This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good day and thank you for standing by. Welcome to the WAG 2Q23 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message devising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today.
spk06: Don Frankfurt, please go ahead.
spk01: Good afternoon, everyone, and thank you for joining WAG's conference call to discuss our second quarter 2023 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman, Adam Storm, President and Chief Product Officer, and Alex Davidea, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements. These forward-looking statements are subject to risk and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of these risks and uncertainties are included in the SEC filing. Also, during the call, we may present both GAAP and non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release which we issued today. The earnings release is available on the investor relations page of our website and is included in exhibit and form 8K furnished to the SEC. Lastly, you can find our earnings presentation posted on our IR website and with the SEC. And with that, let me turn the call over to Garrett.
spk14: Good afternoon and thank you for joining us today to discuss our financial performance for the second quarter of 2023. We are excited to announce another successful quarter for the WAG team, beating expectations for both revenue and adjusted EBITDA while achieving our highest service revenue quarter to date and our first quarter of adjusted EBITDA profitability. This quarter further demonstrates that we are transforming the pet industry by becoming an all-inclusive, trusted partner for the premium pet parent and capitalizing on the secular growth of pet ownership. We remain laser focused on profitability for the remainder of 2023 and balancing growth and profit for 2024. To begin, I will provide a brief overview of our financial results for the second quarter. Following that, Adam, our President and Chief Product Officer, will share updates on our strategic plans and key initiatives for the remainder of 2023 and beyond. Then Alec, our Chief Financial Officer, we'll provide a more detailed analysis of our second quarter results, discuss our capital allocation priorities, and present a revised adjusted EBITDA guidance for 2023, which we are increasing today. During the quarter, revenue grew 55% year over year to 19.8 million. The revenue growth was primarily driven by the success of our services business, fueled by the slow and steady return to office, and the general stickiness of our community. We also saw continued strength in our wellness business, driven in part by the success of Paw Protect, the only pet insurance product in the US with Instant Pay. We continue to grow our footprint in all corners of the pet care market with a focus on disciplined growth in order to achieve profitability. Our adjusted EBITDA was $0.1 million and increased from a 0.9 million loss in the same period last year. As we navigate the dynamic macroeconomic landscape, our primary objective remains centered around achieving a sustainable equilibrium between growth, profit, and margin. In the second quarter, platform participants increased to 549,000, an increase of 42% year-over-year, And WAG premium penetration increased to 54%, significantly ahead of expectations. In the second quarter, our LTV to CAC ratio was a deliberate 10 to 1, which demonstrates our continued operational excellence and efficiency. Our second quarter organic user acquisition rate was more than 70%, which is a result of our focus on dynamic partnerships, a best-in-class experience, and our referral programs. On the supply side of the wag business, we maintain supply and demand equilibrium through a variable platform fee, which averaged $53.10 in the second quarter of 23. As we've mentioned before, we firmly believe that wag offers the best gig in America. And despite the current macroeconomic conditions, the demand for caregivers in our community remains robust. We anticipate that an increasing number of pet enthusiasts will choose to become pet caregivers with WAG for the remainder of 2023 and beyond. In summary, the team at WAG continues to execute against our goals and deliver strong and sustainable results. Our second quarter results demonstrate our ability to scale our platform faster and more profitably than anticipated and show the effectiveness of our strategy and business model to become the number one platform for premium pet parents. Simply put, our team is out executing on the vision we laid out to the investment community more than a year ago as we were preparing to become a public company. And with that, I will turn the call over to Adam Storm to review our strategy for the remainder of 2023. Thanks, Garrett.
spk04: I will once again walk through the five top-level elements of our strategy to drive long-term shareholder value and profitable growth. One, accelerate growth in existing markets. Two, expand premium subscription offerings. Three, platform expansion. Four, opportunistic M&A. And five, operating scale. One, accelerate growth in existing markets. As Garrett mentioned, the second quarter was our highest services revenue quarter to date, driven by the slow and steady return to office trend and healthy consumer travel season. The Castle Back to Work barometer is hovering just below 50% and we expect that to tick upward slowly over the next 24 months. Two, expand premium subscription offerings. Our premium penetration rate, despite the increased pricing at $14.99 a month, remained at a robust 54% ahead of the target we set out at the beginning of the year. Moving forward, we will continue to enhance the value of the WAG premium bundle by introducing more benefits forming additional partnerships, and providing more exclusive offers. Three, platform expansion. Last quarter, we introduced the addition of pawprotect.com to our suite of wellness products. WAG is the exclusive marketing partner of Paw Protect, the only pet insurance plan with instant pay. Paw Protect is the only brand in America to offer each consumer an interest-free, fee-free, and credit-check-free line of credit to cover veterinary bills. We have successfully integrated PawProtect into the petted pet insurance marketplace, demonstrated by its impressive growth in the second quarter. During the quarter, PawProtect's policies grew to 7,700 and achieved an NPS score of 90+, demonstrating our pet parents' overall delight with the product. During the quarter, we also launched WAG Pro to help pet lovers build successful pet care businesses on WAG. WAG Pro caters to the needs of passionate pet care professionals recognizing their invaluable contribution to the welfare and happiness of pets across the nation. WAG Pro members enjoy features including express onboarding, priority approval and placement in the marketplace, expanded reach, enhanced earning opportunities, and exclusive learning resources. As the demand for reliable and trustworthy pet care continues to grow, WAG Pro steps forward as the ultimate solution for connecting skilled caregivers with pet parents in need.
spk03: The successful rollout of WAG Pro demonstrates our commitment to offering the highest quality platform for pet caregivers and pet parents alike.
spk04: We believe WAG Pro is a unique and evolving offering that will enhance our platform and deliver long-term value to the community. Fourth, opportunistic M&A. WAG is strategically positioned to leverage pet-specific M&A opportunities due to our ability to swiftly integrate new assets into our platform supported by our deep understanding of the consumer and our technology-first DNA. At the beginning of the quarter, we acquired MaxBone, a top-tier digital platform for modern pet essentials. MaxBone expands WAG's reach into the premium pet supplies market and deepens our commitment to the needs of the premium pet parent. WAG will continue to opportunistically evaluate deals as we look to expand our setup capabilities in 2023 and 2024. And while we're here, you should check out the new yellow collection on MaxBone.com. Fifth, operating scale. This quarter we saw operating margin improvements across all areas due to the positive impact of our unit economics and fixed cost operating leverage. Adjusted EBITDA margin improved substantially year over year from minus 7% to just under positive 1%, an 8 percentage point improvement. As we mentioned last quarter, 2023 continues to be our year of efficiency and focus on full year adjusted EBITDA profitability. This is achieved through efficient marketing payback cycles, continued operational excellence, platform integrations and cross-sell, and best-in-class customer experience. As seen in our updated guidance, we will be adjusted EBITDA profitable for full year 2023 and plan to be free cash flow positive by the middle of 2024.
spk03: I will now turn the call over to Alex to discuss our second quarter financials in more detail. Thanks, Adam.
spk09: I am proud to say, through the hard work and dedication of our excellent team, the growth of our footprint in all corners of the pet care market, and our disciplined execution, we have taken the next step forward as a business with a progression to profitability, posting our first quarter of adjusted EBITDA profit this quarter. I'll begin with the review of our second quarter financial results, followed by our guidance, which we are raising again today. The second quarter exceeded our expectations across the board with revenue of $19.8 million up 55% from last year, driven by strength across all three revenue categories. Adjusted EBITDA profit of 0.1 million compared to an adjusted EBITDA loss of 900,000 a year ago, a $1 million improvement. Breaking down our three revenue categories. Service revenue was $6.2 million, growing 9% from Q2 last year, making this our largest service revenue quarter to date. This is in the face of a continued slow and steady return to office trend and illustrates the general stickiness of our offerings, together with the success of complementary offerings to core services such as WAG Pro and WAG Premium. Services also included normal amounts of e-commerce revenue for MaxBone, which we closed at the start of the quarter, and credit package revenue. Wellness revenue was 12 million, increasing 69% from Q2 last year through providing best-in-class pet insurance and wellness plan comparisons from the nation's top providers. Our product's ability to provide pet parents with numerous real-time quotes puts us at the forefront of disrupting a fragmented pet insurance and wellness industry. Pet food increased revenue, which is a new revenue category this year via Dog Food Advisor was $1.6 million. Dog Food Advisor is one of the most trusted pet food review sites in existence, providing pet parents with unrivaled insights and analysis of pet foods for their furry family members. In Q2, due to popular demand, we took the knowledge and success of Dog Food Advisor and launched Cat Food Advisor. the premier destination for pet parents and their furry cat family members, with over 100 professionally reviewed pet products, including dry cat food, raw cat food, kitten food, and real-time recall alerts across the US and Canada. Turning to expenses. Cost of revenue, excluding depreciation and amortization, was flat year-over-year at $1.2 million and represents 6% of revenue, down from 9% a year ago. This is the output of a very thoughtful operational excellence in the scalability of our tech stack, together with the implementation of AI to streamline revenue-generating operations. Platform operations and support expenses 3.5 million, or 18% of revenue, down from 24% a year ago. While non-revenue-generating platform operations and support functions remain a key backbone to the business, Our operations have become highly efficient over the past year through redesign and use of AI tools to get answers faster. Now, the average pet parent receives more than 80% of their responses faster via AI with record CSAP. Sales and marketing expenses 10.8 million, or 54% of revenue, up from 48% a year ago, but in line with prior quarter trends. We continue to see excellent opportunities to put dollars to work in sales and marketing as evidenced by a 10 to 1 LTV to CAC, but are maintaining a deliberate and thoughtful approach in order to drive profitability earlier than anticipated. G&A expense is 4.9 million, or 25% of revenue, up from 19% a year ago. Comparing periods, Q2 23 includes a one-time legal settlement cost $500,000 and over $1 million of public company compliance costs that were not present in the prior year. Adjusting to these, G&A in Q2 23 represents 16% of revenue. Looking to our balance sheet, we ended the second quarter with approximately $32 million in cash, cash equivalents, and accounts receivable. Our balance sheet remains strong and sufficient to help us to continue to execute on our plan which includes growing our existing business in a profitable manner, expanding our footprint in all corners of the pet care market through value-add acquisition, and bringing to market innovative new offerings. Moving to our guidance for 23. As Garrett mentioned, we are thrilled with another quarter of outsized growth. As a result, we have reevaluated our 23 four-year forecast. For the four-year 23, we continue to reiterate total revenue in the range of 80 to $84 million as previously disclosed in March 23. And an increase to our adjusted EBITDA guidance to a range of zero to $2 million, a $1 million improvement versus our prior forecast at the high end of the range. For the third quarter, we expect a total revenue in the range of 19 to $20 million which at the midpoint would be a 27% increase in revenue over Q3 2022 and zero to $1 million in adjusted EBITDA or a 208% improvement over Q3 2022 adjusted EBITDA at the midpoint. We continue to be thoughtful and consider of the macroeconomic environment and potential slowdown in consumer spending. We believe we have turned the corner in Q2 23 and will be adjusted EBITDA positive in subsequent quarters and on an annual basis. Further, as Adam mentioned, we plan to be free cash flow positive by the middle of 24, driven by our focus on robust unit economics and operational efficiency in 23 and beyond. Our financial guidance includes the following considerations. The forecast incorporates our internal target of the rule of 50. meaning a total of greater than 50% for revenue growth plus adjusted EBITDA margins for the full year. Severe weather affects service demand and holidays drive incremental overnight versus daytime service demand. Going forward, we expect to skew to overnight and daytime services depending on summer and holidays. Pet adoption during the holidays also affects pet insurance penetration and demand for wellness plans. We anticipate the continued growth in the pet industry, driven by factors such as rising pet ownership, pet insurance penetration, and increasing demand for premium pet products and services will have a positive impact on our financial performance in 23, including on our entrance to pet food and treats. General trends related to the state of the economy, interest rates, and consumer confidence. We have factored in potential risks and opportunities related to these macroeconomic factors in order to accurately forecast our financial performance. We recognize that there may be a potential risk to our financial performance in 2023, such as disruptions to global supply chain, changes in consumer behavior due to unexpected events, such as delayed or imbalanced return to office, digital and performance marketing trends, the potential impact of AI, and our ability to expand through partnerships. In summary, our strong quarter results illustrate how we've become an all-inclusive trusted partner for the premium pet parent and a key player in the pet community. with a highly efficient and profitable business. Our intense focus on profitability and operational efficiencies in 23 position us well for profitable growth for the rest of the year and in 24 and beyond. And with that, we now welcome Q&A. Operator, can you kindly open it up for Q&A?
spk07: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jason Helstein with Oppenheimer. Your line is open.
spk05: Thanks. Two questions. One, so 10 to 1 LTV CAC is kind of insane. It's suggesting that you're leaving growth on the table to kind of, you know, protect capital given that you're, you know, crossing over that EBITDA threshold. Just how are you thinking about leaning more into marketing at some point in the future? And then secondly, are you seeing any head, like how does the inflation headwinds on the pet insurance side impact you? Is it a positive because as premiums go up, you get kind of a cut of that on the lead? Just broad thoughts on how kind of some of the dynamics around pet insurance could impact you guys. Thanks.
spk02: Hey, Jason. This is Garrett. Thanks for the question. So first one, we agree 10 to 1 LTV to CAC is pretty amazing. And like we mentioned, deliberate. It's not a cash issue. It's more, we just believe as we get more profitable, we'll deploy more capital into growth. We think that's functionally going to be a 2024 story. And we grew 55% year over year. So just saving some gas, so to speak. Secondly, in terms of headwinds or tailwinds, in terms of pet insurance and wellness plans, we have not seen a direct impact of inflation. Although I would say, you know, we have two consumers in the marketplace. The first is the pet insurance companies themselves, who we partner with to advertise their products. And the second one is the actual consumers purchasing the insurance. I think if anything, we've seen more of a, you know, sensitivity from the actual pet insurance companies rather than the consumer as a function of kind of the market dynamics.
spk06: Thank you. One moment for our next question. Our next question comes from Tom White with DA Davidson. Your line is open.
spk11: Hey, this is Wyatt Swanson on for Tom. Thanks for taking our questions. So I've got a question on your wellness segment. Can you talk a bit about how you're managing any risks in that business as it relates to revenue concentration? And what can you guys do to maybe diversify revenue streams in that segment over time? This is Wyatt, right, Wyatt? Yep, Wyatt.
spk02: Cool. Hey, man, good to hear from you, and thanks for the question. So wellness, just as a reminder, scaled much more quickly than we originally anticipated. That business went from a few million to tens of millions in revenue run rate very, very quickly. We just kind of saw the fast moving water and leaned in quickly. We have a lot of customers in that business. So like I said earlier, we have kind of two customers on the face of it. One is the actual consumers purchasing pet insurance for the first time or re-upping or changing plans. The second one is the actual pet insurance companies. We work with something like, 12 or more kind of major pet insurance companies in the US. And we just announced earlier today, we're actually expanding into Canada with that product base. So pretty well diversified in terms of the actual insurance companies. But really our goal is just to make sure customers have the best choice for the pet insurance products. And that's really what's functionally going to drive the demand curve. So certainly we're being thoughtful about the, you know, the demand itself that we're as concentrated to, but the customers ultimately have the choice and they're just kind of picking the products that they want. The second thing I would just add there is we are the exclusive marketing partner of Paw Protect, which we think is a phenomenal pet insurance product that hopefully more and more consumers will find delights them. So a lot of choice for the consumer, and ultimately they're going to find the right thing for them. Hopefully that answers your question.
spk11: Yep, that's really helpful. Thank you. And then just to follow up, could you update us on your latest thinking as it relates to the customer value proposition with WAG Premium? As return to office continues to pick up, how are you thinking about the current unit economics with that offering versus trying to maximize customer adoption of it?
spk02: Yeah, so I think we've said this before. The goal with WAG Premium is to keep customers engaged in the platform. It's not so much a revenue-driving initiative. We found it certainly was mispriced at the beginning of this year, which is why we raised prices to $14.99. The penetration actually got too high. Our thesis and kind of belief in the product has not changed. We continue to believe it is a reason for consumers to stay on the platform as participants of the WAG ecosystem. And we're so convinced of that. We actually are rolling out similarly priced pro tooling. So we mentioned earlier that pet caregiver pro subscription and membership is something we're in the middle of testing and rolling out. So again, we just, we need more reasons and believe there's more reasons to be, you know, a forever customer of the WAG ecosystem than anything else.
spk06: Got it. Thank you very much. One moment for our next question. Our next question comes from . Your line is open.
spk00: Hey, guys. Good afternoon. Just wondering on the international expansion for pet insurance. Have you built much into the revenue guide? I noticed it didn't necessarily go up for the full year, but do we build much in terms of revenue contribution from that expansion? And maybe just talk about sort of the size of the addressable market that you're entering internationally.
spk02: Hey, Matt. Good to hear from you. Garrett again. Yeah, so we think international is mostly upside. Canada pet insurance, I think something like half a million pets growing kind of at 7% to 10%-ish. outpacing general pet trends. We think there's a lot of room to run there. It's still early for us. We're just kind of getting our footing, but we certainly think international is interesting. And I genuinely think the things you'll see us launching now, so we just announced, you know, Cat Food Advisor, we just announced Wellness Canada, are all kind of 2024 big bets, the things that we think are going to test now and lean into now, and that'd be really driving forward in 2024. You know, the business is growing at 55% year on year right now. Again, I think we're saving some gas in the tank, so to speak.
spk00: Okay, got it. And then maybe for Alec, just on the adjusted EBITDA guidance up a touch, and it's very minor, but are we just pulling through the second quarter outperformance? Is there something incremental that we should be assuming in terms of cost savings or margin expansion that we should be factoring in for the third and the fourth quarter?
spk10: No, I don't think so. I think Q2 is a representation of where we are today. as the output of a number of things that I mentioned on the efficiencies that we've been able to achieve Q2 to date. And I think we'll see those efficiencies with AI and automation through the rest of the year.
spk00: Okay, got it. And maybe just one more on the platform participant number. Healthy growth year over year, but I did notice sequentially it's down a bit. Any call-outs just in terms of what's driving that number in the second quarter? And then any, I guess I did notice also that marketing, sales and marketing was down a bit sequentially. Did we pull back during the quarter for any notable reason? Maybe just speak to that and the platform participant number. Thanks.
spk02: Yeah, so... We were initially planned for Q1 and Q4 to kind of be the higher watermarks, just as a function of wellness seasonality, Matt. As a reminder, last quarter, we did something like 20.6 of revenue. This quarter was 19.8. So you'll see just kind of sensitivity there with platform participants. It'll just functionally match that. Your second question was sales and marketing was down. Yeah, I think we're just being really thoughtful about where we're deploying dollars right now as just a function of where we want to make incremental bets. And again, that was deliberate. You see it in the LTV to CAC. I really want to just get to profitability, adjusted EBITDA profitability. It's not where they are. I think there's, you know, room to keep plugging along. But for us, the major watermark was, can we get to adjusted EBITDA profitability a year ahead of time? And we did. So I think now you'll see us kind of get back to where we want to go.
spk07: Great. Nice job on the quarter. And I'll take the rest of mine offline. Thanks, guys.
spk06: Thanks, man. One moment for our next question. Our next question comes from Jake Cole with Craig Hallam. Your line is open.
spk13: Thanks guys. This is Jack on for Jeremy. Um, first one for me. So could you just touch on what you're seeing in terms of return to office? Um, I know Castle back to work barometer has been around like 45 to 50%. Do you guys still think that can get to like 70% longterm or, or what do you, what do you guys think the longterm, um, potential is there and how are you thinking of that as a driver of revenue?
spk04: Yeah, thanks for the question. Over the long term, yes, we certainly think it can get back to 70%. I think that we see headlines all the time about this business, you know, getting back to office, that business getting back to office. But, you know, that's all anecdotal, right? The Castleback to Borough Barometer is kind of the thing that we're focusing most on and measuring against. So, you know, we're going to kind of invest in whatever the fastest moving water is. You've seen wellness kind of be that over the last 12, 18, maybe 24 months. So, you know, as... In 2024, which is really kind of a resumption of the growth story, you'll see us investing behind whatever has the highest returns. So if the castle back to work barometer is still at the 50% level, I think that will scale our investments appropriately across the different kind of business lines. if we see more momentum in kind of the return to office in January, and that's the timeline that businesses are on, then certainly we're going to, you know, put firepower behind the services segment.
spk12: Got it. Great. That's, that's really helpful.
spk13: And then maybe switching gears in terms of the premium price point, are you seeing any, any pushback from customers on the 1499? I noticed the, premium penetration went down from 55% to 54%. Just kind of maybe a little bit more color on that. And do you think that you'll stay around that 1499 for a little bit here? Presumably it'll continue to rise long-term, but just any color on the premium pricing would be great.
spk04: Yeah. So I would say the 54% was still above kind of our internal targeting. I think that we're happy anywhere in the kind of, 40 to 50% range is kind of our kind of guidepost. So 54% is well ahead of internal expectations. In terms of pricing, no, like no real pressure. The kind of mix of services in the summer can be more travel-based as opposed to in-office-based. That's going to be more of a sitting and boarding as opposed to walking. So there's kind of some dynamics there. But All around, I think we're really happy with the price and customers seem really happy with the value they're getting.
spk12: Got it. That's helpful, Collar. That's all for me. Thanks, guys.
spk06: One moment for our next question. Our next question comes from Greg Pendy with Chardon. Your line is open.
spk08: Hey, thanks a lot for taking my questions. Just one real quick, just as you call that seasonality in your financial outlook, can you just give us any color on any meaningful differences? I know we could back into the revenues, but just in terms of expenses on overnight versus daytime services, and then secondarily on that point, is there any opportunity you think to grow overnight with sort of a growing premium penetration? Ray, thanks.
spk04: Yeah. So as it pertains to seasonality, the sitting and boarding business, which is effectively a travel business, is going to be Q4 heavy, as you might expect. Yes. So if the walking business is a derivative of office occupancy and the sitting and boarding are a derivative of travel, certainly we're going to be investing behind the kind of travel adjacent businesses, right? So we think there's a lot we can do in terms of ecosystem and caregiver tools to help them promote themselves and build their business. So yeah, we think that it's a big market and there's lots of opportunity to grow.
spk08: Okay. And can you give us any kind of rough estimates on where you think you are in penetration and boarding? versus the market size, just so we get a, you know, an idea of how big of, or what type of opportunity that could be.
spk02: Yeah. Hey Greg, you have Garrett. Um, so again, taking a step back wag started with on-demand dog walking in the U S and a few cities expand very quickly. People ended up falling in love with it and using it four to five times a month. And we're really now just realizing that, uh, customers want us for everything else, which is why over the last few years, you've seen us launch things like 20, 30 and 60 minute drop-ins one-on-one training. personalized pet advice with a vet expert, specialty services in the last quarter or two, which is things like trail running and photos with your dog and all kinds of really cute requests. And I think if you look at the new app and kind of how we're designing things, you'll see us put the caregiver more front and center, which is really a function of just giving people choice. And we think leads us to more kind of sitting and boarding requests and other kind of episodic requests now that we have the customer locked in with premium. We're really early as a reminder, our business is majority online. kind of on-demand or daytime services. And so we're really, I think, you know, if anything, kind of less than 5% penetrated in the travel category, and there's a long way to run there. So very excited about the opportunity, and you'll see kind of consistent changes in the product experience, which we think will make us more competitive for the customer.
spk07: That's very helpful. Thanks a lot. This concludes today's Q&A session. I'd now like to turn the call back over to Garrett Smallwood for any closing remarks.
spk02: Thanks, everyone, for another quarter. This is almost our one-year anniversary, so it's been fun, and we look forward to the next one. Thanks so much.
spk07: Ladies and gentlemen, so that concludes today's presentation. You may now disconnect and have a wonderful day.
Disclaimer