ODDITY Tech Ltd.

the second half of 2025. As a reminder, brand three is a medical-grade skin and body brand that will address a range of issues, including acne, eczema, hyperpigmentation, and other large consumer pain points. So to summarize, data, technology, and our intelligent new brand development machine are fueling and will continue to fuel our online growth and profitability. This is the core of Audity. Moving to science-backed products via Audity Labs. For years, it was my dream to use science to create better products for our consumers, to solve their pain points, and to carve out another source of competitive edge for us. For years, I was amazed by the lack of scientific innovation in our industry. It just didn't make sense to me, given the size of the industry and the progress in science and biotech in the last two decades. The acquisition of Prevella in 2023 gave us the foundation for building Odyssey Labs in Boston as our science-backed new product engine. As a reminder, at Audity Labs, we are using digital biology to discover, launch, and own the next generation of science-backed products that our consumer is so eager for. Last quarter, I spoke about the important steps we have been taking to build labs, to grow the teams, and to develop infrastructures and systems to ensure we are building a platform that works at high scale. As part of that, we are excited to announce that Dr. Ido Bachelet is joining us as the Chief Science Officer to lead our science at Odyssey Labs. Bringing Ido on board is a great milestone for us. I spent time meeting with many scientists, and Ido was by far the strongest fit. He is a highly accomplished, world-class scientist with deep experience building and scaling multiple high-impact biotech labs. He is super creative and shares our culture of disruption and building. After using therapeutics, he decided that instead of developing another drug, he wants to join us in changing an entire industry through science. Dr. Evan Zhao, the co-founder of Revella, has decided to depart Audity to pursue other interests. Evan is a very talented entrepreneur who built Revella into a disruptive consumer biotech. Thanks to the acquisition of Revella, Audity now has the foundation to be at the forefront of science-backed transformation in our industry, and we are grateful for that. I want to personally thank Evan and wish him the best in his future undertakings. As I've said before, Audit Labs is a new master we are building and a complicated one. Very similar to our early days building our technology backbone, it takes time and iterations to build something meaningful. Therefore, as I said before, we are not counting on growth coming from Audit Labs in the near term. We don't need it to achieve our financial targets. We have a ton of growth ahead from Ill Maquillage and Spoiled Child alone, and even more growth on top of that coming from new brands in the pipeline. At Labs, we are literally building another large platform from scratch. But if we get it right, we can differentiate Audit even more from our competitors in the long run. It is hard, and it takes time, but I fully believe in it, and I'm confident we'll make it. Looking ahead, as we told you last quarter, 2024 for us is essentially in the rear view. We have full confidence in achieving our financial targets, and we are once again raising our full outlook today. Our teams are now almost entirely focused on preparing 2025 and beyond, and we are feeling confident in our execution next year. First, because we are leaving growth on the table in 2024 and staying disciplined about pacing ourselves. This is something we have always done, so we deliver on our commitments, which we have achieved not just every quarter as a public company, but every quarter as a private company as well. Second is because of all the growth levers our team is preparing for next year. The teams are now head down with planning, testing, and iterating on winners on many fronts, new marketing campaigns, new products, new models, and new geographies. Based on what I see today, we are in a strong position for 2025. But before I hand it to Lindsay, I want to take a moment to reflect on our first year as a public company. We decided to take the company public because we wanted to build something huge. Because I felt then, as I do now, bullish on our ability to disrupt this enormous global market with our platform and create massive value for our shareholders. To be candid, it's not easy to be a public company, but we have made a great accomplishment in this past year since our IPO. We are very proud of our financial results. We delivered outstanding on our promises to the shareholders. We beat revenue and profit and earnings per share every quarter since going public. At the same time, we didn't change the DNA of our company, a DNA of building, innovation, and investing behind big and hard dreams. And this is something I'm very proud of. We have kept our hungry, outsider startup culture despite our growth. This is the most important thing for our future success. We have also began returning cash to our shareholders with buybacks. We believe our stock offers an incredible value, and we'll use our strong balance sheet to take advantage of that. With that, I will turn it over to Lindsay.

Thanks, Aron. Let's turn to our Q2 results, which I'll refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. Audity delivered a record-breaking second quarter and first half across the board. We grew net revenue by 27% in the quarter to $193 million. The strength was driven by both ill maquillage and spoiled child across a range of product categories. Net revenue growth was driven primarily by an increase in orders, while average order value increased 6% year over year. Average order value growth was driven both by an increase in items per order and positive mix shift to higher priced products like skin, partially offset by a mix shift to repeat sales which carry lower AOV. The proportion of our sales from repeat customers increased on a year-over-year basis this quarter and is on track to be a higher percentage of our sales in the full year 2024 as compared to 2023. Drilling into revenue composition for the quarter, 94% of our net revenue came from sales on our owned website directly to consumers. The remaining 6% of net revenue in the quarter came from sales in Israel and to marketing affiliates. As a reminder, we do not sell any products to Amazon, eBay, or other third-party marketplaces, nor do we generate any direct revenue from products sold on these sites. Any product resold on those sites is unauthorized and done without our consent. Moving down the P&L, gross margin of 72.2% expanded 150 basis points year-over-year. The gross margin improvement was driven by specific supply chain and logistics efficiencies at both brands. We delivered adjusted EBITDA of $62 million in the quarter. Adjusted EBITDA margin of 32.3% expanded 470 basis points from the prior year, driven partly by gross margin expansion and a higher mix of repeat. 2Q EBITDA exceeded our original guidance of $53 to $56 million, and that was driven in part by the timing of investments into new brands and Audubon Labs. The timing of these investments is delayed into the back half of the year. We delivered adjusted diluted earnings per share of 82 cents. Our adjusted EBITDA and EPS exclude approximately $7 million of share-based compensation. Our free cash conversion remains excellent. We've delivered $104 million of free cash flow year-to-date. This free cash generation is a clear reflection of the strength and quality of our business model. In June, our board authorized $150 million three-year buyback. We were purchased 250,000 shares for $10 million in the second quarter and have $140 million remaining in our authorization. We exited the quarter with $268 million of cash equivalents and investments on our balance sheet and zero debt. Turning to our outlook, we're raising our 2024 full year guidance based on the better than expected second quarter results and our high visibility to repeat sales for the remainder of the year. We now expect net revenue between $633 million and $640 million, representing 24% to 26% year-over-year growth. We expect to deliver 71% gross margin for the full year, and we expect to deliver adjusted EBITDA between $142 and $146 million, which includes a step-up in growth investments for Audity Labs and our new brands. We expect full-year adjusted diluted earnings per share will be between $1.71 and $1.76. Turning to the third quarter outlook, we're off to an excellent start and are pleased with the composition of our growth across both brands and categories, as well as our cohort repeat rates. We expect year-over-year net revenue growth in the quarter to be between 22% and 24%. You can find more details on our Q3 outlook in our press release. Lastly, I'll provide some early thoughts on 2025. We expect to deliver net revenue growth of 20% and adjusted EBITDA margin of 20%, consistent with our long-term algorithm. We plan to incur significant investments in Brand 3, Brand 4, and Audity Labs, and we do not expect to benefit from any material revenue contribution from these initiatives in 2025. On the topic of supply chain and tariffs, while the ultimate policy outcomes are still to be determined, We're confident in our ability to manage through with limited financial impact based on the proposals currently in discussion. Our gross margin is high, as is our pricing power, and our financial exposure to tariffs and duties is very small. As a reminder, we source the majority of our products from Europe, and we purchase some components and packaging out of Asia, including China. In 2023, total costs related to tariffs and duties, including from products sourced out of China, amounted to less than 1% of sales. With that, I'll turn it back to the operator for questions.

Thank you very much. And to our audience joining today at this time, if you would like to ask a question, simply press star and 1 on your telephone keypad. Pressing star and 1 will place your line into a queue and we'll take your questions one at a time. Also, we ask today that you please limit yourselves to a single question. A friendly reminder that if you're joining on a speakerphone today, please return to your handset to be certain that your signal does reach our equipment. That is star and one for questions, ladies and gentlemen. We'll hear first today from Dara Mohsenian at Morgan Stanley.