Q1 2022 Leafly Holdings Inc Earnings Call
Payments regarding the services offered by leaf with the markets in which <unk> operates business strategies performance metrics industry environment potential growth opportunities and leases projected future results and financial outlook and can be identified by words, such as expect anticipate intend plan believe seek or will these statements reflect our views as of <unk>.
Today, only and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update. These statements forward looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations for a discussion of the material risks and other important factors that could affect our actual.
Please refer to the risks discussed in today's press release, our annual report on Form 10-K filed with the SEC on March 31, 2022, and our other periodic filings with the SEC.
During the call. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at Investor <unk> Dot com with that let me turn the call over to yoga.
Thank you <unk> and Hello to everyone, who has joined today's call. It is a great time to be in Canada.
Before I get into sharing some of the exciting progress we've made over the last quarter I want to recognize the momentum we are seeing in the industry and what it means for Lee.
Over the past several months across North America, we've seen a buildup to the opening of important recreational market in New Jersey in New Mexico, with New York, and Connecticut, hinting at the potential to start Rec sales in late 2022, we are still anticipating the expansion of recreational licenses in Illinois, and Arizona and in the heart.
Land work is gearing up for recreational use valid initiatives. This fall from North Dakota to Missouri and assigned that legalization will continue to sweep the country. This is great for the industry, but also great for lease fleet as we open new markets, where we can easily scale our technology with few bespoke.
Investments.
And because of our content driven marketplace, we already have a strong foothold across consumers in these markets and we will continue to invest as they come online.
And the biggest not to dis stigmatization I've seen we also have the unique opportunity to ring the opening bell at NASDAQ on for 'twenty, the unofficial but widely celebrated candidates holiday.
In tandem with this industry momentum lastly had a solid start to 2022 revenue for Q1 was $11 4 million, an increase of 21% year over year and in line with our expectations. This growth is a testament to our powerful name recognition and the growth we can drive.
With investment in the lease fleet team and platform and with our continued focus on building tools that provide outstanding ROI for our customers and the best in class shopping experience for consumers.
We saw a 37% increase in the number of retail accounts in Q1 year over year in our retail subscriber funnel remains strong on a consecutive quarter basis, ending retail accounts grew 3%, reflecting elevated churn in challenging markets like Oklahoma and California.
And you're in a higher than average number of out of business accounts as we fully transitioned our sales organization in Q1 to a regionalized model our expanded sales capacity allows us to focus targeted efforts on reducing churn.
Our top of funnel retailer acquisition remains strong and we are positioned well to quickly bring retailers onto our platform, especially in markets that are scaling and in existing markets, where license numbers are poised to expand.
The candidates the industry operates at a local market level and our strategies and investments reflect this.
When we look across the business average revenue per retail account or ARPA varies from market to market and some of our key and most highly penetrated markets. We are seeing steady ARPA growth newer markets with lower retail penetration on the lease fleet platform provides significant opportunity.
The buildup over time as I mentioned last quarter our strategy in these markets is to enter at lower price points expand retail penetration and drive higher spend from retailers over time.
Given the mix of local markets across our platform and our strategic approach, we saw a slight and expected sequential decline in ARPA in Q1.
Over time as we invest in these markets we are effective at increasing ARPA.
We know that pricing power comes through our ability to bring as many retailers in a market onto our platform and we will continue to focus on improving penetration at the local level through our regional sales and CSM teams.
Lease lease consumer strategy differentiates us from others in the market and has led to making candidates more mainstream over.
Over the years, we've educated consumers and increased visibility across the industry before anyone else with publishing about candidates at scale.
With the momentum in Canada today, we see traditional media publishers, introducing more coverage around candidates, which has helped solidify cannabis as move into the mainstream that's positive for candidates and it has had a direct impact on our Seo traffic specifically around our top up.
Funnel news and learn sections as a result, we ended the quarter with approximately $7 7 million monthly active users a drop over Q1 last year.
Fortunately our revenue strategy is not dependent on this top of funnel traffic, we maintained and in some markets grew traffic to sections of the platform that generate the greatest value and consumer engagement for our retail and brand partners.
Top of funnel traffic remains important to our business, but in the short term, we will continue to optimize our strategy for revenue generating traffic and prioritizing markets and in the long term continue to invest in growing top of funnel traffic with unique and elevated cannabis content and defer.
And created consumer experiences.
As we discussed during our first earnings call. Following the closing of our business combination with Meredith merger core we continue to make meaningful investments that we expect will have future positive impacts as we take a purposeful and disciplined approach to drive both short term and long term growth lease.
<unk> growth and success will be driven by investments in a few key areas, one increasing our subscriber base across retail and brand accounts to improving our advertising platform, three reducing friction and enhancing our offerings to our <unk> partners and four creating an <unk>.
Credible consumer shopping experience.
I'll touch first on increasing our subscriber base the number of our retailers and brands subscribers continues to grow these subscriptions represent recurring revenue stream and position us well to move customers up the ARPA curve as we introduced new AD products to these accounts in Q2 and Q3.
One of the most exciting areas of growth is in our new offerings for brands.
<unk>, realizing the power of leaf Li to obtain high value and high intent customers.
Q1, the number of brand advertisers on our platform increased by 135% year over year although.
Although we are in the early stages of building out this customer segment, we are already working with top brands across THC infused other cannabinoid providers and ancillary products.
Our pleased with our progress in acquiring new brand advertisers and see this segment as a tremendous growth opportunity with a large untapped Tam.
We've added team members to aggressively go after this market, including hiring and account director for brand sales and with our revamped brand subscription product now have a strong product that delivers real value for our brand partners.
Moving on to improving our advertising platform.
Our advertising platform continues to mature as the overall industry grows and becomes more established retailers and brands are experiencing increased competition to reach customers. We are continuing to invest in new advertising products and services that put retailers and brands in the driver's seat.
As they seek to get in front of consumers in an efficient way and we are excited to announce releases in the second half of this year.
We introduced more automated bidding tools earlier this year, creating efficiencies as we moved away from Emmanuel more labor intensive process. We are early in the stages, but we have already seen steady and strong growth in AD revenue in markets, where we have introduced bidding.
We are focused on scaling bidding capabilities in Q2 and expect continued growth ahead.
One of the keys to maintaining trust with our customers is providing transparency about the performance of AD units subject to bidding we are providing this data to the customers through the bidding process empowering our best partners to make informed decisions about customer acquisition spend.
And by opening up premium AD units to bidding we've been able to give more partners greater access to high value placements that they might not have had access to previously.
Let's talk about reducing friction for our <unk> partners. The cannabis industry remains an industry full of friction and fragmentation for retailers and brands, particularly in the technology enablement space.
We are working on both reducing the friction in our own environment and reducing it through building tools and services for our B to B partners. Our strategy revolves around empowering retailers to run their best businesses by integrating with their existing systems, rather than forcing them into a closed.
Technology environment.
This reduces the barrier of entry to working with Lee fleet and helped drive a simpler client experience with greater ROI as licensed retailers and brands can more easily leverage our traffic proprietary insights and our technology for customer acquisition E Commerce and digital advertising.
<unk>.
Some of the features we launched in Q1 include a business dashboard, which allows clients instant access to ROI metrics and best in class insights. So they can regularly see the value they're getting from Lee. We also introduced smart tools a collection of best practices that retailers can use.
Their performance on our platform.
We continue to invest in our deals engine, which drives increased consumer activation when retailers offer consumer deals and discounts.
And we will soon exceed over 50 menu and order integrations with Pos providers that power two thirds of the menus on lately today.
We will continue to emphasize putting cannabis retailers and brands and control of their businesses through access to data and practical tools and tips to attract consumers on our platform.
Looking ahead, we expect our sales and customer success teams to drive increased adoption of the platform tools, we offer including order enabled capabilities and advertising add ons.
All of what I, just spoke about inherently leads to creating an unmatched consumer shopping experience lastly is the informed way to shop per we'd users turn to us for our long history unmatched strain and dispensary reviews research and trusted.
Experts.
We can offer a more informed shopping experience from beginning to end by helping consumers understand what they should try and where to buy and connecting them easily with local dispensaries that offer the products they want.
Our focus in 2022 is utilizing our unrivaled proprietary content and data from the past 12 years to provide a level of curation and personalization that increases the value proposition for consumers and ultimately produces greater ROI for retailers and brands.
You can see this come to life in our recently launched strain queries, which leverages the data underlying our streams database and a short quiz to match consumers to the strains that deliver the feelings and experience. They are looking for then connect consumers to the stores that offer products with those strains.
There is no place, where we have more control over our consumer experience and a native app.
Our native App opportunity changed fundamentally late last year, when Apple allowed for ordering in the iOS app.
Growing our account base through investment in our native App as a priority growth vector for us in 2022 and beyond.
To continue this theme of end to end experience in Q1, we introduced a new consumer facing delivery experience to augment our existing strong pickup offering giving consumers an additional way to shop for cannabis in the way they want.
And we are already seeing good results, particularly in California.
We are in the midst of hyper local marketing efforts in Los Angeles, the largest legal cannabis market in North America to drive increased adoption of our full suite of consumer facing products, including our new and improved delivery gateway.
We remain the trusted source for cannabis information insights across a wide spectrum of audiences for media and lawmakers to regulators and the general public.
Bolstered by our own editorial content, we've appeared across dozens of mainstream media outlets over the past quarter and consistently lead on share of voice as we not only provide color and context to the topic of cannabis legalization, but also work to destigmatize and normalize it.
Youth.
This elevated brand recognition is earned at a very low cost and helped heightened awareness and affinity for the lease fleet brand.
I say it often I am pleased with what our teams have been able to accomplish this quarter and excited by the prospects for weekly ahead.
As we continue to invest in areas that will have real and positive impacts on our business.
With that I'll now turn it over to Suresh.
Thank you Yoko and welcome everyone. Our first quarter results were in line with our expectations and set the foundation for the accelerated growth, we expect to see in the second half of the year.
As we detailed in our Q4 call in March 2022 is a year of continued investment in the business.
We've been expanding the sales team to allow us to execute our market by market strategy of building our customer base.
In addition, we're growing our product and engineering team to make further improvements to our platform that enhance the consumer experience and provide a strong ROI for our retailer and brand customers.
Now let me review the Q1 results.
Revenue for the first quarter was $11 4 million, representing a year over year increase of 21% reach.
Retail revenue up $9 2 million grew 17% year over year, while brands revenue of $2 2 million grew 35% over Q1 of 2021.
The growth in overall revenue was driven by both increases in subscribers and add products, which includes our new sponsor that product as well as continued success with our auction bidding product.
We also grew new subscribers.
The number of ending retail accounts grew 37% year over year to 5422.
On a consecutive quarter basis, our ending retail accounts grew 3%.
<unk> touched on earlier, we saw higher churn in markets, like California, and Oklahoma, which have regulatory and licensed challenges.
With our newly organized sales team structured by region. We're now more nimble to address market specific dynamics at the local level.
Our strategy to build out subscribers in Underpenetrated markets.
Contributed to a lower average revenue per account or ARPA was $576 a decline of 109 from Q1 of 'twenty one.
Keep in mind. This is an aggregate across all markets with a very wide range between the low and high end.
In markets with greater penetration ARPA is significantly higher than on average.
As Yoko mention our strategy and you are underpenetrated markets is to build our market presence by offering competitively priced entry level products.
Over time as these markets pass through their development phase competition increases.
When markets reach a higher level of demand from consumers and we achieved strong penetration, we can introduce AD bidding to retail and brand subscribers and drive ARPA higher.
We view, our bidding product and more broadly our ability to build advertising placements that allow for retailers and brands to compete for consumers on lease fleet is a key driver for growth.
Rolled out bidding for limited AD placements on literally in five states in Q1.
And we've seen healthy increases in AD placement revenue.
For the balance of the year, we do expect overall arcata rise from current levels.
And we're excited about our growth and brand subscribers, a growing recurring revenue stream from a new customer base.
The number of brands advertising on our platform at the end of Q1 increased 135% year over year and 19% on a consecutive quarter basis.
Turning to gross margin.
Recently is asset light with a proven scaling business model and strong gross margins.
Total gross margin in the first quarter was 87% a decline of 100 basis points from Q1 of 2021, primarily driven by higher business platform and website infrastructure costs.
The investments that we're making in the business now are putting pressure on gross margins over the next two quarters.
Topline revenue continues to grow we expect margin improvement.
Moving on to operating expenses.
Starting in the second half of 2021 and continuing into 2022, we've been investing in the business for long term growth.
These investments are primarily focused on platform product development and sales and marketing.
We continue to make investments and top talent in order to take our company's growth to the next level.
In December of 2021, we brought on a new SVP of sales Rebecca Warner a seasoned executive from Zillow.
Her arrival, we've restructured our sales teams to move to a more regionalized sales model.
This new structure allows us to go after local markets and a highly intentional way.
Our focus on local markets will help us remain highly relevant and competitive.
In January we added an SVP of engineering, Jeff overland or formerly of pipeline sales CRM software company.
Under his leadership, we've moved to an org structure that upgrades with greater efficiency and allows us to develop and deploy product enhancements and a more streamlined fashion.
Both sales and engineering are making progress in growing their teams.
Year over year, we more than doubled the size of our sales and marketing or.
We also added to our engineering and leadership team.
Additional expense related to head count as the primary driver behind the increase in operating expenses.
With the changes, we're making internally to our engineering team, we expect increased throughput on upgrades and new product releases, which will scale, providing operating leverage overtime.
Total operating expenses in the first quarter was $17 $4 million, an increase of 83% over $9 5 million in Q1 of 2021.
G&A expenses were up $4 4 million in Q1, which includes $1 9 million of stock based compensation expenses as well as the increased costs of operating as a public company.
Total operating loss for the first quarter was $7 4 million.
Total adjusted EBITDA for the first quarter was negative $5 4 million.
As we laid out on our Q4 call and our analyst Day last October 2022 is a year of investment for lease fleet.
With the completion of the destock process and capital available on our balance sheet, we will be investing in both people and product to push lease fleet for the next phase of growth.
Now turning to the balance sheet.
We ended the quarter with $35 $4 million in cash our restricted cash balance at the end of Q1 was $37 2 million.
Since the close of the quarter, we amended a forward share purchase agreements that we entered into prior to the merger closing.
We modified both the pricing and exploration date of all four of those Sps.
More details are available in the 8-K, we filed on May 4th.
It's important to note that these revised agreements have been extended to August 1st.
In addition, some of the holders of sold a portion of the shares into the open market.
As a result, approximately seven $3 million of cash in escrow has been or will be moved into our cash balance.
Moving to our 2022 guidance.
For the full year 2022, we are reiterating our guidance for revenue between $53 million and $58 million, representing 29% growth over 2021 at the midpoint.
As a reminder, this guidance does not factor in any new markets that have not become legalized sales.
We expect adjusted EBITDA loss to be between $31 million and $26 million.
As a reminder, our plan is to provide full year guidance, along with additional color and transparency throughout the year as to how we're tracking.
Q2 is off to a good start and we expect an acceleration of top line year over year growth in the second half of 2022.
In closing we have started off this year as planned and are pleased with the investments, we're making in the platform product development and sales and marketing. These investments will help us bring our best in class offerings for our consumers retailers and brands.
With the first month of Q2 behind US, we see great opportunity for lease lead to accelerate growth in the second half of 2022.
And with that I'll turn the call over to our operator and open it up for questions.
Yes.
Thank you.
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The first question today comes from Jason <unk> from Oppenheimer. Jason. Please go ahead. Your line is now open.
Alright, Thanks, Steve here for Jason. So first question just how are you guys thinking about retail accounts for the next few quarters, just wanted to get a sense on that.
And also secondarily kind of on the macro picture.
If you can give us a sense on your progress of getting licensed dispensaries from states like New York and New Jersey onto the platform. So it's kind of what are you seeing in terms of progress in that regard and anything you can give to us on that thank you.
You bet.
You want to take retail accounts and I'm happy to speak to the macro yes, absolutely.
On retail accounts, we had good growth in Q4, and we're confident in our ability to continue to add retailers onto our platform as Johan mentioned, we had challenges in Q1, both in Oklahoma and in California related to licenses and regulation.
We also saw higher than expected number of accounts going out of business.
Cannabis is dynamic we do see turnover and licenses.
And in many cases, we see the new licensees come back to the platform eventually so.
Our new sales re org in place we're in a good position to focus on the value, we're providing at the local level and with our local market strategy, we're really focused on.
Adding accounts and providing value.
In each local market.
That we serve.
Let me pick up on your macro point East coast markets opening up Super exciting for 'twenty, One New Jersey Rec market rent markets Open let me take these state by State New Jersey, as you know give priority to medical.
<unk> medical licensees for first recreational sales and they've yet to issue new licenses for new recreational stores.
So just some context on new Jersey, we are 91% penetrated across existing medical retailers today. So that's a market share that we've already captured as it pertains to current retail sales.
Similar dynamic in New York, where we have over 90 plus percent penetration of existing medical dispensaries and as you know that market has made some announcements over the last quarter around how their retail stores will open up with initial priority given the social equity licensees those licenses have yet to be issued.
But with our local market sales teams, we are at the ready when those new licenses are issued to bring those players on the platform.
Great. Thank you very much.
Thanks, Steve.
Thank you.
The next question today comes from Harrison <unk> from Cowen Harrison. Please go ahead.
Great. Thanks, so much for taking the questions.
First of all can you maybe highlight some of the work towards you feel youre most underpenetrated.
Discuss the opportunity for growth in those markets.
Yeah, I'll take I'll take the biggest one that puts us in a really fantastic opportunity for us, California.
We are we haven't reached full market penetration is where we'd like to be and one of the things that we're super excited about as it relates to California, notwithstanding not only the fact that it's the largest cannabis market in the world, but our delivery gateways that we launched this in quarter in Q1 of this year actually really.
Is additive to our existing strong pickup offerings why is that important because california is such a delivery driven marketplace. So to introduce this new consumer interface and the UI is qualitatively different for delivery versus pickup and bring that to a market, where we know there's still a lot of demand how do we know that because there are a lot of consumers.
California coming to our site and searching strains for example, we see that as notwithstanding some market structural challenges, which we think will write themselves over time, a great opportunity for us to go after.
Great.
With that.
You also talked about ARPA growth.
It works over time, so could you kind of quantify how are you.
Dr that growth kind of how much growth.
He's closer to market.
And how that relates to.
The overall press release again arcos retrofit market.
<unk>.
So we think.
I think let me just make sure I cover all of that trajectory growth Nathan in nascent markets and so the percentage growth I can't.
Every percentage growth as it relates to specific markets, that's not something that we've gone deeper into in terms of disclosing but let's talk about what drives this and what sets us up to be able to drive ARPA growth overtime, our flywheel starts with supplier penetration so what youll see us do and where you see we report ARPA to aggregate.
<unk> is going into markets and focusing on that supplier penetration and sometimes that means you're going at lower ARPA rates.
What we see over time is that when you can get to that sweet spot of supplier penetration and that's a 70% 80%.
Roughly in the <unk>.
Differs from market to market, but when you can reach those kinds of levels you match that with the consumer demand, we do see it as cirrhosis points this steady growth over time.
I know that's hard to show in our numbers in aggregate, but I would point to just key areas.
<unk> decisions, we make on how to achieve that supplier penetration to grow those markets, Illinois is a great example for us where we saw some challenges with getting suppliers on the platform about 18 months ago.
That was really because a lot of those retailers wanted menus that they were already power and using Jane to auto populate unbelievably. So what did we do we did an integration with gain increased supplier penetration has been able to drive healthy ARPA growth and let's talk about that ARPA growth where does it start.
We bring them onto our platform with the subscriptions and then when you can build that competitive dynamic that arises we have sufficient suppliers on the platform introducing bidding.
And as <unk> mentioned in his commentary we've seen healthy ARPA increases through bidding that we've launched in Q1, we will continue to proliferate bidding across our platform in markets, where the dynamics are right to do so.
Great I appreciate the color.
Got it.
Thank you.
As a reminder, if you would like to ask a question. Please press star.
Followed by one on your telephone keypad.
The next question today comes from Eric jewelry from Craig Hallum Capital Group.
Please go ahead. Your line is now open.
Thank you for taking my questions.
First one from me.
You mentioned.
But you guys sort of prioritize high revenue traffic channels.
And thus <unk> is not necessarily a leading driver of.
On your results or anything like that could you just provide a bit more color on what you mean by.
I started prioritizing higher revenue traffic channels, and how you can focus on driving those versus the others.
Yeah, So I think.
Let's talk about <unk>, and let's put it in context Monro the measure across the top of funnel, but we're also looking at these other metrics and performance indicators and traditionally we booked at the top of funnel through our news and learn section in SCO, we did that because not a lot of publishers. We're publishing around candidates at scale. What we're seeing now is the mainstream media.
Is stepping in to do the work that we've had to do for the past decade.
But what we're also focused on is to your point, it's the efficiency of moving traffic on our platform through the funnel.
And to deliver the greatest value to our <unk> partners, how do we do that that's making sure traffic get to retailer menus.
Here it gets to our dispensary finder, as well as our pickup and delivery gateways, so when youre thinking about and what to look for from US we're going to focus we will continue to focus on delivering that value to our <unk> partners and <unk>.
<unk> growth at top of funnel and that includes through spo investment, but really it's the emphasis on differentiated content and consumer experiences to attract the work.
Let me just pull on that for a little more sticky consumer experiences reduced our reliance on SCO over time.
Truly valuable to our retail and brand partners.
What gives us confidence that this is the right strategy going forward is that even with the declines youre seeing in top of funnel now we didn't see a one to one decline in orders in GM dealers in the quarter.
So why long term expect us, we'll still continue to invest in top of funnel, but will be purposeful and mindful on spend and how we drive that funnel.
Okay.
Very helpful.
And then second one for me I was wondering if you could just expand on your bidding initiatives here I know that that was a manual process here.
I think you mentioned that you guys were sort of converting that to an automated process I'm. Just wondering if you could expand on that a bit for me and then.
I know that this is sort of that bidding is.
Sort of later stage tool that you guys use after penetration.
That's really increase and whatnot, but any indication on sort of how do you expect the pace of.
Potentially automated bidding rollout would be great too. Thank you.
Yeah.
Cited about the progress of our product and engineering team has been able on the automation side and what I am happy to report is that interface between us and the retailers is fully automated now what does that mean, they're getting alerts. They are popping in their bid. They are popping in there, Matt said theyre getting notifications when they've been outbid and we see this quarter.
We have activity on the platform right before the bidding period expires. So that part of it is now automated and that's huge in terms of think about the human hours that are no longer on the phone taking calls as we're closing in on <unk> and we're seeing great turnover in those spots and we're seeing actually.
<unk> increased.
Excuse me.
Oh.
That is going to try to get through this without the coffee so I apologize.
And so we're seeing the increased activation at the very last minute leveraging the automated tools. The last remaining piece of automation for that is to pull all of this through automation and billing, but that'll be secondary because it's really focused on reducing that friction and making bidding easy for our <unk> partners you will continue to see this.
As we said this is market by market looking for optimal conditions both from supplier.
Concentration in making sure their sufficient retailers on platform and looking at sort of that general activity in consumer activity and interest in a particular market, but thats a continued focus throughout the year and youll see that built into our projections.
Okay great.
Does that count as well.
Last one for me here just kind of clarifying.
Is bidding for.
For retail accounts are definitely brand can access as well.
Just a quick clarification and then that's it for me. Thank you.
Yeah. Currently bidding is focused on retailers and again thats a function of aggregating sufficient retailers in a market onto our platform to drive that competitive dynamic. It's really early stages for us with brands, but we're very pleased with the progress to date, the technology will allow us to introduce at two grams.
The Time's right.
Yes.
Thank you.
Thank you Eric.
Thank you.
There are no additional questions waiting at this time, so that concludes the <unk> first quarter 2022 earnings call. Thank you for your participation you may now disconnect your lines.
Okay.
Uh huh.
[noise].