Leafly Holdings, Inc.

Hello and welcome to today's Leafly third quarter 2022 earnings call. My name is Jordan and I'll be coordinating your call today. If you'd like to register an audio question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Keenan Zoff, investor relations with the Blue Shirt Group to begin. Keenan, please go ahead.

Good afternoon and welcome to Leafly's third quarter 2022 earnings call. Joining me on the call today are CEO Yoko Miyashita and CFO Suresh Krishnaswamy. Today's prepared remarks have been recorded, after which Yoko and Suresh will host live Q&A. A copy of our press release, along with an accompanying earnings presentation, can be found on our website at investor.leafleaf.com. Today's call will contain forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the services offered by Leafly, the markets in which Leafly operates, business strategies, performance metrics, industry environment, potential growth opportunities, and Leafly's projected future results and financial outlook, and can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risk assessed in today's press release, our annual report form 10K filed with the SEC on March 31st, 2022, and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at investor.leafley.com. With that, let me turn the call over to Yoko.

Thank you, Keenan, and thank you to everyone for joining us. Revenue for the quarter was $11.8 million, up 8.1% year over year, as we continue to expand our advertising products, partnerships, and the Leafly brand. Revenue from retail was up 5.1% year over year, and revenue from brands was up 19.6% year over year. On a sequential basis, revenue reflected the ongoing challenging environment facing the retailers and brands we serve. The cannabis industry in particular saw anemic sequential growth, with Q3 retail sales estimates coming in at flat to 1% growth compared to Q2. The volume of products sold has grown, but retail price points have declined. Those declines have put pressure on our retailers and brands to reduce their ad spend as their margins compress. This tells us that the macro environment is difficult, but consumer demand for cannabis has not softened and they continue to purchase, which we see reflected in our own platform activity. Although average order value has softened, the number of items ordered with each purchase has remained consistent and retailers are placing deals on our platform at a record number. This is a strong indication that value has become extremely important as consumers are looking for the best prices and deals when they purchase. With our investments this year to build our subscriber base and increase deals functionality on our platform, we're poised to deliver choice and value to consumers when they need it most. We're also helping brands and retailers reach more customers when building their businesses is critically important. With the market pace of growth declining and the subsequent impact to ad spend from retailers and brands, we announced a 21% headcount reduction in October, which is in addition to the significant OpEx savings initiatives we announced on our last earnings call. Suresh will give more details about these in a moment. Both of these actions have realigned our cost structure, enabling us to preserve capital and manage for the long-term health of the company. These measures also give us greater flexibility in this dynamic market, better positioning us to take advantage of opportunities as they arise. Although this was a difficult decision, we are focused on creating shareholder value, and it was the right decision given the current macro environment. Investments made over the past two years allowed us to reorganize our sales teams and bring on much needed talent in our PB&E and G&A teams. This early work provided insight and data to know which investments yield the greatest benefit and information on what we can do to be more efficient and what we can prioritize to drive the greatest return. In addition, we have delivered significant product and partnership launches that we expect will present further monetization opportunities as they scale. As we look to the short to medium term, we're focused on optimizing what we've already accomplished with plenty of opportunity to generate incremental revenue across the weekly platform. Our teams expect to move as quickly as possible in the areas of the business that we are able to control, and we'll be ready to capitalize when the industry returns to robust growth, as we all expect. As a longtime supporter of a fair and equitable cannabis industry, we are encouraged by the industry momentum seen across the country In October, we witnessed history when President Biden reinvigorated federal legalization discussions by announcing pardon and kicking off the process to examine descheduling. It's a historic moment in recognition from the highest levels of the executive branch of what the public overwhelmingly already supports. With the U.S. elections this week, we'll be welcoming two more states to legal recreational cannabis, Maryland and Missouri. whose residents comprise almost 4% of the US population, 18 and over. The Leafly platform is firmly established in these current medical markets with over 80% of medical dispensaries in Maryland and Missouri already engaged on Leafly as of the end of Q3. We look forward to serving the millions of recreational consumers who will now have access to licensed tested cannabis and onboarding new retail locations once those rec markets open. In addition, delivery continues to gain momentum in local markets as well. We're very excited about the partnership with Uber Eats we announced in October. This partnership brings a seamless shopping experience to life within the Uber Eats app. The partnership is currently limited to Toronto. It's important for a number of reasons. One, It normalizes cannabis and is a recognition of the great potential of this industry and the value of the cannabis shopper. Two, we deliver tremendous value to retailers on our platform, giving them access to Uber's wide customer base. Uber's penetration across consumers in Toronto is significantly larger than ours, and the ability to connect those consumers with retailers is critical in a competitive environment, and it's a powerful lever to help retailers grow their business. Three, this partnership lends itself to our strategy of strengthening and building more commercial partnerships through technology integration as we find more avenues to help our retailers reach a broader audience. Specifically for us, we see this partnership as a way to drive new retailer acquisitions and order volume growth in Ontario. New retail leads from the province increased by more than 260% in the week after the announcement. We also see this as an opportunity to drive ARPA higher in this market. We are a valuable connector for consumers and retailers, and our partnership with Uber is helping to connect even more consumers with licensed, tested cannabis products in Toronto. Delivering against our mission to help more people discover cannabis on such a large platform would not have been possible without the growth and momentum from the investments we've made and our focus on technology integrations over the past two years. Moving on to other quarterly highlights, we saw an increase in ending retail accounts of 7.4% quarter-over-quarter or 18.2% year-over-year. We saw continued growth in monthly active users with a 4% increase over last quarter. This was driven by top-of-funnel improvements, which have continued to bring high-quality users to the site. We are disciplined in our marketing approach to drive traffic through meaningful content while establishing Leafly as the trusted go-to source for cannabis. It is not our strategy to utilize low quality paid traffic. Instead, we have focused on improving SEO by publishing content that consumers find valuable, which has been fruitful and is a key component of our mission to help consumers discover cannabis. As you know, one of our four key areas of focus this year has been making improvements to our ad platform to drive lower funnel performance for retailers and brands. We launched some of the largest improvements to our ad platform, including the launch of Marquee Ad Units, the first new ad unit for retailers released in nearly two years, across the most valued real estate on weekly, our homepage, strains, and strains list pages. We launched these products on web in October with expansion into native coming as a fast follow. We are seeing great interest and strong selling momentum, which adds to our durable subscription revenue and reinforces that retailers are still eager to find ways to connect with engaged weekly consumers. We've also improved our attribution on our menu merchandising product, making it easier for brands to easily understand how Leafly drives lower funnel performance through these ad units. We continue to strengthen the role Leafly plays in the success of our retail and brand clients by reducing friction for our B2B partners in key areas. In addition to the Uber partnership, which will expand in Toronto, We completed integrations with Blaze and OnFleet, making it easier for delivery partners to scale on lately and improving the customer shopping experience. We believe delivery is a critical growth driver for us in existing and forthcoming markets. And with our growth and integrations and new partnerships in this area, we intend to lead in this category. Our success in California is a compelling proof point. Our delivery product is driving growth in revenue and performance in California with a 24% year-over-year increase in California revenue and nearly two and a half times increase in orders, almost one-third of those orders coming from our iOS app. Building and maintaining trust remains a focus as we continue to create an incredible consumer shopping experience. We have refocused our editorial and content efforts to make sure we are bringing the most valuable and sought-after content to consumers, through our news and learn channels and premium editorial content. We also introduced effects-based filters in our shopping experience as consumers consistently tell us that it's how they want to shop for cannabis. It's how we're leveraging our unique IP to help consumers in their cannabis discovery journey. We've strengthened our thought leadership with the release of our second annual harvest report, the only annual holistic assessment of cannabis as a crop. a crop that is the sixth largest crop in the United States. We also released our inaugural opt-out report, which highlights the inadvertent ways local municipalities are supporting the illicit market when they opt out of legal cannabis sales. These are important topics not covered extensively by anyone else. We're also excited by the anticipated opening of New York rec stores before the end of the year. Our brand resonance across consumers in the Northeast is significant, and our penetration across existing medical retailers is strong in those markets, including 100% penetration across retailers in New Jersey and over 90% of existing dispensaries in New York on our platform at the end of Q3. On the operations front, we are focused on optimizing our team's existing products and offerings. We're working to create better alignment across teams, drive increased productivity in our sales organization, and improve our go-to-market strategy. We welcomed Carlos Pinto to Leafly in October to oversee the sales, marketing, and content team. His expertise in developing strong cross-functional teams comes just at the right time. We've done the heavy lifting. Consumers recognize the Leafly brand as a source for trusted expertise and premium content. We've built a robust platform for retailers and brands with some amazing products and key technological integrations. And now we're focused on penetrating local markets, adding retailers on platform and connecting them with high value traffic. Today, the legal cannabis market is in its infancy. Despite the current macro environment, the industry is forecasted to grow to $42 billion over the next four years. Legalization momentum only serves to further normalize cannabis, and over time, this will be a valuable CPG industry in need of technology and support services that Leafly will be here to deliver. I am optimistic about the long-term prospects of the industry and of Leafly as we build a healthy and vibrant marketplace for the future of cannabis. And now, I'll turn it over to Suresh.