Oddity Tech - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good morning. Welcome to ODDITY's Q4 and Full Year 2024 earnings conference call. Today's call is being recorded. We have an allocated time for prepared remarks and Q&A. At this time, I would like to turn the conference over to Maria Lycouris, Investor Relations for ODDITY. Thank you. You may begin.

Maria Lycouris (Head of Investor Relations)

Thank you, Operator. I'm joined by Oran Holtzman, ODDITY's co-founder and CEO, Niv Price, ODDITY's CTO, and Lindsay Drucker Mann, ODDITY'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 ODDITY's business strategy, market opportunity, future financial performance, and potential long-term success.

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 issued yesterday and in our most recent annual report on Form 20-F filed with the Securities and Exchange Commission. 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.

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 Holtzman (CEO)

Thanks, everyone, for joining our call today. 2024 was another strong year for us, both for financial achievements, but even more importantly, for the investments we've made to drive our business in the future. As I tell my teams, our success today is because of the hard work we did two and three years ago. We are proud of it, but it is in the past. We must continue to work hard to invest today to ensure we keep winning. It is for this reason that I'm bullish about 2025 and beyond.

Our business is very strong, and we are developing more engines of growth than ever before, engines across ODDITY Labs, new brands, and AI. So let's start with our 2024 performance. In 2024, we grew revenue 27% to $647 million and delivered adjusted EBITDA of $150 million at a 23.3% margin, growing adjusted EBITDA 40% year-over-year. We generated $134 million of free cash flow, converting over 130% of our net income into cash. We again proved the power of online.

We beat our earnings guidance every single quarter since going public and continuously raised our outlook on sales and profitability every single quarter, seven quarters in a row. Both our brands did great in 2024, each growing revenue double digits. IL MAKIAGE crossed the $500 million revenue mark in 2024, and SpoiledChild recently crossed the $150 million mark for its third birthday anniversary this month. We maintained strong and consistent momentum across the year, including our Q4, where we grew revenue by 27%. This momentum continued into 2025, where we had a great start for Q1, growing across brands and product categories.

Given the importance of our Q1, it put us in a good position to once again meet our annual targets for revenue growth of 20% and adjusted EBITDA margin of 20%, which we are committed to doing every year. One of the most important focus metrics for us is repeat sales. Repeat is the best indicator we have of customer happiness and satisfaction and of our ability to sell new products into existing customers. And of course, repeat revenue is high margin for us and drives our strong profitability.

We are therefore pleased to have further strengthened our repeat sales in 2024 and increased it as a percentage of our business from 2023. This was driven by our strong 12-month revenue repeat rate of over 100%, a level that we believe is best in class across B2C. We are clearly an outlier versus other beauty companies that have reported weak demand and excess inventories. I want to explain why we are outperforming today and why we believe we will continue to do so in the future. First, we are deliberately focused on the most attractive growth areas of the market.

This includes the shift to online and the increasing consumer demand for high-performance products. In our view, the move in recent quarters to online appears to be having more meaningful impact than in the past. There is too much product in too many physical points of distribution, while online is growing at a strong pace off a larger base. The global beauty industry is one of the most attractive markets in the world, in our view, huge in size and highly profitable, with so many areas to innovate and grow.

I believe that incumbents have underinvested in technology and have been slow to adapt to a changing consumer. We can see how it is hurting their business today and creating an opportunity for us as we continue to invest and strengthen our moat on those fronts. The second reason for our outperformance is our direct-to-consumer model, which has so many advantages over wholesale brands, and in a tough industry backdrop, those advantages really shine. We have a direct dialogue with consumers without retail interference. We understand the performance of every product by platform, by ad, by geography, by funnel, every hour of the day.

We double down on what is working and continuously optimize to make sure we never hit a wall. Due to our D2C model, we have a very accurate read and strong planning. We have full control of our inventory, avoiding the excess inventory that wholesale brands are facing today, including all the discounting that comes along with it. Turning now to physical products, one of the greatest strengths at ODDITY is our ability to develop high-performing products, launch them into our user base, and create new hero franchises.

From the very beginning, we've built a culture at ODDITY that truly believes in product, product that solves our pain points and does it better than others, product that she loves and wants to come back to. And these strengths really show in our numbers today. Starting with the original product portfolio we launched back in 2018, which continued to grow double digits. Based on industry data, we believe IL MAKIAGE has the number one foundation, the number one primer, and the number two concealer in the U.S. prestige dollar sales.

Our product innovations are growing even faster. A good example is IL MAKIAGE Skin, which we launched in 2022 and as of 2024 represented around 30% of the brand revenue, and it should continue to grow. SpoiledChild is another example, launched in 2022 and now makes up almost 25% of ODDITY revenue today and growing double digits. Part of our product innovation machine is our direct connection with the consumer that enables us to learn what she needs. Another is our strict development protocols that require any product we launch to beat competitors in large-scale consumer trials.

If it isn't perfect, we won't launch it, even if it means we don't launch new products. What was recently added to our existing product sourcing strategy is ODDITY Labs, our biotech lab in Boston that is a major investment for us. Over 60 scientists full-time working on discovering and developing new molecules that have the potential to disrupt our old industry completely. As I said before, I believe this will take time but can be a true game changer for us.

I want to close with some thoughts on why we are bullish on 2025 and discuss some of the investments we are making for the future, starting with a core business where we have incredible strength in both IL MAKIAGE and SpoiledChild, both as a great 2024 and now off to a strong start in 2025. IL MAKIAGE is already one of the largest prestige beauty brands by revenue in the United States after only six years in the market based on industry data, and it is on track to reaching $1 billion of revenue by 2028. The color business continues to grow with great repeat. Skin is a massive opportunity.

As I mentioned, it reached 30% of IL MAKIAGE brand sales in 2024 and will continue to get even larger. Remember that for most of our largest competitors, skin business is twice the size of color. International is another major opportunity that we have slowly played throughout the years. We began slowly accelerating our growth outside of the U.S. in Q1 of 2025, both by increasing scale in existing markets like the U.K., Germany, and Australia, as well as large-scale testing in new markets. So far, it looks good, and we continue to believe international will grow to big numbers.

SpoiledChild, we are also building to be a billion-dollar brand. It has scaled at a healthy rate, passing the $150 million LTM revenue mark and doing it with strong repeat rates and AOV. It shows how much unmet demand there is for the brand. We have begun testing international markets for SpoiledChild in 2025 with good indications and seeing big potential there. Another reason that makes us bullish about our future is our new brands. With every brand, we push ourselves even more to not only disrupt the market but disrupt ourselves again and again.

Brand 3 is a telehealth platform for consumers that will start with medical-grade skin and body issues like acne, eczema, and hyperpigmentation, and then will expand to other health domains. Our offering includes a comprehensive and innovative product range and access to prescription and OTC treatments, enabling full personalization to user profiles, types, and severities. Individual treatment plans can be updated and adjusted to minimize side effects and increase efficacy. With Brand 3, we are building a user experience and product portfolio that we believe can change the game.

We have built new capabilities for it, including specialized vision technology for assessment and a mobile app with a treatment lifecycle coaching engine to encourage compliance with their treatment routine. Brand 3 is on track to launch as scheduled in the second half of this year. We plan to soft launch in Q3 and then roll out official launch in Q4. Brand 3 is also a big opportunity that we are very excited about. More details on that front to come. Moving to ODDITY Labs, where we are using pharma-grade technologies and AI-based molecule discovery to develop high-efficacy science-backed products for our industry.

Our mission at ODDITY Labs is to bring real science to our industry at high scale for the first time and turbocharge distribution through ODDITY's online platform. We continue to grow our team with new talent across bioengineering, computation, chemistry, and delivery teams. Our scientists are actively developing both short and long-term innovation in skin, color, hair, and body with a singular goal of exceeding the efficacy of existing products in these spaces.

To achieve this, we are working on multiple parallel R&D strategies across each of our programs to increase the chances of success. In the short term, we are working on preparing to launch new molecules for Brand 3 and Brand 4. Separate teams are working on longer-term developments, ensuring we focus on both delivering short-term impact while investing in the future. These longer-term developments include our next generation of molecule delivery systems, new modalities, and new biological pathways to improve efficacy.

Beyond our internal R&D, we are doubling our power by partnering with leading platforms to accelerate target and hit discovery using cutting-edge technology, including training in advanced human organoid models to identify new targets and predict molecules' efficacy, AI-based platforms that identify new targets and generate predictions that modulate a given target based on genetic data and RNA sequencing, and GenAI algorithms that develop new, highly effective complexes composed of natural ingredients. Biology is just one part of the equation. Effective delivery is essential to translating scientific breakthroughs into real-world performance.

We are investing in delivery systems, building internal capabilities, and partnering with third parties to optimize how different compounds reach their targets. It is still early to know what will work as we are doing it for the first time, but I can assure you we push hard 24/7 on multiple areas to increase the chances of success. As I already said in previous calls, we don't need ODDITY Labs to meet our financial targets, but what we are building in Labs is for total disruption. If we do it right, ODDITY Labs will change our company and our industry forever.

I truly believe it. Finally, a few words on our investment in tech before I hand it to our CTO, Niv Price. Our big and early investments in tech are paying huge dividends for us today, allowing us to be ahead of our competitors in winning online. This is why we continue to double down on our investments in tech talent and capabilities. This year, with the acquisition of Phionex IP, we brought in-house an elite AI research team with experience from Israeli Intelligence Units. This team will focus on solving ODDITY's high-impact missions, enhance our current models, and help us preserve our lead. I will now hand it to Niv to talk through what we are building in tech in more detail.

Niv Price (CTO)

Thanks, Oran. Indeed, we believe the ODDITY platform today is the most advanced AI-based commercial engine in our industry, and we continue to push our capabilities to new heights. Our technology model allows us to deliver a better experience to customers than what is possible in a store. In order to do that, we need great data and the ability to hyper-personalize the user experience. These are problems that machine models are especially well-suited for and why we have, from an early stage, focused on building these capabilities.

Let's start with product matching, the ability to understand each user and deliver them the perfect product match based on her needs. The vast majority of our first-purchase revenue comes through one of our AI-based matching algorithms. We're continuously improving these models in order to reduce returns and increase satisfaction and repeat. As one example, our latest version of IL MAKIAGE's PowerMatch, which we recently released, is our best-performing shade matching model ever. It's a multi-model architecture training on both images and text, and it's reduced returns of our best-selling shades by more than 10%.

Turning to our user journey and how we personalize every experience to the individual in order to maximize conversion and LTV, I like to think of these models as a virtual personalized store that is being built around our users as they walk through, based on the information we gather about them. One example is a new model we introduced recently for SpoiledChild, targeting post-purchase upsell. Instead of offering a random product after purchase or one pre-chosen by a human, we use machine models to make the decision.

This drove a 30%-plus improvement in upsell conversion and a 15%-plus improvement in upsell AOV. For Brand 3, we're taking product matching and hyper-personalization to a new level with a full suite of AI models. These include severity assessment for different skin conditions, as well as lesion classification, and predictive view, where we combine generative AI models with our unique data and algorithms in order to predict and show users at day one how they should expect to look like across their treatment journey, all the way to clarity.

These capabilities are critical to aligning expectations with our users, increasing their satisfaction and compliance, and reducing churn. Working closely with top dermatologists, we were able to show that our acne models have reached this year a level of accuracy that matches or beats that of a single dermatologist. Breakthrough foundation models from OpenAI, Meta, Google, and others have been a huge win for us. We can take these models, combine them with our unique data and algorithms, and build new tools faster and way more efficiently than what was possible before. I'll give you an example in the acne domain.

We start with a foundation model that knows how to identify circles, colors, and texture. We then teach the foundation model, "If you see a circular red bump, that's a lesion," and teaching it means showing it many ground truth examples using our proprietary data of more than 10 million unique images from our users, which we believe is one of the largest datasets of this nature in the world, then we do another final step of additional training with our data, and boom, you have a domain expert. This approach has two important advantages. One, speed.

Since the starting point was that of a foundation model that knows the world quite well, turning it into an expert is faster than if you had to teach it from scratch. Two, quality. The results are usually better than if you started from scratch. But the precondition for this is you must have the data. So for us, having the unique proprietary data, we can now move much faster, save on costs, and get more accurate results. Turning to the platform, it's important to emphasize, especially as we're rolling out more and more brands, we're building ODDITY's technology with a modular and extensible design, which makes it usable across all brands and makes it plug-and-play for all new launches. This allows us to be super efficient in terms of time, resources, and capital.

These modular ODDITY core libraries span across every aspect of our platform, from user-facing interactions like our funnels and checkouts to video on demand with Kenza, to our computer vision diagnostics and tracking core capabilities, product recommendations, tons and tons of applications, which would be expensive to build separately. But on our platform, we leverage these core libraries to drive speed, result, and efficiency for each brand. With that, I will turn it over to our Global CFO, Lindsay.

Lindsay Drucker Mann (CFO)

Thanks, Niv. Let's turn to our Q4 results, which I will refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. ODDITY delivered another record-breaking quarter to cap off a record-breaking year. We grew net revenue by 27% in the quarter to $97 million. The strength was driven by both IL MAKIAGE and SpoiledChild across a range of product categories.

Net revenue growth was driven primarily by an increase in orders, while average order value increased 12% year-over-year. Average order value growth continues to be driven by mix, in particular the increased proportion of IL MAKIAGE Skin, as well as higher items per order. The 27% revenue growth we delivered this quarter beat our 22% to 24% guidance. The upside stands in contrast to the concerns we hear from investors about weakening sales trends in other beauty businesses, including both wholesalers and retailers.

As Oran said, our results are a testament to the strength and resilience of our direct-to-consumer model and how we've positioned our business to win in the most important vectors of industry growth. Moving down the P&L, gross margin of 72.7% expanded 330 basis points year-over-year and exceeded our guidance of 68%. The delta versus our outlook was driven in part by product mix. We delivered adjusted EBITDA of $15 million in the quarter and adjusted EBITDA margin of 12.3%, above our guidance in absolute dollars and in margin percentage terms.

Adjusted EBITDA margin compressed by 453 basis points as we incurred planned incremental expenses in the quarter to drive future growth initiatives, including Brand 3, Brand 4, and ODDITY Labs. We delivered adjusted diluted earnings per share of $0.20 compared to our guidance between $0.11 and $0.13. Our adjusted EBITDA and EPS excludes approximately $8 million of share-based compensation. 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 generated $134 million of free cash flow in 2024, an increase from the $85 million we generated in 2023.

In fact, our free cash as a percentage of revenue was 21% in 2024 and 17% in 2023, leading among other beauty companies based on reported results. We believe the strength in our cash flows is just one more indicator of our model's advantages relative to our competitors. We continue to put that cash to work and create value for our shareholders. During the full year of 2024, we repurchased 3.6 million shares of our stock for approximately $147 million. This includes 2.4 million shares repurchased in Q4 via direct buyback of a portion of L Catterton's shares for approximately $100 million.

We have $103 million remaining on our buyback authorization. We will stay opportunistic on share buybacks going forward based on our strong cash flows, ample cash reserves, and attractive share price. We exited the year with $169 million of cash equivalents and investments on our balance sheet and zero debt. Turning to our outlook for 2025, Q1 is off to a strong start with good momentum in January and February. The size of the quarter, combined with the high predictability of cohort repeat, gives us good visibility to meet our long-term algorithm of 20% revenue growth and 20% adjusted EBITDA margins.

Some specific drivers impacting our full-year P&L include: during 2025, we plan to incur incremental expenses associated with growth investments in Brand 3, Brand 4, and ODDITY Labs. This is principally to cover costs associated with people, tech infrastructure, and product development. Even with these investments, we're firmly committed to delivering a 20% adjusted EBITDA margin for the full year and beyond. 3 launch, as Oran said, we're on track for the second half of this year and continue to expect no material revenue contribution in 2025.

Brand 4 will be ready for launch this year, but we've decided to move it to early 2026 to give more focus to Brand 3, more leadership focus, and more capital allocation to one brand versus splitting it in the same year for two brands. This has no material impact on our 2025 outlook, as we are still incurring significant pre-launch expenses and have not contemplated any revenue contribution from Brand 4 in the year. Gross margin for the year is expected to be around 70% as our product mix normalizes, which we discussed in our last earnings call as well.

We will also incur higher cost of goods expense this year for Brand 3, which will operate at a lower gross margin at launch than the company average. As we said before, we continue to see minimal impact on our business from changes in tariff policy. Sticking with the topic of policy uncertainty, let me address TikTok. TikTok is one of many platforms that we use for acquisition, and we have no over-reliance on it. The expected impact to our business if TikTok ceases operating in the U.S. is not material. Moving down the P&L, we expect adjusted EBITDA margin of 20% in line with our long-term algorithm.

We continue to plan to reinvest any EBITDA dollar upside back into the business. Adjusted EPS of $1.94 to $1.98 assumes a blended tax rate of 20% and does not incorporate the potential benefit from additional share buybacks. Turning to Q1 outlook, we're off to an excellent start and are pleased with the composition of our growth across both brands and categories, as well as our cohort repeat rates. We expect year-over-year net revenue growth in the quarter to be between 22% and 24%. You can find more details on our Q1 outlook in our press release. And with that, I'll turn the call back to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question. One moment while we pull for questions. Our first question is from Cory Carpenter with J.P. Morgan. Please proceed.

Cory Carpenter (Executive Director and Senior Equity Research Analyst)

Good morning. Thanks for the questions. I had two. Maybe one international, Oran. I think you mentioned in the prepared remarks, you're starting to push more in Q1. So could you just go a little deeper on your strategy and kind of what you're doing on the international side and why now? And Lindsay, I think for you, just Q1. Understand that's your highest customer acquisition quarter. So could you just talk about what you've seen the first few months on the customer acquisition side in ROAS and payback on that spend? Thank you.

Oran Holtzman (CEO)

Hi, good morning, Cory. At full international, the teams are working hard to accelerate international for many years, as you know. What I wanted to achieve now is to showcase that it is our decision when and how much we want to grow there. I also decided it's important to spread the growth across more markets and instructed the teams already back in 2024 to allow for more growth internationally in 2025. We began slowly accelerating the growth outside of the U.S. in Q1 of this year, both by increasing scaling existing markets like the U.K., Germany, and Australia, as well as larger scale testing in new markets.

So far, it looks very good, as expected, and we continue to believe international will grow to huge numbers for us. As you know, it's a massive opportunity. Our competitors internationally is, I think 2/3 of their business. And we are building a truly localized experience for each international market we enter, which gives us strong performance from day one when we launch those new international markets. And this is one of our biggest levers, and we can use it whenever we want.

The reason that we pushed international, it's not because of softness in the U.S. I instructed the teams last year that I want to push more in 2025, and that's what we did as planned. And it's our decision how quickly we want to pace the growth in those new markets and to prioritize it. I hope it answered that question. Lindsay?

Lindsay Drucker Mann (CFO)

Yes. Thanks, Cory. So Q1 is off to a great start, as we mentioned in our prepared remarks. As you know, Q1 is a really important quarter for us. It's when we turn the engines back on for our acquisition. And we exited Q4 with really good momentum, nice performance across both brands and multiple product categories. You heard Oran talk about Skin now for 2024, reaching 30% of IL MAKIAGE brand revenue. That's been a big highlight for us, even as the color business continues to grow double digits, and SpoiledChild has good momentum.

So all of those things really carried forward for us in Q1. In terms of ROAS, media gets more expensive every year. Consistently, we're able to offset it with all the very strong repeat rates that we have. And that trend, of course, Oran mentioned it for 2024, but it continued into Q1 as well, that we're repeated as a larger portion of our business, which allows us to get a nice overall return on our ad spend.

Cory Carpenter (Executive Director and Senior Equity Research Analyst)

Thank you both.

Operator (participant)

Our next question is from Youssef Squali with Truist Securities. Please proceed.

Youssef Squali (Managing Director)

All right. Thank you very much. Good morning, guys. So Oran, I know you talked a little bit about this in your prepared remarks, but at a high level, in terms of your growth relative to peers, are you seeing any weakness or trade down across your consumer base from ongoing macro concerns? It looks like consumer confidence, at least in the U.S., continues to deteriorate. Do you think this business continues to perform well regardless of how the macro does over, say, the next 12 months, 12 to 18 months?

And then, Lindsay on TikTok, was TikTok impacted at all as a marketing channel for you guys by the brief shutdown in January? And if the platform does go away, what's the best substitute with comparable ROAS for you guys? Is it Instagram? Would love to just see if there is a substitute.

Oran Holtzman (CEO)

Good morning, Youssef. I would think both. Let's start with the easy one. TikTok is being shut down tomorrow. Nothing happened to the business. We already saw it in one day, and the fact that we do everything internally without agencies allows us to move very fast and to shift spend to other platforms, and therefore, no impact. As for the market, look, we said it before, the consumer is moving online. I said it multiple times. I believe this is the case. I believe it will be more than 50%.

We know the challenges some of our competitors have, and it's really not surprising us when you consider how much the consumer is moving online and how much their focus is going into brick and mortar with over 1,000 new points of distribution in just the couple of last years. We did see a lot of promotions from other brands in Q4, which was probably to drive demand. This isn't an issue for us, thankfully, because we don't run the business this way. We are not participating in holiday sales.

But for other brands, it can be very damaging as part of their consumers are conditioned to shop only during sales and promotion. And so it makes it very tricky for Q1 for them. Overall, it's like what we see out there now is a big opportunity for us because we believe this transformation is still in early days. Online penetration can double from where we are today. And that's what keeps us very bullish about the future.

Youssef Squali (Managing Director)

Okay. Thanks, Oran.

Operator (participant)

Our next question is from Javier Escalante with Evercore ISI. Please proceed.

Javier Escalante (Research Analyst)

Oran, Lindsay, nice talking to you. My question has to do more on the consumer side. If you can expand on repeat purchases, which I understand you define it more as conversion within the same cohort. And perhaps if you have visibility on that, whether you can discuss IL MAKIAGE in terms of which areas you see the strongest repeats within existing products, I believe should be foundation. But this is my guess. And how much of the IL MAKIAGE growth is coming right now from consumer trial of the skincare extensions? Thank you.

Oran Holtzman (CEO)

Good morning. I'll start with repeats. Unlike most D2C companies, we generate most of our revenue from repeats. And this is although we grew over 25% so far this year. So this is why the business is so profitable. Repeat in 2024 grew to more than 60% of the business revenue, way higher than 2023. Again, this is although we grew over 25%, actually 27% in revenue. This is an important metric for us because it really shows how strong the satisfaction and happiness is.

And if I dive deeper, our 12-month net revenue repeat rate is more than 100%, which we believe is among the best there is in D2C. And this metric was less than 50% compared to more than 100% just a few years ago. We drive repeat by three main ways. One is more repeat from the same product: foundation, concealer, hair, and skin. Number two is expanding wallet share with new products.

If I sold her a foundation or concealer before, now we are offering her skin product, which is a repeat. And number three, we are getting cross-selling from IL MAKIAGE to SpoiledChild and the future for new brands. So this is the way that we view it. Repeat is very strong. Like the cohort that we see, we don't see any softness.

Javier Escalante (Research Analyst)

Oran, if I can squeeze a second one, if you don't mind.

Oran Holtzman (CEO)

Yes, sure.

Javier Escalante (Research Analyst)

The strong growth in Q1 is certainly a stark contrast with most traditional beauty companies. Could you talk about customer acquisition kind of like in growth rates? Say Q1 2024, I have these many millions of users. And as of now in Q1, I have these many more in a growth rate. If you can tell us how much of the 20% to 23%, I believe, growth would be the midpoint of your guidance come from new users versus existing users buying again? Thank you.

Oran Holtzman (CEO)

Sure. Our biggest push in user acquisition is age one. Like every year, Q1 is the biggest, then Q2. Then we slow down because we don't want to grow more than that. And we enjoy the repeat. But it doesn't mean that we don't have very strong repeat in Q1. If I had it, I wouldn't be like if I didn't have it, I wouldn't be able to land on those EBITDA margins. Because, as you know, acquisition is not super profitable. So we are pushing and we are acquiring new users, but at the same time, we are landing on a very healthy EBITDA margin, which is a testament of the strong repeat rate as part of revenue, although we grow the new user by acquisition.

As for media, as Lindsay said, we continue to generate attractive returns on our marketing spending. And again, you can see it by our strong margins that we forecast for Q1 and for 2025 full year. Q1 media is getting more expensive, but as expected. But due to the super healthy repeat, as I mentioned before, it's being offset and we can see healthy margins.

Javier Escalante (Research Analyst)

Thank you very much.

Operator (participant)

Our next question is from Andrew Boone with Citizens. Please proceed.

Andrew Boone (Senior Equity Research Analyst)

Thanks so much for taking my questions. I'd love to understand the key product milestones as we think about Brand 3 coming to market later this year. What do you guys need to accomplish and kind of knock down to set Brand 3 up for growth and for it to scale into 2025 and 2026? And then, Lindsay, just stepping back from a bigger picture perspective, as we do think about the P&L, you guys are making significant investments across multiple growth factors that really aren't contributing in 2025 materially. How do we think about sizing those growth investments to better understand your inherent underlying profitability? Thanks so much.

Oran Holtzman (CEO)

I will start with the second question. Of course, Lindsay, you can elaborate. We are, I want to say, more than doubling our investments in Q1 versus Q1 last year around Labs, Brand 3, and Brand 4. So when you think about the magnitude, just like continue to grow. And although we continue to grow, we still land on our margins that we are committed to. Brand 3 is a telehealth platform with medical-grade products. We are starting with skin and body issues like acne, eczema, and other pigmentation.

Then we'll add additional health domains already in 2026 next year. I can't elaborate more for competitive reasons. But for where we are today, we start with body and skin. We see these issues as huge pain points that impact a big portion of our user base. And satisfaction with current solution is terrible, either inconvenient visits to the doctor office or picking an ineffective treatment blindly at a drugstore. This is a huge opportunity for ODDITY. We would never launch it this year unless I had a very good read that we know how to win around those areas.

We tested a lot. We are building this brand for more than two years, and we are in a good position to launch it. We are developing ODDITY's most personalized and most comprehensive line of products comprised of OTC and RX products, all to be sold online under our own brand. Most products formulated with existing ingredients on the market, and some OTC products will include exclusive ingredients from ODDITY Labs. Two, we are building a first-of-a-kind, as I mentioned, telehealth mobile app experience to increase compliance and drive higher repeat compared to the market today.

Three is leveraging the best thing of ODDITY, which is our platform, our user base, and marketing to them and developing products to address their needs. As I mentioned, the soft launch Q3, official launch Q4. We are actively scaling the teams, which is a significant investment for ODDITY. We completed developing the product line and branding. We set up the telehealth infrastructure to streamline user experience and support the delivery of our personalized treatments. And as we've discussed, major breakthrough for us around vision. The numbers that I saw are very compelling in terms of diagnosis and matching. And I'm very excited to launch this brand.

Lindsay Drucker Mann (CFO)

Andrew, just to give you a little bit more perspective maybe on the amount of spend, I'll highlight two things for you. Number one, if you look at our profitability first half of 2024, which was essentially just IL MAKIAGE, SpoiledChild, and then just beginning to ramp on our investments. We did have ODDITY Labs, of course, in the base, but there's some investments there, but not as much as you saw for the full year in the back half of the year as we ramped in and what we're guiding to in 2025.

You can get a sense looking at first half of 2024 at how profitable the underlying business is. And remember, 2024 is our highest dollar level of marketing spend. And so we're at our largest scale, and it's our lowest portion of repeat. So this is that profitable despite the fact that it's kind of it's a period where we actually are doing a lot of investment inherent in the D2C business. So I think that's one factor. And the second thing that I would mention in terms of cost is we have had very material increase in investments in these growth initiatives.

We talked about SpoiledChild being a brand that we spent $20 million upfront to launch. So Brand 3 is more involved for us than what SpoiledChild was, but it gives you a bit of a sense of kind of what the upfront investment is that we've, of course, layered over a couple of years.

Oran Holtzman (CEO)

I would just say tens of millions in terms of investment this year. So we can't elaborate more, but big investment for us across Labs, Brand 3, and Brand 4.

Andrew Boone (Senior Equity Research Analyst)

That's very helpful. Thank you so much, guys.

Operator (participant)

Our next question is from Dara Mohsenian with Morgan Stanley. Please proceed. Hey, good morning. So maybe we can stick to Brand 3.

Dara Mohsenian (Managing Director and Senior Equity Analyst)

I was just hoping to get a bit more specifics on the consumer need states you're targeting with Brand 3, the total addressable market that you see, and maybe just a bit of an update to the extent you'd like to share on sort of effectiveness of the product so far in Brand 3 and your testing for those consumer need states versus the existing competing products that are out there.

Oran Holtzman (CEO)

Yeah, sure. I think that I said it, but I will say it again. We start with acne, eczema, hyperpigmentation, and body issues. As for trials, I want to say that we did close to 100 groups of trials. For the personalization and customization, we see numbers that are better than anything out there that we saw so far in terms of matching and satisfaction. Truly, like more than two years in the works just that far.

So we wouldn't launch it unless we were very confident that we have a strong offering. And just understand the magnitude. We are launching dozens of new products for Brand 3 after testing, and it's a huge lift for us. But thank God the majority of the work is behind us, and we are gearing up for launch.

Dara Mohsenian (Managing Director and Senior Equity Analyst)

Great. That's helpful. And then on the ODDITY Labs front, can you just give us an update on commercialization of products there in 2025, both on existing SKUs, so more upgrading existing products, but also in terms of new products and molecule discovery, obviously Brand 3, maybe a piece of that, but how you see that developing in terms of new products going forward and commercializing some of that molecule discovery in 2025?

Oran Holtzman (CEO)

Yeah. Still early with Labs, not because we are not confident, just because we are building something really meaningful there in terms of infrastructure and processes. The good news is that you will see new products coming from Labs for Brand 3 and Brand 4, which is very short term, and in addition, we work very hard to build around, I want to say, more than 10 programs to launch more products from Labs that will take a bit more time because we want to ensure that we are not just launching for the sake of launching to make sure that we are launching for way higher efficacy than what exists in the market.

We are scaling the teams. We now have around 60 scientists there, building to 100. We've built a lot of infrastructure needed to make it a high-scale commercial engine for us, including systems, processes, and controls. We are constantly partnering with other platforms to help us accelerate target and hit discovery. In addition, we are working on biology delivery systems to help optimize how different compounds can reach their target. And as I mentioned, short-term focus, Brand 3, Brand 4. Long-term is way broader than that. And again, for competitive reasons, we are not sharing what exactly we work on there.

Lastly, we are constantly exploring M&A opportunities to strengthen ODDITY Labs' capabilities, looking for strong teams with advanced technologies or new discoveries that are aligned with our target space. I hope it's helpful.

Dara Mohsenian (Managing Director and Senior Equity Analyst)

Thanks.

Our next question is from Scott Schoenhaus with KeyBanc Capital Markets. Please proceed.

Scott Schoenhaus (Managing Director and Equity Research Analyst)

Thanks, team, for taking my questions. My first one is on Brand 3 launch and the telehealth platform. Lindsay, I think you mentioned that gross margins would be a little bit compressed versus your legacy brands here. Is that related to sort of the healthcare providers, the dermatologists that you have access to that will weigh on the gross margins? Just kind of wanted to drill into the workflows of this telehealth platform and in dermatology. Obviously, there's a shortage of dermatologists, and there's long wait times.

So there's a huge opportunity, I feel like, in this market segment for telehealth as well as diagnosis. And kind of want to work through the workflow platform with the telehealth versus the vision technology. Thanks.

Lindsay Drucker Mann (CFO)

Hey, Scott, thanks. The gross margin comment is really specific to, as we've talked about for Brand 3, users will have access to both over-the-counter and prescription. The call-out is really on the prescription side where there's higher cost of goods associated with doctor networks, compounding pharmacies, and that kind of thing. That being said, even with a lower gross margin profile, this is a business where we expect to have great frequency and repeat. And so as for all of our brands, we demand a threshold of contribution margin, EBITDA margin, and we're really, really, really excited about the unit economic profile and financial model for Brand 3.

Oran Holtzman (CEO)

I would just add that we need the infrastructure for doctors just for the RX part, which is going to be less than 50% of our offering. And everything is in place to meet our deadline for launch.

Scott Schoenhaus (Managing Director and Equity Research Analyst)

Thanks. Oran, in my follow-up, you just actually talked about ODDITY Labs, and you talked about M&A. So interesting perspective here, question. How do you balance expanding your team at ODDITY Labs organically versus M&A? I think you also mentioned you're partnering for target optimization as well. Can you just dive into that more, Oran? Thanks.

Oran Holtzman (CEO)

Yeah. Sure. There is a limitation of what we can do internally in terms of, I believe it's a race, and we need to move really fast. And there is limitation of capacity and resources. And in order to make sure that we can double our power, we try to get help from others. And if we see something that is very promising for pharma, we reach out to them and we check if they can help us developing something with us for a certain area that we don't have expertise in.

This is one example. As for M&A, we acquired Revela for the same reason, and we're constantly looking for strong teams, mostly in pharma because in our industry, it's not that common. And if we see a strong team, we will not hesitate to acquire them.

Scott Schoenhaus (Managing Director and Equity Research Analyst)

Thank you.

Oran Holtzman (CEO)

Our next question is from Lorraine Hutchinson with Bank of America. Please proceed.

Lorraine Hutchinson (Senior Retail Analyst)

Thanks. Good morning. Can you talk about the product you've launched in Q1 at each of the brands, what you're excited about, and then what's in the pipeline for the next several months?

Lindsay Drucker Mann (CFO)

Hi Lorraine. Sure. So Oran talked about this a bit in his prepared remarks about how important product innovation has been for us as a way to continue to drive revenue, repeat, and convert our users who had never found what they were looking for into customers. So important in order to drive that conversion from users to customers and then to convert customers into repeat customers. And we can see the benefit of that based on, number one, just how much contribution we're getting to the business today from new product innovation. So Skin is a great example. There was no Skin.

SpoiledChild, there was no Skin or SpoiledChild until 2022, and you can see how large those businesses have become. And then you can also see with our AOV up 12% in the quarter, and it was up nicely all year. We are getting, in that instance, a nice benefit from both the higher price points of those products, but also the fact that people are adding more items to order because they're finding more of what they want. It allows us to do a better job of upsells, bundles, and other things like that, which ultimately drive revenue. We do have some nice products in the pipeline that we tested.

Before we launch anything, we do a lot of testing to make sure that we feel really good about the product's ability to work. Of course, we're always testing our products themselves, but even before the product efficacy, just understanding ad sets and funnels and that kind of stuff. And so we've had some nice products that were tested in 2024. We have one product I'll highlight in IL MAKIAGE, which is our neck cream that's going in Q1 2025. Maybe I find that they target me often on my social platform, so maybe that's a hint for me personally on what I need.

But also, we have liquid magnesium. We have some eye creams and other items. So it's about five for each brand this year for the full year across the year that will be, and that's not even counting the really robust product set that we'll be launching with Brand 3.

Oran Holtzman (CEO)

Like any other year, around five products from each brand will be launched.

Lorraine Hutchinson (Senior Retail Analyst)

Thank you.

Operator (participant)

Our next question is from Lauren Lieberman with Barclays. Please proceed.

Lauren Lieberman (Managing Director)

Great. Thanks. Good morning, guys. I was curious to talk a little bit about the consumer environment. So obviously, I understand that you don't have any exposure to traditional retail and some of the inventory destocking dynamics that are going on. But you talk about how your consumer base is very broad across age cohorts, demographic cohorts, socioeconomic cohorts.

And I was just curious if there's anything you are seeing from the consumer environment because we hear a lot about the kind of cautious consumer, things not getting worse, but certainly not getting better, strength at the high end, but kind of everyone, let's call it below $100,000 of income, household income kind of struggling. So it's amazing how resilient your business has been. And so I was just curious if you could comment again on anything you're seeing or not seeing from the consumer environment. And if you're not seeing it, why do you think that is? Thanks.

Lindsay Drucker Mann (CFO)

Thanks, Lauren. I guess I'll take it. I mean, listen, we hear what other companies talk about. We certainly follow what our competitors are saying. You know, as you've been covering this industry for a long time, that beauty is a really resilient category in and out of economic cycles. I suppose what's different about beauty this cycle is just the secular channel shift. And I know for many, if not all, the companies that I listen to, even if their businesses were challenged, every single one of them called out online as a bright spot. And you can see from our business how strong the performance is.

Of course, it feels like Amazon has hit a bit of a critical mass or a groove where they're getting more great brands on their platform, and you're seeing that benefit. So I think you rightly point out that we have a very broad demo, broad across ages, broad across income as far as we can see just based on the wide range of brands that people trade into us from. So from prestige beauty to mass beauty to mass, there's a lot of different customers that trade into us. And to us, it's a reflection of the value that we deliver. What is it they say? Price is what you pay. Value is what you get.

A consumer is willing to pay significantly more for the same type of product because the product's great and because we're delivering them something that they just cannot get outside of the ODDITY platform. I think we're not necessarily the right place to look. We have a broad demo. We're really tiny in the midst of a very, very large industry, and we're right at the center of all this sort of excellent secular growth without anybody really doing anything close to what we are.

Oran Holtzman (CEO)

I would just add one more thing. What we did have three or four years ago is the diversification of offering. Now, we have color, we have skin, we have hair, we have wellness with SpoiledChild. We are expanding to dermapharma with them and with their Brand 3. And I think it helps a lot in meeting our goals if some area is softer. But needless to say, as we mentioned, that so far we see very strong Q1.

Lauren Lieberman (Managing Director)

Great. And if I can just sneak in one more really small, I was just curious cross-selling between SpoiledChild and IL MAKIAGE. Do you have any way of kind of quantifying that or what the crossover on the customer base is at this point?

Lindsay Drucker Mann (CFO)

Yeah. At the beginning of a new brand, often you see a lot more cross-selling, crossover, I should say, of users from IL MAKIAGE that we then convert into customers for SpoiledChild. By the way, that was true for Skin also. Initially for IL MAKIAGE Skin, we started off mostly with color customers who then ultimately would convert into skin.

But now, as the brand scales, IL MAKIAGE and SpoiledChild has scaled, and IL MAKIAGE Skin, as another example, has scaled, they stand on their own more. I think in general, we've talked about something like half of SpoiledChild's revenues came from IL MAKIAGE users, not necessarily customers, but users, so folks that had come through our IL MAKIAGE platform, given us a bunch of information, taken a quiz, we learned about them, didn't find what they were looking for, but then converted over into SpoiledChild in addition to IL MAKIAGE customers who actually crossed over the two brands.

Lauren Lieberman (Managing Director)

Okay. Awesome. Thank you so much.

Operator (participant)

We have reached the end of our question and answer session. I would like to turn the conference back over to Oran for closing remarks.

Thank you very much, guys. See you next quarter.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.