Q3 2024 Oddity Tech Ltd Earnings Call

Speaker Change: Good morning and welcome to the auditors third quarter 2024 earnings conference call. Today's call is being recorded and we have allocated time for prepared remarks and Q&A.

Speaker Change: At this time, I'd like to turn the conference over to Maria Lycouris, Investor Relations for Audity. Thank you. You may begin.

Maria Lycouris: Thank you, operator. I'm joined by Oran Holtzman, Audity's co-founder and CEO, and Lindsay Drucker-Mann, Audity's global CFO.

As a reminder, management's remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates, including statements about Audity's business strategy, market opportunity, future financial performance, and potential long-term success.

Forward-looking statements involve risks and uncertainties, and actual results can differ materially due to a variety of factors.

Speaker Change: These factors are described under forward-looking statements in our earnings press release issued yesterday and in our annual report on Form 20-F filed with the Securities and Exchange Commission on March 6, 2024. We do not undertake any obligation to update forward-looking statements which speak only as of today.

Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business.

Speaker Change: Additional information about these non-GAAP financial measures, including their definitions, are included in our earnings press release, which we issued yesterday. I will now hand the call over to Oran.

Oran: Thanks everyone for joining us today. The beauty industry is transforming, and Audity is leading this transformation.

Oran: The strength and resilience of our direct-to-consumer model is on full display in this market backdrop.

Oran: In contrast to the most of our competitors who are experiencing slowing sales, weaker food traffic and excess inventory, Audit is constantly delivering strong and profitable growth. Our third quarter results once again demonstrate how Audit is leading in the most important vectors of growth in the global beauty market.

First, the massive consumer shift online, where auditing is already dominating, is the largest direct-to-consumer platform online. And second, the consumer's increasing demand for high-performance products.

Oran: It creates a positive feedback loop for our business as we redeploy our strong access cash flows to double down on investment in technology, science and building new brands. All of which will strengthen our competitive position and will continue to deliver our future growth.

Turning to our earning results, we once again broke records across our payments.

Oran: For the first nine months of this year, revenue increased 27% to $523 million. We delivered adjusted EBITDA of $135 million and generated $119 million of free cash flow. Close to 90% of EBITDA converted to cash.

Oran: To understand how strong those results are, this compares to mid-single-digit growth for our large-cap competitors. Our numbers show once again the power of online and how strong our model is.

Oran: As I've said many times before, the consumer shift online is a massive industry driver, and therefore we believe that the majority of the softness and beauty numbers for our competitors is mainly due to channel mix.

Oran: And just to begin, we believe online will quickly become the largest channel at 50% of the market.

Oran: Those that told us in early days that beauty can't work online, or questioned our D2C sustainable growth, see it clearly now, when we are one of the only public multi-brand beauty companies that constantly grow revenue over 20%.

It is now clear that the power and advantage of our direct-to-consumer model are very deep. We have massive engagement on a daily basis with our users, directly with no one between us. We have the data to predict which consumers are in the market to buy and which products they are likely seeking.

Oran: Their direct interaction drives higher consumer satisfaction and enables us to have greater predictability in our business with tone of agility. We are not cared by retailer distribution and how they cycle brands in and out to drive newness.

Oran: We control our destiny unconstrained and therefore can continue to grow our brand even in tough market conditions.

Oran: Our users, their desires, and their data are the only things that drive our product development priorities and our launches. No retailers forcing our hand, and no head stylist guessing trends.

Oran: This is why we are successful at launching new brands and new products. With our direct relationship, we know what users want, and our pro-development muscles allow us to create the next winners to drive growth.

Oran: So this is the huge advantage we have over our competitors with our direct-to-consumer model and why we will continue to win. I also want to address the questions we hear about the durability of direct-to-consumer.

Oran: It's very important to understand why we continue to show again and again how our model is different than other D2C models that have struggled.

Oran: Unlike others, our business is built around acquiring users, not around acquiring customers or acquiring revenue.

Oran: Our user base today is over 50 million in size, and with the data that you have given us, we understand so much about them.

Oran: We invest a lot in technology and built an R&D center in Tel Aviv by technology talent from the Israeli tech ecosystem. Our ability to attract top technology talent from the best Israeli intelligence units is a huge advantage. The tech team is still the largest team in the company, representing approximately 40% of our platform headcount.

Oran: This technology combined with our user data is an essential unlock to building a profitable online business.

Oran: Our unit economics work for online. This is why, from the very early on, our cash flows were strong and enabled large and constant reinvestment in the future growth.

Oran: For other direct-to-consumer businesses, the more they scale, the harder and more expensive it is for them to grow. But for us, it's the opposite. The more we scale, the easier growth becomes for us.

Oran: First, because we are growing with so much repeat. Repeat is over 50% of our revenue and increased as a percentage of our mix again this year, even though we continue to grow the business more than 25%.

Oran: Second, because we know so much about our users, we are able to build brands and products they want. And then we build machine learning models to put those new brands and products in front of our users. Higher scale means for us more data, better conversion, and greater share of wallet.

Oran: All of this has continued to drive strong performance for us. In the last 12 months, we generated $621 million of revenue, representing 30% growth with 24% of adjusted EBITDA margin.

Oran: We generated $127 million of free cash flow in the last 12 months, taking us to $248 million of cash on our balance sheet with zero debt, even after returning cash to our shareholders by repurchasing almost $50 million of our stock this year.

Oran: This is what happens when you add technology to one of the best consumer categories in the world.

Oran: So this is the opportunity, the advantage of our model, and how we position the business.

Oran: I will now turn to our growth drivers for 2025 and beyond, and why we continue to be so bullish.

Oran: The first is our massive global term, a $600 billion global market with so many categories and subcategories for us to enter to.

Oran: Every year we show that we know how to do it, how to add more new products to capture a higher share of this massive dam.

Oran: Next is the enormous growth runway for our existing brands Ilmakyaj and Spoiled Child, both on track to reach $1 billion of revenue over time, and both are sustaining double-digit growth rates today.

Oran: Ilmakyaj will cross the 500 million dollar mark this year, which makes it one of a very short list of brands to hit this milestone. Ilmakyaj and Spoilchild will continue to drive growth from their existing products, from a pipeline of new products and categories, and from scaling internationally.

Oran: As you know, up to this point, we have been primarily focused on the U.S., where we continue to see a high-growth runway. And unlike our competitors, we have zero exposure to China's consumer slowdown.

Oran: The next driver is new brands, with Brand 3 and Brand 4 ready to launch in the second half of next year, while continuing to add additional brands to our future pipeline.

Oran: BrandCree is a direct-to-consumer telehealth platform for consumers with skin and body issues. We have made impressive progress in building the team, the brand identity, and the product offering, product line, and a ton of tech investments, including first-of-its-kind vision technology for the brand.

Oran: Our next road driver is technology innovation, where we continue to invest significant resources, expanding our teams, improving our algorithms, our computer vision tools, and their integration with our platform. There is still a lot of work to be done. New models will continue to expand revenue and margins.

Oran: And finally, Nodity Labs, to discover new proprietary molecules to drive progress innovation and allow us to launch high-efficacy, science-backed products.

Oran: We are continuing to grow our teams, which now total 60 scientists with new talent across our bioengineering, computation, chemistry, and delivery teams.

Oran: To accommodate the expansion, we recently opened our new lab in Kendall Square, Boston. I am fully committed to ODT Lab's success and believe it can help us become one of the largest beauty companies in the world if we succeed there.

Oran: With all of these growth drivers, we have so much optionality over long term, so many different ways to grow.

Oran: For 2025, we will enter the year with great momentum and strong positioning based on tons of preparation that teams did, like they do every year, to ensure success.

Oran: I am very confident in delivering our financial objectives and commitments, which we have done for the past six quarters since becoming public, and also every single quarter beforehand. With that, I will turn over to Lindsay.

Lindsay Drucker-Mann: Thanks, Oran. Let's turn to our Q3 results, which I'll refer to on an adjusted basis. You can find the full reconciliation to GAP in our press release.

Lindsay Drucker-Mann: Audity delivered another record-breaking quarter across the board. We grew net revenue by 26% in the quarter to $119 million. The strength was driven by both Eel Maquillage and Spoiled Child across a range of product categories.

Oran: Net revenue growth was driven primarily by an increase in orders, while average order value increased 9% year-over-year.

Oran: Average order value growth was driven both by an increase in items per order and positive mix shift to higher priced products like skin, partially offset by mix shift to repeat sales which carry lower AOV. The 26% revenue growth we delivered this quarter beat our 22-24% guidance.

Oran: This upside stands in contrast to concerns we hear from investors about weakening sales trends in other beauty businesses, including both wholesalers and retailers.

Speaker Change: As Oran said, our results are a testament to the strength and resilience of our direct consumer model and how we've positioned our business to win in the most important vectors of industry growth.

In fact, our business is firing on all cylinders.

Let me give you some examples of how.

Our latest customer cohorts are our strongest cohorts ever.

Speaker Change: Frequency of repeat revenue in our latest cohorts are the best ever. Repeat continues to increase as the percentage of sales. AOV continues to increase, including first order and repeat AOVs, which are our highest ever.

Oran: We're scaling both brands across a wide range of demographics and consumers, old and young, high income, and low income. Revenue growth is broad-based across different categories and products.

Oran: All of our product vintages are growing, from the 2018 and 2019 product vintage.

for the 2023 and 2024 vintage.

Oran: These individual data points of strength are not random, and they don't exist in isolation. They're all related.

Oran: They're all the outcome of a platform that is meeting enormous consumer demand, gaining share of wallets.

Oran: selling more items per order, and layering new product franchises on top of a growing core. This increases our surface area, expands the runway, and drives customer happiness, all of which support a very attractive and durable financial model.

Oran: Moving down the P&L, gross margin of 69.9% compressed 35 basis points and exceeded our guidance of 60%.

Oran: We expect further normalization of our growth margin in the fourth quarter towards 68 percent, which is a level more consistent with our long-term run rate.

Oran: As a reminder, we don't manage our business to gross margin. We manage our business to direct contribution margin, otherwise known as DC margin. We calculate DC margin as gross margin minus performance media spend.

Oran: products with lower gross margin but higher repeat frequency can deliver the same DC margin as a product with a higher gross margin but lower repeat frequency and this is a trade-off for agnostic 2.

Oran: As we've said before, our gross margin in 2024 has been coming in higher than what we see as a sustainable rate based on our view of product mix. As a result, we do expect gross margin will compress in 2025 as it normalizes relative to a very strong result this year.

Oran: We delivered adjusted EBITDA of $25 million in the quarter and adjusted EBITDA margin of 20.8% above our guidance in absolute dollars and in margin percentage terms.

Oran: Adjusted EBITDA margin compressed by 112 basis points as we incurred planned incremental expenses in the quarter to drive future growth initiatives including Brand 3, Brand 4, and Audity Labs.

Oran: The timing of some of these expenses shifted out of Q3 and into Q4, and as a result, we expect a bit more EBITDA margin compression in Q4 as those investments flow through.

Oran: We delivered adjusted diluted earnings per share of $0.32. Our adjusted EBITDA and EPS exclude approximately $3 million of share-based compensation.

Oran: We continue to deliver very strong free cash flow and free cash conversion, a clear reflection of the strength and quality of our business model. We delivered $119 million of free cash flow year to date.

Oran: We were purchased around 1 million shares of our stock in the third quarter for approximately $37 million and have around $103 million remaining on our authorization.

Oran: We will remain opportunistic on share buybacks based on our strong cash flows, ample cash reserves, and attractive share price. We exited the quarter with 248 million of cash, equivalents, and investments on our balance sheet, and zero debt.

Oran: Turning to our outlook, we're once again raising our 2024 full-year guidance based on the better-than-expected third quarter results.

and a strong start to the fourth quarter.

Oran: We now expect net revenue between $642 and $644 million, representing 26 to 27 percent year-over-year growth.

Oran: We expect to deliver a 71.5% growth margin for the full year. And we expect to deliver adjusted EBITDA between $147 and $149 million, which includes a step-up in growth investments for Audity Labs and our new grants.

Oran: We expect full-year adjusted diluted earnings per share will be between $1.85 and $1.87.

Oran: Turning to the fourth quarter outlook. We're off to an excellent start and are pleased with the composition of growth across both brands and categories as well as our cohort repeat rates.

Oran: We expect year-over-year net revenue growth in the quarter to be between 22 and 24 percent. You can find more details on our Q4 outlook in our press release.

Oran: Lastly, I'll reiterate the early thoughts on 2025 that we communicated last quarter. We expect to deliver a net revenue growth of 20% and adjusted EBITDA margin of 20% consistent with our long-term algorithm.

Oran: We plan to incur significant investments in Brand 3, Brand 4, and Oddity Labs, and we do not expect to benefit from any material revenue contribution from these initiatives in 2025. With that, I will turn the call back to the operator for questions.

Speaker Change: Thank you, ladies and gentlemen. We will now begin the question and answer session.

Speaker Change: Should you have a question, please press the star followed by the number 1 on your touch-tone phone. You will then hear a prompt that your hand has been raised.

Speaker Change: Should you wish to decline from the polling process, please press star followed by the number 2.

Oran: If you are using a speakerphone, please lift the handset before pressing any keys.

One moment please for our first question.

Speaker Change: Our first question comes from Dara Musanyan from Morgan Stanley. Please go ahead.

Speaker Change: Thanks, operator. So, Lindsay, can you give us a little more detail on that strong start in Q4 and any more info on what you're seeing in the business so far this quarter? And then also just looking ahead...

Speaker Change: Can you give us an update on brands 3 and 4 when you really expect the revenue contribution from those brands to start to ramp up and the timing of the rollout as you look towards next year and any spending up front ahead of that and how you think about the spending pre-launch?

Thanks.

Great. Thanks, Sarah.

Speaker Change: Q4 started strong with continued good momentum from Q3. Q3 was an excellent quarter for us. As I talked about, really, our cohorts are performing at their best.

Speaker Change: As you know, Q3, Q4 mostly repeat business for us, but we do have a lot of signals based on how we see our customers.

Speaker Change: and our users behaving and the customer behavior that we saw in QC, which is very strong continued. And that includes repeat rates being at the best AOV, being at its highest both the first order and repeat order AOV. And that's because

Speaker Change: where people are adding more items to their order. So we're increasing order size in terms of numbers of items, but also we're getting a nice positive mixed tailwind from skin in particular and just general trip to higher priced products.

which is a great signal in terms of customer demand.

Speaker Change: and their willingness to spend more for the value that we deliver.

Speaker Change: We're seeing growth in all of our product vintages, so our original 2018-2019 product lineup that we launched in the U.S. with continues to grow, even as the newer product vintages that we released this year, last year, the year before, all of those new franchises that continue to layer on.

Speaker Change: But I guess what I would stress is that all of this really is according to plan. We have a lot of control over our business, as you know, and a lot of visibility.

Speaker Change: ability to predict and drive the ultimate outcome for the quarter. And so that's what we saw transpire in Q3, and that's exactly what we're seeing entering Q4 with high visibility to the strong finish that's reflected in our guidance.

Yes, ESCO brand 3 and brand 4.

Speaker Change: Both brands are being developed and in progress according to the plan. Both will be ready.

second half of next year.

Speaker Change: The most important part is for both brands, we continue to use Yelma Kajal and Spoiled Child user base to create new segments, and user segments for those new brands. So once we launch them, we are launching for existing user base, which is very important.

Speaker Change: And as for the progress, I will just give more sense about brand three. We are actively building and scaling the teams.

Speaker Change: We completed the branding process and we set up our Telehealth and Disfunction Controlling Physician Network and Pharmacist to streamline our user experience and support the delivery of personalized treatment.

Speaker Change: We continue to do very large-scale consumer studies, extensively testing our new products and treatments. Just because it's super personalized and customized, it requires a lot of work.

Speaker Change: Vision technology has made great progress, including intensity, localization, classification. We are working on this technology for more than two years, and we see great results. And this is before launch.

Speaker Change: And lastly, generative AI models are being built to show expected...

Speaker Change: progression over multiple week horizon for treatment which is something that we added recently and we are very bullish about the ability to create better results and to set better expectations with our users.

Speaker Change: Brand 3, we don't share much. We're also not sharing too much internally, to be honest. Brand 4, sorry. But everything is according to the plan, as its own team, as its own CEO already. And we are progressing, and it will be a great brand. Let me just add one more thing to what Oran said.

Speaker Change: We said this but it bears repeating because I've gotten this question before for brand three and four We don't expect any material contribution to our revenue for 2025 as we've talked about achieving 20% revenue We don't need brands three and four to achieve those targets either as Oran said on the call at Il Makiage

Speaker Change: was very strong and Spoiled Child very strong. And we believe Il Makiage is on track to be a billion-dollar business and same with Spoiled Child. So we still have a tremendous amount of growth in our base.

Speaker Change: So the revenue contribution next year will be not material from any of our new initiatives. However...

Speaker Change: The cost structure will be material, which is why we're guiding to gross margin compression towards

Thank you for your time.

Great, that's helpful. Thanks.

Speaker Change: Thank you. Our next question comes from Andrew Boone of J&P Securities. Please go ahead.

Thank you very much.

Speaker Change: Thanks so much for taking my questions. Lindsay, can you help unpack the top-line growth you gave us? Can we better understand the 9% AOV increase?

Speaker Change: And then if I think about unit growth, kind of that's implied with that in the mid teens, how do we think about unit growth for 25 as we think about the 20% formula? And then Oran, a bigger picture question on generative AI.

Speaker Change: You know, we're seeing major improvements with Meta and Google being more relevant. I'm assuming that also applies to the targeting that you guys are able to do in terms of matching consumers. Can you help us better understand what that technology has accomplished for you guys and how you're using it?

Thanks so much.

Speaker Change: Thanks for the question. I'll start on AOV. AOV has been an ongoing tailwind for us.

Speaker Change: Although the primary driver of our revenue growth, both this year, each quarter, and looking back, has really been order-driven. However, we are seeing AOV growth, despite the fact that we've had this pretty big shift.

from being a mostly first-order business to now being...

Speaker Change: a majority repeat business and repeat carries a lower AOV. So we've had AOV growth despite the headwind from that shift to repeat.

and the driver has been mostly...

People are, we're growing order size.

Speaker Change: We're able to do that because we've expanded our product line, and our models are doing a better and better job every single day, matching people with the right products so that we can increase things like upsells and bundles, and we've been really effective at that.

Speaker Change: In addition, we've been able to increase AOV just based on mix. So a lot of the new product introductions we've had, including in skin, have higher price points associated. So it's been a lot of things, and again, it all kind of comes back to our model. We have not been...

Speaker Change: These are not from like straight line price increases across products. We have taken those in the past, and we have that muscle, and we use them judiciously, but that has not been a meaningful driver for us at AOV. Going forward as we look into the future, primary driver of our revenue growth will continue to be orders.

Speaker Change: Hi, you're right calling out Meta and Google for AI, we've said multiple times like

Speaker Change: It's not only about the models, it's about the data. And what we have is...

Speaker Change: So much data in our industry and it allows us to build

Speaker Change: Models that will help us do better job in personalization and customization.

Speaker Change: We are working a lot in that regard for brand 3, because it's a treatment and it's so important to set expectations and to make sure that we are doing a great job in customization, personalization. But again, very early for us, we believe it's going to help us in multiple areas, and the teams are testing. And when we have more to demonstrate and to showcase, we will.

Thank you.

Speaker Change: Thank you. For our last question, we have Yousef Squaliou from Tribus Securitas. Please go ahead.

Speaker Change: Yeah, hi. Good morning. This is Nick Grunin. I'm pretty used to this.

Speaker Change: So as you think about the opportunity you had in international expansion,

Speaker Change: How do you think about that, the size of that opportunity, and when do you think you'll start leaning into that?

Speaker Change: And then secondly, Ron, I think you mentioned skin and body issues for brand three. I'm just curious, does that imply you're considering offering GLP drugs or is it really more focused on the skin side of the house? Thanks.

Speaker Change: I will start with the second question. We don't have any plans to do now GLP.

Speaker Change: So, we started with body and skin, but again, no intention for GLP at that point. What was the second question, Lindsay? Well, just to follow up, when we refer to body issues, it includes things like eczema and other body conditions.

Not weight loss.

Speaker Change: We are already very successful and high profitable in all geographies, especially Laos, which is Canada, UK, Germany, and Australia. Internationally, it's a huge growth opportunity for us. Looking at our competitors, we think that international can be 50% of our business over time.

Speaker Change: And we totally localize experience in each geography based on what we know we are either number one or number two in each.

Speaker Change: country that we opened so far, and what we continue to do is, we have ready to go new markets that are fully localized in

Speaker Change: Large geographies that the team already set up, test live in the market in thousands of orders to make sure human economics and satisfaction is strong.

And we are waiting, we are waiting because...

And we don't need them yet.

Speaker Change: But it doesn't mean that we are not going to use it in 2025.

Speaker Change: We have always slow-played international markets expansion to when needed, revenue-wise, and to make sure that we are very successful in those countries that we already opened. So, again, internationally it's a huge opportunity for us. I believe that over time it will be more than 50% of the business.

Speaker Change: But for now, we are still focused primarily on the U.S. And thank God we don't have exposure to the Chinese consumer, which is tough now.

Very helpful. Thank you.

Thank you.

Thank you. Is there enough...

Yeah, please go ahead.

Speaker Change: Thank you. So there are no further questions at this time. That concludes our Q&A session. I'd like to turn the conference over to Oran Holtzman, co-founder and CEO. Please go ahead.

Oran Holtzman: Thank you guys for joining, and see you next quarter with another great quarter. Bye guys.

Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.