Oddity Tech Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 4 speakers on the call.

Operator

Afternoon, and welcome to Audity's Second Quarter 2023 Earnings Conference Call. At this time, I'd like to turn the conference over to Maria Liporius, Investor Relations for Audity. Thank you. You may begin.

Speaker 1

Thank you, operator. I'm joined by Eran Holtzman, Audity's Co Founder and CEO and Lindsey Drucker Mann, Audity's Global CFO. As a reminder, due to the timing of this earnings call, which is within the 25 day quiet period following the company's IPO, We will not be taking questions on today's call. 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 Audite's business strategy, market opportunity, future financial performance and potential long to our investor's success.

Speaker 1

Forward looking statements involve risks and uncertainties and actual results could differ materially due to a variety of factors. These factors are described under forward looking statements in our earnings press release and in our prospectus filed with the Securities and Exchange Commission on July 18, 2023. 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. Definitions and reconciliations of these non GAAP financial measures to their most comparable GAAP measures are included in our earnings press release we issued today.

Speaker 1

I will now hand the call over to Eran.

Speaker 2

Thank you everyone for joining us today. We are very excited to show our 2nd quarter results and our first earnings call as a public company. And it's only fitting that we kick off our life as a public company with an outstanding quarter of financial performance that position us to raise our 2023 outlook to revenue and profit above our plan. We generated $151,000,000 of net revenue, a 55% increase from last year and $42,000,000 of adjusted EBITDA in the 2nd quarter, representing 27.6% of adjusted EBITDA margin. These results are above the estimates we issued in our IPO across every metric, including sales, adjusted EBITDA and net income.

Speaker 2

We are making very strong progress in our mission to transform the global beauty and wellness market with technology and entrepreneurial DNA, and we are here to build something huge. Our technology powered platform is unlocking online for massive and super attractive time by leveraging data science, artificial intelligence, computer vision and now biotech to deliver superior products and experiences to our more than 40,000,000 users. Our model has rapidly scaled to what we believe is the largest and most profitable online direct to consumer platform in the industry. To our existing powerhouse brand, Ilmakiage Spoil Child today and brands 34 in development to launch in the future. In order to perform successfully online only, we're investing heavily in data science and technology early on and built our tech team to be the largest team in the company.

Speaker 2

Technology continues to be the primary investment priority for us today, although we believe we are already way ahead of our competitors. We achieved many important milestones during the Q2 that we believe set us up for a long runway of top and bottom line growth. First, we made significant progress in the quarter, which include driving revenue growth and market share gains for our Illmatica's Poll Child brand, to expanding our existing brands into new categories and continuing to develop new brands tailored for our user base, which will be connected to the ODP to B2C platform. 2nd, the acquisition of Revela and Launch Apology Lab was a game changing achievement for us during this quarter. We moved aggressively to use pharma grade AI technology to boost the development and expansion of proprietary science backed to Molecules and Product Formulations.

Speaker 2

We believe Audity Labs will change the industry and will be a massive driver for Audity as a company. And finally, with the successful completion of our IPO, we recruited best in class investor partners to join us to building a truly transformational business that compounds long term value. Moving on to our business performance, Net revenue increased 55% in the Q2, driven by growth across brands, product categories and markets. The unprecedented success of SpoilChild is a compelling proof point of the power of our model and tech platform. SpoilChild scaled to $50,000,000 of to order billings in the 1st 12 months, which we believe makes it the most successful direct to consumer brand launch across any vertical.

Speaker 2

The brand became profitable only 1 year after launch and it will be a nice contributor to EBITDA this year. To Spoil Childs continue to look better than Ilmakias in all metrics, although Ilmakias is one of the strongest D2C brands in history in terms of scale, growth and profitability.

Speaker 3

To the

Speaker 2

operator. Drilling into physical products, new launches were solid driver of results in the quarter And it's a compelling engine for us into 2023 and beyond. We have an exciting product roadmap across color, skin and hair for the rest of 2020 2024. Our data driven approach and direct to consumer model gives us the powerful advantage testing products in market to gathering data before officially launching to increase our chances of success. We truly launch products for our user base unlike other D2C companies who launch product and then search for an audience for it.

Speaker 2

We already have live in market that we launched during Q2 for our 2024 launches with very encouraging initial signs. We are also making a rapid progress on product development based on our proprietary and patent pending Audity Labs molecule, which to I will elaborate shortly. On Technology Products, we continue to build and optimize our AI and machine learning model to enable profitable growth and support to the Journeys. We made continued progress on our various models that improve repeat rate. We continue to roll out new versions to Farfetch and Spoiled Brain to enhance product recommendation, introducing improved post purchase models that drive higher AOPs, improved unit economics for 1st purchase and lifetime revenue.

Speaker 2

We continue to build our generative AI capabilities in text, images, video to an audio with test across range of use cases, including customer acquisition and retention. We continue to make very rapid and meaningful progress computer vision, our strong team of computer vision scientists and partners in vision technology has massive potential for our future. We continue to prioritize focus on 2 fronts. 1st, enhancing our existing technology products and second, to building new vision tools to deliver groundbreaking diagnostic capabilities. In the Q2, we delivered progress in both of those fronts.

Speaker 2

To the continued integration of vision technology into our existing AI matching engine. We made significant progress in the quarter in our new vision tool to both identify and categorize individual skin issues. These are center capabilities we are building to support the roll off of brand to 3 with additional cases for the future. On the marketing front, we continue to achieve very to our strong efficiency on marketing spend, supporting our attractive revenue growth and strong profitability. We continue to optimize our performance marketing distribution model, and we continue to optimize our ads and conversion funders based on high quality data sets.

Speaker 2

We additionally continue to invest in our brands to drive awareness. For Ilma Kiaj, our close partnership with the Arsenal Women's Football Club was recognized as one of the most successful women's sports partnership in the U. K. As of Spoiled Child, we launched our 1st TV campaign, which reached over 50,000,000 households, delivered over 260,000,000 impressions, which help increasing brand awareness. Moving to OTT Labs, we closed the acquisition of Provella in April to bring true biotech capabilities and pharma's AI based medical discovery to drive game changing physical product innovation to our category.

Speaker 2

From day 1, we work to harness this capability to drive the next generation of physical product innovation. We stood up the lab opening our research lab in Kendall Square, Boston and expanding our team of the highest caliber of bioengineers, chemists and PhD scientists. The lab is fully operating today with our scientists working hard on our future. The lab is being overseen by myself, by Doctor. Evan Zhao and by Doctor.

Speaker 2

David Zhang. We are deepening the work on over 10 new molecules to address pressing those pain points and unlock new and massive TAMs for all the team. Finally, we made a very strong progress on our future brand launches, including brand number 3 and brand number 4, which are planned to go live in 2025. For Brand 3, the current stage is mainly around continued effort of developing our computer vision technology that will be the core of the brand. In addition, we made progress in product development.

Speaker 2

My sister and I are spending at least 20% of our time on building brand number 3. To. As for brand number 4, we picked the category for the brand, and we have started building strong team and began working on brand positioning within the category. With that, let me hand it to Lindsay Brokerman, our CFO, to review our financial performance and outlook.

Speaker 3

Thanks, Iran. We are pleased with our very strong financial performance in the Q2, which supports our improved outlook for the Q3 and full year and allows us to raise our fiscal 2023 outlook above plan. We're also pleased that similar to previous years, We were able to deliver the bulk of our full year objectives in the first half alone by aggressively fueling profitable growth in the first and second quarters, and thereby enabling us to invest resources in future initiatives in the second half of the year. Our business continues to deliver the rare combination of scale, to growth and profitability and the 2nd quarter delivered on all fronts. Net revenue increased 55% the quarter to $151,300,000 This result is 8% above the midpoint of the $135,000,000 to $145,000,000 preliminary estimates we communicated in connection with our IPO.

Speaker 3

Revenue growth in the period was a very high quality driven by growth cross brands, categories and markets. Our revenue continues to be driven largely by increased orders with nice incremental contribution year over year from Spoiled Child, to the operator, which has rapidly scaled since its launch in the Q1 of last year. For the first half of the year, we increased net revenue by 69% to $317,000,000 Gross profit increased 60% to $106,800,000 in the quarter and gross margin improved to 70.6% from 68.2% in the prior year. The 244 basis point to improvement was driven by gross margin improvement across brands, offset by negative mix shift from higher contribution of spoiled child to sales. To date, we generated 70.8 percent gross margin, a 328 basis point improvement from the prior year.

Speaker 3

Reported net income was $30,000,000 compared to $16,600,000 in the prior year and net income margin was 19.8%. Adjusted EBITDA increased 76 percent to $41,800,000 in the quarter. This is 22% above the midpoint to the $32,000,000 to $37,000,000 preliminary estimates we communicated in connection with our IPO. Adjusted EBITDA margins expanded to to 27.6 percent of sales, a 328 basis point improvement versus the prior year. Adjusted EBITDA growth was largely driven by strong top line growth, expanded gross margins and the higher contribution of repeat business to revenue versus the prior year.

Speaker 3

We generated $70,200,000 of adjusted EBITDA in the first half of twenty twenty three compared to $30,500,000 in the prior year period. Adjusted net income increased 76 percent to $32,300,000 in the quarter. Adjusted net income improvement was largely driven by the increase in to EBITDA. Weighted average diluted shares were 57,500,000 in the quarter, and we delivered adjusted diluted earnings per share of $0.56 to our reported diluted earnings per share of $0.52 The adjustments to GAAP metrics include $2,600,000 of pre tax stock based compensation expense and $300,000 of other pre tax non recurring items. Moving on to the cash flow statement and balance sheet.

Speaker 3

Year to date, we generated $76,000,000 cash from operations and free cash flow of $75,000,000 after CapEx of $1,000,000 We exited the quarter with $107,000,000 of cash on our balance sheet and no debt. Turning to our financial outlook. To the back of our very strong 2Q results, we're raising our full year 2023 guidance across sales and key profit metrics. This improvement is driven by slowing a portion of the 2Q beat across the full year, while reinvesting some portion of this upside back against the business in the back half. For the full year, we expect net revenue between $475,000,000 $480,000,000 to representing 46% to 48% growth year over year, an improvement from our prior plan for 40% year over year growth.

Speaker 3

We expect gross margins of around 69.5%, which is better than the 67.9% we had built into our prior plan. We expect adjusted EBITDA between $96,000,000 $101,000,000 representing EBITDA margins between 20% 21%, to better than the $91,000,000 we had expected prior and adjusted EPS between $1.11 and $1.17 which includes a tax rate of around 25% for the full year and diluted shares of around 59,700,000. To one note about stock based compensation. We expect to book expense of around $14,000,000 in the 3rd quarter, which is above our run rate expectation to stock based comp going forward. And this is due to one time expense associated with accelerated vesting in connection with our IPO.

Speaker 3

To stock based compensation expense is expected to decline in the Q4 to approximately $8,000,000 We're also introducing guidance for the Q3 of 2023, and you can find details of this guidance in our press release. And with that, I'll turn it back to Arun.

Speaker 2

Thanks, Lindsay, and thanks, everyone, for joining us today. Our strong second quarter results demonstrate the power of our model, and our growth engine leaves us to well positioned to deliver strong financial performance in the future. Our business is firing in all cylinders, and I have never been more bullish about our future.

Speaker 3

To the operator. To you. Thank you

Operator

for your participation today. As a reminder, due to the timing of this earnings call, which is within the 25 to a quiet period following the company's IPO. We will not be taking questions on today's call. And with that, this concludes today's teleconference. You may now disconnect your lines.

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Key Takeaways

  • Audity reported 55% net revenue growth to $151.3M in Q2 and $41.8M of adjusted EBITDA (27.6% margin), outperforming its IPO guidance and prompting it to raise its full-year 2023 revenue outlook to $475–480M and adjusted EBITDA to $96–101M.
  • The company is heavily investing in its technology platform—leveraging AI, computer vision, and newly acquired biotech capabilities through Revela and Apology Lab—to power its online D2C model and drive product innovation via Audity Labs’ Boston research center.
  • SpoilChild, Audity’s newest brand, achieved $50M in first-year billings and profitability, outpacing even the flagship Ilmakiage brand, while the firm continues expanding existing brands into new categories and has 34 brands in development including vision-driven Brand 3 and a new Brand 4 slated for 2025.
  • Audity maintained strong marketing efficiency with optimized performance channels, a TV campaign for SpoilChild that delivered 260M impressions, and high-profile partnerships like Ilmakiage’s deal with Arsenal Women’s Football Club to boost brand awareness.
  • Financially, the company generated $76M of operating cash flow and $75M of free cash flow in H1 2023, exited Q2 with $107M of cash and no debt, supporting continued investment and growth initiatives.
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Earnings Conference Call
Oddity Tech Q2 2023
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