Wag! Group Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the WAG Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer will follow the formal presentation. As a reminder, this conference is being recorded. I'll now introduce your host, Greg Robles with Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and thank you for joining WAG's conference call to discuss our Q2 2024 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman Adam Storm, President and Chief Product Officer and Alec Davidian, Chief Financial Officer. Before we get started, please note that today's comments include forward looking statements. These forward looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of these risks and uncertainties are included in our filings with the SEC.

Speaker 1

We also remind you that we undertake no obligation to update the information contained on this call. These statements should be considered estimates only and are not a guarantee of future performance. 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.

Speaker 1

These non GAAP measures are not intended to be a substitute for our GAAP results. Lastly, you can find our earnings presentation posted on our IR website and with the SEC. And with that, I'll 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 Q2 of 2024. First, I will provide an overview of our financial results for the Q2. Following that, Adam, our President and Chief Product Officer, will share brief updates on our strategic priorities for 2024 and beyond. Then Alec, our Chief Financial Officer, will provide a more detailed analysis of our 2nd quarter results and discuss our capital allocation priorities. During the Q2, our revenues decreased 6% to $18,700,000 while our adjusted EBITDA increased to 1.6 $1,000,000 a quarterly record for WAG.

Speaker 2

As we have communicated, these results were highly intentional as we reduced marketing spend to increase profitability in the short term. As noted in our preliminary results released in July, our debt prepayment penalty expires this month and our full debt becomes due a year from now. We are intensely focused on increasing adjusted EBITDA and free cash flow as we evaluate all options to refinance our debt. Strengthening our balance sheet and demonstrating consistent profitability is of the utmost importance. Additionally, we recently completed a $10,000,000 registered public offering last month and we will use the net proceeds to pay down a significant portion of our debt.

Speaker 2

We will refinance the remaining debt principal and strengthen our balance sheet, allowing us to generate substantial free cash flow. In fact, by lowering our debt principal and refinancing the remaining balance, we believe we'll be in a position to deliver positive free cash flow going forward. Our adjusted EBITDA margin is improving as indicated by our 8.8 percent adjusted EBITDA margin in 2nd quarter, which is a significant improvement from the 0.5% a year ago and the 0.7% from the Q1 of this year. As we return to growth, we expect to maintain a healthy adjusted EBITDA margin to balance profitability and growth going forward. In 2nd quarter, we delivered a quarterly record adjusted EBITDA of $1,600,000 which was driven by reduced and more efficient marketing spend and operational efficiency across all business units.

Speaker 2

In turn, 2nd quarter platform participants decreased 15% year over year to 467,000. We remain focused on acquiring the highest quality customers. On the operations side, we continue to benefit from AI and process automation tools, which we will lean into in order to increase the quality of our products while reducing overall OpEx. As we move into the back half of the year, we remain focused on reaching more U. S.

Speaker 2

Households as the all encompassing trusted partner for premium wellness, service and products. We expect to generate free cash flow as we benefit from lower interest expense in our debt, which ultimately provides us with increased flexibility to reward shareholders through opportunistic M and A, reinvesting in the business for further growth and returning cash to shareholders through stock buybacks. And with that, I will turn the call over to Adam to review our strategic priorities for 2024.

Speaker 3

Thanks, Garrett. Our strategic priorities remain unchanged and are as follows. Building best in class software solutions for consumers and partners is core to what we do. We are focused on solving the needs of the premium pet household across wellness, insurance, prescription meds and other solutions. Of note, we're very excited about the long term growth prospects of our prescription B2B SaaS platform and expect to share a more fulsome update on our next earnings call.

Speaker 3

We continue to believe in the power of the veterinary channel and the opportunity in digitally prescribing vet medications to streamline the prescription process for pet parents and vets alike. 2, we're focused on growing our platform via product expansion, proprietary partnerships and opportunistic M and A. Our integrations of Dog Food Advisor, Max Phone and Firmacy were seamless and we're always looking for new opportunities that delight the premium pet parents and are a value add to the WAG platform. On We Compare, we remain confident in our ability to replicate our success with pet insurance and other insurance verticals, but we expect majority of the growth contribution to come in 2025 when we have more marketing bandwidth to allocate for a more robust launch. As Garrett mentioned, we are intensely focused on driving free cash flow, increasing profitability and therefore have been more measured with our marketing spend.

Speaker 3

In short, the team at WAG is performing exceptionally well and we continue to advance against our core strategic pillars. We remain excited about our company's future growth prospects and believe a strengthened balance sheet will allow us to return to growth and scale our business profitably and sustainably for increased shareholder value creation. I will now turn the call over to Alec to discuss our Q2 financials and 2024 forecast in more detail. Thanks, Adam. Our Q2 results, which were

Speaker 4

highlighted by a highest adjusted EBITDA profitability on record, are a result of our commitment to strengthening our balance sheet. Our results were driven by prudent cost management initiatives. As a result, Q2 metrics rose follows: Revenue of $18,700,000 down 6% year over year, comprising of wellness of 11,500,000 dollars services of $5,600,000 and pet food and treats of $1,500,000 Adjusted EBITDA of $1,600,000 dollars representing a $1,500,000 improvement year over year and an adjusted EBITDA margin improvement from positive 0.5% to positive 8.8%. Platform participants of 467,000 a decline of 15% year over year, however, generating higher revenue per user statistic. Our expenses when analyzed as a percentage of revenue were as follows.

Speaker 4

Cost of revenue excluding depreciation and amortization totaled $1,200,000 representing 6% of revenue staying flat to 6% a year ago. Platform operations and support expenses totaled $2,700,000 representing 15% of revenue versus 18% a year ago. The decrease year over year was achieved through optimized technology benefits and headcount costs. Sales and marketing expense totaled $11,000,000 representing 59% of revenue, up from 54% a year ago, but down from 67% in Q1 this year. As mentioned earlier, we reduced marketing spend in the quarter to increase profitability in the near term, but expect to increase this investment once we refinance our debt.

Speaker 4

G and A expense totaled $3,800,000 representing 20 percent of revenue, down from 24% a year ago. The reduction was driven by technology and headcount cost optimization and lower public company costs. From a balance sheet we ended the quarter with $17,000,000 in cash, cash equivalents and accounts receivable. As we mentioned, in July, we completed a $10,000,000 capital raise that added approximately $8,500,000 of cash to the balance sheet after expenses. We plan to use the proceeds to pay down high interest debt.

Speaker 4

This will generate approximately 340,000 dollars of quarterly interest cost savings starting in Q3. With the lower debt balance and better cash to debt ratio, we are positioning ourselves for a debt refinancing that has the potential to generate further interest cost savings. We are actively exploring options and we'll provide an update at the appropriate time. Moving to our guidance for 2024. Taking into consideration our results yet to date, we reiterate our guidance provided on July 10 of revenue of $92,000,000 to $102,000,000 which represents growth of 10% to 22% over 2023.

Speaker 4

Adjusted EBITDA in the range of $4,000,000 to $8,000,000 representing drastic growth over 2023. This guide anticipates a 4% to 8% adjusted EBITDA margin, in addition to our expected positive free cash flow in the second half of twenty twenty four. For our Q3 2024 guidance, we expect revenue in the range of $20,000,000 to $24,000,000 and adjusted EBITDA in the range of 1,500,000 dollars to $2,500,000 We are approaching Q3 from a position of strength and we are seeing healthy competition in the pet category alongside an improved consumer environment for the premium household compared to last quarter. In summary, our 2nd quarter illustrates our commitment to strengthening the balance sheet, our ability to balance growth versus profit, and finally, confidence in the next stage of WAGS journey as a profitable growth company beyond 2024. Our operational discipline on headcount and automation will allow us to continue lowering OpEx and increasing profit for sustainable profitable growth.

Speaker 4

And with that, we now welcome Q and A. Operator, can you kindly open it up for Q and A?

Operator

Your first question comes from Jason Helfstein with Oppenheimer. Your line is now open.

Speaker 5

Hi, everybody. So now that you guys got that financing done, the equity financing, do you how are you thinking about leaning back into marketing? Obviously, you didn't change the full year guide, But do we think about you leaning into marketing potentially in the Q4 or we more think about that next year? And then I guess as we're just thinking about next year, like how do you think about, I don't know, like the priorities for growth? Is it like the same kind of view as you came into this year just with more money to spend?

Speaker 5

Thank you.

Speaker 3

Hey, Jason. Thanks for the question. So as it pertains to growth, I really think our first priority is the debt. So the financing was really about paying down debt and putting us putting the remaining debt balance. This is after the prepayment penalty expires, putting the remaining balance in a place that we can refi.

Speaker 3

So is it as it pertains to growth, I think that we're first going to refi the remainder of the debt. And then once that's behind us and we're really in a position where we're generating real cash, then we'll lean back into growth. And that will happen in the back half of this year. As it pertains to 2025, yes, we want to return to being a growth company, but probably a little bit more balanced between growth and profitability than we came into this year. Our initial thoughts for this year was to kind of be very growth heavy and something like 3% or 4% EBITDA margins.

Speaker 3

Next year, I think that we want to be more on the order of 8%, 10%, 12% EBITDA margin somewhere in that range, and then kind of balanced growth on top of that. Hope that answers your question.

Speaker 5

Yes, super helpful. Thanks.

Operator

Your next question comes from Jeremy Hamblin with Craig Hallum. Your line is now open.

Speaker 6

Thanks and congrats on the improvements in profitability. I wanted to hone in actually on the point that Alec was making. There's been a lot of noise and frankly a bit of softening in consumer spend. I think I caught in Alec's comments that in Q3 you've seen increased demand for premium pet care services, but wanted to see if you could explore that. You're obviously guiding to a sequential improvement, pretty nice sequential improvement here in Q3 versus Q2.

Speaker 6

So I wanted to get a sense for how things are starting out and how you're seeing kind of competitive balance?

Speaker 3

Sure. So thanks for the question, Jeremy. I don't think it's a surprise to anyone to say that the macro backdrop is a little bit shaky right now, like literally right now this week. But broadly within the pet ecosystem, premium pet care, so that's kind of like all of the wellness categories have been pretty durable. I don't think, Innovidio trading off has a big impact on whether or not you're going to get a pet insurance policy.

Speaker 3

So I don't think it's a shock to you or kind of anybody listening to this call to say that wellness and our kind of health related businesses have been kind of the bright spot over the last 12 months. And I don't see that changing. I think that's a pretty durable secular trend and we're going to kind of continue to play in that space. Great.

Speaker 6

And then wanted to see it looks to me like you saw pretty significant improvement in your ARPU, given the platform for what you're learning as you've kind of gone through this process of getting more disciplined, getting more profitable and squeezing a bit more out of the platform itself. As you reignite the growth engines here post debt refinancing, how from a strategic standpoint, what learnings have you had that you're going to apply so that moving into 2025 as you invest dollars in sales and marketing to continue to get that good improvement in ARPU?

Speaker 3

Yes, that's a good question and good observation, frankly. So any quarter where we pull back on marketing sequentially, the customer mix is going to change a little bit. So there's more returning customers relative to new customers as a function of that spend. Those returning customers are going to have higher ARPU as you've noticed, but it's also kind of actions that we're taking internally. So cross sell and up sell becomes really, really important when we're looking for growth outside of just deploying marketing dollars.

Speaker 3

So you're going to see more of that. I think that the roadmap and the customer acquisition landscape is going to push us a little bit harder on the upsell, cross sell that you kind of observed in Q2.

Speaker 6

Got it. And then with the clearly focuses on debt refinancing here. As you start to think about the timing for that, I think the prepayment penalty expires here in the coming few days. What's the timing that you think that that can get done? And then how much improvement do you think that you can get out there in the market in terms of kind of annualized interest rate reduction?

Speaker 6

I mean, are we looking at 400, 500 basis points or something more than that, based kind of on the engagement you've had thus far?

Speaker 4

Good question, Jeremy. So definitely in the back half of this year, we're actively working on it at the moment and having a lot of good conversations with a lot of different parties. Some of this is outside of our control on paperwork and working through a process with parties and typical timeline is not days, it's weeks to potentially months. But ultimately, we feel confident that we'll be able to close it in the second half of the year. From a interest rate perspective, we're currently at 15.8%.

Speaker 4

We think that and expect that we can get to a rate closer to 10%, which will be a significant impact from interest expense perspective together with or compounded with a lower outstanding principal note.

Speaker 6

Got it. And then in conjunction maybe with that question, you saw a reduction in your G and A costs. We know that you've made some tough decisions in terms of staffing levels. How should we be thinking about, as you get into kind of Q3 and really more into Q4 and looking to kind of reignite revenue growth, how should we be thinking about that G and A line item? As you I think based on what you have in your guidance, you're looking at somewhere in the $27,000,000 plus revenue in Q4, how much does your G and A grow in getting to those types of revenue levels?

Speaker 4

So G and A for the quarter was 20%. I think as revenue scales in Q3, Q4, G and A will not scale with revenue. I think it's scalable. We're seeing efficiencies with headcount, with technology. And so I would expect that to increase a little bit, but it will scale nicely as revenue scales.

Speaker 6

Got it. And then just lastly, in terms of looking ahead in the success you've had with the wellness platform and marketplace, as you get into launching we compare next year in earnest, what type of support do you need in terms of infrastructure to manage that? In other words, kind of bodies and team versus kind of the sales and marketing support costs in getting that launched? Is there more infrastructure significant significantly more infrastructure that you need in launching that? Or how do you feel about your sales and marketing costs related to launching that.

Speaker 4

So we've done a lot of the heavy and hard work for We Compare. There's still a little bit to do to Adam's point. We have most of the tech ready to go and it's a final fine tuning. As we've always done with added headcount where there's a good ROI and so as we compare launches and scales, and we'll likely add headcount there as well. And there will be some marketing to deploy it, but we have what we believe is our playbook with the pet insurance business and our mood with providers from the supply side and on the demand side with the insurance providers that we will be applying to We Compact.

Speaker 4

So while there'll be some investment, it will not be a significant investment to get that up and running.

Speaker 6

Great. Thanks. Congratulations and best wishes.

Speaker 3

Thanks, Jeremy.

Operator

Your next question comes from Matthew Koranda with Roth Capital. Your line is now open.

Speaker 3

Hi, guys. Good afternoon. Can you just do the math on the refi for us? Just wanted to make sure I understood the working pieces. So I think $9,000,000 in cash in the Q2, dollars 8,500,000 added from the recent raise and then going to repay all of the debt, remind us the total principal out and then what that means for the size of the new facility that you're looking for?

Speaker 2

Yes, absolutely. Alex, can you take this one?

Speaker 4

We have $9,000,000 in cash. The outstanding principal is $25,700,000 After the raise, we have added around $9,000,000 in cash. So and then with the clearing of AR, we're at 18,000,000 dollars So that's essentially a $7,000,000 delta between our current cash and debt. So that puts us in a position to pay down the debt and refinance the delta, looking at a refinance at somewhere in the range of $12,000,000 to $14,000,000 maybe 15,000,000 dollars as the new debt amount versus the $25,700,000 we have today.

Speaker 3

Got it. And I assume that that gives you sufficient working capital cushion and gets you to sustain profitability in 2025. Is that the right way to think about it?

Speaker 4

Absolutely. We've never been a heavy working like heavy CapEx company or heavy working capital company. So it will give us sufficient coverage there combined with our expectations of adjusted EBITDA generation in future quarters to add incremental cash to the balance sheet.

Speaker 3

Got it. Okay. And then just in terms of the Q3 outlook and the rest of the year, maybe could you speak a little bit to what you're assuming in terms of return on ad spend? Because I know you mentioned pulling back on marketing, focus on profitability that obviously hits the top line. But what are we assuming in terms of efficiency on the marketing spend in terms of returns?

Speaker 3

I'm happy to jump into this one.

Speaker 4

Kind of a

Speaker 3

similar profile to Q2, frankly, but with a little bit more scale, hopefully coming from the seasonality of these different businesses. We're also like leaning into partnerships and different distribution channels that are not necessarily Google, Facebook, what have you, that kind of give us more bang for your buck. So it's kind of the change in gears from focusing on growth as the primary metric like we came into the year with and kind of having shorter payback windows, higher ROI bar for future growth. And then finally, it's important to note that the debt refi is really our top priority right now and balance sheet health. And I don't think that we're going to kind of really push the levers on growth until we have that refi kind of lockdown or in its final stages.

Speaker 3

Okay, fair enough. And then moving I guess, the move out of social and search and the traditional performance channels, is that in reaction to anything that you guys have seen in terms of just erosion of performance? Or is that just we're moving into a broader set of channels to try to find new customers? Like maybe just put that in context for us. Yes.

Speaker 3

I think that over the longer term, durable partnerships and ways of acquiring customers that look more like organic acquisition as opposed to giving margin to Google or Facebook. I think that's just more scalable and has a better return profile. So that has been a big focus for us kind of Q2 and going forward. As it pertains to ROI on marketing generally, it is an election year and it's looking to be a contentious one at that. So I do think that the marketing landscape is going to be more challenging in Q4 Q3 and Q4 this year than otherwise, but not in really a super dramatic way just on the margin.

Speaker 3

Okay, very helpful. Appreciate it, guys. Thanks, Matt.

Speaker 6

At this

Operator

time, this concludes our I'm sorry, Garrett Smallwood.

Speaker 3

I'm sure Garrett means to give closing remarks here, but thank you everybody for joining the call. Garrett has 2 young children at home, so I'm sure he's chasing somebody, doing something right now. But thanks everybody for joining the call. Looking forward to connecting soon.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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