Q2 2023 Wag! Group Co Earnings Call
Good day and thank you for standing by welcome to the web two <unk> 23 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the special need to press Star one on your telephone you will then hear an automated message device in your hand is raised to Australia. Your question.
Please press Star one again, please be advised today's conference being recorded I would now like to hand, the comps over to your speaker today, Dan Frankfurt. Please go ahead.
Good afternoon, everyone and thank you for joining <unk> conference call to discuss our second quarter 2023 financial results.
Our call today are Gary.
That's not what it executive officer and chairman.
Out of a storm president and COO.
Product officer and Alex.
Financial Officer.
Before we get started please note that today's comments include forward looking statements.
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.
Discussing our biggest risks and uncertainties are included in the SEC filings.
Also during our call we may present, both GAAP and non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release, which we issued today.
The earnings release is available on the Investor Relations page of our website and has included an exhibit and form 8-K furnished to the SEC last week you can find our earnings presentation posted on our IR website and with the SEC.
And with that let me turn the call over to Dan.
Good afternoon, and thank you for joining us today to discuss our financial performance for the second quarter up 2023, we.
We were excited to announce another successful quarter for the waxing, beating expectations for both revenue and adjusted EBITDA, while achieving our highest service revenue quarter to date and our first quarter of adjusted EBITDA profitability.
This quarter further demonstrates that we are transforming the pet industry, becoming an all inclusive trusted partner for the premium pet parents and capitalizing on the secular growth pattern under ship.
We remain laser focused on profitability for the remainder of 2023 and balancing growth and profit for 2024.
To begin I will provide a brief overview of our financial results for the second quarter.
Following that Adam our President and Chief product Officer will share updates on our strategic plan and key initiatives for the remainder of 2023 and beyond.
Then Alex our Chief Financial Officer, who will provide a more detailed analysis of our second quarter results discuss our capital allocation priorities and present, a revised adjusted EBITDA guidance for 2023, which we are increasing today.
During the quarter revenue grew 55% year over year to $19 8 million.
The revenue growth was primarily driven by the success of our services business.
Fueled by the slow and steady return to office and general stickiness of our community.
We also saw continued strength in our wellness business driven in part by the success of pop protect.
Only patent insurance product in the U S within Fintech.
We continue to grow our footprint all corners of the pet care market with a focus on disciplined growth in order to achieve profitability.
Our adjusted EBITDA was 0.1 million an increase from 0.9 million loss in the same period last year.
As we navigate the dynamic macroeconomic landscape our primary objective remains centered around achieving a sustainable equilibrium between growth.
<unk> and margin.
In the second quarter platform participants increased to 549000, an increase of 42% year over year, and we had premium penetration increased to 54% significantly ahead of expectation.
In the second quarter, our LTV to CAC ratio was a deliberate tend to one which demonstrates our continued operational excellence and efficiency.
Our second quarter organic user acquisition rate with more than 70% was the result of our focus on dynamic partnership.
Best in class experience and our referral program.
On the supply side of the bag business, we maintain supply and demand equilibrium.
Variable platform.
Which averaged $53.10 in the second quarter of 'twenty three.
As we've mentioned before we firmly believe that wag offers the best gig in America and despite the current macroeconomic conditions the demand for caregivers in our community remains robust.
We anticipate that an increasing number of patents easier, we'll choose to become pet caregivers with lag for the remainder of 2023 and beyond.
In summary, the team at <unk> continues to execute against our goals and deliver strong and sustainable results.
Our second quarter results demonstrate our ability to scale, our platform faster and more profitability than anticipated and show the effectiveness of our strategy and business model to become the number one platform for premium pet parents.
Simply put our team is out executing on the vision, we laid out to the investment community more than a year ago as we were preparing to become a public company.
And with that I will turn the call over to Adam Storm to review our strategy for the remainder of 2023.
Thanks, Gary I will once again walk through the five top level element of our strategy to drive long term shareholder value and profitable growth.
One accelerate growth in existing markets.
To expand premium subscription offerings.
<unk> platform expansion for opportunistic M&A and five operating scale.
One.
Accelerate growth in existing markets.
As Stuart mentioned, the second quarter was our highest services revenue quarter to date, driven by the slow and steady return to office trend and healthy consumer travel season.
The capital back to work parameter is hovering just below 50% and we expect that to tick upward slowly over the next 24 months.
To expand premium subscription offerings.
Our premium penetration rate. Despite the increased pricing of 14 99 months remained at a robust 54% ahead of the target we set out at the beginning of the year.
Moving forward, we will continue to enhance the value of the wag premium bundle by introducing more benefit forming additional partnerships and providing more exclusive offers.
Three platform expansion.
Last quarter, we introduced the addition of pop protect dot com to our suite of wellness products.
Lag as the exclusive marketing partner upon protect the only pet insurance plan with impact.
Pop protected the only brand in America to offer each consumer.
Free fee free and credit check free line of credit to cover veterinary Bill.
We have successfully integrated <unk> into the.
Insurance marketplace demonstrated by its impressive growth in the second quarter.
During the quarter pop protect policies grew to 7700 and achieved an NPS score of 95, demonstrating our pet parent overall delight with the product.
During the quarter, we also launched wag CRO to help leverage built successful pet care businesses on lag.
<unk> pro caters to the needs of passionate pet care professionals.
Recognizing the invaluable contribution to the welfare and happiness of pets across the nation.
Lagged pro members enjoying features including express Onboarding.
I already have approval in placements in the marketplace expanded reach enhanced earning opportunities and exclusive learning resources.
As the demand for reliable and trustworthy pet care continues to grow wag pro steps forward as the ultimate solution for connecting skilled caregivers with pet parents and need this.
Successful rollout of lag pro demonstrates our commitment to offering the highest quality platform for caregivers and pet parents alike. We believe <unk> has a unique and evolving offering.
Hence our platform and deliver long term value to the community.
Fourth.
Opportunistic M&A.
<unk> is strategically positioned to leverage specific M&A opportunities due to our ability to swiftly integrate new assets into our platform supported by our deep understanding of the consumer and our technology first DNA.
At the beginning of the quarter, we acquired Mexico.
Pure digital platform for modern Essentials Max.
Backbone extends wag to reach into the premium pet supplies market and deepened our commitment to the needs of the premium pet parents.
We will continue to Opportunistically evaluate deals as we look to expand our set of capabilities in 2023 and 2024.
And while we're here you should check out the new yellow collection on macro and dot com.
Operating scale.
This quarter, we saw operating margin improvement across all areas due to the positive impact of our unit economics fixed cost operating leverage adjusted EBITDA margin improved substantially year over year from minus 7% to just under positive, 1% and eight percentage point improvement.
As we mentioned last quarter 2023 continues to be a year of efficiency and focus on our full year adjusted EBITDA profitability.
This is achieved through efficient marketing payback cycle.
<unk> operational excellence.
That form integrations and cross sell and best in class customer experience.
As seen in our updated guidance, we will be adjusted EBITDA profitable for full year 2023, and plan to be free cash flow positive by the middle of 2024.
I will now turn the call over to Alex to discuss our second quarter financials in more detail.
Thanks, Adam.
I am proud to say through the hard work and dedication of our excellent team.
Growth of our footprint in all corners of the pet care market.
And our disciplined execution.
We've taken the next step forward as a business or a progression to profitability posting a first quarter of adjusted EBIT profit this quarter.
I'll begin with a review of our second quarter financial results, followed by our guidance, which we are racing again today.
Second quarter exceeded our expectations across the board with revenue of $19 8 million up 55% from last year.
Driven by strength across all three revenue categories.
Adjusted EBITDA profit of <unk> 1 million compared to an adjusted EBITDA loss of 900000, a year ago, a $1 million in pregnancy.
Sure.
Breaking down the three revenue categories.
Service revenue was $6 2 million.
Growing 9% from Q2 last year, making this our largest service revenue quarter to date.
This is in the face of a continued slow and steady return to office trend and illustrate the general stickiness of our offerings.
Together with the success of complementary offerings to core services, such as Wacko and life premiums.
<unk> also included normal amounts of E Commerce revenue for Mexico, which we closed at the start of the quarter and credit package revenue.
Wireless revenue was 12 million, increasing 69% from Q2 last year.
Through providing best in class pet insurance of walnuts climate comparison from the nation's top providers.
Our products ability to provide pet parents and numerous realtime quote puts us at the forefront of disrupting a fragmented pet insurance a wireless industry.
Pet food and creates revenue, which is a new revenue category. This year. The adult FID advisor was $1 6 million.
<unk> is one of the most trusted pet food review sites Inexistent, providing parents with unrivaled insights and analysis of pet food for their furry family members.
In Q2 due to popular demand.
We took the knowledge and success with outside advisers at launch Cafe devices.
The premier destination for pet parents and their furry family members.
With over 100 professionally reviewed products, including dry Catherine raw food kitchen food and.
In real time recall that across the U S and Canada.
Turning to expenses.
Cost of revenue, excluding depreciation and amortization was flat year over year at $1 2 million and represents 6% of revenue down from 9% a year ago.
This is the output of a very thoughtful operational excellence and the scalability of our tech stack together with the implementation of AI to streamline our revenue generating operations.
Platform operations, and support expenses, $3 5 million or 18% of revenue down from 24% a year ago.
While non revenue generating platform operations and support functions remain a key backbone to the business operations have become highly efficient over the past year through redesign and use of AI tools to get onto faster.
Now the average pet parent receives more than 80% of their responses faster.
AI with record season.
Right.
Sales and marketing expense of $10 8 million or 54% of revenue up from 48% a year ago, but in line with prior quarter trends.
We continue to see excellent opportunities to put dollars to work in sales and marketing as evidenced by a 10% to one LTV to CAC, but maintaining a deliberate and thoughtful approach in order to drive profitability earlier than anticipated.
G&A expense of $4 9 million or 25% of revenue up from 19% a year ago.
Comparing periods Q2, 23 includes a onetime legal settlement costs of 500000 and over $1 million of public company compliance costs that were not present in the prior year.
Adjusting for these G&A in Q2, 'twenty three represents 16% of revenue.
Okay.
Looking to our balance sheet, we ended the second quarter with approximately $32 million in cash cash equivalents and accounts receivable.
Okay.
Our balance sheet remains strong and sufficient to help us to continue to execute on our plan, which includes growing our existing business in a profitable manner.
Expanding our footprint in all corners of the pet chem market through value add acquisition.
And bringing to market innovative new offerings.
Moving to our guidance of 23.
As Garrett mentioned, we are thrilled with another quarter of outsized growth.
It turns out we have reevaluated, our 'twenty three full year forecast.
For the full year 2003, we continue to reiterate total revenue in the range of $80 million to $84 million.
As previously disclosed in March 'twenty three.
And an increase to our adjusted EBITDA guidance to a range of zero to $2 million.
$1 million improvement versus our prior forecast at the high end of the range.
For the third quarter, we expect total revenue in the range of $19 million to $20 million.
At the midpoint would be a 27% increase in revenue over Q3 2002.
And zero to $1 million and adjusted EBITDA or a 208% improvement over Q3 2000 to adjusted EBITDA at the midpoint.
We continue to be thoughtful and consider of the macroeconomic environment and potential slowdown in consumer spending.
Yes.
We believe we have turned the corner in Q2, 2003 and will be adjusted EBIT positive in subsequent quarters and on an annual basis.
Further as Adam mentioned, we plan to be free cash flow positive by the middle of 2004, driven by our focus on robust unit economics and operational efficiency in 'twenty three and beyond.
Our financial guidance includes the following consideration.
The forecast incorporates our internal target of the rule of 50.
Meaning a total of greater than 50% for revenue growth plus adjusted EBIT margin for the full year.
Severe weather affects service demand and holiday to drive incremental overnight versus daytime service demand.
Going forward, we expect this SKU to overnight in daytime services, depending on summer and holiday.
Pet adoption during the holidays also FX pet insurance penetration and demand for wellness plans.
Okay.
We anticipate the continued growth in the industry driven by factors such as rising pet ownership pet insurance penetration.
And increasing demand for premium products and services will have a positive impact on our financial performance in 'twenty, three including on our entry into the pet food and treats.
General trends related to the state of the economy interest rates and consumer confidence, we have factored in potential risks and opportunities related to these macroeconomic factors in order to accurately forecast our financial performance.
Okay.
We recognize that there may be potential risk to our financial performance in 2003, such as disruption to global supply chain.
Changes in consumer behavior due to unexpected events, such as delayed or imbalanced returned to office.
Difficult in performance marketing trend.
Potential impact of AI, and our ability to expand through partnerships.
In summary.
Our strong quarter results illustrate how we have become an all inclusive trusted partner for the premium pet parent and a key player in the pet community with a highly efficient and profitable business.
Our intense focus on profitability and operational efficiencies in 'twenty, three position us well for profitable growth for the rest of the year and in 2004 and beyond.
And with that we now welcome Q&A.
Operator can you kind of open it up for Q&A.
Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one and again, we will pause for a moment, while we compile our Q&A roster.
Our first question comes from Jason <unk> with Oppenheimer. Your line is open.
Thanks, two questions. One so tend to one LTV CAC is kind of insane, it's suggesting that youre, leaving growth on the table.
To kind of.
Project capital given that you are.
Crossing over that EBITDA threshold.
How are you thinking about leaning more into marketing at some point.
In the future and then secondly are you seeing any.
How does the inflation headwinds on.
The patents you're inside impact to you is it a positive because as premiums go up you get kind of a cut of that on the lead just broad thoughts on how kind of some of the dynamics around pet insurance.
Impact to you guys. Thanks.
Hey, Jason This is Gary Thanks for the question. So first one we greet tend to one LTV to CAC.
Pretty amazing.
You mentioned deliberate it's not a cash issue. It's more we just believe as we get more profitable will deploy more capital in the growth maybe that's functionally going into 2024 story.
We grew 55% year over year, so just savings in gas so to speak.
Secondly, in terms of headwinds or a tailwind in terms of pet insurance and wellness plans, we have not seen a direct impact of inflation, although I would say to consumers in the marketplace. The first is the pet insurance companies themselves, we partner with to advertise their products and the second one is actual consumers purchase.
The insurance I think if anything we've seen more of.
Sensitivity from the actual pet insurance companies rather than the consumer is a function of kind of the market dynamics.
Thank you.
One moment for our next question.
Our next question comes from Tom White with D. A Davidson your line is open.
Hey, this is why it's once in on for Tom Thanks for taking our questions.
So I've got a question on your wellness segment can you talk a bit about how you're managing any risks in that business as it relates to revenue concentration and what can you guys do to maybe diversify revenue streams in that segment over time.
And why it right.
Yes.
Alright, thats good to hear from you and thanks for the question so well.
Well, let's just as a reminder, scaled much.
Much more quickly than we originally anticipated and that business went from a few tens.
Tens of millions in revenue run rate very very quickly just kind of saw the fast moving water and lead didn't quickly.
A lot of customers in that business. So like I said earlier, we have two customers on the.
On the face of it one is the actual consumers purchasing pet insurance for the first time or re upping or changing plans. The second one is the actual pet insurance companies, we work with something like 12 or more kind of major pet insurance companies in the U S and we just announced earlier today, we are actually expanding into Canada with that product base.
So pretty well diversified in terms of the actual insurance companies.
But really our goal is just to make sure customers have the best choice for the pet insurance products and that's really what's functionally going to drive the demand curve. So certainly we're being thoughtful about the.
The demand itself. So we're scottrade to you, but the customers ultimately have the choice and they're just kind of picking the products that they want.
Secondly, I would just add there is we are the exclusive marketing partner of pop protect which we think is phenomenal pet insurance product and hopefully more and more consumers will find delights them. So a lot of choice for the consumer knows where they're going to fund the right thing for them.
The answer to your question.
Yes, that's really helpful. Thank you and then just a follow up could you update us on your latest thinking as it relates to that.
The customer value proposition with wide premium.
<unk> returned to office continues to pick up how are you thinking about the current unit economics with that offering versus trying to maximize customer adoption of it.
Yes.
I think we've said this before the goal with wag premium is to keep customers engaged in the platform not so much a revenue driving initiatives. We've found that certainly was mispriced at the beginning of this year, which might raise prices to 14 99 penetration actually got too high our thesis.
And kind of.
Our belief in the product has not changed we continue to believe as you reason for consumers to stay on the platform S. Participants of the wag ecosystem and we are so convinced of that extra rolling out Similarly priced pro tooling. So we mentioned earlier the caregiver pro subscription membership is something we are in the middle of testing and rolling out. So again, we just we need more reason.
And there is more reasons to be <unk>.
Robert customer gulag ecosystem than anything else.
Got it thank you very much.
One moment for our next question.
Our next question comes from Matt Koranda with Roth.
Your line is open.
Hey, guys good afternoon.
Just wondering on the international expansion for Pet insurance.
You build much into the revenue guide I noticed that didn't necessarily go up to the full year, but do we build much.
In terms of revenue contribution from that expansion and then maybe just talk about sort of the size of the addressable market that youre entering internationally.
Hey, Matt good to hear from you Garrett again.
We think international's mostly upside.
In terms of adding something like 5 million pets growing kind of at 7% to 10% ish.
Outpacing general pet trends, we think there's a lot of room to run there still early for US. We're just kind of get our footing, but we certainly think international interesting and I generally think the things you'll see us launching now so we just announced capsules advisory just announced wellness, Canada are all kind of 2024 big bets I think that we think are in a test now I'll lead into now and that would be really driving forward in <unk>.
24.
Business is growing at 65% year on year right now again, I think we are saving some some some.
Gas in the tank so to speak.
Okay got it and then maybe for Alex just on adjusted.
Adjusted EBITDA guidance up a touch and Thats very minor, but just are we just pulling through the second quarter outperformance is there something incremental.
We should be assuming in terms of cost savings or margin expansion that we should be factoring in for the third and the fourth quarter.
No I don't think so I think Q2 is a representation of where we are today.
The output of a number of things that I mentioned on the efficiencies that we've been able to achieve.
Q2 to date and I think we will see these efficiencies with AI and automation.
<unk> University.
Yes.
Okay got it.
Maybe just one more on the platform participant number healthy growth year over year, but I did notice sequentially its down a bit.
Any callouts just in terms of what's driving that number.
In the second quarter.
And then any I guess I didn't notice also that marketing sales and marketing was down a bit sequentially do we pulled back.
During the quarter for any notable reason, maybe just speak to that in the platform participant number. Thanks.
Yes so.
We were initially planned for Q1 and Q4 to kind of be the higher watermarks, just as a function of wellness seasonality, Matt as a reminder, last quarter, we did something like 26% revenue. This quarter was 19 point, so youll see it just kind of sensitivity there with thoughtful participants functionally match that.
Your second question was sales and marketing was down yes, I think we're just being really thoughtful about where we are deploying dollars right. Now is just a function of where we want to make incremental backups.
And again that was deliberate at an LTV to CAC.
I really wanted to get to profitability adjusted EBITDA profitability, it's not where there I think there's room to to keep plugging along but for US. The major watermark was can we get to adjusted EBITDA profitability. A year ahead of time and we did so I think you'll see us kind of get back to where we want to go.
Alright, nice job on the quarter and I'll take the Rosemont offline. Thanks, guys.
Thanks, Matt.
Next question.
Our next question comes from Jay Cohen with Craig Hallum. Your line is open.
Yes.
Thanks, guys. This is Jack on for Jeremy.
First one for me so could you just touch on what Youre seeing in terms of return to office I know castle back to work barometers been around like 45% to 50% do you guys still think that can get to like 70% long term or what do you. What do you guys think the long term.
The potential is there and how are you thinking of that as the driver of revenue.
Yes. Thanks for the question over the long term, yes, we certainly think it can get back to 70% I think we see headlines all the time about this business getting back to office that business getting back office, but that's all anecdotal right the capital back to work parameters kind of.
The thing that we are focusing most on and measuring against.
So.
We're going to keep we're going to kind of invest in wherever the fastest moving water as you.
<unk> seen wellness kind of be that over the last.
12, 18, 24 months, so as in 2024, which is really kind of a resumption of the growth story.
Youll see us investing behind whatever has the highest returns so if the capital back to work barometer is still at the 50% level I think that will.
Scale, our investments appropriately across the different business lines, if we see more momentum in kind of the return to office in January .
Timeline and the business is Iran, and certainly we're going to.
Put firepower behind the services segment.
Got it great.
It's really helpful. And then maybe switching gears in terms of the premium price point.
Are you seeing any any pushback from customers on the <unk> hundred 99 I noticed.
Premium penetration went down from 55% to 54.
Just kind of maybe a little bit more color on that and do you think.
You'll stay around that 14 99.
For a little bit here.
Presumably it will continue to rise long term, but just any color on the premium pricing that would be great.
So I would say the 54% was still above kind of our internal targeting I think were happy anywhere in the kind of.
40% to 50% range is kind of our kind of guideposts. So 54% is well ahead of internal expectations in terms of pricing no like no no real pressure.
The kind of mix of services in the summer can be more travel based as opposed to in office space, that's going to be more of a sitting in boarding as opposed to walking through kind of some dynamics there, but all around I think we're really happy with the price and customers seem really happy with the value they're getting.
Got it that's helpful color that's all for me thanks, guys.
One moment for our next question.
Our next question comes from Greg <unk> with Chardan. Your line is open.
Hey, Thanks, a lot for taking my question.
Just one real quick just as you called out seasonality in your financial outlook can you just give us any color on any meaningful differences I know, we can back into the revenues, but just in terms of expenses on overnight versus daytime services and then secondarily on that point is there any opportunity you think to grow overnight.
What sort of a growing premium penetration.
Thanks.
Yeah. So.
As it pertains to seasonality.
Sitting in boarding business with respectively, a travel business theres going to be Q4 heavy as you might expect.
Yes, so so if the walking business is a derivative of office occupancy and the sitting in boarding that are a derivative of travel certainly we're going to be investing.
Behind the kind of travel adjacent businesses right. So we think there's a lot. We can do in terms of ecosystem and caregiver tools to help them promote themselves and build their business. So yes, we think that.
It's a big market and there's lots of opportunity to.
Growth.
Time services.
And so we're really I think.
If anything kind of less than 5% penetrated in the travel category and there's a long way to run their so very excited about the opportunity and you'll see kind of consistent changes in the product experience, which we think will make us more competitive for the customer.
That's very helpful. Thanks, a lot.
This.
Today's Q&A session I'd now like to turn the call back over to Gary small woods for any closing remarks.
Thanks, everyone for another quarters.
Almost our one year anniversary so it's been fun and they will look for the next one thanks so much.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Yeah.
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Yes.
Okay.
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Yeah.