ODDITY Tech Ltd.

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.

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.

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.