Leafly Holdings, Inc.

Good afternoon and thank you for attending today's Leafly second quarter 2023 earnings call. My name is Jason and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. I'd now like to pass the conference over to our host, Josh DeBerg.

Good afternoon and welcome to Leafly's Q2 2023 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 a live Q&A. A copy of our press release, along with an accompanying earnings presentation, can be found on our website at investor.lethley.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 risk and uncertainties that could cause actual results to differ materially from expectations, and we caution you not to place undue reliance on such statements. For discussion of the material risk and other important factors that could affect our actual results, please refer to the risk discussed in today's press release, our annual report on Form 10-K filed with the SEC on March 29, 2023, and 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.legally.com. With that, let me turn the call over to Yoko.

Thanks, Josh, and hello to everyone who is joining us today. Revenue for the quarter was $10.7 million, slightly above our guidance given in May. There are a few themes driving this, which I'll speak to in a moment. Overall, I'm pleased with the considerable amount of work the team has accomplished over the past several months to put us on stronger footing as we head into the second half of this year. Our focus on new go-to-market initiatives coupled with weekly strong value props had strengthened relationships with high-value customers. We also delivered positive adjusted EBITDA, highlighting our efforts towards building a durable and profitable business. This was driven by the outside-in revenue and continued focus and discipline on operational efficiencies. As expected, we significantly reduced our cash burn in the second quarter to approximately $850,000 from just under $10 million in the first quarter. Operationally, we are in a stronger position than a year ago, which positions us well for long-term sustainability. The industry continues to consolidate and face some instability. In light of that, there are signs that the efforts we've taken over the last nine months to navigate these challenges are becoming more deeply rooted, and we are seeing some green shoots across the company. We continue to highlight the weekly value prop, and our new team structure implemented last quarter has allowed us to invest in and strengthen our relationships with our high-value clients, particularly when critical momentum events occur, such as the introduction of adult youth in a market. We've also continued our efforts to reduce retailer friction and focused on enhancing the consumer experience by improving functionality in deals, search, and delivery. We have been focused on building a healthier subscription base of revenue. And when combined with out-of-business churn as a result of the softer macro environment over the past year, we saw a sequential decline in ending retail accounts. As a reminder, we have a wide range of retail accounts on our platform, from small single-store owners to large MSOs across all legal markets, and each faces its own set of challenges. Looking ahead, we continue to actively manage delinquencies and emphasize collection efforts which along with the difficult environment for some operators will likely result in a decline in ending retail accounts in the short term. In addition, we expect to see additional cancellations arising out of price increase conversations. We will continue to focus on building our platform, leveraging our local market strategy, where we utilize a playbook tailored to specific key markets and their local needs. In May, we began rolling out new rate cards and price increases in select markets to select clients to better align our pricing with the value we deliver to our partners. We've been pleased with the response so far, as it validates Weebly's role as an integral part of retailers' businesses and the value we provide. We've also emphasized annual subscription agreements to lock in revenue and lower our servicing costs. These new contracts also now have an established escalator upon annual renewal. The net of these changes have resulted in some less profitable accounts churning, which will likely continue into Q3. And while the account base will decline in the short term, we expect to evolve to a healthier customer base, supporting more durable revenue over time, and make progress to that end in Q2. As a result, total ending retail accounts declined 8% from Q1, but ARPA in Q2 remained steady. It is likely that delinquencies in churn will lead to further declines in total ending retail accounts in Q3, but we expect improvements to ARPA in subsequent quarters, particularly as the price increases take effect and churn stabilizes. In addition, as we've noted in previous calls, we've adjusted our go-to-market team to align our resources to our highest value clients and better optimize for individual customer needs and market dynamics. For our lower-paying clients, we have implemented a one-to-many, more cost-optimized approach. Given the current industry-wide softness in brand advertising, we are opening up our expansive brand advertising products and inventory to retailers for additional add-on purchase. To do this, we cross-trained our sales staff on retail and brand products to empower the team to leverage our whole suite of products and customize solutions based on customer needs. We've made our teams smaller and more agile, including our product and engineering teams. This has allowed us to make quick and meaningful improvements to the platform that reduce retailer friction based on customer feedback, which in turn has allowed us to create additional value on our platform. In June, we launched a beta version of a new order API which allows any POS system to integrate with Leafly, rather than the select few with custom integrations historically. This opens a wider opportunity for retailers to work with Leafly and allows them to seamlessly integrate Leafly orders into the systems they are already using in-store. Our belief is that unlocking additional order integrations through this new API will enhance retailers' order processing capabilities, leading to an increase in customer retention over time and boosting the average number of orders per retailer. We plan to make this API more broadly available over the next couple of months. We also improved our delivery experience for both retailers and consumers. We now support scheduled delivery windows, which allows retailers to receive orders for a future delivery time. enhancing the delivery experience for the customer and making it easier for the retailer to plan for. It's early, but we have already seen early adoption amongst delivery-enabled retailers. Deals continue to be an important driver of orders as consumers look for value in this softer macro environment, and we've made significant improvements to our deals engine to enable retailers more flexibility in the types of deals they are able to offer and the ease with which they are able to post them. Over the course of Q2, we saw the number of deals live on Leafly increase by 31%, and the percentage of orders using a deal increased by nearly 8% over the same period. We also enhanced the consumer experience on Leafly, particularly around shopping. We used their journey to make it easier and faster for consumers to create an account or sign in so that checkout is faster. These enhancements led to immediate improvements in the number of new accounts created. This is important as consumers who create an account are far more likely to place an order than users that haven't, and it gives us greater opportunities to build shopper retention and improve our targeting capabilities. We're also focused on features that drive consumer engagement and conversion to orders. For example, We enhanced our strain effects-based shopping experience by better aligning the consumer search to local retailer inventory. This is our data advantage at play, leveraging our proprietary strain database and our substantial effects data to drive better discovery and shopping for consumers. We also revamped our order history page, creating a seamless reordering experience we are all accustomed to on larger e-commerce platforms. While some of these are incremental improvements, they are making the shopping experience on Leafly better. The number of orders has grown year over year, and just as importantly, the number of customers ordering on Leafly is up year over year as well. This is in part, we believe, because of our focus on the consumer experience over the past year. All of these initiatives have been focused around improving conversion to sales, which drives direct value for retailers. And we're seeing some encouraging results, which we believe will provide long-term revenue opportunities. We'll continue to focus efforts in these mid to lower funnel areas, engaging our most valuable consumers and driving increased orders. This includes producing compelling and engaging content that helps inform their shopping decisions. This content shift is a change from our previous focus on general cannabis mouths that drove top-of-funnel consumer traffic. As our business and the industry has evolved and mainstream media has taken on a larger role in covering cannabis-related news, we can focus greater efforts on deeper funnel content and monetization. Over time, we expect growth in mouths to become less relevant to the overall health of the business. We will continue to develop and create content that gives consumers valuable information to help educate them about cannabis and inform their shopping decisions and content that demonstrates our presence in local markets across the country. Finally, there continues to be legalization momentum that brings long-term opportunity. In Minnesota, recreational use became legal at the beginning of the month, with tribal sales commencing on the first and broader retail sales expected to begin next year. In Florida, a ballot initiative to legalize recreational use received enough signatures to move forward in 2024. And in Pennsylvania, lawmakers introduced a REC legalization bill, which is now in committee. While the path isn't always a straight line for states moving towards legalization, Leafly will be there to welcome millions of new shoppers in the legal cannabis market when they finally win legal access. Now, I'll turn it over to Suresh.