Wag! Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Greetings, and welcome to the WAG Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Robles with Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Good afternoon, everyone, and thank you for joining WAG's conference call to discuss our Q3 2023 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman Adam Storm, President and Chief Product Officer and Alex Davidian, Chief Financial Officer. Before we get started, please note that today's comments include forward looking statements. These forward looking statements are subject A discussion of these risks and uncertainties are included in our filings within the SEC. We also remind you that we undertake no obligation These statements should be considered estimates only and are not a guarantee of future performance.

Speaker 1

Also, during the call, we 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 is included in Exhibit and Form 8 ks furnished to the SEC. These non GAAP measures are not intended to be a substitute for our GAAP results. Lastly, you can find our earnings presentation posted And with that, I will now turn the call over to Garrett Smallwood.

Speaker 2

Good afternoon and thank you for joining us today to discuss our financial performance for the Q3 of 2023. We are excited to announce another successful quarter for the Wag team, exceeding our own expectations for both revenue and adjusted EBITDA. This quarter further demonstrates that we are transforming the pet industry by becoming an all inclusive trusted partner for the premium pet parent and capitalizing on the secular growth of pet ownership. We continue to build lasting high frequency relationships with households across the U. S.

Speaker 2

By becoming their go to destination for premium services, health and wellness. While we remain laser focused on profitability for the remainder of 2023, we continue to invest in our platform and technology, building proprietary solutions to the most important needs. In 2024 and beyond, we will continue to use our proprietary technology, scalable platform and deep and trusted relationships with premium households to strike the right balance of growth and profitability. With that, I will provide a brief overview of our financial results for the Q3. Following that, Adam, our President and Chief Product Officer, We'll share updates on our strategic plans and key initiatives for the remainder of 2023 beyond.

Speaker 2

Then Alec, our Chief Financial Officer, I'll provide a more detailed analysis of our Q3 results, discuss our capital allocation priorities and reiterate our 2023 guidance. During the quarter, revenue grew by 42% year over year to $21,800,000 This growth was driven by the success of our wellness business, by demand for pet insurance and wellness products. In addition to the success of Pop Protect, the only pet insurance product in the U. S. With instant pay.

Speaker 2

We're seeing early signs of success with Cat Food Advisor, which validates our longer term growth initiatives by expanding our reach

Speaker 3

in the pet food and treats category.

Speaker 2

Our adjusted EBITDA was $1,000,000 an increase from a loss of $500,000 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, profit and margin. In the Q3, platform participants increased to 632,000, an increase of 34% year over year NWAG Premium maintained strong penetration at 52%. Our 3rd quarter organic acquisition rate Was more than 70%, which is a result of our focus on dynamic partnerships, a best in class experience and our referral programs. We continue to be thoughtful and deliberate around capital allocation and brand building.

Speaker 2

And as a result, our LTV to CAC ratio was a deliberate 9:one. On the supply side of the business, we maintained a supply and demand equilibrium through a variable platform fee, which averaged $50.26 in Q3 2023. In summary, the team at WAG continues to execute against our goals and deliver strong and sustainable results. Our Q3 results demonstrate our ability to scale the platform faster and more profitably than anticipated and show the effectiveness of our strategy and business model To become the number one platform for premium pet parents. Simply collect, we have out executed on the strategy we set forth almost 2 years ago for the 7th consecutive quarter.

Speaker 2

And with that, I will turn the call over to Adam Storm to review our strategy for the remainder of 2023. Thanks, Garrett. I'll once again walk through the 5 top level elements of our strategy to drive long term shareholder value and profitable growth. 1, accelerate growth in existing markets. As Derek mentioned, the 3rd quarter was another record revenue quarter, driven by the demand for pet insurance and wellness products across the U.

Speaker 2

S. As well as a post summer return to normal daytime service habits. We will continue to leverage our technology and best in class user experience to innovate on comparison tools and matchmaking services For highly fragmented experiences with the largest total addressable markets such as pet food and treats and pet insurance. 2, expand premium subscription offerings. Our premium penetration rate remained at a robust 52% Ahead of our long term goal of 50%.

Speaker 2

We are continuing to test the value of the WAG premium bundle by introducing new benefits and experimenting with current offers. We are actively experimenting around a 10% price discount for new subscribers with an emphasis On the upcoming holidays, which should work overnight sitting and boarding, which is a higher average order value service set. 3, platform expansion. Last quarter, we rolled out the Wag! Store in partnership with MaxxBone, which we acquired in Q2 of 2023, Bringing modern pet essentials to our engaged community of pet parents and pet caregivers.

Speaker 2

MaxSold has incredible assortment of premium products. For example, the Christian Cowen collapse jumper, which Kim Kardashian organically posted about on her Instagram page Pomeranian Sushi. I urge you to check it out. Other best sellers include the Eco Swim Carrier and the EV Fit harness, which come in fun colors such as peach, yellow, ivory and dusk blue. We will continue to roll out seasonal products, Collaborations and must haves to expand the WAG brand while capturing additional share of wallet.

Speaker 2

4th, opportunistic M and A. WAG continues to be strategically positioned to leverage pet specific M and 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 CMM. We are most excited about assets that have high rates of organic acquisition, A product or service that is beloved by customers and or categories of household spend we do not currently capture. 5th, operating scale. This quarter, we saw operating margin improvements across all areas due to the positive impact of our unit economics and fixed cost operating leverage.

Speaker 2

Adjusted EBITDA margin improved substantially year over year From minus 3% to positive 5%, an 8 percentage point improvement. A significant year over year improvement is inherent to our High margin software marketplace model, where incremental revenue significantly enhances the adjusted EBITDA profile of the entire platform. 2023 continues to be our year of efficiency and focus on full year adjusted EBITDA profitability, which we have achieved as of Q3 2023. We will continue to invest in efficient marketing payback cycles, operational excellence, platform integration and cross sell and best in class customer experience. I will now turn the call over to Alec to discuss our Q3 financial results in more detail.

Speaker 3

Thanks, Adam. Q3, building on our Q1 and Q2 momentum, Record platform participants of 632,000, revenue of $21,800,000 and adjusted EBITDA of 1,000,000 resulting in back to back adjusted EBITDA profitable quarters. This also takes us to full year 'twenty three adjusted EBITDA profitable year to date, a huge milestone in the company's history. 3rd quarter revenue $21,800,000 exceeded our expectations, up 42% from last year, driven by strength across all 3 revenue categories. This resulted in an adjusted EBITDA profit of $1,000,000 for G3 versus an adjusted EBITDA loss of $500,000 last year.

Speaker 3

Breaking down the 3 revenue categories. Services revenue was $6,600,000 Growing 12% from Q3 last year, making this the largest service revenue order to date. We continue to see post summer return to normal service habits And by now, a continued slow and steady return to office trend. This also includes normal amounts of e commerce revenue from Maximo and WagStor. Wellness revenue was $13,500,000 increasing 42% from Q3 last year, driven by Demand for our pet insurance and wellness products through our proprietary comparison engine technology.

Speaker 3

Our technology's ability to add value to customers is clear And in Q3, we experienced record traffic as some of the return to normal activities resumed. Pet Food and Treats revenue, A new revenue category for this year was $1,700,000 Dog Food Advisor and newly launched cat food advisor continue to provide pet parents with high quality information Turning to expenses. Cost of revenue, excluding depreciation and amortization, dollars 1,400,000 was consistent year over year at 7% of revenue. Particle costs were down year over year as a result of very thoughtful operational excellence and the scalability of our tech stack, offset by product costs and the sale of Platform operations and support expense of $3,000,000 equates to 14% of revenue, Down from 37% a year ago. While non revenue generating platform operations and support functions remain a key backbone to the business, Our operations have become highly efficient over the past year to redesign and use of AI tools to get answers faster.

Speaker 3

Sales and marketing expense of $12,800,000 equates to 59% of revenue, down from 73% a year ago. We saw numerous opportunities to put dollars to work in sales and marketing across our various revenue streams and we'll continue to take advantage of efficiency because we identify them. G and A expense of $4,700,000 equates to 21% of revenue, down from 155% a year ago, which included transaction costs. 21% represents the lowest ratio since we have become public and illustrates the scalability of our platform and operation for excellence of our leadership team. From a balance sheet perspective, We ended the Q3 with approximately $31,000,000 in cash, cash equivalents and accounts receivable.

Speaker 3

Our adjusted EBITDA positive results puts us in a strong position to continue to deploy cash through sales and marketing, product innovation and value add acquisitions. Moving to our guidance for 2023. Taking into consideration results year to date, we reiterate our full year 2023 forecast of Total revenue in the range of $80,000,000 to $84,000,000 and adjusted EBITDA guidance to a range of $0,000,000 to 2,000,000 $83,000,000 are at the midpoint of the respective ranges. For the Q4, we expect total revenue of 20,000,000 At the midpoint of the full year 'twenty three range, which would be an 18% increase in revenue over Q4 'twenty two And adjusted EBITDA of $300,000 at the midpoint of the full year 'twenty two range, which would be a 168% improvement over Q4 'twenty two adjusted EBITDA. With our strong future results, which took year to date adjusted EBITDA to $700,000 we are in a strong position To complete 23 fiscal year as an adjusted EBITDA profitable company, we continue to be thoughtful and considerate of the macroeconomic environment And potential slowdown in consumer spending.

Speaker 3

Our financial guidance includes the following considerations. The forecast incorporates our internal target of the rule of 50, meaning a total of greater than 50% from revenue growth plus adjusted EBITDA margin for the full year. We expect holidays to drive incremental overnight versus daytime service demand, but also expect that severe weather will impact service demand. Pet adoption during the holidays also positively impacted penetration and demand for wellness plans. We anticipate that continued growth in the pet industry, driven by factors such as higher rates of pet ownership, pet insurance penetration and increasing demand Premium Pet Products and Services will have a positive impact on our full year 'twenty three results, including on our entrance to pet food and treats.

Speaker 3

General trends related to the state of the economy, interest rates, consumer confidence. We have factored in potential risks and opportunities related to these macroeconomic factors in And finally, we recognize that there may be potential risks To our financial performance in 2023, such as disruptions to global supply chains, changes in consumer behavior due to unexpected events, Such as a delayed or imbalanced return to office, judicial and performance marketing trends, the potential impact of AI and our ability to Expand through partnerships. In summary, our strong quarter results illustrate our Team's strong ability to execute across our diversified revenue streams, taking advantage of opportunities that arise to build a profitable business and shareholder value. And with that, we now welcome Q and A. Operator, can you kindly open it up for Q and A?

Operator

Thank you. We will now conduct a question and answer A confirmation tone will indicate your line is in the question The first question comes from Jason Hestien with Oppenheimer. Please proceed.

Speaker 4

Everyone, thanks. So Garrett, you're coming off of over 40% revenue growth this quarter. I want to push you to kind of comment on how you're thinking about growth potentially next year. And then How are you thinking about marketing relative to kind of growth? You talked about a rule 50, is that something that you want folks to focus on next year?

Speaker 4

Just whatever you can talk about kind of like growth versus marketing as we're thinking about next year? And then secondly, any kind of color on mix of service versus wellness as we move into next year? Do we just kind of look at the current trends and just kind of assume the same Mix shift as we move into next year. Thank you.

Speaker 2

Thanks, Jason. Good to hear from you. Great question. I think Taking a step back, we're certainly very excited about the progress in 2023. Some good news, we haven't really seen any sort of consumer slowdown or Change in behavior that I think maybe some we're anticipating as a function of the macro this year.

Speaker 2

We feel like we have a really resilient premium consumer base. In terms of next year, obviously, we'll have more to share next quarter in terms of forecast. But I definitely think the minimum expectation just broadly is We're a rule of 30, if not 40 marketplace. I think we're going to see how this kind of quarter pans out, frankly, meaning Q4. But I think we're very excited about next year's potential.

Speaker 2

There's a lot of great products and services on the roadmap in addition to the ones we launched this year, but to answer your question specifically, we're really just laying the groundwork to

Speaker 4

Thank you.

Operator

Our next question comes from Jeremy Hamblin with Craig Hallum. Please proceed.

Speaker 5

Thanks and congrats on the strong results here across your segment. Yes. I wanted to dive into your wellness segment here and just understand in terms of driving that growth also over 40 I mean, you had a record number here in Q3 at $632,000 or being more driven by higher spend or the combination of both.

Speaker 2

Hey, Jeremy, great to hear from you. Again, Garrett here. Wellness is certainly a very exciting category. I think you're seeing a number of insurers Wellness players and health players leaning into our marketplace is a great place to find and meet customers. We're certainly enjoying it in terms of our opportunity to match customers with great In terms of participant growth, wellness is functionally going to grow as Net new customers, really that's we're seeing basically a one to one more revenue from Relus implies more net new participants in the platform.

Speaker 2

And know you can imagine that those customers then cross sell to the other ecosystems of products, right? So you come for purchasing the right pet insurance product somewhere or And then you stay for a daytime service or an overnight service or purchasing a MaxxBone product.

Speaker 5

Got it. Okay. And then let me shift gears here and talk about Forever Marketing, as we look ahead here, we're going to get into In election year, sometimes costs are a little bit higher for advertising. You guys are still running really CAC ratio 9 to 1, I think, in the quarter. Any color that you might be able to share in terms of The strategy you're utilizing to reach new customers as well as Keep existing customers engaged on the platform or to reactivate lapsed customers.

Speaker 2

Yes. So I certainly think if you look at the LTV to CAC, we're running incredibly efficiently is probably the best way to put it. We certainly think there's room to run. We made it pretty clear, I think, in the last two earnings that we're very focused on profitability for this year and we're thrilled that we're adjusted EBITDA profitable for the fiscal year as of this quarter. We don't expect that to change, obviously, for the remainder of the year.

Speaker 2

So now we know we have kind of adjusted EBITDA profitability as a minimum expectation. Now I think we're feeling more comfortable about our ability to deploy more in sales and marketing. So in terms of next year's thinking, I'd be surprised that We weren't leaning further into sales and marketing, whether that's with the big partners you'd expect, whether that's with partners that are offline, that We already have in place or just existing customers that we want to retarget or reach with custom offers. Generally, I think next year, we expect to lean even further into sales and marketing.

Speaker 5

Got it. And then just a couple other Questions here. In terms of your pet caregiver pipeline, have you seen any change? I mean, we still have Unemployment is still quite low, but you are seeing an uptick And first time unemployment, are you guys seeing that Pipeline still strong. Is it getting better?

Speaker 5

And then are you still experimenting in terms of of the fee that you're charging to join the platform for the PCGs.

Speaker 6

Hey, Jeremy, this is Adam. Good set of questions. Long story short, no, there's no change in our supply characteristics. We really think it's the best gig in America, walking dogs and sunny days and nice neighborhoods. It's Kind of what everybody wants to do.

Speaker 6

In terms of kind of how the broader macro affects it, In theory, unemployment would be good for us because it would make the gig more kind of competitive or whatever you want to call it. But really don't think that there is a macro tie in. I think this is an awesome gig that people want to do Rain or shine, no pun intended. I don't think regardless of what happens to the macro, I don't think that's going to be a have a large impact. In terms of the onboarding fee you mentioned, it's really about finding price equilibrium or supply demand equilibrium in a market.

Speaker 6

We're not like looking to really drive that as a primary revenue source. So any fluctuation you see in that onboarding fee is really just a Supply and demand mechanism.

Speaker 5

Got it. Last one for me. High level question. You noted This year, we're focused on profitability, which you look well on track to achieve. In terms of looking a little bit ahead here, what is the In an environment like this where you get kind of shaky set of investors, a little more uncertainty in the macro, What's the reasonable timeline that you guys are thinking about to get your EBITDA margins into, let's say, the high single digit range or maybe even up

Speaker 2

Yes. So I think last quarter yes, no, I think last quarter, Alec Hinted that we plan on reaching free cash flow by second half of twenty twenty four, which I think is a really important milestone, Jeremy, to your point. It's kind of default Our ability to kind of manage the business independently from any macro factors. And I think that would also then imply a strong EBITDA margin of High single digit. So I think that's sooner than anticipated, and we certainly expect to hit our free cash flow target in the second half of twenty twenty four.

Speaker 5

Okay, great. Thanks for taking all the questions. Best wishes.

Speaker 2

Thanks, Jeremy.

Operator

Thank you. The next question comes from Tom White with D. A. Davidson. Please proceed.

Speaker 7

Great. Thanks for taking my questions, guys. Walking dogs in nice weather in a nice neighborhood sounds like a gig I need right about now. 2, if I could. Just I guess first on the 4th quarter revenue outlook.

Speaker 7

It looks like you beat the high end of the 3rd quarter guide, But you're holding the full year kind of unchanged and I guess at the midpoint kind of implies the Q4 could be down a little bit Sequentially, is that just kind of seasonality or some of the weather kind of implications that you touched on, Alec? Or is there something else about the Q4 that maybe you're thinking a little bit differently about than you were a few months ago? And then I have a quick follow-up.

Speaker 2

Hey, Tom, great to hear from you. We'd love to have you. And so to answer your question on Q4, I don't know if you're following, but we expect a lot of incremental weather This quarter, I think California is already expecting like catastrophic storming next week, which obviously is a headwind in terms of some of the services business. Second thing is, we certainly saw a really strong Q3 in our wellness business as a function of pet insurance products, wellness plans and other premium healthcare products. We're unclear if that trend will stay, although we've certainly been excited about the initial Q4 results that we've seen.

Speaker 2

But just to be really clear, we're really just thinking about 20242020 At this point, most of our focus is on next year and making sure we're growing profitably with strong margins.

Speaker 7

Okay. That makes sense. And I guess just to follow-up on the wellness piece and specifically like I'm just curious whether you're seeing any kind of change in behavior on the part of those advertiser partners that Maybe it could be related to the macro, like in terms of bid levels for leads or any volatility in the bidding. I'm just I guess, I'm just trying to see whether the macro might be having any kind of influence there. It does I'm seeing from the numbers, but I guess maybe just kind of looking ahead, are you seeing any?

Speaker 2

No, yes, I think we're seeing strong demand. I think you saw in Q3 actually people were leaning in further asking if there was more they could be doing in partnership with us. I watched Something I think on CNBC this morning around the progressive CEO saying they're going to be leaning back in aggressively in 2024. I think it's a good sign broadly for insurers. So we're seeing strong demand.

Speaker 2

We expect to see continued strong demand. I think the macro is cooling a bit. I don't know if that was true 2 quarters ago, maybe felt a little more volatility, but I think that's certainly Calm and people certainly seem to be in a better place.

Speaker 7

Okay, great guys. Thanks. That's it for me.

Speaker 2

Thank you.

Operator

The next question comes from Matt Koranda with Roth Capital. Please proceed.

Speaker 8

Hey, guys. Good afternoon. So two questions, I guess. First one is just more near term in nature. In the services platform specifically, have you observed any change in behavior with your customer set in response to any of the macro Crosscurrents that have happened in the last couple of months, just curious what you've seen quarter to date in terms of behavior, maybe just Mix of services, if you could unpack sort of how to think about that, if there's any discernible change.

Speaker 6

Hey, Matt, this is Adam. Yes, I think that our daytime services, as we've said, is a function of Occupancy, which is, talent relative to, let's say, 2019, but No real change there quarter over quarter. That's something that we've kind of been pretty open and honest about, whereas the sitting and boarding The overnight segment is more so a function of travel and travel is doing great. Travel is actually above 2019 levels per the TSA data. So the services mix is probably going to be a little bit more overnight as we think about Q4, which is seasonal and then 2024 generally.

Speaker 6

We're really just letting the consumer lead us to what they want and then kind of investing behind them.

Speaker 8

Okay. That sounds fair. And then the other question was on platform participants. Nice growth this quarter, whether you look at it Sequentially or year over year. Curious if maybe you could unpack for us sort of where like maybe the Split of platform participants by the segment.

Speaker 8

And I guess the other question that I For you, which may be harder to answer is, how many of the platform participants that you cite Are attaching to more than one of your segments. Just curious to get a sense for cross sell between the segments that you have.

Speaker 2

Yes. Hey, Matt, it's Garrett here. I wish you wanted to walk dogs like I say. No, we don't really talk about the top participants by Revenue group because there's so much happening dynamically in a given quarter, where that's less caregivers doing daytime, more doing overnight, that leads to that to be a different number or more people cross selling in a given quarter because of seasonality to things like, let's say, buying wellness plans or insurance products or talking to a vet. But I generally think that you should look at Two things.

Speaker 2

1 will be revenue divided by platform participants to get a good sense of ARPU, kind of how that trend is going. Obviously, we want to see that continue to stay Going up, frankly. Like that means we're doing a good job of cross selling and monetizing the consumer base. The second thing would just be kind of revenue split by platform participants. Probably a good way to think about it.

Speaker 2

I mean, all these products are premium products. They're all somewhat expensive. I don't know if you looked at MaxOne recently, but rompers are $90 So generally, I think 2 things. 1 is there's certainly strong cross sell happening. That's something we expect to even lean into further as we broaden Our bench of products and services.

Speaker 2

The second thing would just be to think about revenue divided by platform participants to get a healthy understanding of how we think about monetizing those customers.

Speaker 8

Okay. Helpful, guys. I'll leave it there. Thank you.

Operator

Thank you. At this time, I would like to turn the call back over to management for closing comments.

Speaker 2

Thanks, all. Two things I want to add that we didn't talk about in the management presentation. One is Just kind of we've got a lot of questions around the impact of AI and how we think about its efficacy in the WAG organization. We're really very excited about AI and its potential. We think it's been a great tool for employees to accelerate their efficiency, their tasks and ability to just Create more, frankly, like do more with less.

Speaker 2

As a result, we're really thinking about headcount and SG and A efficiency in 2024. As a function of AI and automation, we don't expect much headcount changes. We think we're going to continue to have operating leverage in the business. The second thing is, we're very excited about the future WAG and 2024 specifically, I think you'll continue to see us leaning into long term profitable growth. We think it's we're still very early on this journey.

Speaker 2

So if you have any 2 takeaways today other than the fact that we just did record revenue and record EBITDA for the 7th consecutive quarter, it's that we're very excited about 2024

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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Wag! Group Q3 2023
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