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spk05: Good morning, and welcome to Oddity's preliminary third quarter 2023 results conference call. Today's call is being recorded, and we have allocated time for prepared remarks and Q&A. At this time, I'd like to turn the call over to Maria Licoris, Investor Relations for Oddity. Thank you. You may begin.
spk06: Thank you, Operator. I'm joined by Aran Holtzman, Oddity co-founder and CEO, and Lindsay Druckerman, Oddity's global CFO. As a reminder, management's remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates, including statements about Audity's business strategy, market opportunity, future financial performance, and potential long-term success. Forward-looking statements involve risks and uncertainties, and actual results could differ materially due to a variety of factors. These factors are described under forward-looking statements in our preliminary earnings press release, issued yesterday and in our perspectives filed with the Securities and Exchange Commission on July 18, 2023. We do not undertake any obligation to update forward-looking statements, which speak only as of today. Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business. Additional information about these non-GAAP financial measures, including their definitions, are included in our preliminary earnings press release, which we issued yesterday. I will now hand the call over to Iran.
spk03: Thank you, everyone, for joining us today. We are excited to share certain preliminary third quarter results today, which we expect to beat our guidance issued in August on net revenues and gross margin and be the midpoint of our guidance on adjusted EBITDA margin. Based on these preliminary estimates, revenue is growing faster, gross margins are higher, and adjusted EBITDA is better than we expected. This is despite our real effort to pace our growth and slow down as we historically have done in H2. With this record-breaking quarter, we expect to deliver net revenue growth of at least 58% and adjusted EBITDA of $89 million for the first nine months of the year. We are scaling at a speed that beats legacy incumbents, but also the majority of internet and consumer companies. and with profit margins and cash flows that we have not seen in other direct-to-consumer companies. Our expected outstanding financial performance reflects the strength of our model, the power of our technology-based platform, the health of our brands, and the massive runway we have in front of us. Our business continues to fire on all cylinders. Our large investments in technology and data capabilities over the past five years are enabling us to continue to grow fast without damaging our high margins and rare profitability. At my company, we don't just sit and hope that growth will happen. We make it happen. And we do it every single day with strong planning, strict discipline, hard work, innovation, and by taking big swings to enable long-term growth, which we are fully committed to. This mindset and discipline have led to our record-breaking success so far, and it is what we believe positioned us for compounding success in 2024 and beyond. As we speak, our teams are hard at work building the growth engines that we expect will power us for many years to come. Driving our current brand, Ilmak Yaj and Spoiled Child, both with what we think are enormous runways ahead of them. Both are still very young with ton of growth potential to unlock, but we also spend our time on building our future brands. We believe our business is very well positioned for future growth with multiple powerful drivers. First, we operate in a massive and growing global term with a wide range of product categories and pain points for us to go after. We focus on areas that our over 40 million users crave and where our data shows huge potential demand, where there is a consumer pain point that we believe is not solved today, but other brands and within the economics that can work online. Second, we are the market leader in the online channel, which is still super underdeveloped relative to its potential. Online today represents around 25% of the total market, but we expect it to be 50% in the next coming years. We don't need to convince anyone on this call that internet and online is the future of our industry. But if some of you want a similar proof point, take a look at China, where online is already huge. But although it is crystal clear for me that this is where we go as an industry, I believe that my competitors are still behind and under-invested in technology. In my view, we are five to 10 years ahead of them with a wide open playing field to press our advantage and continue to lead the market. Third, the Audity platform is a proven brand scaling machine, and we believe there is a massive runway ahead. Our platform capabilities have allowed us to grow faster and more profitably than other direct customer businesses. It's why Spoiled Child is, to the best of our knowledge, the most successful B2C brand launch in its combined scale and profitability. We proved with Spoiled Child that we have the ability to do it again. And it's a matter of time until we have more brands in our portfolio and platform. We have the user base of 40 million users, the data of over 1 billion data points. We have the technology algorithms and tech team that truly drive the future, and we have the unmatched product development engine with our biotech lab in Boston. It is easier for us today than it was three years ago. I want to spend a few minutes talking about our technology muscle. We have invested early and aggressively in technology since our inception. Our tech team represents over 40% of our talent, and we expect it to remain 40% for the foreseeable future as we continue to invest in new capabilities to drive us forward. It's important to remember that although I'm Israeli, technology was never the goal. It was the means to win in an underpenetrated category, to give the best online experience to our users, while we hype a growth, a healthy business with strong profitability. When we say technology internally, we refer to three primary areas, artificial intelligence, computer vision, and biotech. Starting with AI, we use machine learning models across a wide range of use cases, that support the user. These models are integrated into everything from our marketing engines to our product recommendation engines that give the user a precise match to the user experience itself with hundreds of online funnels. AI was our breakthrough in D2C for Beauty. Instead of forcing the customer to decide on a product, our machine learning models decide for the consumer. Instead of relying on rule-based algorithms to determine the user experience, We use machine learning models to deliver an optimal outcome that we have achieved with high conversion and high satisfaction. We have machine learning models in almost every part of the user journey. Those machines are responsible for high user satisfaction, which leads to high repeat rates that drive our strong profitability and high growth. Without it, we would never be able to print these results. Without it, we are just in another unprofitability to see companies. Moving on to our computer vision technology, a capability we established with the acquisition of Voyage 81 in 2021. Our vision team includes some of the world's most talented vision scientists, mostly coming from the Israel Defense Forces, including the Voyage 81 team, the joint audit team, to build out our vision capabilities. When we originally developed our product matching technology, we decided to start with basing our algorithms on data we collect from users, massive data. And after basing our AI on over a ton of data points, we then added computer vision technology to provide another dimension of information, which allow us to rapidly expand our capabilities with lower amount of data needed for our machine learning models. We believe we are just scratching the surface of how vision can drive our business forward with an expensive roadmap plan for the next three years. For the past 18 months, we invested a lot in using our vision technology for our third brand, which is a medical-grade skin and body brand, planned to be launched in 2025. The last technology area is around science-backed products, using AI and biotech to simply develop better physical products. It has always been my dream to leverage the power of technology to really deliver proprietary and science-backed products for our users. I've been hunting it for years, and with the Revelle acquisition, the team, and the technology, we are finally unleashing this power. Revela's founding team pioneered advanced biotechnology methods, including artificial intelligence-based molecule discovery to develop ingredients that can transform the beauty and wellness market. The team is taking the same techniques that are widely used today in the pharma industry and unleashing them in our category to deliver groundbreaking ingredients to solve real consumer pain points. We plan to launch 10 products under Ilmak Yaj's Spoiled Child brand in 2024 with Audity Labs molecules. And we believe Audity Labs molecule will account for at least 30% of our business in five years. The Ravella integration and expansion of Audity Labs is progressing even faster than with what I expected. We are attracting an incredible level of talent, scientists, entrepreneurs, as we are moving to transform the industry. Audity Labs will be one of our main growth engines for all brands. We firmly believe the roadmap and pipeline is strong, and we are truly building something that has never done before. You don't see its contribution in our current earnings today, just expenses, but I'm more bullish than ever about its future. It's the same feeling I had when we started to develop the early technology team in Tel Aviv. So this is a quick overview of the technology. Moving to the brands. Our commitment to building brand equity powerhouses that consumers love is core to our business. Technology is not enough. At the end of the day, we ship products with brand stories. And the numbers don't lie. The success and scale of both Il Makiage and Spoiled Child in such a short period of time, we believe is unprecedented and reflects their brand strength. Let's start from Il Makiage, a brand that grew online from zero to over $300 million in revenue in less than five years. And we are building it to be a $1 billion plus brand within the next five years. Il Makiage is already, based to our knowledge, is the first growing online beauty brand in the U.S. Yet, we haven't grown anywhere near as much as we think we could have. We believe the $1 billion mark is very achievable for the brand, and I'll share why. First, in our color cosmetic business, we are a very small fraction of the overall market size, with a significant runway to take further share. We've constantly done this since we launched five years ago, and think there is much more room to run, especially as the consumer continues to shift online. Second is category extension for real make-up. We already started with skin and proved we can do it. We spent the last two years building a solid base for Ilmakia skin to scale quietly in market testing skin in response to the strong demand from our users and product. And we have built a profitable winners across product, including moisturizer, serums, and exfoliator. Ilmakia skin is already bigger than 80 or 90% of online D2C skin brands in the US in terms of revenue. And we've just started. Third, international is an enormous opportunity where we already have a lot of success in geography expansion. As you know, our competitors generate two-thirds or more of their business outside of the U.S. For us, in Il Makyaj, international is less than 30%. We have already proven our model work well overseas. We believe we are number one or number two largest online beauty brand in many countries we have launched in, including the U.K., Germany, Canada, and Australia overall. with growing and profitable business in each of these markets that we believe have a lot of room to continue growing. In the medium term, based on our extensive testing and infrastructure build-out, we think we have a good line of sight to expand profitably into new markets. Our second brand, Spoiled Child, has been an amazing success. We believe it's the most successful B2C brand launch across any vertical of all time in revenue, and it's already profitable this year, in year two. We built Spoiled Child to address the strong demands from our users for next-generation wellness brands that truly solve their pain points. Spoiled Child is scaling in with even faster than Il Makiage did, beating again and again all my internal projections with success in both hair and skin. Huge categories. We are building engines we believe will drive Spoiled Child toward $1 billion of revenue and beyond, and I will explain how. One, similar to Il Makiage, we have thoughtfully developed held back growth in this brand, which you can see based on more than 50% of its sales coming from repeat, despite being only a year-old brand with hyper growth. New categories are in development. We are already winning in both skin and hair, which set us up well for additional extensions. And lastly, international for Spoiled Child is zero. We are still 100% U.S., and although my team is begging me to expand to other countries, we didn't. There is still so much growth available for us, for Spoilchild in the U.S., before even considering moving forward to new geography. Again, discipline is everything for me. I recently hired a CEO for the brand. I was waiting to get to $100 million gross revenue, run with, and once we hit it, we felt confident to hand it to strong hands. Gilif Prati is one of the most talented leaders out there for online businesses, and it's already building new capabilities to add to Spoilchild's strong base. In both brands, we invest heavily in product development, in marketing, and in consumer experience to drive strong affinity and repeat. And it shows more than half of our revenue comes from repeat customers, and this is true for both Il Makiage and Spoiled Child. There is nothing that better reflects product efficacy and brand love than repeat rate. The rest is die presentations and baseless data. Beyond reflecting brain affinity, the large repeat rate is an outcome of us holding our growth back. In any given year, we could have grown 50% to 100% more than what we did. But we are disciplined about growth. We leave a lot of growth on the table for the future. And we are building a machine that we believe will compound sustainably and durably over a long time. In all my years as CEO of the company, I didn't have one month that I felt that we saw our limits. Not even close. My strategy is to always have the ability to double and never push our limits. In this way, I feel good sitting with my teams and investors and telling them the future is bright with zero concerns. Some people say I'm crazy, grow as much as you can or run, but this is my way to be able to sleep a few hours at night. Looking to the future, we will continue to add brands to our platform where we see large-time, huge pain points coming from our user base and where you're in the economics, can support strong profitability and returns on capital. We have two future brands already in development that we plan to launch in 2025, and we are incredibly bullish on their opportunity. I touched briefly earlier on Brandtree, a medical-grade skin and body brand that will include a mix of OTC and prescription products. I believe Brandtree will transform the dermatology and skin market with revolutionary skin diagnostic powered by computer vision tools with a UI that drives a far superior experience than what is possible in a doctor's office or any physical store environment, and with high-performing science-backed products launched out of Audity Labs that solve a wide range of skin and body concerns. SO Brand 4, stay tuned. We'll have more to say in the future, but it's heavily under development. Now let me hand it over to Lindsay.
spk08: Thanks, Aran. We're thrilled with the strong business performance in the third quarter, which is expected to exceed the guidance we provided back in August on net revenues and growth margin and is expected to deliver at the top end of adjusted EPSA margin guidance. We're entering the fourth quarter with great momentum and are poised to deliver a strong finish to the year. We now expect third quarter net revenue to grow between 29% and 31% year over year, ahead of the 18% to 23% initial guidance. The upside is driven by better growth across both brands, and importantly came with good quality and profitability. Ultimately, it proved harder to slow the business down than we originally modeled based on strong repeat revenue. We expect third quarter growth margin to be 68.5%, which is approximately 100 basis points better than the 67.5% initial guidance we gave for the quarter. The growth margin upside was driven by better cost efficiency at both brands, which has benefited from specific cost optimization efforts relative to the prior year. 68.5% gross margins represents a 40 basis point improvement from the third quarter of the prior year, driven by gross margin expansion at both Il Makiage and Spoiled Child, offset by negative margin mix from higher Spoiled Child contributions to sales. While Spoiled Child has made good progress in narrowing the gross margin gap relative to Il Makiage, we will see some negative growth margin shift as it becomes a larger proportion of overall sales. We expect third quarter adjusted EBITDA margin will be in a range of 21 to 21.5% at the top end of the initial 20 to 21.5% guidance we gave for the quarter. The EBITDA margin upside was driven by our stronger gross margin performance, and we continue to deliver great efficiency on our marketing and other OPEX spendings. This preliminary range represents around a 1,200 basis point improvement year-over-year for the quarter, despite a higher contribution from Spoiled Child, which carries a lower EBITDA margin than Il Makiage today. This year-over-year improvement is driven largely by better efficiency in our marketing spending as we throttled back acquisition spend and benefited from very strong repeat sales. This was offset by increased investment to drive future brands and products, as well as investment in Audity Labs. We exited the quarter with approximately $160 million of cash and zero debt. Our balance sheet strength is a function of our robust profitability and excellent returns on capital, which yield attractive cash flows at high cash conversions. We're not providing any updated guidance on the fourth quarter or full year at this time, but we do plan to update our outlook in November when we formally report our third quarter results. Turning to the macro backdrop as it relates to the consumer broadly, there is no indication in our business of a shift or a softening, whether as a result of constrained credit, higher energy prices, or other factors. We're just not seeing it. We also believe our model is relatively insulated from the macro because of our idiosyncratic growth drivers and the inherent agility in our go-to-market, as well as our attractive category exposure and broad demographic appeal, although we are, of course, watching closely. One note about the complexion of our P&L. We believe we are delivering growth and profitability at a level that outstrips the majority of internet and DTC businesses out there. And we're delivering this even as we're actively restraining our growth, which, as Aron said, is the right discipline to ensure sustained durability and compounding in our model for many years. Not only are we actively holding back on the top line, but we're also restraining profitability. And we're doing this by investing today's margin upside against the business opportunities we see for tomorrow. Our base business wants to be more profitable than we're letting it, a function of our high repeat rates, Bill Maquillage's excellent margin profile, and Spoiled Child's fast ramp up the profitability curve in only its second year post-launch. But with the size of our TAM and the sheer scope of opportunity in front of us, We believe these investments in new brands, products, and capabilities create a virtuous cycle of profitable growth at high returns that will compound value for us for many years to come. With that said, looking to the future, we remain committed to our long-term plan to sustain revenue growth of at least 20% and EBITDA margins of at least 20%. This is an algorithm we have strong confidence in our ability to consistently achieve and one that we will strive to exceed. With that, I'll hand the call back to Aran.
spk03: Operator, we are now ready to take your questions.
spk05: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Andrew Boone with J&P Securities. Please proceed with your question.
spk01: Good morning, and thanks so much for taking my questions. Ron, I wanted to start with a big-picture question that we frequently get from investors, which is, help us understand the operational benefits of slowing down the business. Understood the improved revenue visibility, but what do you guys gain from an operating standpoint by slowing down the business? And then for my second question, Lindsay, it sounded like you guys are choosing to invest more and get back into the business. Can you guys talk about whether there's any acceleration that we should expect from brand three and brand four or oddity labs as you guys are choosing to reinvest back in the business versus the 2025 timetable? Thanks so much.
spk03: Thank you, Andrew. Look, guys, I know you are not used to this from other companies, but the same that I historically did also in 23, I was basing audited revenue growth in H2. This is the right thing to do to create a healthy long-term business. Having said that, no one can tell me that growing 58% in the first nine months of this year is slow, especially while we are generating over 20% of adjusted EBITDA margin. 2023 is our best year ever, beating 2022 in all parameters. In terms of revenue, we grew 58% in the first nine months compared to 52% in the first nine months of 2022. And we are trading to grow by more than 50% in 2023 compared to 46% growth in 2022 with much higher revenue base. Just to put it in perspective, in the first nine months of 2023, Estee Lauder expects to decline 6% and L'Oreal expects to grow only 9%. Second is the repeat rate. 2023 net repeat rate revenue is striking to be our highest ever. We didn't have any expectation to have such a strong number in this year. New Year's acquisition efficiency is trending to be our best ever in 2023, beating 2022 while we are growing like crazy this year. Again, 58%. And SO profitability, adjusted EBITDA margin 20% plus, almost doubling 2022 EBITDA margin of 12%. So, yes, we are growing. We slowed down in H2O. like we always did. I just said it on the call. Like for me, I want to feel in every moment that we have the runway. I want to feel in every moment that I can double. That's my way to sit with you now and to sit with investors and feel very confident about what we are building. If I grew 20% or 15%, I could say that it's slow. But 58%, it's a very strong growth rate with a very strong runway. If we could have done 100%, probably yes, but why?
spk08: Great. And, Andrew, on your second question, so there's a couple. So as we talked about, we exceeded our revenue forecast for the quarter. The upside was of really high quality. It was across both brands. It was a function of the better repeat performance in part as, you know, ultimately we got stronger repeat than we expected. And as a result, that has attracted flow through to profitability. This has a couple benefits for us. and supports our ability to drive long-term growth. Number one, it gives us the opportunity to, as you mentioned, redeploy that revenue upside against the many initiatives we see that will allow us to drive growth for the long term. So we have tons of areas that we can invest given the large TAM and expansive opportunity that we see in the future. So that's new products, new brands, new capabilities, again, to allow us to support long-term growth. In terms of acceleration, Brand 3 is still on track for 2025. Brand 4 is still on track for 2025. But we have the benefit of incremental investment to ensure our success. And as Oran said, as we've been slowing the business down, At this part of the year, the teams have been very hard at work stacking a number of growth engines for 2024, 2025, and beyond, and that includes, you know, things that we're working on for our new brand.
spk04: Thank you. Thank you.
spk05: Our next question comes from the line of Yusef Squally with Truist Securities. Please proceed with your question.
spk00: Great. Thank you very much. And congrats, guys, on a strong quarter out of the IPO gate. So can you talk a little bit about the momentum in the business as you exited Q3 and entering Q4? Obviously, you're tracking at a higher kind of cadence than we had expected and that you had expected. How sustainable is that cadence going into year end, considering that Q4 is typically your slowest? And then, Lindsay, maybe can you talk about the cost efficiencies and just how much more can you take out just as you kind of ramp up the revenues and maybe how much higher could gross margins get over time? Thank you.
spk08: Great. Thank you. So, yeah, exiting the third quarter, our business and entering the fourth quarter, we're very pleased by what we're seeing in our business really across the board, across brands, across product categories across markets. You know, we weren't initially planning when we spoke with you guys in mid-August, and we gave our update following the second quarter. Obviously, since then, we've exceeded our guidance, so we're pleased to see the tone of the business. As we mentioned, we're not updating 4Q or full-year guidance at this time, but we'll talk to you in about a month, and we'll give you an update then. And then in terms of cost efficiency, look, we're always, as an organization, and in particular as it relates to new product initiatives, new brand initiatives, we really don't focus on the cost side at first, on the cost of goods side at first. We want to make sure we've got the right products, the right consumer proposition, the right acquisition engines, the right price points. All of those things have lined up appropriately, and then from there, we can back solve and deliver more cost efficiencies. In the case of Spoiled Child, in its first year, last year, we were not efficient at all on the cost side. We were, for example, air freighting a ton of products to make sure that we had the right inventory, and we were really getting our legs underneath us. This year, we made some progress shipping away to improve the cost efficiency of that brand more than we had expected, candidly, when we delivered our initial outlook. And I would say for Il Makiage also, you know, we haven't been extraordinarily focused on cost of goods efficiency there. That's something over time that we believe we can get better at. We had some initiatives that we put into place this year around really blocking and tackling type of stuff that we're just doing better from a supply chain, from a logistics standpoint. And so those things came into play to benefit us. We're not looking for any material gross margin improvement as we think about what's in store for us next year. In fact, spoiled child still operates at a lower gross margin versus ill maquillage, so as that becomes a bigger portion of our mix, that's something that we'll need to offset, but we feel very good about the level of our gross margins today and how that translates. Ultimately, most importantly, we really think about this on a total unit economics perspective, so we're working towards EBITDA margins, and we're feeling really great about how both ill maquillage and spoiled child are set up for that for the long term.
spk04: Great. Thanks, Lindsay.
spk05: Thank you. Our next question comes from Scott Schoenhaus with KeyBain Capital Markets. Please proceed with your question.
spk02: Hi. This is Steve Decker for Scott. How should we think about the product technology stack you mentioned in your release? to drive growth in the next year and beyond?
spk04: Can you repeat the question, please? Sorry.
spk02: How should we think about the product and technology stack you mentioned in your release to drive growth into next year and beyond?
spk03: Yes. So, look, we are, as for, first of all, we start with Audity Labs. We are thrilled with the integration of Revella and the progress at Audity Labs, which is coming together even faster than I hoped. It is not easy integration, it's not easy to add so many scientists to a consumer company, but we did it in a very short period of time. Audity Labs is a core part of Audity and future. The progress is outperforming our expectation based on three things. Number one, the molecular roadmap itself is bigger and stronger than what we believe can be done. Number two, the speed at which the team is progressing is even faster. And number three, the talent that we are able to attract is unprecedented to our industry, very strong talent, already close to 20 people in our lab in Boston, mostly PhDs coming from best labs. As it relates to the roadmap itself, the areas that we are hunting have the following criteria, always huge time, big pain points we see coming from our users, and where signs that we see the trials allow the success. For example, in brand three, we are working on new and proprietary ingredients that solve a number of skin issues and body issues for a population that is currently underserved. This is just one example. Other than that, in the physical product side, we have two very strong departments in ill-makeup and spoiled child. If in the past we were working on first developing products and then trying to find the audience, today we work vice versa. We have the user base. We are listening to them. We are building segments on those user base. Then we go back to the teams. They develop the products, and then we launch it back to the user. That's why it's so efficient. That's why with the D2C model, it allows us to test and test before launching with high success rate. Tech product side, again, that's what we do. We need to make sure that the technology can allow us, first of all, to match new products and new categories that we are launching. So machine learning is a big part of that. In addition, in every part of the journey, we are trying to improve the product, the tech product, and that's why it's the largest team in the company. Overall, both tech and science product, that's the core of the business, and that's the core of them. That should be the main driver for the future in terms of their growth with very decent margins.
spk04: That's great. Thank you.
spk05: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.
spk07: Thanks. Good morning. First thing I wanted to ask about was just as you've walked through plans to launch 10 products in 2024 with the new molecules from Oddity Labs, Anything you can share with us on how you are planning on marketing these products, any kind of new or different approach, something that might go broader than your typical targeting online? Because I think it's a very interesting inflection point where the quality, dare I say it, the differentiation of the product set seems like it's about to change. So I was curious if your marketing approach will change at all along with that. Thanks.
spk03: Thank you, Lauren. Look, you know, it was always my dream before, like before acquiring Revella, before launching Audity Labs, we are working like the rest of the industry, very strong product teams in both in-market and spoiled child, massive testing before launching. But in the end of the day, we use the same ingredients like the rest of the industry. My dream was to add technology around physical products. I think that we met dozens of startups in Tel Aviv and in Boston before closing the deal with Rivela. And the idea was that today we have so much data around users and about their pain points and what works and doesn't work. But at the end of the day, when you use the same molecules and the same ingredients, it makes it very tough to create something better. So what we are doing with them now, you know, all three founders came from drug discovery and cancer and decided to use their background and knowledge of an AI-based molecule discovery in beauty. And it was my missing part of the puzzle. We built a machine that has the ability to collect the data for millions of users. We built a technology that makes beauty work online. We just needed a strong engine for science product based on data we collect. And this is Audity Labs. In terms of how we market it, That's the magic. Since it's coming from a user base with the data, we just need to go back to this segment and marketing the product. That's what makes this model so strong. We just need to add more scientists and extend ODT Labs like we already do today. That's why I believe it's a massive part of our future. As for next year, 10 new molecules coming from ODT Labs. Again, after so much testing, And, you know, when you work with scientists that want to test in lab, we want to test also with consumer. And we are running very extensive testing, and it looks very promising.
spk07: I mean, I guess the root of the question is that while for sure you are not in need of growth, to say the least, right? We've talked several times how you intentionally slow down the business. But I think what's interesting also is to think about – expanding the user base or expanding your reach when the product quality changes as it's set to. So that's kind of what I'm getting at, or maybe that's something you don't need to think about for a long time. But it feels like there's an even bigger market out there when the product quality steps up as it's about to.
spk03: Yeah, it's a great question. You have two ways to expand and to grow. Number one is to extend your user base, and number two is just to offer and to extend your product line to the same user base. We are doing both. In H2, by the way, we acquire less users than I think that we ever had before because we didn't need more growth. But it doesn't mean that I don't want to use the user base to launch more products for them just because there is no cost for that, just the cost of development. So we do both. If we need to grow more, we'll continue to acquire more users, specifically and primarily for those pain points. But if not, we'll continue to work hard just launching new products to the same user base. Like two ways to grow, basically.
spk07: Yeah, okay. And do you think about at what point you start adding more infrastructure, whether it's, you know, probably people, you know, but be able to, you're already managing the growth very well that you have, obviously. But, yeah, I mean, to get to a point where, let's say, word of mouth on these products is stronger than you anticipate, do you need to add resources internally to manage that even higher level of sales growth, right? Rather than you controlling, if you will, the level of sales growth, that it kind of accelerates beyond intention, right? do you have the infrastructure you need to handle that?
spk03: So first of all, it's a good problem to have. And I hope that we will have this problem for a long time. Look, the way that we run the business, each brand has its own CEO, its own leadership team. By the way, Brandtree already has its own CEO that works with Revelec team, for example, on new molecules for Brandtree. So we try to run it very independently in terms of brands. just to ensure that we have strong infrastructure for growth for each and every brand. And as for Audity Labs, like I'm overseeing personally with our chief science officer, the founder of Revela. I talk to them almost every day. I'm very involved in what they do. And we built it to allow like high scale and like I think that we know how to do it.
spk08: Lauren, I'll just jump in. The model, I think is what you're alluding to, has built in a lot of leverage. And number one, that's one of the beauties about being a technology-based company is that it gives us the opportunity to scale without a lot of incremental cost per se. You know, one of the ways that you can see that actually play out is in Spoiled Child itself, right? It achieved profitability in about a year. It's going to be a nice profit contributor to us this year. And I think as you look across, like typically to see any new brand launch, that has scaled this materially and this profitably, it doesn't exist. And as you look at some of the large sort of legacy analog CPG platforms, every time you launch a new brand, well, first of all, they struggle to launch or grow anything organically. But you have to spend the same amount to reacquire the same customer every single time versus us. We have this user base of over 40 million where we're just going deeper and deeper and with low incremental costs, which delivers high margins. That being said, as we've talked about, you know, the model that we've committed to sustaining over the foreseeable future, if it's 20% plus revenue, 20% plus EBITDA margins, that has embedded in it a lot of reinvestment for the future. But you could see our individual brands operating at a level that's far more profitable just based on the inherent leverage in the model.
spk07: Okay. That's great. Thank you guys so much. I appreciate it.
spk05: Thank you. Our next question is a follow-up from the line of Yusef Squally with Truist Securities. Please proceed with your question.
spk00: Oh, thanks. Great. Thanks for taking the follow-up question. So one question we've been getting from clients is around billings and some customer reviews. I guess on certain sites like Better Business Bureau, et cetera, there are a number of unhappy customers, but it seems like it has more to do with billings and uh people may be charged wrongly then you know the quality of the product that's something that's clearly very important that we haven't seen so which is great but can you maybe just address what the issues there are if there are any issues at at scale maybe there aren't but if you can just address this this this topic would be really helpful thank you yeah thank you first and foremost it's important to understand the magnitude of the claim and we're talking about friction of a percent
spk03: We are running online only at a huge scale, millions of orders every month, 100% D2C. This means millions of customers to whom we are shipping physical products globally, even if it's 0.01% of all customers, say 10 out of 100,000 customers, have an issue because of our insane volume, the absolute number of complaints. We can see it's very low. Any online company that operates even close to ourselves will experience this. There will always be a certain percentage who are unhappy and issues with their address shipping or just got confused with for some reason. But our customers are happy. We track it every day. This is my job to make sure that our customers are happy because if they're not happy, you don't have repeat rates. If you don't have repeat, you don't have a profit of business. So I stand by 100%. We have very strong customer reviews. Not only that, if you look at other third-party reviews like Trustpilot or Google Reviews or even BBB itself, you will see tens of thousands of reviews with an average of 4.5 stars. Again, with this scale, it's very tough. There are two areas where we see a bit more Obviously, we work hard with technology because everything that we build around auto replenishment and about payments, we built internally. But specific to auto replenishment, I'm not aware of any other large online company who is more transparent than us and requires every single customer to actively opt in. Again, unlike most auto replenishment models, out there in both in-market and spoiled child, the default is a one-time purchase and not auto subscription or auto replenishment, rather opt out during a one-time purchase. This is a huge difference. And if I cared less about user satisfaction and happiness, I would have changed it and made the business even more profitable, way more profitable. But of course, I'm not planning to do it. And specific to billing, for a small portion of our customers, There can be a confusing with pre-authorization on their cards, which is the same thing that you can get when you order Uber. It mostly relates to our Try Before You Buy program, which, again, we do for the better shopping experience, and it costs us in margin. But we believe that in some beauty products, it is essential. Now, you know, I don't think that it makes sense to cancel this massive customer benefit because a super small fraction of users who didn't fully read of, like, how it works. and we're confused. We'll continue to work hard to educate those users and we invested a lot in technology around it. And again, we built funnels and we built machine models to try to better predict who is going to get more confused and we are trying to change the messages for them. Again, we work hard around it, but I say it and I feel 100% sure about it. Our customers are happy. Otherwise, we'll never have this repeat rate. That makes sense. Thanks a lot, Oren. Thank you.
spk05: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Holtzman for any final comments.
spk03: No, thank you very much, guys, for joining us today. Looking forward to speak to you soon in our Q3 reports.
spk05: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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