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spk11: Greetings. Welcome to the WAG Q4 2023 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Gary Smallwood, Chief Executive Officer and Chairman. You may begin.
spk22: Good afternoon, everyone, and thank you for joining WAG's conference call to discuss our fourth quarter and full year 2023 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman, Adam Storm, President and Chief Product Officer, and Alec Davidian, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements. These forward-looking statements are subject to risks 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 is included in our earnings release today and our filings with the SEC, including our upcoming 10-K for the year ended December 31, 2023. We also remind you that we undertake no obligation to update the information contained on this call. These statements should be considered estimates only and are not a guarantee of future performance. Also, during the call, we present both GAAP and non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are available in today's earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. Lastly, you can find our earnings release and earnings presentation posted on the investor relations page of our website. And with that, I'll now turn the call over to Garrett Smallwood.
spk07: Good afternoon and thank you for joining us today to discuss our financial performance for the fourth quarter and full year 2023 and provide guidance for fiscal year 2024. First, I will provide a brief overview of our financial results for the fourth quarter and discuss our 2024 plans. Following that, Adam, our president and chief product officer, will share updates on our strategic plans and key initiatives for 2024 and beyond. Then Alec, our chief financial officer, will provide a more detailed analysis of our fourth quarter and full year 2023 results, discuss our capital allocation priorities, and share our 2024 guidance. We're excited to announce another successful quarter for the WAG team in line with our expectations for revenue and adjusted EBITDA, which resulted in the high end of our range for fiscal year 2023 for revenue and midpoint of our range for adjusted EBITDA. During the quarter, revenue grew 27% year over year to 21.7 million, which was a new quarterly record. This growth was driven by the success of our wellness business fueled by pet parent demand for pet insurance and wellness products, In addition, we are seeing early signs of success with MaxBone within services, which validates our longer-term growth initiatives by expanding our reach within retailers to the premium product category. Our adjusted EBITDA was break-even, an increase from a loss of $0.4 million in the same period last year. As we navigated the dynamic macroeconomic landscape, our primary objective centered around achieving a sustainable equilibrium between growth, profit, and margin. In the fourth quarter, platform participants increased to 600,000, an increase of 38% year-over-year, and WAC premium penetration remained above our 50% target. To summarize 2023, this was a year of operational efficiency as we demonstrated adjusted EBITDA profitability for three consecutive quarters, reaching fiscal year adjusted EBITDA profitability significantly ahead of schedule. We did this while growing revenues 53% year over year and reinvesting in the platforms. A few highlights for the year include entering the pet food and treat category with our acquisition of Dog Food Advisor and the launch of Cat Food Advisor, deepening our offerings in the wellness category with our exclusive offering of Prop Protect, the only pet insurance product offering instant pay in the U.S., and entering the premium pet essential category with the acquisition of MaxBone. We couldn't be more excited about the proprietary technology breadth of our platform and deep relationships we have with premium households as we enter into 2024. In 2024 and beyond, we are focused on profitable revenue growth and reaching more U.S. households as the all-encompassing trusted partner for premium wellness, service and products. We will do this by reinvesting free cash flow into growth, which we expect to achieve in the back half of 2024. We believe we are in the early innings of a secular growth trend in the premium wellness, service, and product categories in which we operate. We are nearly overwhelmed with the opportunities ahead of us and the resilience and strength of the premium households we service, who are showing no signs of slowing down. Accordingly, we are eager to build, innovate, and acquire in order to expand the WAG platform and deliver for our customers. As of today, we're setting a path to reach more than $200 million in revenue by fiscal year 2027, which quantifies the clear demand for our platform. This translates into year-over-year profitable growth of at least 25% for the next four years. We will do this while maintaining disciplined headcount growth through the use of AI and process automation. In summary, the team at WAG continues to execute against our goals and deliver strong and sustainable growth. Our fourth quarter and full year 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 U.S. households. Our 2024 guidance, which Alec will outline shortly, demonstrates our commitment to durable year-over-year profitable revenue growth. And with that, I will turn the call over to Adam to review our strategy for 2024.
spk05: Thanks, Garrett. I'm excited to share the three top-level elements of our strategy to drive long-term shareholder value and profitable growth in 2024 and beyond. One, best-in-class technology. As a technology company, we're excited to continue building proprietary solutions to capture the hearts and minds of our customers. We'll leverage our technology and best-in-class user experience to innovate on comparison tools for wellness products, matchmaking services for the highly fragmented pet services landscape, and white-label solutions for premium partners such as Tractor Supply, Forbes, and Bright Horizons. These proprietary partnerships develop a unique and defensible mode in combination with our offerings that make WAG a leader in the market. Two, platform expansion and M&A. As evidenced by our successful acquisitions and seamless integrations of Dogfood Advisor, MaxBone, and Pharmacy, we'll continue to pursue opportunities that expand the scope of our offerings for our customers. Our technology-first DNA allows us to move swiftly, both on the buy and the integration, increasing the return profile of the deal and delivering value for the end customer. We are excited to announce another incredible opportunity in Woof Woof TV, one of the largest social media platforms for pet lovers, which we closed in Q4 2023. Woof Woof TV expands our reach with pet lovers with more than 18 million followers across Facebook, Instagram, TikTok, and more. Woof Woof TV provides a unique media asset that enables WAG to develop proprietary content for WAG-owned brands and partner brands. Don't hesitate to give them a follow on Instagram or a like on Facebook. Three, operational efficiency. We believe a hallmark pillar of a successful technology company is the ability to scale revenue without a corresponding increase in headcount. In 2023, we achieved a record $1 million in revenue per employee, which we expect to increase in 2024 and beyond. This was accomplished through intense focus on automation, proprietary marketplace technology that does not require significant customer service or sales headcount, and the inherent scalability of our digital products. As Garrett alluded to, 2023 was our year of efficiency. 2024 will set the foundation for consistent and repeatable growth for this year and beyond. This growth will be achieved by doubling down on our best-in-class technology, broad and accessible platform, seamless M&A, and intense focus on operational efficiency. I will now turn the call over to Alec to discuss our fourth quarter and full-year financials and 2024 forecast in more detail. Thanks, Adam.
spk04: We have previously described 2023 as our year of efficiency and optimizing the business for future success, which we continue to define as consistent profitable growth. While executing to this, we have finished 2023 and Q4 strong, which are as follows. For the full year 2023, we generated record revenues of 83.9 million, which represents 53% year-over-year growth and is at the top end of our guidance range. Record adjusted EBITDA of 0.7 million, representing the midpoint of our guidance range. And finally, record platform participants, with Q4 totaling 600,000 platform participants, representing 38% growth from a year ago. The meaningful growth of these three key metrics, as compared to last year, demonstrate the strength of our business model, strategy, and execution. For Q4, revenue was 21.7 million, a Q4 quarterly record, representing 27% year-over-year growth. Adjusted EBITDA breakeven. I will note this was slightly lower than our prior guidance, which is a result of post-holiday demand in conjunction with the fact we saw significant opportunity to lean into sales and marketing in the back of Q4, primarily in December. The opportunity was too great to not deploy capital and take advantage of the surge in consumer demand, which we expect to be recognized in Q1 2024. Delving deeper into the financial results, revenue category results were as follows. Full-year services was $24.4 million, growing 12% year-over-year. Wellness was $52.9 million, growing 60% year-over-year. And pet food and treats was $6.6 million. Services in 2023 include a nominal amount of e-commerce revenue from the award-winning portfolio of products on MaxBone.com. Looking at the fourth quarter specifically, services was $6.3 million, growing 7% from a year ago. driven by favorable sitting and boarding mix uptick. Wellness was 13.5 million, growing 21% from a year ago, driven by a strong pet insurance and wellness plan demand. And finally, pet food and treats was 1.9 million. As a reminder, pet food and treats is a new revenue category we entered into at the start of 2023, encompassing dog food advisor and cat food advisor, which has grown 40% from Q1 to Q4. Our expenses analyzed as a percentage of revenue illustrate operational excellence and scaling and are as follows. For the full year 2023, cost of revenue, excluding depreciation and amortization, totaled $5.5 million, representing 7% of revenue consistent with last year. In the fourth quarter, cost of revenue totaled $1.8 million, representing 8% of revenue, up from 6% a year ago. The incremental costs in 2023 were driven by maximum product and wellness-related costs. Full-year 2023 platform operations and support expense totaled $12.5 million, representing 15% of revenue versus 25% last year. In the fourth quarter, platform operations and support expense totaled $2.8 million, representing 13% of revenue, down from 16% a year ago. The 10% absolute percentage point decrease year-over-year was achieved through the deployment of our highly efficient processes, automation, and software tools throughout 2023. For the full year, 2023 sales and marketing expense totaled $50.5 million, representing 60% of revenue, down from 64% last year. In the fourth quarter, sales and marketing expense totaled $13.7 million, representing 63% of revenue compared to 62% a year ago. As mentioned earlier, we experienced record consumer demand post-holidays and deployed capital thoughtfully to take advantage of the opportunity. Full-year G&A expense totaled $19.2 million, representing 23% of revenue down from 59% last year, which did include one-time costs of going public. Fourth quarter GN expense totaled $4.7 million, representing 22% of revenue, down from 23% a year ago. This is the outcome of revenue scale, operating leverage, and hiring discipline. From a balance sheet perspective, we ended the year with $28.3 million in cash, cash equivalents, and accounts receivable. This balance also reflects full cash payment of $1.25 million for Wolf of TV that closed in December. Becoming adjusted EBITDA positive in the second half of 2023 has significantly reduced cash burn compared to last year. Now looking ahead to our 2024 guidance and longer-term outlook, we expect to generate the following. Revenues of 105 to 115 million in 2024, which represents growth of 25 to 37 percent over 2023. Adjusted EBITDA in the range of 2 to 6 million, representing 177 to 731 percent over 2023. This guide anticipates 2 to 5 percent adjusted EBITDA margin, together with positive free cash flow in the second half of 2024. Additionally, on the heels of a strong 2023 and expectations for 2024, we are also announcing that our board of directors has authorized a debt pay down of up to $10 million of principal in 2024. If the full $10 million pay down is executed, it would result in $1.6 million of cash interest payment savings on an annual basis, which directly contributes to free cash flow. Looking beyond 2024, we expect an average of 25% compound revenue growth for the time periods of 2024 through 2027, assuming no meaningful change in the macroeconomic environment, with the expectation of driving towards over $200 million of revenue in 2027. In summary, our strong fourth quarter and annual results illustrate Firstly, the strong demand and tailwinds within the PEC category, which according to Morgan Stanley, is set to grow at a CAGR of 8% over 2022 to 2030, reaching a projected total of $277 billion. Secondly, management's ability to execute and drive discipline growth, which we have achieved for seven consecutive quarters, And thirdly, confidence in the next stage of WAG's journey as a profitable growth company in 2024 and beyond, which we have outlined here today. And with that, we now welcome Q&A. Operator, can you kindly open it up for Q&A?
spk11: Thank you. And at this time, we will be conducting a question and answer session. If you would 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 would 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 Jeremy Hamblin with Craig Hallam Capital Group. Please proceed with your question.
spk03: Thanks and congratulations on the strong results and guidance. I wanted to start with just asking a little more detail on your FY24 revenue guidance. So it implies a 25 to 37% year-over-year growth. Included within that, what's the organic growth rate that's embedded within there? And that's part one. And then part two is on the EBITDA portion of the deal that you've done, whether it's Wolf Wolf or Max Bone, what is the EBITDA contribution from acquiring those platforms that's embedded within that guidance in terms of my assumption would be that they are going to be a drag on EBITDA, but any clarification would be super helpful.
spk07: Hey Jeremy, it's Garrett. Great to hear from you. Thanks everyone for being here. So I think there are two questions. Let me make sure I get them right. So in terms of our fiscal year 2024 guidance on revenue of 105 to 115, that is entirely organic. I would not assume any M&A-related growth. The second question related to EBITDA of businesses that we have acquired and integrated into the lab platform. Just taking a step back, generally we look at businesses that are highly efficient, and have the ability to cross-sell or up-sell into our existing customer base. It's part of our M&A thesis. These businesses should not be a drag coefficient on the business. They also won't be kind of at scale. Frankly, that's why we acquire them. So I think about them as kind of a neutral effect on both revenue and EBIT.
spk13: Hopefully I answered both your questions, Jerry.
spk03: Yeah, no, great. That's helpful. And then just in terms of... You know, one of the things that has been a bit tricky here as we start 2024, you know, weather has had an impact across the country, particularly in January, whether it was, you know, kind of storms, freezing temperatures, first few weeks of January. We've also had, you know, some torrential rains, you know, on the West Coast where you guys have, you know, some exposure. Wanted to just get a sense for how that might be impacting your business as, you know, and then kind of related to that, you know, platform participation, you know, the number of participants that you're seeing here in Q1 and kind of the typical, a reminder just of the typical seasonality that we should expect.
spk07: Yeah. Hey, Jeremy, Garrett again. Thanks for the question. I guess two questions. One, how has kind of weather impacted the business? Taking a step back again, We are very fortunate to have an incredibly diverse platform business at this point. As a reminder, pet parents and households count on us for anything from pet food advice to pet treat advice to purchasing the right insurance or wellness plan, in addition to daytime and overnight services. So there's certainly been some impact of weather, nothing outside of normal, and I think it's already kind of baked in. One thing I'd add there, Jeremy, is January, I think, is some of our strongest start to the year in the history of the business. So we are not seeing a slowdown in the consumer that we service, which is generally the premium household. I think your second question was around seasonality. Generally, I would expect 2024 to trend similar to 2023 in terms of quarter over quarter growth and kind of mix of revenue contribution by different parts of the business. Q1, Q3 versus Q2, Q4 as a function of adoptions and weather and summer and everything else should stay consistent.
spk03: Got it. Um, and then in terms of, uh, the comment, uh, particular to the strongest start that you've ever seen, is that, is that being driven? Like which, which segment are you seeing that, um, is it across all three of your segments, whether it's services, bookings, or, you know, food and treats, or is that being driven more by wellness, um, you know, and, and kind of pet adoption maybe being higher than expected?
spk07: I certainly did that one where I think we've seen, um, just from a macro perspective, more adoptions, more premium adoptions. Those premium pet parents need things like premium pet food, early pet insurance, early wellness plans, and are starting to think about services. As a reminder, kind of 12 to 18 weeks, a little bit early for dog walks. They might be meeting a walker for the first time or considering an overnight, but it's not yet a current priority. It's probably more of a Q2, Q3 thing once you've adopted your pet. But I would generally say the strength mostly in pet food, treats, insurance, wellness, and health.
spk03: Got it. Okay. And then, and then last one for me and I'll hop out of the queue, but in terms of the cost of revenues, right. And, and, you know, that's obviously going to change from what your prior business model look like, you know, kind of P you know, pre food and treats business, but you know, how do we think about scaling that, that portion of your financial model as you, you guys move forward? I mean, I think like your platform operations and support has been, you know, pretty remarkable. And, you know, just, you know, that was basically flat year over year on revenue growth that was up, you know, high 20s on a percent. But you're obviously going to see your cogs, you know, move higher as you have that food and treat business. But, you know, just a sense for what you're expecting from on that and then kind of within the component of your projected growth for this year, you know, what is coming from the food and treats piece of your business?
spk04: I'll take the cost of revenue line. It was 7% in 23. I'd expect it to be consistent in 24. That's going to be a function of payment processing fees and background checks, which increase with revenue volume. There will be some scaling. It could come down to six as the business does scale, but it will be in that six to seven.
spk07: And then, Jeremy, on the second question in terms of pet food and treat contribution overall, we really like that category, really like the space. I think you'll see us continue to lean in there. What was 23 growth for that business? Pet food and treats. Yeah.
spk06: From Q1 to Q4, it grew 14%.
spk14: That's great.
spk07: So I think we're going to continue to lean in there, Jeremy. I think generally the revenue mix in 24 will look something like the revenue mix in 23, just broadly.
spk03: Got it. Super helpful and best wishes this year. Thanks, Jeremy.
spk11: Thank you. Our next question comes from the line of Jason Hellstein with Oppenheimer. Please proceed with your question.
spk02: Hey, this is Steve on for Jason. So we just have two questions. First off, how do you see the revenue mix when you reach that $200 million in revenue guidance for 27? And then secondly, how do you think about pricing or fee increases this year, if any? Thank you.
spk07: Hey, Steve. Great to hear from you. Thanks for being here. 2027 revenue mix. I think we have a lot of confidence in all parts of the business, Steve. I certainly think we'll take advantage of the tailwinds we're seeing in the premium pet parent. The premium pet parent certainly seems to be leaning into healthy pet food and treats, things like CBD, joint medicine, supplements, et cetera, as well as insurance. I think insurance penetration went from 3% to 7%. I expect it to grow at 8% to 9% CAGR. So I think those would be the two current tailwinds I would call out. Not to say services isn't a great business and isn't growing nicely, but I think that it's certainly been more impacted by the return to office, which has been a little bit slower. So I think we'll see how 2027 plays out as office space resumes, people's kind of mobility resumes, and the parent continues to stay resilient. But we're confident in all three parts of the business for what it's worth. Your second question on pricing, you know, taking 10 steps back, Pet caregivers on the WAG platform set their own rates. So that's pretty nice in terms of how people manage market equilibrium and supply and demand. Kind of happens organically, frankly. We don't think we'll do too much experimenting with pricing within the actual services being delivered that's up related to the pet caregiver. In terms of pricing of things like subscription products, our telehealth product mix, or any of our new product launches, I generally think we are very aware that we have a premium pet parent who's looking for a massive amount of convenience and simplicity in their life, and they want to pay up for that. So I think we'll continue to flex our muscle on benefiting from price resilience as long as we're delivering the right experience.
spk23: Great. Thank you very much.
spk11: Thanks, Dave. Thank you. Our next question comes from the line of Matt Carondo with Roth MKM. Please proceed with your question.
spk19: Hey guys, good afternoon. Just wanted to clarify the 24 guide. It sounded like you said sort of rateable compared to 23 in terms of mix between services, wellness, and food and treats, but just want to give the opportunity to maybe expound upon relative growth rates between those three categories.
spk07: Yeah, I think at 23, and Matt, I didn't mean to ignore you. Good to see you. Good to talk to you. I'm not actually seeing you, but it's good to hear from you. In terms of 23, you saw our wellness group of businesses, which is purchasing pet insurance, purchasing wellness plans, getting advice from a vet, et cetera, grow pretty tremendously. And I think that's a function of, A, we have a phenomenal product and a phenomenal marketplace, and two, consumer demand, which is kind of unbound, frankly. I think we'll continue to lean aggressively into that business. It's hyper-efficient. It's a great marketplace. It's an amazing product experience if you haven't tried it. Not to say pet food and treats and services growth is less important, but I think you will continue to see us lean very aggressively into wellness and services and pet food and treats will follow.
spk19: Okay. All right. That helps. And then just in terms of the, I guess, the pull through to the EBITDA outlook, when you guys talk about sort of the margin improvement that's expected year over year, I guess I would have expected with the level of revenue growth that you're projecting that you may see a little bit more leverage. Are we reinvesting somewhere in the P&L? Maybe just talk about sort of where we're leaning in. I would imagine sales and marketing is going to be a bigger line item this year. But maybe just talk about the puts and takes around where we're reinvesting dollars on the P&L in 24.
spk21: That's right.
spk07: Yeah, great question. We actually published in our management presentation available on wag.co. Slide 15, which provides kind of an illustrative platform participant growth and consolidated P&L reflective of kind of different examples of quarterly platform participants, both at a million and 1.5 million platform participants, along with consistent growth in sales and marketing spend, along with operating expenses. And the flow through is pretty, we believe, pretty compelling. To answer your question, though, we do expect in 2024, just as a function of what we're seeing in the marketplace, that we'll continue to reinvest profits back into growth. I think we've seen it in kind of other comps, you know, two to 250 million in revenue got you really bit of scale. And I expect similar for us, maybe a little bit earlier, 150 to 200. But we're just reducing a tremendous amount of demand. We have a great product people love, and we really want to take advantage of that. So the mandate from us is continue to be really efficient and thoughtful and judicious on managing growth, profit, and margin, but more growth, I think, in the foreseeable future.
spk19: Okay. Gotcha. And then just last one, projecting second half free cashflow positive, I guess. And then you mentioned some debt pay down plans or authorization for 10 million paid down. Maybe Alec, if you want to just cover sort of the thought process behind the level of pay down that we're targeting, if we're kind of hitting that sustainable projected free cashflow level in the second half, why not pay more down and just save on the higher cost of debt there? Maybe just talk about the rationale there. That'd be helpful.
spk17: Yeah, that's a great question, Matt.
spk04: So we're thinking through pay down across the rest of the year. We will most likely stagger it through the year, but it depends on ultimately the level of performance through the different quarters. So you're quite possibly seeing us paying down a bigger chunk to begin with, to your point, and then as free cash flow hits later in the year, topping up to the remaining amounts.
spk14: Okay, makes sense. I'll jump back into you guys. Thank you.
spk11: Thank you. Our next question comes from the line of Greg Pandy with Chardon. Please proceed with your question.
spk09: Hey, guys. Thanks for taking my question. Just a quick one, I guess. Within the guidance and the EBITDA guidance, can you talk about how you're thinking about the Bright Horizons deal? Is that something that you're going to be putting some dollars behind? And hopefully that will gradually roll out. And then also, is that built? Where were you thinking in terms of your guidance on that?
spk07: Yeah. Hey, Greg. Great to talk to you. Thanks for being here. In terms of Bright Horizons, and this is a refresher, Bright Horizons is a public company, a trainer at BFAM. They offer daycare and childcare for, I believe, ages six months to seven years across the U.S. Phenomenal business from everything I can understand. And we've partnered with them to offer pet care via their distributed kind of employer-sponsored channels. And it marks our entrance really into the employer-sponsored channel. And so we really like this deal because it unlocks a great audience. Think about major employers across the U.S., brands like Salesforce, et cetera, and a great brand in Bright Horizons. And we kind of are able to piggyback and provide a great experience to their customers. You know, these things generally have a ramp time, as I think you're alluding to. It takes time to roll out to an employer and then roll out to the employees and figure out how to actually use it and figure out how to actually benefit from it and actually put it to work. So it probably is more of a back half 24, 25 thing than it is a first half 2024 thing, frankly. But it's not to say we aren't already seeing some early signs of promise and we're not really excited about the partnership. It's probably more of a back half slash 2025 win for us as it's rolled out.
spk09: Got it. And then just one final one, just on the return to office trends, I think you mentioned that it was a little bit sluggish in the fourth quarter and you called out boarding on top of it. So just kind of wondering, you know, in the fourth quarter, did you see maybe some of the hybrid workers choosing to work remotely more often and given the holidays or just kind of any, anything notable to kind of call out on that? And how'd you think about that in light of the revenue guidance for 2024?
spk07: Yeah, you know, I think what we saw throughout 23, frankly, was a really trepidatious employer and employee, meaning like no real push or incentive to go back to the office. I think we generally hovered around 48 to 50 percent throughout the year across the major markets. And that's a few days a week. We're not assuming some massive step change there. We certainly think the macro pressure and the layoffs we're seeing, especially across larger companies, may accelerate the return to office and kind of the dependency then on WAG daytime services. But we're not necessarily penning it in. But just in terms of 2030, it wasn't any sort of step change that year. I think we saw kind of a slower employer than maybe we had originally thought to push people back to office. But it didn't really change the pattern or use case. I think people still depend on us. while they're stuck in meetings all day. People still depend on us while they're out on the weekends. People still depend on us while they're traveling. And then in terms of 2024, I think we might see some level of improvement, but I don't expect it to be at the 85. It probably gets to 55 or 60 by the end of the year is my guess.
spk20: Got it. Thanks a lot.
spk11: Thank you. Our next question comes from the line. Our next question comes from the line of Aria Call with Call Capital. Please proceed with your question.
spk12: Thank you very much. That was fine. I hope that was an excellent pronunciation of my name. Quick question. Can you hear me? Yeah. Hey, Aria. Hi. Thank you for taking my two questions. I'm sure when you do financial analysis, you look at comparisons to other companies. As you well know, Rover had been public. When they reached 110 million of sales a number of years ago, they were reporting EBITDA margins of 11%. And if you hit the guidance you're suggesting here for 2024, you'll be at 110 million in the middle range as well, reporting about 4% EBITDA margins. So the question really is, what is different about the mix of your business the two of the businesses that your margins are going to be lower. Is there some, some structural reason for why your margins are lower versus theirs because of the, what you offer or is it a function of you're just investing more money in sales and marketing to drive future growth?
spk07: Yep. Hey, I'm Garrett again. And again, thanks for being here. Um, I'm not sure if Rover was a public company when they were doing 110, but I can certainly say that when you are a public company, you are burdened by additional costs, which probably takes EBITDA margins down. As a reminder, it is not cheap being public in terms of both headcounts, compliance, regulation, and just generally best practices. So I would add that in there. It's probably actually a multi-percentage point impact to our fully loaded EBIT margin. The second part of that is I think we're probably in a a different stage as we think about, you know, future growth. I think we're really investing in durable long-term growth, maybe a bit differently than maybe they were. The second, the third point I would add is, you know, there is a management presentation we published that gets a sense of kind of EBITDA margin scale along with gross, sorry, free cash flow scale, which was just published. I think that gives us everyone a better idea of kind of how we look. as we get to higher platform participant numbers.
spk12: Got it. Thank you. And then just a follow-up question. Just looking at the quarterly seasonality of your business, as you look at 2023, the year just finished, the number of platform participants actually did not rise between March 24 and December 24. But then in 2022, it had more of a, sequential quarterly rise during the year. What I'm trying to understand is going forward, how should we think about the seasonality of our business? Is it a business that can grow the number of participants every three months versus the prior three months? Or is there a real seasonality in the business where the business has the most participants early in the year and it plateaus there?
spk07: Yeah, I certainly think that there is... some level of seasonality in the business in Q1 and Q3 primarily. Q1, Q3 are when more sitting and boardings occur in the services business. A significant number of pet insurance plans, wellness plans, and vet communications happen as a function of new pet adoptions and a few other unique marketplace dynamics. But I would say 23 is going to look a little bit different than 2024 as we're really going to be reinvesting in growth in 2024, whereas we may be a little more prudent in 23 to reach adjusted EBITDA profitability. So we expect quarterly participants to grow year on year, maybe not always quarter on quarter, but certainly year on year. The last thing I had REA is, can you please send me an email with your Rover numbers? The last numbers I have are 97 million in revenue at 21 at minus nine of EBIT. So if you have something different, I'd love to see it.
spk12: Okay, no problem. Again, thank you very much, and best of luck in the year ahead.
spk06: Thanks, Ariane.
spk11: Thank you. We have reached the end of the question and answer session. I'll now turn the call back over to Gary Smallwood for closing remarks.
spk07: Thank you, everyone, for being here. We're extremely excited for 2024 and the years to follow. Again, I've said this for three or four times now. We have updated our management presentation available at wag.co under Investor I think it's under press releases and presentations. Please give it a look. I think it answers the majority of questions you may have as you think about the business, the customers, and us as management. And we look forward to keeping in touch and for a great year. Thanks, everyone.
spk11: And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
spk18: Goodbye. Thank you. Thank you. Thank you. you Thank you. Thank you.
spk16: Bye.
spk11: Greetings. Welcome to the WAG Q4 2023 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Gary Smallwood, Chief Executive Officer and Chairman. You may begin.
spk22: Good afternoon, everyone, and thank you for joining WAG's conference call to discuss our fourth quarter and full year 2023 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman, Adam Storm, President and Chief Product Officer, and Alec Davidian, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements. These forward-looking statements are subject to risks 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 is included in our earnings release today and our filings with the SEC, including our upcoming 10-K for the year ended December 31st, 2023. We also remind you that we undertake no obligation to update the information contained on this call. These statements should be considered estimates only and are not a guarantee of future performance. Also, during the call, we present both GAAP and non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are available in today's earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. Lastly, you can find our earnings release and earnings presentation posted on the investor relations page of our website. And with that, I'll now turn the call over to Garrett Smallwood.
spk07: Good afternoon and thank you for joining us today to discuss our financial performance for the fourth quarter and full year 2023 and provide guidance for fiscal year 2024. First, I will provide a brief overview of our financial results for the fourth quarter and discuss our 2024 plans. Following that, Adam, our President and Chief Product Officer, will share updates on our strategic plans and key initiatives for 2024 and beyond. Then Alec, our Chief Financial Officer, will provide a more detailed analysis of our fourth quarter and full year 2023 results, discuss our capital allocation priorities, and share our 2024 guidance. We're excited to announce another successful quarter for the WAG team in line with our expectations for revenue and adjusted EBITDA, which resulted in the high end of our range for fiscal year 2023 for revenue and midpoint of our range for adjusted EBITDA. During the quarter, revenue grew 27% year over year to 21.7 million, which was a new quarterly record. This growth was driven by the success of our wellness business fueled by pet parent demand for pet insurance and wellness products, In addition, we are seeing early signs of success with MaxBone within services, which validates our longer-term growth initiatives by expanding our reach within retailers to the premium product category. Our adjusted EBITDA was break-even, an increase from a loss of $0.4 million in the same period last year. As we navigated the dynamic macroeconomic landscape, our primary objectives centered around achieving a sustainable equilibrium between growth, profit, and margin. In the fourth quarter, platform participants increased to 600,000, an increase of 38% year-over-year, and WAG premium penetration remained above our 50% target. To summarize 2023, this was a year of operational efficiency as we demonstrated adjusted EBITDA profitability for three consecutive quarters, reaching fiscal year adjusted EBITDA profitability significantly ahead of schedule. We did this while growing revenues 53% year over year and reinvesting in the platform. A few highlights for the year include entering the pet food and treat category with our acquisition of Dog Food Advisor and the launch of Cat Food Advisor, deepening our offerings in the wellness category with our exclusive offering of Paw Protect, the only pet insurance product offering instant pay in the U.S., and entering the premium pet essential category with the acquisition of MaxBone. We couldn't be more excited about the proprietary technology breadth of our platform and deep relationships we have with premium households as we enter into 2024. In 2024 and beyond, we are focused on profitable revenue growth and reaching more U.S. households as the all-encompassing trusted partner for premium wellness, service and products. We will do this by reinvesting free cash flow into growth, which we expect to achieve in the back half of 2024. We believe we are in the early innings of a secular growth trend in the premium wellness, service, and product categories in which we operate. We are nearly overwhelmed with the opportunities ahead of us and the resilience and strength of the premium households we service, who are showing no signs of slowing down. Accordingly, we are eager to build, innovate, and acquire in order to expand the WAG platform and deliver for our customers. As of today, we're setting a path to reach more than $200 million in revenue by fiscal year 2027, which quantifies the clear demand for our platform. This translates into year-over-year profitable growth of at least 25% for the next four years. We will do this while maintaining disciplined headcount growth through the use of AI and process automation. In summary, the team at WAG continues to execute against our goals and deliver strong and sustainable growth. Our fourth quarter and full year 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 U.S. households. Our 2024 guidance, which Alec will outline shortly, demonstrates our commitment to durable year-over-year profitable revenue growth. And with that, I will turn the call over to Adam to review our strategy for 2024.
spk05: Thanks, Garrett. I'm excited to share the three top-level elements of our strategy to drive long-term shareholder value and profitable growth in 2024 and beyond. One, best-in-class technology. As a technology company, we're excited to continue building proprietary solutions to capture the hearts and minds of our customers. We'll leverage our technology and best-in-class user experience to innovate on comparison tools for wellness products, matchmaking services for the highly fragmented pet services landscape, and white-label solutions for premium partners such as Tractor Supply, Forbes, and Bright Horizons. These proprietary partnerships develop a unique and defensible mode in combination with our offerings that make WAG a leader in the market. Two, platform expansion and M&A. As evidenced by our successful acquisitions and seamless integrations of Dogfood Advisor, MaxBone, and Pharmacy, we'll continue to pursue opportunities that expand the scope of our offerings for our customers. Our technology-first DNA allows us to move swiftly, both on the buy and the integration, increasing the return profile of the deal and delivering value for the end customer. We are excited to announce another incredible opportunity in Woof Woof TV, one of the largest social media platforms for pet lovers, which we closed in Q4 2023. Woof Woof TV expands our reach with pet lovers with more than 18 million followers across Facebook, Instagram, TikTok, and more. Woof Woof TV provides a unique media asset that enables WAG to develop proprietary content for WAG-owned brands and partner brands. Don't hesitate to give them a follow on Instagram or a like on Facebook. Three, operational efficiency. We believe a hallmark pillar of a successful technology company is the ability to scale revenue without a corresponding increase in headcount. In 2023, we achieved a record $1 million in revenue per employee, which we expect to increase in 2024 and beyond. This was accomplished through intense focus on automation, proprietary marketplace technology that does not require significant customer service or sales headcount, and the inherent scalability of our digital products. As Garrett alluded to, 2023 was our year of efficiency. 2024 will set the foundation for consistent and repeatable growth for this year and beyond. This growth will be achieved by doubling down on our best-in-class technology, broad and accessible platform, seamless M&A, and intense focus on operational efficiency. I will now turn the call over to Alec to discuss our fourth quarter and full year financials and 2024 forecast in more detail.
spk04: Thanks, Adam. We had previously described 2023 as our year of efficiency and optimizing the business for future success, which we continue to define as consistent profitable growth. While executing to this, we have finished 2023 and Q4 strong, which are as follows. For the full year 2023, we generated record revenues of 83.9 million, which represents 53% year-over-year growth and is at the top end of our guidance range. Record adjusted EBITDA of 0.7 million, representing the midpoint of our guidance range. And finally, record platform participants, with Q4 totaling 600,000 platform participants, representing 38% growth from a year ago. The meaningful growth of these three key metrics, as compared to last year, demonstrate the strength of our business model, strategy, and execution. For Q4, revenue was 21.7 million, a Q4 quarterly record, representing 27% year-over-year growth. Adjusted EBITDA breakeven. I will note this was slightly lower than our prior guidance, which is a result of post-holiday demand, in conjunction with the fact we saw significant opportunity to lean into sales and marketing in the back of Q4, primarily in December. The opportunity was too great to not deploy capital and take advantage of the surge in consumer demand, which we expect to be recognized in Q1 2024. Delving deeper into the financial results, revenue category results were as follows. Full-year services was $24.4 million, growing 12% year-over-year. Wellness was $52.9 million, growing 60% year-over-year. And pet food and treats was $6.6 million. Services in 2023 include a nominal amount of e-commerce revenue from the award-winning portfolio of products on maxbone.com. Looking at the fourth quarter specifically, services was $6.3 million, growing 7% from a year ago. driven by favorable sitting and boarding mix uptick. Wellness was $13.5 million, growing 21% from a year ago, driven by a strong pet insurance and wellness plan demand. And finally, pet food and treats was $1.9 million. As a reminder, pet food and treats is a new revenue category we entered into at the start of 2023, encompassing dog food advisor and cat food advisor, which has grown 40% from Q1 to Q4. Our expenses analyzed as a percentage of revenue illustrate operational excellence and scaling and are as follows. For the full year 2023, cost of revenue, excluding depreciation and amortization, totaled $5.5 million, representing 7% of revenue consistent with last year. In the fourth quarter, cost of revenue totaled $1.8 million, representing 8% of revenue, up from 6% a year ago. The incremental costs in 2023 were driven by maximum product and wellness-related costs. Full-year 2023 platform operations and support expense totaled $12.5 million, representing 15% of revenue versus 25% last year. In the fourth quarter, platform operations and support expense totaled $2.8 million, representing 13% of revenue, down from 16% a year ago. The 10% absolute percentage point decrease year-over-year was achieved through the deployment of our highly efficient processes, automation, and software tools throughout 2023. For the full year, 2023 sales and marketing expense totaled $50.5 million, representing 60% of revenue, down from 64% last year. In the fourth quarter, sales and marketing expense totaled $13.7 million, representing 63% of revenue compared to 62% a year ago. As mentioned earlier, we experienced record consumer demand post-holidays and deployed capital thoughtfully to take advantage of the opportunity. Full-year G&A expense totaled $19.2 million, representing 23% of revenue down from 59% last year, which did include one-time costs of going public. Fourth quarter GN expense totaled $4.7 million, representing 22% of revenue, down from 23% a year ago. This is the outcome of revenue scale, operating leverage, and hiring discipline. From a balance sheet perspective, we ended the year with $28.3 million in cash, cash equivalents, and accounts receivable. This balance also reflects full cash payment of $1.25 million for WoofWoof TV that closed in December. Becoming adjusted EBITDA positive in the second half of 2023 has significantly reduced cash burn compared to last year. Now looking ahead to our 2024 guidance and longer-term outlook, we expect to generate the following. Revenues of 105 to 115 million in 2024, which represents growth of 25 to 37 percent over 2023. Adjusted EBITDA in the range of 2 to 6 million, representing 177 to 731 percent over 2023. This guide anticipates 2 to 5 percent adjusted EBITDA margin, together with positive free cash flow in the second half of 2024. Additionally, on the heels of a strong 2023 and expectations for 2024, we are also announcing that our board of directors has authorized a debt pay down of up to $10 million of principal in 2024. If the full $10 million pay down is executed, it would result in $1.6 million of cash interest payment savings on an annual basis, which directly contributes to free cash flow. Looking beyond 2024, we expect an average of 25 percent compound revenue growth for the time periods of 2024 through 2027, assuming no meaningful change in the macroeconomic environment, with the expectation of driving towards over $200 million of revenue in 2027. In summary, our strong fourth quarter and annual results illustrate Firstly, the strong demand and tailwinds within the PEC category, which according to Morgan Stanley, is set to grow at a CAGR of 8% over 2022 to 2030, reaching a projected total of $277 billion. Secondly, management's ability to execute and drive discipline growth, which we have achieved for seven consecutive quarters, And thirdly, confidence in the next stage of WAG's journey as a profitable growth company in 2024 and beyond, which we have outlined here today. And with that, we now welcome Q&A. Operator, can you kindly open it up for Q&A?
spk11: Thank you. And at this time, we will be conducting a question and answer session. If you would 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 would 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 Jeremy Hamblin with Craig Hallam Capital Group. Please proceed with your question.
spk03: Thanks and congratulations on the strong results and guidance. I wanted to start with just asking a little more detail on your FY24 revenue guidance. So it implies a 25 to 37% year-over-year growth. Included within that, what's the organic growth rate that's embedded within there? And that's part one. And then part two is on the EBITDA portion of the deal that you've done, whether it's Wolf Wolf or Max Bone, what is the EBITDA contribution from acquiring those platforms that's embedded within that guidance in terms of my assumption would be that they are going to be a drag on EBITDA, but any clarification would be super helpful.
spk07: Hey Jeremy, it's Garrett. Great to hear from you. Thanks everyone for being here. So I think there are two questions. Let me make sure I get them right. So in terms of our fiscal year 2024 guidance on revenue of 105 to 115, that is entirely organic. I would not assume any M&A related growth. The second question related to EBITDA of businesses that we have acquired and integrated to the lab platform. Just taking a step back. Generally, we look at businesses that are highly efficient and have the ability to cross-sell or up-sell into our existing customer base. It's part of our M&A thesis. These businesses should not be a drag coefficient on the business. They also won't be kind of at scale. Frankly, that's why we acquire them. So I think about them as kind of a neutral effect on both revenue and EBIT.
spk13: Hopefully I answered both your questions, Jeremy.
spk03: Yeah, no, great. That's helpful. And then just in terms of... You know, one of the things that has been a bit tricky here as we start 2024, you know, weather has had an impact across the country, particularly in January, whether it was, you know, kind of storms, freezing temperatures, first few weeks of January. We've also had, you know, some torrential rains, you know, on the West Coast where you guys have, you know, some exposure. Wanted to just get a sense for how that might be impacting your business as, you know, and then kind of related to that, you know, platform participation, you know, the number of participants that you're seeing here in Q1 and kind of the typical, a reminder just of the typical seasonality that we should expect.
spk07: Yeah. Hey, Jeremy, Garrett again. Thanks for the question. I guess two questions. One, how has kind of weather impacted the business? Taking a step back again, We are very fortunate to have an incredibly diverse platform business at this point. As a reminder, pet parents and households count on us for anything from pet food advice to pet treat advice to purchasing the right insurance or wellness plan, in addition to daytime and overnight services. So there's certainly been some impact of weather, nothing outside of normal, and I think it's already kind of baked in. One thing I'd add there, Jeremy, is January, I think, is some of our strongest start to the year in the history of the business. So we are not seeing a slowdown in the consumer that we service, which is generally the premium household. I think your second question was around seasonality. Generally, I would expect 2024 to trend similar to 2023 in terms of quarter over quarter growth and kind of mix of revenue contribution by different parts of the business. Q1, Q3 versus Q2, Q4 as a function of adoptions and weather and summer and everything else should stay consistent.
spk03: Got it. Um, and then in terms of, uh, the comment, uh, particular to the strongest start that you've ever seen, is that, is that being driven? Like which, which segment are you seeing that, um, is it across all three of your segments, whether it's services, bookings, or, you know, food and treats, or is that being driven more by wellness, um, you know, and, and kind of pet adoption maybe being higher than expected?
spk07: I certainly did that one where I think we've seen, um, just from a macro perspective, more adoptions, more premium adoptions. Those premium pet parents need things like premium pet food, early pet insurance, early wellness plans, and are starting to think about services. As a reminder, kind of 12 to 18 weeks, a little bit early for dog walks. They might be meeting a walker for the first time or considering an overnight, but it's not yet a current priority. It's probably more of a Q2, Q3 thing once you've adopted your pet. But I would generally say the strength mostly in pet food, treats, insurance, wellness, and health.
spk03: Got it. Okay. And then, and then last one for me and I'll hop out of the queue, but in terms of the cost of revenues, right. And, and, you know, that's obviously going to change from what your prior business model look like, you know, kind of P you know, pre food and treats business, but you know, how do we think about scaling that, that portion of your financial model as you, you guys move forward? I mean, I think your platform operations and support has been pretty remarkable. That was basically flat year over year on revenue growth that was up high 20s on a percent. But you're obviously going to see your COGS move higher as you have that food and treat business. But just a sense for what you're expecting on that and then kind of within the component of your projected growth for this year, what is coming from the food and treats piece of your business?
spk04: I'll take the cost of revenue line. It was 7% in 23. I'd expect it to be consistent in 24. That's going to be a function, the cost of their function of payment processing fees and background checks, which increase with revenue volume. There will be some scaling. It could come down to six as the business does scale, but it will be in that six to seven region.
spk07: And then, Jeremy, on the second question in terms of pet food and treat contribution overall, we really like that category, really like the space. I think you'll see us continue to lean in there. What was 2023 growth for that business? Pet food and treats. Yeah.
spk06: From Q1 to Q4, it grew 14%.
spk14: That's great.
spk07: So I think we're going to continue to lean there, Jeremy. I think generally the revenue mix in 24 will look something like the revenue mix in 23, just broadly.
spk03: Got it. Super helpful and best wishes this year. Thanks, Jeremy.
spk11: Thank you. Our next question comes from the line of Jason Hellstein with Oppenheimer. Please proceed with your question.
spk02: Hey, this is Steve on for Jason. So we just have two questions. First off, how do you see the revenue mix when you reach that $200 million in revenue guidance for 27? And then secondly, how do you think about pricing or fee increases this year, if any? Thank you.
spk07: Hey, Steve. Great to hear from you. Thanks for being here. 2027 revenue mix. I think we have a lot of confidence in all parts of the business, Steve. I certainly think we'll take advantage of the tailwinds we're seeing in the premium pet parent. The premium pet parent certainly seems to be leaning into healthy pet food and treats, things like CBD, joint medicine, supplements, et cetera, as well as insurance. I think insurance penetration went from 3% to 7% and expected to grow at 8% to 9% CAGR. So I think those would be the two current tailwinds I would call out. Not to say service isn't a great business and isn't growing nicely, but I think that it's certainly been more impacted by the return to office, which has been a little bit slower. So I think we'll see how 2027 plays out as office space resumes, people's kind of mobility resumes, and the parent continues to stay resilient. But we're confident in all three parts of the business for what it's worth. Your second question on pricing, you know, taking 10 steps back pet caregivers on the WAG platform set their own rates. So that's pretty nice in terms of how people manage market equilibrium and supply and demand. Kind of happens organically, frankly. We don't think we'll do too much experimenting with pricing within the actual services being delivered that's up related to the pet caregiver. In terms of pricing of things like subscription products, our telehealth product mix, or any of our new product launches, I generally think we are very aware that we have a premium pet parent who's looking for a massive amount of convenience and simplicity in their life, and they want to pay up for that. So I think we'll continue to flex our muscle on benefiting from price resilience as long as we're delivering the right experience.
spk23: Great. Thank you very much.
spk11: Thanks, Dave. Thank you. Our next question comes from the line of Matt Carondo with Roth MKM. Please proceed with your question.
spk19: Hey guys, good afternoon. Just wanted to clarify the 24 guide. It sounded like you said sort of rateable compared to 23 in terms of mix between services, wellness, and food and treats, but just want to give the opportunity to maybe expound upon relative growth rates between those three categories.
spk07: Yeah, I think at 23, Matt, I didn't mean to ignore you. Good to see you. Good to talk to you. I'm not actually seeing you, but it's good to hear from you. In terms of 23, you saw our wellness group of businesses, which is purchasing pet insurance, purchasing wellness plans, getting advice from a vet, et cetera, grow pretty tremendously. And I think that's a function of, A, we have a phenomenal product and a phenomenal marketplace. And two, consumer demand, which is kind of unbound, frankly. I think we'll continue to lean aggressively into that business. It's hyper-efficient. It's a great marketplace. It's an amazing product experience if you haven't tried it. Not to say pet food and treat and services growth is less important, but I think you will continue to see us lean very aggressively into wellness and services and pet food and treats will follow.
spk19: Okay. All right. That helps. And then just in terms of the, I guess, the pull through to the EBITDA outlook, when you guys talk about sort of the margin improvement that's expected year over year, I guess I would have expected with the level of revenue growth that you're projecting that you may see a little bit more leverage. Are we reinvesting somewhere in the P&L? Maybe just talk about sort of where we're leaning in. I would imagine sales and marketing is going to be a bigger line item this year, but maybe just talk about the puts and takes around where we're reinvesting dollars on the P&L in 24.
spk21: That's right.
spk07: Yeah, great question. We actually published in our management presentation available on wag.co. Slide 15, which provides kind of an illustrative platform participant growth and consolidated P&L reflective of kind of different examples of quarterly platform participants, both at a million and 1.5 million platform participants, along with consistent growth in sales and marketing spend, along with operating expenses. And the flow through is pretty, we believe, pretty compelling. To answer your question, though, we do expect in 2024, just as a function of what we're seeing in the marketplace, that we'll continue to reinvest profits back into growth. I think we've seen it in kind of other comps, you know, two to 250 million in revenue got you really bit of scale. And I expect similar for us, maybe a little bit earlier, 150 to 200. But we're just reducing a tremendous amount of demand. We have a great product people love, and we really want to take advantage of that. So the mandate from us is continue to be really efficient and thoughtful and judicious on managing growth, profit, and margin, but more growth, I think, in the foreseeable future.
spk19: Okay. Gotcha. And then just last one, projecting second half free cashflow positive, I guess. And then you mentioned some debt pay down plans or authorization for 10 million paid down. Maybe Alec, if you want to just cover sort of the thought process behind the level of pay down that we're targeting, if we're kind of hitting that sustainable projected free cashflow level in the second half, why not pay more down and just save on the higher cost of debt there? Maybe just talk about the rationale there. That'd be helpful.
spk17: Yeah, that's a great question, Matt.
spk04: So we're thinking through pay down across the rest of the year. We will most likely stagger it through the year, but it depends on ultimately the level of performance through the different quarters. So you're quite possibly seeing us paying down a bigger chunk to begin with, to your point, and then as free cash flow hits later in the year, topping up to the remaining amounts.
spk14: Okay, makes sense. I'll jump back into you guys. Thank you.
spk11: Thank you. Our next question comes from the line of Greg Pandy with Chardon. Please proceed with your question.
spk09: Hey, guys. Thanks for taking my question. Just a quick one, I guess. Within the guidance and the EBITDA guidance, can you talk about how you're thinking about the Bright Horizons deal? Is that something that you're going to be putting some dollars behind? And hopefully that will gradually roll out. And then also, is that built? Where were you thinking in terms of your guidance on that?
spk07: Yeah. Hey, Greg. Great to talk to you. Thanks for being here. In terms of Bright Horizons, and this is a refresher, Bright Horizons is a public company, a trainer at BFAM. They offer daycare and childcare for, I believe, ages six months to seven years across the U.S. Phenomenal business from everything I can understand. And we've partnered with them to offer pet care via their distributed kind of employer-sponsored channels. And it marks our entrance really into the employer-sponsored channel. And so we really like this deal because it unlocks a great audience. Think about major employers across the U.S., brands like Salesforce, et cetera, and a great brand in Bright Horizons. And we kind of are able to piggyback and provide a great experience to their customers. You know, these things generally have a ramp time, as I think you're alluding to. It takes time to roll out to an employer and then roll out to the employees and then figure out how to actually use it and figure out how to actually benefit from it and actually put it to work. So it probably is more of a back half 24, 25 thing than it is a first half 2024 thing, frankly. But it's not to say we aren't already seeing some early signs of promise and we're not really excited about the partnership. It's probably more of a back half slash 2025 win for us as it's rolled out.
spk09: Got it. And then just one final one, just on the return to office trends, I think you mentioned that it was a little bit sluggish in the fourth quarter and you called out boarding on top of it. So just kind of wondering, you know, in the fourth quarter, did you see maybe some of the hybrid workers choosing to work remotely more often and given the holidays or just kind of any, anything notable to kind of call out on that? And how'd you think about that in light of the revenue guidance for 2024?
spk07: Yeah, you know, I think what we saw throughout 23, frankly, was a really trepidatious employer and employee, meaning like no real push or incentive to go back to the office. I think we generally hovered around 48 to 50% throughout the year across the major markets. You know, and that's a few days a week. We're not assuming some massive step change there. We certainly think the macro pressure and the layoffs we're seeing, especially across larger companies, may accelerate the return to office and kind of a dependency then on WAG daytime services. But we're not necessarily penning it in. But just in terms of 2030, we really, it wasn't any sort of step change that year. I think we saw kind of a slower employer than maybe we had originally thought to push people back to office, but didn't really change the pattern or use case. I think people still depend on us while they're stuck in meetings all day. People still depend on us while they're out on the weekends. People still depend on us while they're traveling. And then in terms of 2024, I think we might see some level of improvement, but I don't expect it to be at the 85. It probably gets to 55 or 60 by the end of the year is my guess.
spk20: Got it. Thanks a lot.
spk11: Thank you. Our next question comes from the line. Our next question comes from the line of Aria Cole with Cole Capital. Please proceed with your question.
spk12: Thank you very much. That was fine. I hope that was an excellent pronunciation of my name. Quick question. Can you hear me? Yeah. Hey, Aria. Hi. Good. Thank you for taking my two questions. I'm sure when you do financial analysis, you look at comparisons to other companies. As you well know, Rover had been public. When they reached 110 million of sales a number of years ago, they were reporting EBITDA margins of 11%. And if you hit the guidance you're suggesting here for 2024, you'll be at 110 million in the middle range as well, reporting about 4% EBITDA margins. So the question really is, what is different about the mix of your business the two of the businesses that your margins are going to be lower. Is there some, some structural reason for why your margins are lower versus theirs because of the, what you offer or is it a function of you're just investing more money in sales and marketing to drive future growth?
spk07: Yep. Hey, I'm Garrett again. And again, thanks for being here. Um, I'm not sure if Rover was a public company when they were doing 110, but I can certainly say that when you are a public company, you are burdened by additional costs, which probably takes EBIT margins down. As a reminder, it is not cheap being public in terms of both headcounts, compliance, regulation, and just generally best practices. So I would add that in there. It's probably actually a multi-percentage point impact to our fully loaded EBIT margin. The second part of that is I think we're probably in a a different stage as we think about, you know, future growth. I think we're really investing in durable long-term growth, maybe a bit differently than maybe they were. The second, the third point I would add is, you know, there is a management presentation we published that gets a sense of kind of EBITDA margin scale along with gross, sorry, free cash flow scale, which was just published. I think that gives us everyone a better idea of kind of how we look. as we get to higher platform participant numbers.
spk12: Got it. Thank you. And then just a follow-up question, just looking at the quarterly seasonality of your business, as you look at 2023, the year just finished, the number of platform participants actually did not rise between March 24 and December 24. But then in 2022, it had more of a, sequential quarterly rise during the year. What I'm trying to understand is going forward, how should we think about the seasonality of our business? Is it a business that can grow the number of participants every three months versus the prior three months? Or is there a real seasonality in the business where the business has the most participants early in the year and it plateaus there?
spk07: Yeah, I certainly think that there is... some level of seasonality in the business in Q1 and Q3 primarily. Q1, Q3 are when more sitting and boardings occur in the services business. A significant number of pet insurance plans, wellness plans, and vet communications happen as a function of new pet adoptions and a few other unique marketplace dynamics. But I would say 23 is going to look a little bit different than 2024 as we're really going to be reinvesting in growth in 2024, whereas we may be a little more prudent in 23 to reach adjusted EBITDA profitability. So we expect quarterly participants to grow year on year, maybe not always quarter on quarter, but certainly year on year. The last thing I had at REA is, can you please send me an email with your Rover numbers? The last numbers I have are 97 million in revenue at 21 at minus nine of EBIT. So if you have something different, I'd love to see it.
spk12: Okay, no problem. Again, thank you very much, and best of luck in the year ahead. Thanks, R.M.
spk11: Thank you. We have reached the end of the question and answer session. I'll now turn the call back over to Gary Smallwood for closing remarks.
spk07: Thank you, everyone, for being here. We're extremely excited for 2024 and the years to follow. Again, I've said this for three or four times now. We have updated our management presentation available at wag.co under Investor I think it's under press releases and presentations. Please give it a look. I think it answers the majority of questions you may have as you think about the business, the customers, and us as management. And we look forward to keeping in touch and for a great year. Thanks, everyone.
spk11: And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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