Q2 2022 Leafly Holdings Inc Earnings Call
As for retailers brands and multistate operators that their advertising budgets are under scrutiny.
While we're putting strategies in place to navigate through these challenges. We believe these factors will impact the second half of the year Okay.
Accordingly, we are taking steps to reduce operating expenses and have implemented a hiring freeze on top of the slower pace of hiring we saw in Q2.
So rash will give specific details around our guidance, but I want to be upfront about one thing we believe the medium and long term prospects for the cannabis industry are strong and we have a tremendous opportunity in front of us.
Our overall strategy remains unchanged and we will focus on maximizing efficiencies across all areas by prioritizing projects and products that will result in the highest return.
In spite of some of these headwinds I'm, particularly pleased with the growth we're seeing from brand advertisers associated with our Q4 2021 product launch.
Revenue from brands in the second quarter was up 22% over Q2 last year and up 33% sequentially.
We also saw a stabilization and steady improvement in our monthly active users highlighting our strategic efforts to expand our consumer audience deliver an exceptional consumer experience and drive long term valuable and returning customers.
We are an essential part of the cannabis industry and Leapley plays a critical role in connecting retailers and brands with the growing number of cannabis consumers across North America.
We remain focused on the key priorities put in place earlier this year in order to increase our retailer and brand subscriber base improve our AD platform reduce friction for <unk> partners and create an incredible shopping experience.
To deliver on these we've recruited top technical product and UX talent. This year. The team is now structured to innovate and nimbly execute our highest priority needs.
In our last call, we talked about creating an incredible consumer shopping experience and in Q2, we released several enhancements that drive consumer engagement and differentiation.
Our teams have been successful in driving downloads of our native apps. This year, an important strategy to increase consumer engagement.
Native App consumers are some of the most engaged and active consumers on our platform. We rolled out a number of in App features to improve the consumer shopping experience.
Consumers can now place delivery orders directly in our iOS app.
They can also now request doctors' appointments directly from our App, making it easier for them to connect with nearby doctors to obtain medical marijuana cards.
As Youll recall, we launched a new delivery functionality directly within weekly in Q1 of this year.
And in Q2, we made a number of enhancements, including the addition of more filtering options. So consumers can better see what dispensaries deliver and shop by product.
This is a fundamentally different way to shop for cannabis, it's a product first shopping experience that leverages, our reviews and content similar.
Similar to help consumers are accustomed to shopping on other non cannabis marketplaces.
We continued to capitalize on our unparalleled straining database with our best buds strength with this simple personalized quiz helps users identify which stream most closely matches the feelings and effects. They are looking for connecting them more quickly with the right product.
We believe this more seamless connection to products that matter help demystify candidates and builds shopper confidence.
Personalization remains one of the biggest unmet needs for consumers and Leapley with its unique data assets is poised to solve this challenge.
We see the consumer experience is a foundational element of our flywheel and it expands across all sections of our platform.
The information and resources consumers have come to expect to the ease of ordering.
In addition, our consumer and content teams have been laser focused on expanding our consumer audience.
We've made technical improvements in our top of funnel acquisition.
Susan learn sections of our site and implemented a stronger content strategy focused on our most popular top performing material.
We continued to see increased MAU growth through July due to the hard work and investments in this area, particularly to high demand areas of our site like our defense refiner.
Our long history category expertise.
<unk> catalog of content and our screening database strongly position us to expand our consumer base as candidates becomes more mainstream.
On the advertising side retail markets across North America continue to evolve at different paces.
Illustrating this our top penetrated markets, which continue to drive growth in the business and provide key learnings as we expand into newer markets.
I am proud to share that our new automated auction based bidding tool for retailers has now been rolled out in five states.
We saw increases in AD revenue and the majority of those markets. These bidding based AD products offer retailers greater opportunity to reach our valuable consumer audience and drive sales.
We built automation into our bidding process, resulting in greater efficiency as we take these AD units out for Rebidding every 90 days.
Our bidding success in early markets has demonstrated our ability to move retailers up the arc ARPA curve as markets mature providing continued proof points that support our strategy.
And lower penetrated markets, we continue to bring new retailers onto the platform to reach critical scale. Although we still continue to see churn in these lower penetrated markets and in markets with structural challenges.
Our newly structured sales teams.
Were designed to focus on our local market strategy to both increased penetration and reduce churn.
We repeatedly hear from retailers that greater flexibility and reduced friction is essential to empowering them to manage their ad spend and generate sales.
We greatly reduced the barrier of entry for retailers to work with weekly.
This past quarter, we launched pickup and delivery integration with Blaze point of sale, which has allowed retailers using blaze to increase the volume and velocity of their sales.
We are now menu integrated with almost half of the cannabis point of sales systems, serving licensed retailers in North America.
This aligns with our strategy of integrating with existing systems, rather than forcing retailers into a closed technology environment.
We continue to emphasize putting candidates retailers and brands and control of their businesses through access to data. So they can attract consumers on our platform and.
In Q2, we released improvements and enhancements to our retailer dashboard, giving retailers greater visibility and transparency into their success on lately.
More recently, we rolled out tools that allow clients instant access to our ROI metrics and best in class insights. So that they can regularly see the value they're getting from us.
We also recently launched our dealer packages, where retailers can offer promotions to consumers directly on our site in the path to purchase.
We're seeing early adoption of this product, which provides an incremental revenue stream. We believe this product resonates well in the current macro environment, where consumers are looking for value and retailers are competing for sales.
Now focusing on some other momentum we are seeing in Q2, we reached 100% market penetration in the garden state.
Meaning every dispensary in New Jersey had a menu on the <unk> platform.
It is a strong indicator of our focus on important east coast markets and the power and reach of the lease fleet brand.
Spurred by our ability to build a presence even before our market legalize.
As we continue to invest for long term growth.
The industry is evolving at a rapid pace and our strategy is directly aligned to capitalize on the great momentum we expect to see.
The <unk> brand is becoming more widely recognized as a thought leader in the cannabis space one of the largest repository to canvas data.
This includes our canvas data library of tens of thousands of cannabinoid into European strain profiles from leaf we certified lab.
Subjective strain effects from consumer reviews and candidates popularity metrics.
Given the breadth of this library, we recently launched a program called Leapley plus University, which allows accredited canvas researchers to supplement their work with our large candidates dataset that would otherwise not be available.
Rhode Island is expected to begin adult use sales in December .
With Connecticut, and New York expected to come on hopefully soon thereafter.
We're closely watching the midterm elections that could bring legalized cannabis to millions of more consumers across the us.
We're also excited about the 185 conditional retail licenses that were recently issued an Illinois after being tied up in litigation.
These elections in moments changed the landscape within local markets governments hold the keys to when and how markets open up from number of licenses to legalize e-commerce and delivery, we're closely watching the prospects for better federal banking legislation. This fall.
Over the years, we've seen tremendous momentum in this industry and while we face headwinds today.
The industry is set up for long term growth.
<unk> is positioned to reap the benefits of this growth as we continue to serve consumers brands and retailers, who join US along on this journey.
With that I'll turn it over to Suresh.
Thank you Yoko and welcome everyone.
Revenue in the second quarter was $12 1 million up 13, 8% year over year.
We saw continued strength in local markets, where we have high penetration and increased ARPA in those markets.
Pending retail accounts grew 18, 8% year over year.
Breaking revenue down further revenue from retail was $9 1 million up 11, 3% over last year.
Revenue from brands was $3 million up 22, 2% over last year.
On a sequential basis total revenue was up five 5%.
Revenue from retail was down one 2% quarter over quarter, primarily as a result of slightly higher than normal churn rates and lower penetrated markets, where the marketplace dynamics hasnt developed sufficiently to fuel a competitive marketplace.
Combined with slower than expected New retailer addition, ending retail accounts at the end of Q2 declined three 2% sequentially.
Retail ARPA in the second quarter was $570 million.
Nine 8% decline over last year.
This is in aggregate across all markets with a wide range between the low and high end.
And the majority of markets with greater penetration.
Significantly higher than our average.
Once markets achieve scale between consumer demand and strong retail penetration, we can introduce bidding, which typically drives ARPA higher.
ARPA was up just slightly from last quarter, reflecting increased pricing leverage in our top markets and early quarter success from our bid AG products.
Arizona as an example of one of those top markets, where ARPA increased 25, 9% quarter over quarter.
Although currently retailers are showing softness in AD spend due to the macroeconomic backdrop, we believe that over the long term our auction bid products will drive increased monetization from retailers.
Turning to brands.
The sequential basis revenue grew 33, 2% over Q1.
Growth came primarily from the new menu merchandising product, we launched in Q4 and from owned channel advertising, reflecting continued growth of those products over time.
Brand accounts grew six 4% over Q1, as we continue to increase the brand subscriber and advertiser base on our platform.
As mentioned, we're starting to see some macroeconomic impacts in the business, which softer AD spend as budgets are under greater scrutiny, particularly in discretionary spend.
Starting to see this late in Q2, and we expect to see this downward pressure continue in both retail and brand advertising spend through the second half.
Now turning to gross margin.
We are asset light and we continue to benefit from high gross margins as our fixed cost to operate the platform are relatively minimal.
<unk> gross margin in the second quarter was 88% a decrease from 88, 5% in Q2 2021, driven by increased business platform expenses.
Moving on to operating expenses.
Total operating expenses were $19 5 million, an increase of 83, 9% over $10 6 million in Q2 2021.
We started investing in the business following a convertible note rate at the end of Q2, 'twenty, one which is reflected in the significant year over year increase.
This increase was largely due to increased head count and marketing and advertising costs.
In the second quarter, we continued to invest in and align our organizational structure across our sales and product teams.
For example, we moved to geographically based local sales model.
And the product and design teams.
Reorganize the teams to be able to deliver against our highest roadmap priorities.
These reorders are complete and we expect to scale over the long term.
Breaking these line items down further.
Sales and marketing expenses increased 86, 7% over Q2 last year.
We increased head count and invested more in advertising and marketing primarily around 420, our delivery product launch and targeted paid advertising in strategic markets.
G&A expenses increased 141, 2% over last year and included additional head count and associated compensation as well as public company costs, which includes D&O insurance.
Product and development expenses increased 26, 2% over Q2 last year.
Total operating loss for the second quarter was $8 9 million net.
Net income was $14 8 million, which benefited from a $24 4 million change in the fair value of derivative liabilities.
Total adjusted EBITDA in the second quarter, which excludes the change in fair value of derivative liabilities was negative $8 4 million compared to negative <unk> 8 million from a year ago and prior to investments.
Looking ahead, we are implementing plans to reduce operating expenses, excluding stock based compensation by close to $3 million for the second half of the year, primarily in marketing and peony and the savings from implementing a hiring freeze.
We continue to manage our expenses carefully and look at ways to proactively manage our cash flow.
Now turning to the balance sheet.
We ended the quarter with $35 4 million in cash and $31 9 million and restricted cash.
<unk> August 1st this year holders of the forward share purchase agreements exercise their option to have the company repurchase all of the remaining shares under the agreements for a total repurchase price of $31 7 million.
Now let me provide some details on a go forward basis.
For the full year 2022, we now expect revenue between $48 million and $51 million, representing 15% growth over 2021 at the midpoint and more weighted in the fourth quarter.
Our full year forecast is impacted by the following.
We restructured our sales organization and the pacing of retailer acquisition and increased monetization were impacted during that transition.
In addition, we've seen higher than normal churn levels, including out of business churn reflective of the current macroeconomic environment.
Combined with the softening in AD spend we expect in the second half of the year the impact of these headwinds in the first half is leading us to reduce growth expectation from retail by approximately $4 million for the full year.
And brands, we're taking a cautious outlook as a result of the softer demand for AD products, we've already seen in June and July .
We have also paused additional product launches.
As we're focused on driving greater value for customers from existing products.
This will have a roughly $2 million expected impact to the full year.
We have since redirected resources to strengthen <unk> integrations and invest in our platform.
At the low end of our guidance, we have built in assumptions that retailer and brand AD spend softens further than what we're seeing today.
At the high end of our guidance.
We assume churn stabilizes or returns to historical levels pacing of acquisition and upgrades improves and retailer AD spend on auction bidding inventory increases.
As a result of the lower revenue projections, we have made adjustments to our expense structure.
With a disciplined approach we now expect an adjusted EBITDA loss of approximately 26 to $28 5 million for the year.
This implies a significant reduction in previously planned second half investments.
And includes the hiring freeze that we've already implemented.
With the talent, we have onboard our focus remains on positioning for long term growth.
And in the short term driving better productivity and value for our retail and brand customers.
Building out our consumer experience to drive high value consumer traffic to lease fleet and continued improvements in our <unk> integration.
Which makes it easier for retailers and brands to do business with us.
We are navigating through an uncertain economic environment.
But the cannabis industry continues to grow and we have significant opportunity in front of us.
We have laid the foundation for growth.
Our focus now is on streamline execution.
With that I'll turn the call over to our operator and open it up for questions. Thank you.
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Our first question comes from Harrison Vivas with Cowen. Please go ahead.
Great. Thanks.
So first question kind of wanted to dig in on churn.
Kind of a multipart question so.
You called out churn.
Higher degrees of churn and underpenetrated or new markets.
My understanding is that these are historically lower ARPA markets. So.
Most affordable for retailers. So can you just talk about.
I guess, specifically what markets Youre seeing the greatest level of churn in.
And then I guess, just just given the uncertainty I think transparently theres a long way so can you kind of.
Maybe break out more new account adds you saw during the quarter. The number of accounts that were closed and are you are you.
Pulling any retailers off the platform because they're either late or not.
Thank you Bill.
Okay.
Okay.
So Harrison thanks, Thanks for the question.
So what we're seeing in churn and what we what we saw in the second quarter.
It's really we had sort of in the first half two categories of churn right. So we did talk about this a little bit in Q1, where we do have structurally challenged and low penetration.
Markets in which we have low penetration in some of these are.
Oklahoma for example is something we called out and in these markets really B b.
The marketplace dynamics have not developed sufficiently.
Really.
Allow for a competitive marketplace and so we did see that churn increase I mean, they are lower our markets.
So that impacts the number of ending retail accounts.
And obviously has a lower impact on overall revenues, but the other thing that we did see.
Is the emerging macro impacts and we really saw that in the second quarter. So we saw rising out of business churn, which really reflects the challenges that our clients are facing.
In the current environment. So so basically what we're doing is.
Good.
Looking at the second half of the year and really projecting some of those those trends to continue in terms of new account adds and specifically in the second quarter. It was also impacted by a.
A few things one one we had our sales re org in the second quarter, we talked about that and while that positions us really well at the local market level to scale. It also temporarily slowed down our execution and that had impacts on retailer acquisition pacing.
So that is something that we can point to that directly impacted the rate.
Retail acquisition in of new accounts in the second quarter.
And on that I can say that we're encouraged by the pace that we've seen so far in the third quarter July has stabilized and our guidance does project a continuation of the recent trends that we saw.
In terms of pulling retailers off the platform.
And your question about that we.
We have we have seen increased.
Churn like I mentioned, we have seen.
Some impact on higher than expected.
Movement into the.
Bad debt bucket.
However, we have not.
We've not seen that significantly.
Impacting our revenue projections I mean, what we're really looking at is on a go forward basis, where do we see the trends given the macro environment and where we think we have room to continue to add add accounts and we've seen that so far start off with a pretty on a pretty.
Positive note in Q3.
Okay. Okay. That's helpful. Just one small follow up can you talk can you talk more about the dynamics in Oklahoma.
Maybe.
Sounds like a read through.
Robert Spanish but.
Oklahoma is very dense et cetera market. So you think that the competitive dynamics are better.
To drive.
Hello, Hi, ARPA or higher utilization from dispensaries. So can you talk about why that's.
What youre seeing from that market specifically.
For lately I think it's the intersection of two things, it's a lower penetrated market in terms of our the establishment of our marketplace combined with the structural issues that we're well aware of right you've got the unlimited number of licenses compared to the number of patients and I think we're all starting to acknowledge that over saturation of <unk>.
Since it is it problematic is insufficient number of licensed stores. So what's interesting about Oklahoma for US is not one of our best safe, but by zone. It can be attractive and we're looking at strategies are taking where the marketplace has taken root within Oklahoma to drive monetization.
But from our perspective, the structural issues work themselves out over time. Unfortunately, that's more out of business until the market reaches equilibrium as well as continuing in our local market strategy with our sales teams to work with those retailers on the ground.
Okay that makes sense.
Second question on <unk>.
I guess last quarter.
Yeah.
I think as you were talking to them.
Being down year over year, obviously, there is a covered benefit to 2021.
And I think you talked.
Oh about seeing more.
Traffic to the higher value parts of.
This quarter I understand.
I'm curious if there was a focus on driving more.
Traffic to the top of funnel portion of the site, which.
I guess I'm, just trying to trying to understand.
How are you balancing investment behind driving traffic towards top of funnel versus towards the bottom of the funnel.
Alright.
What I think we've had over the last one I'll call. It six months is really a keen understanding of what works and what doesn't work.
We're really interested in developing developing that high value organic traffic and we're really pleased with how we built back over the last quarter and are continuing to see that growth into Q3.
We're not going to be spending our marketing dollars in paid acquisition every quarter, that's not our model that's not who we are so for US. It's been this investment in building a sustainable long term traffic source that we control and is really brand aligned.
All of those things remain true you've got to drive the top of funnel and you got to drive them through the funnel to high value portions of our site that really deliver the kind of audience that our retailers and brands are looking for and that's where we've been focused.
Got it that's helpful also.
Back in the queue. Thanks.
Thanks Harrison.
Thank you for your questions.
Our next question comes from Eric <unk> with Craig Hallum Capital Group. Please proceed.
Thank you for taking my questions.
So you mentioned you've rolled out bidding automated bidding in five markets you saw increased spend in most.
What is your perspective on the markets that did not increase I mean is this just a simple factor of timing they've only been out there for a couple of weeks is it sort of amid the macro.
<unk>.
Tightening.
AD spend or is this something that you see about the product.
Overall, we just love to hear your perspective. Thank you, yes that is a great question, Eric and a reminder, when we launched it we launched the total manual telephones and spreadsheets Q4, and we launched that in two markets and we've expanded with now over five and we are just coming out of our.
Second full round and actually early third rounds in some markets, but we've really leveraged the learnings out of this first year of bidding to know what are the right market conditions that drive the bidding outcomes. We're looking for.
Let me give you. An example of that what is the right concentration of stores in a zone to drive bidding what are some of the default settings in your bidding process, if you win or lose a spot and it's that kind of iteration that we're excited about that continues to inform the evolution of our bidding strategy.
Thank you very much.
Thank you for your question Eric.
Our next question comes from Jason <unk> with Oppenheimer. Please go ahead.
Hi, how are you two questions first when did you rollout the new retailer dashboard.
Can you tell us like what percent of retailers have already interacted with it I'll just ask them one at a time for questions.
I would our retailer dashboard is in constant evolution in terms of engagement metrics, we have not disclosed those but youre trying to get a deeper question deeper point, there so tease that out for me.
As I think about it.
And improved dashboard will take the learnings you've learned right and help the retailers make smarter decisions about what.
Should they be raising their bid should they not et cetera.
And because we are dealing with small businesses.
How many of them just set it and forget it and then don't look and so you may be making progress with some but I don't know like a high percentage havent interacted with the new dashboard thats kind of something coming forward to that's what I'm trying to understand absolutely and I think it's not just the dashboards, but it goes to fidelity of adoption of the products right.
Like how do you actually drive the benefit of these and that comes through in what we've done with the local market sales structure. When you can match them to a CSM and an account manager in your zone.
The power of the platform and the data combined with that human touch of reaching out to our small they are long tail.
Are you using our data properly let US show you best practices, let us teach you how you can use the data and what other tools you can use on lately to increased sales on our platform.
So then just could you clarify the comment just setting the wording may be a little confusing about churn was impacted by immature competitive marketplace dynamics are you specifically, referring to like the situation in Oklahoma that Youre talking about.
Yes in terms of marketplace dynamics and churn right you got to reach sufficient penetration and we've got some numbers in mind of where we see the best best behavior is rolling out and remember for US you guys used the retailers on the demands here start because they are reading our content then you get the retailers on when you get the retailers wanting to get their menus on the more menu the better.
Consumer experience, that's the flywheel so for us hard to do when you don't have the majority of the retailers in a particular area on platform. That's why in our local market focus and our lower <unk> markets, we're focused on penetration.
Okay.
Takes time, it's not instantaneous and until you can prove that value by making that fly will work for you. We do expect to see some churn in those zones.
So and then the comment on the subscription and the subscription box does that are you still you know selling a is that a box of items that people subscribe to and Thats in the brand bucket now.
Oh, I think you referred maybe youre, referring to our brands subscription products, we are not a subscription in a box we.
We have our retailer subscription and rehab our brand subscription product and my follow up I just want to clarify because there were some picture on the slides have a box of stuff.
And then.
Just I wanted to add some more color about the share count. So you gave us kind of like a post.
Kind of.
FPA Treasury share count of 63 point.
You gave us a share count fully diluted 63, six is that using the treasury method based on the current stock price because it seems high based on the current stock price.
Yes, that's you.
Thing.
That's just a full number.
<unk> of shares in each of these in each of these.
So what we are using.
We sort of lifted out the potential dilutive.
Securities.
That adds up.
The $6 six.
Okay. So I mean.
I mean, just you want to share it.
One on record but.
Based on our math it seems like at the current stock price the dilutive impact as I grew up more like 53 million shares that make more sense.
Yes, I can do the math and just get back to you on that.
Yes.
And then maybe just one more so just to clarify again, because it's just good to have it on record so.
Post the FPA, you have $35 million of cash.
And then have any of the non current liabilities still those still exist or some of those went away with the SBA.
The lockup.
Yes, no we had.
31, 9 million restricted cash and the SBA holders.
Redeem dollars shares so 31 seven.
Basically can return.
And we're ending up with what we ended Q2 with in terms of free cash of $35 4 million.
Got it okay. Thank you.
Thank you for your questions Jason.
There are no further questions in the queue at this time.
This will conclude today's <unk> second quarter 2022 earnings call. Thank you for your participation you may now disconnect your lines.
Yes.