already took us through our revenue results this quarter, I will start with gross margin on slide eight. Continued investment in adjacent verticals and our repairs and OE business changed the overall product category mix, which reduced overall margin this quarter by approximately 90 of the 140 basis point decline. While these investments impacted our overall margin this quarter, With our focus, margins increase in the adjacent vertical by 15.1% and by 6.2% in repairs and OE parts. As these businesses scale, these margin gains will become accurate for overall businesses. The remaining 50 basis point decline in gross margin is attributable to continued COVID-19 supply chain disruptions as we remain more reliant on alternative sourcing of the products due to limited availability and inflation. While we expect this to continue in the short run, we believe we will be able to mitigate the impact through three key initiatives listed on the slide that will enable us to progressively move gross margin to over 23% by December 2024. As outlined on the slide, we believe we can capture roughly 100 basis points of margin by year end through shipping cost reductions. and vendor and price optimization efforts. Further, we believe that margin improvements in our adjacent vertical OE and repairs categories can net another 100 to 150 basis points by the year end 2023. Additionally, we believe that we can capture another 100 basis points by December 24 to increase private label and white label product sales as we build out the part of our business. As a reminder, we operate a capital efficient, just-in-time inventory business model. Since we don't carry inventory, we don't have material fulfillment cost in our operating expenses. To properly compare our gross margin with the competition requires an adjustment of competitors' gross margin for their fulfillment cost. Turning now to operating expenses on slide nine. Starting with advertisement expenses, we saw a decrease of 0.8 million or 7.6% for the quarter, primarily due to lower traffic. Advertising expenses as a percentage of revenue were 10.2% this quarter compared to 9.6% in quarter one of 2021. The increase in percentage is primarily attributable to increasing the cost per click as we acquire higher quality traffic along with changes in traffic mix. While digital advertising markets are also seeing some price inflation, we are staying disciplined by holding true to our ROI framework across our various marketing channels. We also continue to innovate with new channels and are being very deliberate around where we invest across the marketing funnel to unlock the best efficiencies. Currently, our advertisement costs are variable as we heavily use performance-based marketing. Turning now to our balance sheet and our cash flow highlights on slide 10, our capital efficient and inventory light business model provides higher return on capital employed by the company. This model enables us to expand in new lines of business and new markets without material investment in the inventory. This quarter, we had $94.9 million in revenue with just averaging $1.4 million of physical inventory on hand. I will now turn the call back to Nino for a review of our strategic initiatives.