Q3 2023 Leafly Holdings Inc Earnings Call
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Good afternoon. Thank you for attending <unk> third quarter 2023 earnings call. My name is Victoria and I'll be your moderator today, all lines will be needed during the presentation portion of the call with an opportunity for questions and answers at the end I would now like.
The conference I'm scared host Josh the Burgh. Thank you you May proceed Josh.
Good afternoon, and welcome to <unk> Q3, 2023 earnings call joining me on the call today are CEO, Yoko Yorkshire, and CFO Suresh Krishna for me.
Today's prepared remarks had been recorded after which Yoko answer as well who's the live Q&A a copy of our press release, along with the accompanying earnings presentation can be found on our website at investor <unk> Dot com.
Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095 forward. Looking statements include statements regarding the services offered by weekly the markets in which we operate business strategies performance metrics industry environment potential.
Growth opportunities and we projected future results and financial outlook and can be identified by words, such as expect anticipate intend plan believe seek or well.
These statements reflect our views as of today only 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 expectation and we caution you not to place undue reliance on such statements for a discussion of the material risks and other important factors that could affect our actual results. Please refer to the risks discussed in.
Today's press release, our annual report on Form 10-K filed with the SEC on March 29, 2023, 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 Yoko.
Yes, good afternoon.
Our third quarter results reflect our progress towards building a sustainable business in this evolving industry.
With this strategic focus on profitability, we are driving revenue from a healthier more resilient base of customers, which we believe will provide us with a stronger financial foundation and the long term.
We're also carefully managing our expenses.
Adjusted EBITDA for Q3 was negative $200000 ahead of our guidance.
We had minimal cash burn and essentially ended the quarter flat with around $14 5 million.
This operational rigor has enabled us to remain focused on our key objectives.
Strengthen our relationships with high value clients reduce retailer friction and continue to improve the consumer experience solidifying weekly as a leading destination for cannabis discovery and ecommerce.
Despite our progress in these areas, which I'll talk about in a minute.
Other headwinds continue to pressure the industry.
Cannabis markets are experiencing pinpoints of various types first retailers must solve for overall inflation and increased costs to operate a local business in today's environment as well as price compression in flower in many markets.
These external factors are compounded by lack of access to traditional banking and much needed liquidity.
In addition, regulatory Lockdowns in many markets are driving constraints in their businesses.
All of these factors negatively affect their ability to spend on the <unk> platform.
And are also driving a continuation and out of business across our customer base.
We also see market consolidation with operators and retailers unable to continue operating stand alone and these constrained environment.
These outside factors masked the growth taking place across the broad candidates industry well.
Well it gives us confidence in the long term opportunity is that consumer demand for Canada is unwavering and continues to grow.
Estimates by Forbes show that legal cannabis sales in the U S are on track to reach $33 billion. This year and are expected to grow to $50 billion by 2028.
This is why we remain intently focused on strengthening the <unk> brand and nurturing our customer base as budget constrained retailers continue to struggle.
Our team has spent the past many weeks reviewing accounts and their ability to pay and that work continues.
We've made efforts to work collaboratively with our retailers, but in cases, where they are unable to make payments or solidify a payment plan. We have had to make the difficult decision to remove them from our platform.
The most significant regional impacts from these efforts have been in California, and Oklahoma and to a lesser degree in Oregon.
While some of this work has immediate consequences for metrics such as ending retail accounts and revenue. We believe this is an important and necessary work considering the current environment to ensure that we build our platform and reinforce our financial footing with healthy operators.
As a result, we ended Q3 with ending retail accounts of $44 66, which is a decline from Q2.
The majority of the accounts that are no longer on the platform came from our long tail lower paying retailers ARPA rose 15, 5% quarter over quarter.
We expect the rate of decline in ending retail accounts to moderate but continue in the near term.
We're spending our time and attention focused on attracting and retaining stronger companies and are incentivizing retailers to shift subscriptions from evergreen to annual contracts.
In addition, we've realigned our support costs for.
For the tier of our lower spend clients, we have implemented a more cost optimized one to many service approach.
This gives us the ability to take a more consultative approach with top performing clients as we look to increase our share of wallet.
We also continue to find ways to bolster the value of the lease fleet platform. This includes better monetization of our brand advertising products that we now deliver value.
By Cross training our sales force, we're now selling these AD products to a broader base of retailers as well as traditional brand customers.
And we continue to make improvements to our suite of tools, making several significant enhancements to our product to reduce retailer friction and drive orders.
Single, most important metric for retailers.
In September we launched a new open API for order integration, allowing any Canada point of sale system to seamlessly work with weekly.
This allows us to drive rapid scaling them order integration availability without reliance on additional lease fleet resources.
This breaks down barriers to integration improves accessibility for both our customers and business partners and bolsters operational performance and efficiency for retailers.
There are currently 50, Pos systems that are using our or API, which means more than 2800 retailers can seamlessly activate border integration functionality.
Deals continue to be a key component of the shopping experience in Q3, we launched cart based deals, allowing retailers and brands to apply discounts to an entire order and surface that deal more easily to shoppers.
We also made improvements to our AD functionality, introducing a tool that increases customization of ads across the suite.
On the consumer experience side, we saw an increase in both the number of shoppers on the platform and in the number of orders placed year over year.
As a result of a more intentional focus on mid to lower funnel efficiency and greater shopper conversion.
We also enhanced our consumer lifecycle management, which automates reorder notification via E mail and in App push making it easier for consumers to order again based on their past purchase history.
We've made the shopping by affect experience better and it is now easier for consumers to shop. The strains. Most recently added to our comprehensive strains database.
And of course, many of the improvements we have made to reduce retailer friction translate to improvements to the consumer experience as well.
The market continues to show signs of evolving.
We're celebrating Ohio on Tuesday to legalize adult use the 24th state to do so.
Lynn legalized adult use and have their first day of Rec sales on July one.
We've seen great growth quarter over quarter in the market with a 33% increase in order volume and a 21% increase in revenue as we partner with retailers to make the transition from medical to rack.
New York's long awaited adult use regulations went into effect in September, but the regulations greatly limited retailers ability to market and promote their products and reduced consumers' ability to research and shop online wechat.
We challenge these limitations and under a temporary stay agreed to by the New York Attorney General's Office lease please able to offer paid advertising services display retailer product pricing and transmit orders to licensed legal retailers in New York.
This win reinforces our commitment to give consumers information and resources to be informed shoppers and provide retailers access to critical channels to reach consumers.
It also helps established weekly as a leader in the New York market.
And finally in Q3, we had two very significant moments in the long journey of cannabis legalization at the federal level.
Should relieve some of the operational challenges retailers in the U S have been facing.
I guess the U S Department of health and Human services, formerly recommended the rescheduling of candidates to schedule III under the controlled substances Act.
And then the Senate banking committee passed the safer banking bill team to build up for a full Senate vote.
The challenges and opportunities that this evolving industry presents continue to keep us nimble and resilient and we remain focused on the growth and opportunity that lies ahead and rightsize the business and are operating with rigor and focus as that opportunity develops.
We continue to bring value to retailers brands and consumers, providing the technology they need to drive sales and e-commerce shopping experiences.
Ensuring that we remain an important and unique player in the local cannabis markets across North America, now I'll turn it over to Suresh.
Thank you Yoko and welcome everyone.
Reiterate what Yoko discussed the cannabis industry continues to be rife with challenges, we continue to see retailers struggle with their own margins and this has led to pressure on our business earlier. This year, we shifted our priorities to invest in the areas of our business, where we could realize the greatest return.
This meant partnering more closely with our largest customers and improving our platform usability for consumers. We believe this is the right decision in this current market environment and we will continue to focus on these priorities, while being mindful of costs across the business.
Now to our results.
In the third quarter, our revenue was $10 6 million down 10, 2% year over year.
Retail revenue was $9 3 million and brand revenue was $1 3 million <unk>.
Revenue for the quarter was lighter than expected due to the decline in retail ending accounts. These accounts declines were primarily related to customer budget constraints and lease lead removal of non paying customers in.
In addition, we experienced further softening in brand revenue.
We have been diligently working on building a healthier customer base that includes improving our credit and collections processes over the last two quarters.
We're supporting customers and helping them understand and optimize the value of our products to health care businesses succeed.
In some cases, we're assisting them in right sizing services to match their tighter budgets.
And in retail accounts in Q3 were $44 66 compared to $56 37 at the end of Q3 dollars 22.
Most of the accounts coming off the platform or the longer tail of smaller retailers with lower ARPA.
As a result of these smaller accounts coming off our site coupled with the price increases in August our retail ARPA in Q3 was up 16% year over year to $644.
Touching briefly on brand, we have not seen a pickup in the brands business, but revenue in this area seems to be leveling out.
Near term, we remain conservative on our estimates for this part of the business will monitor brand spend performance in the upcoming holiday period is a possible indicator for the health of 2020 for brand spend.
Continuing down the financial statement, our total gross margin in the third quarter improved to 89% compared to 87, 1% a year earlier, primarily due to headcount reductions implemented in March.
For operating expenses Q3 totaled $10 9 million down 33% year over year.
We started 2023 with an increased focus on cost savings.
Through both head count reduction and cost cutting efforts. This year, we've achieved meaningful results as seen in our operating expenses.
Adjusted EBITDA for Q3 was negative <unk> 2 million above the guidance, we provided of negative <unk> 5 million.
Turning to the balance sheet, we ended the quarter with 14 5 million in cash excluding restricted cash the same level as last quarter.
And we're targeting to end the year around similar levels and cash.
Now to our guidance.
For Q4, 'twenty three we expect revenue of around $9 5 million and an adjusted EBITDA of approximately negative $1 3 million.
The fourth quarter revenue estimate primarily reflects a full quarter's impact of the lower ending retail account base.
We expect the decline in ending retail accounts to continue in the near term, but at a more moderate rate.
In light of the difficult environment for candidates and its impact on our top line, we're managing expenses very carefully and investing in relationships with our largest customers. We're focusing on what we can control and remain committed to staying on the path to profitability.
We will now open up the call for questions operator.
Yes.
Okay.
We will now begin the question and answer session, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove.
That question. Please press star followed by two.
Again to ask a question press Star one as a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking a question we'll pause.
Pause here briefly ask questions are registered.
Our first question comes from the line of Vivien <unk> with TD talent.
Your line is now open.
Hi, This is James Cassidy Alterative in I guess my first question just any incremental color you can offer on how the price increase conversations went with retailers. Obviously the top line was a bit below God and there was a pretty outsized loss of an account. So any extra color you can provide there and maybe how things trended versus your.
Vacations.
Yeah.
Yeah.
Hi, Seamus CFO here. Thanks for the question let.
Let me just take a step back and set the context of what we set out to do with the price increases they were highly targeted looking at specific markets.
<unk> within those markets as well as specific retailers and we really painted the bull's eye for these on where we knew the market can support them.
And factored into our forecast that we anticipated some churn as a result of that and we all of that taken into consideration have come out ahead. So we're actually quite pleased with how the market has received our price increases now what you will see is that we did report.
Sure.
A higher churn across our lower tier spend that lower value retailers and thats consistent whether the reason was for budget reasons and they've been the most susceptible.
In terms of market conditions, and our ability to price.
Price increases so we did see a higher rate of churn across that tier than others as it relates to the price increases, but overall I'm actually really quite proud of the work that's been done the targeted approach and how that's going on across our client base.
That's helpful. Thank you.
One more from me I guess, maybe building on retail relationships is there any early commentary you can offer on how new offerings like the API for order integration and scheduled delivery our trend in.
Should we expect this to help drive incremental spend with existing accounts in the near term or is this sort of.
Just another offering that can help get new retailers onto the platform.
One other things we set out to do early this year was reduced friction for retailers why because that operational efficiency for retailers is cost savings. That's part of the value we drive for them and in terms of the order integrations continuing to just make that order to pick up flow that order to delivery.
<unk> flow seamless we know that's important for retailers. It makes adoption of our platform easier and anything we can do to reduce time to ordering and friction in the pickup process is valuable. So we look at that is building the foundation for further monetization because when we can drive more orders more seamlessly.
That drives value, that's our basis for for monetizing across.
Across our retail base.
Great. Thanks, I'll hop back in the queue.
Thanks Shannon.
Thank you for your question. The next question comes from the line of Jason Jason <unk> with Oppenheimer. Your.
Your line is now open.
Hey, everybody.
Well two questions one.
Are there any more expenses to cut or basically where it kind of bare bones and effectively just need to kind of grow into positive cash flow question, one and then number two.
I would imagine you've been having conversations about with larger companies that you might want to merge with sell through et cetera.
Yeah.
What are the are there things that those companies want you to do that you can't do yet.
That would be at like an impediment to.
You know kind of doing something so maybe talk about that thank you.
Hey, Jason I'll take the first question.
We made significant reductions in operating expenses this year.
Looking at it Q3 was 33% lower year over year.
Excluding stock based comp that's 36% lower.
And we're managing the business to maintain a similar year over year savings for Q4 and going forward as well. So we've seen significant improvement in both operating and adjusted EBITDA margins, especially relative to the last two years. So we're going to continue to manage the business to the bottom line.
Very focused on our cash balance.
We said, we're looking to end the year at similar levels in cash.
We're always looking for opportunities to work more efficiently and optimize both head count and spend.
In line with priorities.
So we're going to continue to manage the business in line with our revenues and.
I can say.
And just staying on the path to profitability.
As it relates to the second question.
As it relates to how we work with non index I think our focus remains on execution and driving the business.
Now that we play out.
<unk> role in this space.
<unk> consumers retailers and brands with differentiated IP and data.
Don.
For us, it's bringing that to bear driving value monetization through our platform.
And in difficult times like we've seen in that.
In this space and vertical overall, but we believe that the long term strategy for lease fleet is really to remain focused on execution.
Jason.
Yeah, I don't have any more questions.
Okay I just wanted to double check. Thank you so much for your question.
Our next question comes from the line of Casey Ryan with West Park capital.
Your line is now open.
Thank you and good afternoon everybody.
Two questions I think we'll start off with.
What does non paying.
I'm just trying to get a sense of how long the cycle is for someone to sort of.
Ultimately face the brick wall of not being able to access the platform as a sort of 30 days or 60 days or 90 days there.
How do you structure that flows from it.
Policy standpoint.
Yeah.
Sure Hey, Casey.
So what we've been doing over the last couple of quarters is being very proactive in managing our accounts, especially relationships with customers as we go through this difficult environment.
And so we've been focusing on some payments the ability to pay and all of this is really to support a healthier base.
Base of accounts. So what this does mean is we have stopped services from our accounts.
And that was one of the contributors to our Q3 reduction.
And accounts and what we're seeing in terms of non payment is some of our lowest our accounts, especially across the structurally challenged markets, California, Oregon, Oklahoma.
We signed up.
A good number of them last.
Last year.
And coming into this year.
Starting to see as the environment changed.
In the last quarter.
A lot of them were having increased challenges in terms of pain. So when we look at our processes, we've tightened that up significantly.
In terms of numbers from from 90 days going down too.
60 days.
It's very much a function of this environment and the fact that we are.
Working very closely with these accounts to.
And really help them understand the value of our platform optimize their services.
And really work with them to be more successful user.
Using our platform within within their budgets.
Okay. Good. Thank you that's actually helpful.
Sort of a grasp on time.
Sort of a broader question what do you think these accounts do when they are cut off from.
A lot for them like leaflet here are some of the competitive plan.
Platform.
What do you think their economic action.
I mean does that essentially put them out of business do you think or do you think.
They sort of continue to stabilize the market with even lower pricing.
Even though the ability to market that lower pricing could be greatly diminished.
Hum.
Let me take a stab at that one in terms of what they do like what we also what we've often seen in the history of churn is that they'll go up and they'll come back when they have the ability to pay.
For us, it's about closing that cycle from churn to reactivation.
Something that we don't break down, but it's just the pattern, we've seen especially in that long tail. So for us we view that as an opportunity to accelerate that time to reactivation and looking at what our lower price point offerings.
Can we bring them on at a price that makes sense for them through difficult market conditions. So.
We're excited about being able to launch some of those win back offers and bring customers back onto the platform at a price point that makes sense and that's cost efficient for us that's really the sort of lessen that we're pulling through over a tough market conditions over the last 18 months.
Okay.
Yes.
Actually sort of interesting to think about okay. Thank you.
And then what can you say about I guess activity or sort of maybe account adds I guess I would say.
And sort of newer states, where we've seen good medical direct transition I'm just curious at what we can say like hey, there's some good news like or maybe there isn't great news in terms of marijuana in Missouri and states like that like do you feel like as you look across the country of your markets.
I'd like to open it.
Net positive account growth in some states although of course, the aggregate negative which is understandable given the way you framed it.
Yes, I'd love to absolutely.
Yeah.
Absolutely.
Can be net account or that can be net spend growth right and that is so market by market I think that's sort of the complexity fascinating aspect of this industry overall, but we have shared some of the numbers for example, with Maryland and I'm. So proud of the efforts in our activation in Maryland, where we started.
Early before Forex day one.
Demand side levers going in terms of really cultivating that consumer audience doing a lot more coverage being on the ground there.
Then starting to work with retailers as we were nearing that July 1st state.
There is sort of a natural cycle to this and how the market develops at appropriate times for them to be pulling advertising leverage, but what we've been able to see is both new account activation in that market, but also really.
<unk> spend across retailer leveraging this consultative approach that we've brought that we've really focused on over the last year.
Yeah.
Yes.
Okay. Good that's really that's really helpful. Probably the last question maybe for US just the bad debt expense ticked up it's understandable that you guys are in the process.
Where do you think it goes from from sort of the current levels sort of.
Sort of flattish or do you think it goes up.
For you to focus on it.
Any sort of long tail accounts further as we go into Q4 Q1 of next year.
Okay.
Casey just to confirm it.
Was that question on accounts or <unk>.
Are you talking about.
Bad debt expense.
Oh on the bad debt expense, yeah, absolutely. So I was just.
Okay.
We will talk to you here.
We have seen that pick up over the last couple of quarters.
No question I think in line with that we have been very proactive in managing this right and some of the success that we have seen lately is growing.
Filter through as you know with a lag.
So we're not.
Bookings for that are at this time too.
The increase from these levels going into next year.
We are looking to build a healthier revenue base as we go into 2024 right. So what we're trying to do all of this is to is to build build revenue from clients, who are able to pay who do pay and that insurance durability revenue overtime.
So we.
We think our products are quite a bit of value to customers. So when when they do move off the platform, we see they're putting themselves at a disadvantage.
But we do know customers are going through a tough environment and people are making difficult decisions. So what we're doing is working with them.
To.
Optimize their spend within their budgets and at the same time, what we're seeing is.
Over time.
As Yoko said the ones that.
Do.
Has the ability to come back to the platform we've seen.
Pretty good reactivation rates from from a confidence.
Platform. So all of this to say that the tighter manner.
Management.
<unk> sees that we have put in place for bad debt are working and we should start seeing that level off.
Ticked down as we go into next year.
Thank you for your question.
The next question comes from the line of Dan <unk> with benchmark company.
Dan Your line is now open.
Thanks, Good afternoon.
Just following up on that ratio that you have been spending most of the call on this but I guess hypothetically speaking I mean, we've seen this really with zillow sort of focusing on kind of the top 20% of the market.
Filtering down and then obviously changing their pricing models over time and not exactly a clean comparison here, but as.
As you think about the market I kind of just wanted to get your sense in terms of.
How much leverage do you still have with the top of the market and if you were to focus even more of your time and effort on expanding ARPA with the top tier retailers and drive more.
More conversion to them.
That might look like either from a growth or profitability perspective, and just the delta right now that youre seeing from.
Maybe that next year trading down where you want to keep them on platform.
You know for whatever reasons macro or are there just not good at running a business.
How much trade down mercy, how much your NIM pressure, we're seeing at this point in time that might rebound, yes, either market or legal conditions were to change.
Hey, Dan.
Let me see if I can answer this from the perspective of we tend to talk about things in extreme right at the very top of the market.
Larger msos very bottom your long tail smaller retailers.
You know there are internal way of actually measuring and managing is actually includes some of what we'll call sort of this mid tier their multistate.
Multi store operators and what we're seeing is a lot of opportunistic behavior in that segment that we get really excited about.
If we break down some of the spend we see a lot of activation, where those players see the opportunity through a platform like Li leaf Li she get the word out to get the brand recognition to get the footfall into stores. So.
So that's sort of what I'll call mid tier operator, that's really smartening up around optimization and efficiencies.
Still you would probably have gotten the most juice out of that space over the course of this year on the top and think about those msos.
Our most sophisticated class highly focused on ROI and they've had very targeted strategies themselves in terms of markets, they've abandoned or exited and the conversations we're having there around.
How very perform let's focus so what are the products that can drive the performance that's measurable and how can they activate across markets, where it makes sense to do so so I think that's highly tailored approach is that necessary to really see.
And drive the growth that we'd like to see out of that top segment on the line side I think we've talked about that enough to really communicate hey, its just about bringing them on with the right products the right price point and the right support structure.
Watch.
I'm very optimistic about what we can do through this set sort of three to 10 store operator side.
And they've got.
They don't own massive market share in a large market like California for example, but theyre peppering, they've got stores sort of throughout smaller but mid sized markets and I think there's still a lot that we can do for that segment.
But ultimately whether you're talking about the highest level MSL or you're talking about the low tier it's really about aligning the right product at the right price at the right support structure and truly delivering and communicating and helping them understand the value that we create for them.
Got it.
Really helpful and I guess can we talked about this a little bit last quarter, you mentioned that.
Kind of briefly on the call today, just in terms of the consumer aspect to I mean.
Are you able to leverage higher conversion better flow through and I know a lot of the focus right now is on retail reducing retailer friction, but it feels like there is still a lot of easy lift on your end that you can do or low hanging fruit.
In terms of cards and other things to add that could improve flow through and maybe as those things come online is that kind of the thought process on being able to reevaluate pricing models or further price hikes or I guess, we just have to see how the market plays out.
Yes, and yes.
But I think the comment I'd pull through there is it's truly about communicating that value right. We're just slightly different than traditional consumer market places, where you can do a take rate. So it's really about driving that value in the form of customer activation.
Consumer activation for that retailer and brand.
So for US the one thing sometimes you can miss as we're focused on reducing retailer friction there is in marrying benefit on the consumer side, making it easier for the consumer that's what drive stickiness for the legally platform as well. So we see those as two sided wins whenever we're implementing new features and helping that flow.
Absolutely on the consumer side.
<unk> ability to improve and enhance that experience and as you know covering this space in E. Com, so broadly lots of little things to test and learn and try and implement as we go.
Alright, great. Thanks for the color guys I appreciate it.
Thanks, Dan.
Thank you question.
There are no additional questions waiting at this time I would now like the best conference back to Yoko for further remarks.
Thank you for joining us we appreciate your time today and we're looking forward to sharing our year end results with you on our next call.
That concludes today's call. Thank you for your participation and enjoy the rest of your day.
Rest of your day.