Wag! Group Co. (NASDAQ:PET) Q3 2023 Earnings Call Transcript

Wag! Group Co. (NASDAQ:PET) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Greetings, and welcome to the Wag! Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Robles with Investor Relations. Thank you, sir. You may begin.

Greg Robles: Good afternoon, everyone, and thank you for joining Wag!’s conference call to discuss our Third quarter 2023 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 within the SEC. 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-K 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 on our IR website and with the SEC. And with that, I will now turn the call over to Garrett Smallwood.

Garrett Smallwood: Good afternoon, and thank you for joining us today to discuss our financial performance for the third quarter 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. 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 third quarter. Following that, Adam, our President and Chief Product Officer, will share updates on our strategic plans and key initiatives for the remainder of 2023 and beyond. And Alec, our Chief Financial Officer, will provide a more detailed analysis of our Third quarter results, discuss our capital allocation priorities, and reiterate our 2023 guidance. During the quarter, revenue grew by 42% year-over-year to $21.8 million. This growth was driven by the success of our wellness business fueled by demand for pet insurance and wellness products.

In addition to the success of Paw Protect, the only pet insurance product in the US with instant pay. We’re seeing early signs of success with Cat Food Advisor, which validates our longer-term growth initiatives by expanding our reach in the pet food and treats category. Our adjusted EBITDA was $1 million, an increase from a loss of $0.5 million 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 third quarter, platform participants increased to 632,000, an increase of 34% year-over-year. And Wag! Premium maintained strong penetration at 52%. Our third 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. And as a result, our LTV:CAC ratio was a deliberate 9:1. On the supply side of the business, we maintained the 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 Third quarter results demonstrate our ability to scale the platform faster and more profitably than anticipated. It showed the effectiveness of our strategy and business model to become the number one platform for premium pet parents. Simply to add, we have out-executed on the strategy we set forth almost two years ago for the seventh consecutive quarter.

And with that, I will turn the call over to Adam Storm to review our strategy for the remainder of 2023.

Adam Storm: Thanks, Garrett. I’ll once again walk through the five top-level elements of our strategy to drive long-term shareholder value and profitable growth. One, accelerate growth in existing markets. As Garrett mentioned, the third quarter was another record-revenue quarter, driven by the demand for pet insurance and wellness products across the US, as well as a post summer returned to normal daytime service hours. 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. Two, expanding premium subscription offerings; our premium penetration rate remained at a robust 52% ahead of our long-term goal of 50%.

We are continuing to test the value of the Wag! Premium bundle by introducing new benefits and experimenting with current offers. We’re actively experimenting around a 10% price discount for new subscribers with an emphasis on the upcoming holidays, which shoot were overnight sitting in boarding, which is a higher average order value service. Three, platform expansion. Last quarter, we rolled out the Wag! Store in partnership with Maxbone, which we acquired in Q2 of ’23, bringing modern pet essentials to our engaged community for pet parents and pet caregivers. Maxbone has incredible assortment of premium products, for example, the Christian Cowan collab Jumper, which Kim Kardashian organically posted about on her Instagram page with her prop Pomeranian, Sushi.

I urge you to check it out. Other bestsellers include the Eco Sling Carrier and the Easy Fit Harness, which come in fun colors such as peach, yellow, ivory, and dusk blue. We’ll continue to roll out seasonal products, collaborations, and must-haves to expand Wag!’s brand while capturing additional share of wallet. Four, opportunistic M&A. Wag! continues to be strategically positioned to leverage pet specific M&A opportunities due to our ability to quickly integrate new assets into our platform, supported by our deep understanding of the consumer and our technology first. 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 that we do not currently capture.

Fifth, 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. Adjusted EBITDA margin improved substantially year-over-year from minus 3% to positive 5%, an 8% point improvement. The significant year-over-year improvement is inherent to our high margin software marketplace model, where incremental revenue significantly enhances the adjusted EBITDA profile for 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 ’23. We will continue to invest in a different marketing payback cycles, operational excellence, platform integrations and cross-sell, and best-in-class customer experience.

I will now turn the call over to Alec to discuss our Third quarter financial results in more detail.

Alec Davidian: Thanks, Adam. Q3 building on our Q1 and Q2 momentum, created from our core platform participants of 632,000, revenue of $21.8 million, and adjusted EBITDA of $1 million. That is now turning back-to-back adjusted EBITDA profitable quarters. This also takes us to full-year ’23 adjusted EBITDA profitable year to date, a huge milestone in the company’s history. Third quarter revenue of $21.8 million exceeded our expectations, up 42% from last year, driven by strength across all three revenue categories. This resulted in an adjusted EBITDA profit of $1 million for Q3 versus an adjusted EBITDA loss $0.5 million last year. I came down with our three revenue categories. Services revenue was $6.6 million, growing 12% from Q3 last year, making it the largest service revenue quarter to date.

We continue to see post similar retention of service habits, combined with a continued slow and steady return-to-office trend. That has also increased in nominal amounts of e-commerce revenue from Maxbone and Wag! Store. Wellness revenue was $13.5 million, increasing 42% from Q3 last year, driven by demand for our pet insurance and wellness programs through our proprietary comparison engine technology. Our technology’s ability to add value to customers is clear and in Q3, we experienced record traffic as some have returned to normal activities resumed. Pet food and treats revenue, a new revenue category for this year, was $1.7 million. Feel free to buy the newly launched Cat Food Advisor to continue to provide pet parents with high-quality information to allow them to make the right food decisions for their pets.

Turning to expenses; cost of revenue, excluding depreciation and amortization, $1.4 million, was consistent year-over-year at 7% of revenue. Capital 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 products through Maxbone and Wag! Store. Platform operations and support expense of $3 million equates to 14% of revenue, down from 37% a year ago. While non-revenue generating platform operations and support functions remain a key factor into the business, our operations have become highly efficient over the past year through redesign and use of AI tools to get answers faster. Sales and marketing expense of $12.8 million equates to 59% of revenue, down from 73% a year ago.

And so numerous opportunities to put dollars to work in sales and marketing costs on various revenue streams, and we’ll continue to take advantage of efficiency as we identify them. G&A expense of $4.7 million equates to 21% of revenue, down from 165% 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 operational excellence of our leadership team. From a balance sheet perspective, we ended the third quarter with approximately $31 million in cash, cash equivalents, and accounts receivable. Our adjusted EBITDA positive results puts us in a strong position to continue to deploy cash for sales and marketing, product innovation, and value add acquisitions.

Moving to our guidance for ’23, taking into consideration results year to date, we reiterate our full-year ’23 forecast. Total revenue in the range of $80 million to $84 million and adjusted EBITDA guidance to a range of zero to $2 million. $82 million and $1 million are at the midpoint of the respective ranges. For the fourth quarter, we expect total revenue of $20 million at the midpoint of the full-year ’23 range, which would be an 18% increase in revenue over Q4 ’22 and adjusted EBITDA of $0.3 million at the midpoint for the full-year ’23 range, which would be a 168% improvement over Q4 ’22 adjusted EBITDA. With our strong Q3 results, which took year-to -date adjusted EBITDA to $0.7 million, 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. Our financial guidance includes the following considerations. The forecast incorporates our internal target of 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 message daytime service demand, but also expect that severe weather will impact service demand. Pet adoption during the holidays also positively impacted the pet insurance penetration and demand for wellness plans. We anticipate the continued growth in the pet industry driven by factors such as higher rates of pet ownership, pet insurance penetration, and increasing demand for premium pet products and services, will have a positive impact on our full-year ’23 results, including on our entrance to pet food entry.

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 and wanted to accurately forecast our financial performance. And finally, we recognize that there may be potential risks to our financial performance in ’23, such as disruptions to global supply chains, changes in consumer behavior due to unexpected events such a delayed in balanced return-to-office, digital and performance marketing trends, the potential impact of AI, and our ability to expand through partnerships. In summary, a 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&A.

Operator, can you kindly open it up for Q&A.

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Q&A Session

Operator: Thank you. We will now conduct a question-and-answer session. [Operator Instructions] The first question comes from Jason Helfstein with Oppenheimer. Please proceed.

Jason Helfstein: Hi, everyone. Thanks. So, Garrett, you’re coming off of over 40% revenue growth this quarter. I want to push you to comment on how you’re thinking about growth potentially next year? And then how you’re thinking about marketing relative to growth, you talked about rule of 50. Is that something that you want folks to focus on next year? How much is — whatever you can talk about how 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 look at the current trends and just assume the same mix shift as we move into next year? Thank you.

Garrett Smallwood: 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, I think maybe some were anticipating as a function of the macro this year. 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 quarter pans out, frankly, leaning Q4. But I think we’re very excited about next year’s potential. 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 accelerate growth in 2024, and that growth should be very profitable to our expectation.

Jason Helfstein: Thank you.

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

Jeremy Hamblin: Thanks, and congrats on the strong results here across your segments. I wanted to dive into your wellness segment here and just understand in terms of driving that growth. Also, you know, over 40% growth in that segment. Is that being driven by more participation, more participants? 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?

Garrett Smallwood: 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 and wellness players and health players leaning into our marketplace, a great place to find new customers. We’re certainly enjoying it in terms of our opportunity to match customers, great experiences, and services and products that care about. In terms of a participant growth, wellness is functionally going to grow as net new customers, we’re saying, but maybe like a 1:1, more revenue from this implies more net new participants in the platform. And as you can imagine those customers then cross-sell to the other ecosystems of products, right? So you come for purchasing the right pet insurance product somewhere or finding the right insurance products somewhere, and then you stay for a daytime service or an overnight service or purchasing a maximum product.

Jeremy Hamblin: Got it. Okay. And then let me shift gears here and talk about sales and marketing. As we look ahead here, we’re going to get into an election year. Sometimes, costs are a little bit higher for advertising. You guys are still running really strong CAC ratio, 9:1, 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 to keep existing customers engaged on the platform or to reactivate lapsed customers?

Garrett Smallwood: Yes. I certainly think if you look at the LTV and CAC, we’re running incredibly efficiently, is by 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. I don’t expect that to change, obviously, for the remainder of the year. So, now we know we have 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.

But generally, I think next year we expect to lean even further into sales and marketing.

Jeremy Hamblin: Got it. And then just a couple of 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 in first time, unemployment. Are you guys seeing that pipeline still strong? Is it getting better? And then, are you still experimenting in terms of a fee that you’re charging to join the platform for the PPGs?

Adam Storm: Hey, Jeremy. This is Adam. A 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, kind of what everybody wants to do. In terms of how the broader macro affects it, you know, in theory, unemployment would be good for us because it makes the game more competitive or whatever you want to call it. But I really don’t think that there’s 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 we’re — regardless what happens to the macro, I don’t think that’s going to have a large impact. In terms of the onboarding fee you mentioned, it’s really about finding price equilibrium or supply-demand equilibrium in our markets.

We’re not looking to really drive that as a primary revenue source. So, any fluctuation you see in that onboarding fees is really just a supply and demand mechanism.

Jeremy Hamblin: Got it. Last one for me, high-level question. You noted the focus 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 shaky set of investors, a little more uncertainty in the macro, what’s a 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 to 10%?

Garrett Smallwood: Yes, I know. I think last quarter, Alec hinted that we plan on reaching free cash flow by second-half of 2024, which I think is really important milestone, Jeremy, to your point. It kind of defaults our ability to manage the business independently from any macro factors. 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 second-half of 2024.