Wag! Group - Q1 2024

Transcript

Operator (participant)

Good morning and welcome to the Wag! First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'll now introduce your host, Greg Robles, with Investor Relations. Thank you, you may begin.

Greg Robles (Director of Investor Relations)

Good afternoon, everyone, and thank you for joining Wag!'s conference call to discuss our First Quarter 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 is 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 direct 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. With that, I'll now turn the call over to Garrett Smallwood.

Garrett Smallwood (CEO and Chairman)

Good afternoon, and thank you for joining us today to discuss our financial performance for the first quarter of 2024. First, I will provide a brief overview of our financial results for the first quarter. Following that, Adam, our President and Chief Product Officer, will share updates on our strategic priorities for 2024 and beyond. Then Alec, our Chief Financial Officer, will provide a more detailed analysis of our first quarter results and discuss our capital allocation priorities. We're excited to announce another successful quarter for the Wag! team, in line with our expectations for revenue and ahead of our expectations for Adjusted EBITDA, in addition to achieving positive cash flows from operating activities. During the quarter, revenue grew 13% year-over-year to $23.2 million, which was a new quarterly record.

This growth was driven by the success of our wellness business, fueled by pet parent demand for pet insurance, wellness products, and veterinary needs. Following the quarter close, and more recently, we announced the launch of Furscription, Digital E-Prescribing and Prescription Management SaaS tools for veterinary staff across the US, with a robust waitlist of veterinary clinics. We also announced WeCompare, a new consumer brand that aims to be the easiest way to compare insurance products, starting with auto. Adam will discuss these launches in greater detail. On the operations side, we have found success in AI and automation, ending Q1 2024 with 78 employees, down 8% from 84 in Q4 2023. This has been achieved within customer success, QA, marketing, and design. We have found that senior employees equipped with AI are an order of magnitude more productive than those without.

As a result, we reached nearly $1.2 million in annualized revenue per employee in Q1 2024, up 23% year-over-year. Finally, we are showing that 78% of revenue in Q1 2024 was B2B revenue, which is defined as revenue generated by business partners such as pet insurance companies, pet food companies, wholesale distribution partners, and pet treat companies, which demonstrates the growing value of our platform and creates predictability for future revenues. Our adjusted EBITDA was $0.2 million, an increase from a loss of $0.4 million in the same period last year. Our priorities continue to center around achieving a sustainable equilibrium between growth, profit, and margin. In the 1st Quarter, platform participants increased to 671,000, an increase of 10% year-over-year, and Wag! Premium and penetration continues to hover around our 50% target.

In regards to sales and marketing and overall consumer trends, we see CPCs and CPMs continue to be elevated through the end of the year as a result of the election, a competitive consumer environment, and elevated competition in the pet category. We've seen upwards of a 90% change in spend across key marketing partners and platforms. Accordingly, we will continue to invest in proprietary customer acquisition with initiatives such as WeCompare and Furscription, which we expect to accelerate in the back half of this year. We remain focused on profitable revenue growth and reaching more US households as the all-encompassing trusted partner for premium wellness, service, and products. We will do this by reinvesting free cash flow into growth, which we expect to achieve in the back half of this year.

We believe we're in the early innings of a secular growth trend in the premium wellness, service, and product categories in which we operate. In summary, the team at Wag! continues to execute against our goals and deliver strong and sustainable growth. Our first quarter results demonstrate our ability to scale our platform profitably and show the effectiveness of our strategy and business model to become the number one platform for premium U.S. households. With that, I will turn the call over to Adam to review our strategic priorities for 2024.

Adam Storm (President and CPO)

Thanks, Garrett. I'm excited to outline the strategic priorities that will create profitable growth and shareholder value in 2024 and beyond. One, best-in-class technology. As a technology company, we are excited to continue building proprietary solutions that capture the hearts and minds of our customers. As an example, we're thrilled to launch Furscription, which comes after years of real-world experimentation and user research under the Furmacy umbrella. Furscription is a revolutionary SaaS tool for veterinary clinics designed to streamline the prescription process, ensuring pet parents can obtain their pets' medication faster and easier than ever before. Veterinarians can electronically prescribe medications directly through the Furscription, eliminating both the need for and risk with handwritten prescriptions and manual prescription management channels such as fax and phone calls.

Today, we have an LOI in place with a veterinary software distributor to provide prescription access to thousands of clinics, a significant waitlist of independent clinics who want to join our beta, and pharmacies who are ready to fulfill orders. The beta went live in early May, and we're excited to continue updating you with our progress on the newly launched veterinary channel. Two, platform expansion and M&A. As evidenced by our successful acquisitions and seamless integrations of Dog Food Advisor, Maxbone, and Furmacy, we'll continue to pursue opportunities that expand the scope of our offerings for our customers. As Garrett mentioned, we recently announced the launch of WeCompare, a new consumer brand that aims to be the easiest way to compare insurance products. WeCompare will start by providing auto insurance comparisons with other verticals on the horizon.

We are confident we can replicate our success within the pet insurance category in the broader insurance market. For some context, the auto category is a $360 billion TAM with 215 million policyholders in the U.S., representing a large opportunity to surprise and delight customers with our technology and easy-to-use software. Three, operational efficiency. We believe a hallmark pillar of a successful technology company is the ability to scale revenue without a corresponding increase in headcount. As Garrett mentioned, we ended Q1 with 78 employees, down 8% from 84 in Q4 of 2023. Despite the reduction in headcount, annualized revenue per employee hit a record $1.2 million, demonstrating the power of embracing new technology and tools. To wrap up, Wag! is firing on all cylinders with significant progress across the three strategic pillars we reviewed.

We are extremely excited about the growth potential of these new business lines and will continue to provide updates as they scale. I'll now turn the call over to Alec to discuss our first quarter financials and 2024 forecast in more detail.

Alec Davidian (CFO)

Thanks, Adam. Our strong Q1 results, which include all-time record high platform participants and record high revenues while achieving positive cash flows from operating activities, are a result of our continued execution on our vision of success, which we define as consistent profitable growth and disciplined capital deployment. Specifically, revenue of $23.2 million and new record represents 13% year-over-year growth. Adjusted EBITDA of $0.2 million represents 142% year-over-year improvement, an adjusted EBITDA margin improvement from -2% to +1%. Platform participants of 671,000 and new record represents 10% year-over-year growth and positive cash flows from operating activities of $0.2 million. Delving deeper into the financial results, revenue category results were as follows. Wellness, driven by a proprietary comparison engine technology for insurance and wellness plans, was $15.8 million, growing 14% from a year ago. Services was $5.3 million, consistent with a year ago.

Finally, pet food and treats was $2.1 million, growing 55% from a year ago. As mentioned on our year-end earnings call, we experienced record demand coming into the start of 2024 and opportunistically deployed capital to take advantage of this demand while not losing sight on profitability. Our expenses, which illustrate operational excellence and scaling when analyzed as a percentage of revenue, were as follows. Cost of revenue, excluding depreciation and amortization, totaled $1.6 million, representing 7% of revenue, up from 5% a year ago, and is in line with the 2023 average of 7% and recent trends. The increase compared to Q1 2023 is driven by incremental costs from various new product launches during 2023 as we continue to innovate and build out a robust platform for pets and households. Platform operations and support expense totaled $3 million, representing 13% of revenue versus 15% a year ago.

The decrease year-over-year was achieved through the deployment of our highly efficient process automation, AI, and software tooling that has allowed us to do more with less. Sales and marketing expense totaled $15.7 million, representing 67% of revenue, up from 64% a year ago. As mentioned earlier, we thoughtfully deployed capital to take advantage of demand while still aiming to be profitable for the quarter. G&A expense totaled $4.2 million, representing 18% of revenue, down from 24% a year ago. This is an outcome of the revenue scale, operating leverage, and now as we enter our third fiscal year as a public company, seeing public company costs begin to plateau as we establish efficient processes and muscle memory. Public costs are a significant part of G&A, at approximately $1.3 million in Q1, which equates to a 6% drag on our Adjusted EBITDA margin.

Additionally, this quarter, the P&L includes a $0.7 million charge related to the $5 million debt paydown that we executed in March 2024. The charge relates to the accounting acceleration of debt discount related to the prepayment and fees for the early principal payment. The $0.7 million charge had a $0.02 impact on EPS, moving EPS from -0.09 to -0.11. From a balance sheet perspective, we ended the quarter with $24 million in cash, cash equivalents, and accounts receivable. This balance also reflects the completion of an initial $5 million debt paydown. The $5 million debt paydown had the immediate impact of saving approximately $800,000 of interest expense over an annual period and contributing to our path to achieving Free Cash Flow.

Moving to our guidance for 2024, taking into consideration our results year to date, we reiterate our 2024 full-year forecast of revenues of $105-$115 million in 2024, which represents growth of 25%-37% over 2023. Adjusted EBITDA in the range of $2-$6 million, representing growth of 177%-731% over 2023. This guide anticipates a 2%-5% adjusted EBITDA margin together with positive free cash flows in the second half of 2024. We are approaching Q2 cautiously as we are seeing increased competition in the pet category alongside a competitive consumer environment for the premium household we serve. Accordingly, we anticipate revenues to be weighted to the back half of 2024 alongside the growth of WeCompare, Furscription, and easing CPCs and CPMs post-election.

In summary, our strong first quarter illustrates, first, the strong demand and tailwinds within the pet category as reflected in our Q1 results. We are tracking ahead of Morgan Stanley's estimated CAGR growth of 8%. Second, management's ability to execute and drive consistent disciplined growth, which we have now executed for eight consecutive quarters. As we progress into the back half of 2024, we are focused on generating free cash flow while maintaining our growth trajectory. And third, confidence in the next stage of Wag!'s journey as a profitable growth company beyond 2024. We've shared our plans to simplify e-prescribing with Furscription, expand our proprietary comparison technology of WeCompare, and integrate leading technologies like AR into our workflows. Across our platform, we continue to believe we're just getting started at Wag! and wake up every day excited to delight customers and create shareholder value.

With that, we now welcome Q&A. Operator, can you kindly open up for Q&A?

Operator (participant)

If you would like to ask a question, please press star one on your telephone now. You will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now. Our first question comes from Matt Koranda from Roth MKM. Please go ahead, Matt.

Matt Koranda (Managing Director and Senior Research Analyst)

Hey, guys. Good morning. Thanks for taking the question. I just wanted to start off with WeCompare. I guess, how is that built into the guidance for the full year? And does this sort of change the pet platform approach that you guys have historically stated as your strategy? I guess, are there other comparison verticals that may now be in play beyond auto?

Garrett Smallwood (CEO and Chairman)

Hey, Matt. Happy Thursday. Thanks for being here. Yes, I have two good questions. One, the first is, how does WeCompare fit into guidance? I think it's too early to update kind of how we're thinking about 2024. I think it's certainly more important probably for 2025, but we think it's a big opportunity. Second question is, how does it change the pet parent approach? I don't think it does. I think we made it pretty clear since the beginning that we want to serve the premium household needs, and we've certainly started with pet. But broadly speaking, the premium household is kind of the target audience for us. We call them a chief household officer. They're 27-44, usually have two kids and one or two dogs, like 1.25 dogs on average for what it's worth.

I certainly think there's a ton of opportunity as we think about WeCompare broadly. We're going to start with auto and see how it goes.

Matt Koranda (Managing Director and Senior Research Analyst)

Okay. Gotcha. And then just more specifically on the 2024 outlook, I guess what you guys have alluded to in the prepared remarks is that there's an acceleration in growth in the back half of the year. Just curious, what gives you the confidence there that we're going to see a re-acceleration in the back half? And then maybe just any update on sort of how we're growing quarter to date in the second quarter so we can kind of level set expectations around the front quarter here.

Garrett Smallwood (CEO and Chairman)

Yeah, absolutely. This really comes down to we have a debt that we think kind of holding us back, frankly. And there's a big question we get pretty frequently from investors and shareholders as to when we'll achieve Free Cash Flow and kind of free ourselves from the debt. And that debt, the prepayment penalty expires in August of this year. And so I think we're putting more emphasis, frankly, on EBITDA generation this quarter than maybe we would otherwise. So just to put it into context or frame it in terms of April, preliminary April numbers show us having kind of highest monthly Adjusted EBITDA in company history.

So I think we're going to be really focused this quarter on profitability, on Adjusted EBITDA, and then seeing how that enables us to refinance or consider other options for our debt, which in the long term enables a quicker path to Free Cash Flow generation and, frankly, just frees us up to make more bets. So that's the reason generally for why we think it's more of a second-half thing than a right now thing. We know if we wanted to, we could kind of deploy dollars to grow.

Matt Koranda (Managing Director and Senior Research Analyst)

Okay. Super helpful. I'll leave it there. Thanks.

Operator (participant)

Our next question comes from Jason Helfstein from Oppenheimer. Please go ahead, Jason.

Jason Helfstein (Managing Director and Senior Analyst)

Hey. Thanks, everybody. So just to keep going with that, so while you did highlight CPCs being kind of high in the pet category and those other factors that some of your competitors may be doing to kind of bail themselves out of decisions, etc., your point is that you could lean into growth if you wanted to. But the point is, again, you're kind of focused on EBITDA in the short term so that you have maximum balance sheet flexibility. And then once you start to see how some of these newer products resonate with customers, then you can kind of prioritize where you want to lean in because there may be certain areas that will be more efficient to lean into than others. Is that the right way to think about the outlook right now?

Garrett Smallwood (CEO and Chairman)

Yes. I couldn't have said any better myself. That was a great summary. The only other thing I'd add in terms of the pet category generally is we certainly think there is a trend of a year-over-year decline maybe in pet adoptions, and more people are leaning in to spend to manage their business. And so you're just seeing a little bit more competition, and generally not in categories that we're super dependent on. But I generally think you're seeing that in pet land. So it was a great summary.

Jason Helfstein (Managing Director and Senior Analyst)

And then just to follow up, I mean, you guys originally got started with the sitting and boarding and walking, whatever, walking, sitting, boarding. And then you've kind of more expanded on using that as a top of funnel to kind of sell a whole lot of other things. Are you thinking, has the strategy shifted as we think about what the business is going to look like, I don't know, 12-24 months from now in the mix? Obviously, it's going to be a higher mix of wellness. But just broadly, how that strategy has evolved since you guys came public?

Garrett Smallwood (CEO and Chairman)

Yeah. I mean, look, if you think about when we took over this business in 2019, it was primarily, almost exclusively, an on-demand dog walking business. And every year, we've kind of jumped into the fast-moving water of where we think consumer demand is, frankly, and what matters to the audience that we're serving, which is a premium household. And every year, we make a couple of new bets, which we've been working on, frankly, for the year before. And so really, it's about expanding the set of problems we're tackling. And right now, that's e-prescribing for vets. That's WeCompare, which is comparing other products for insurance. I think we'll continue to do that. Our plan is really just to address the chief household officer's needs and do that in a way which we think we have a proprietary advantage, whether that's distribution or technology.

Jason Helfstein (Managing Director and Senior Analyst)

Got it. Appreciate the caller, Nate.

Operator (participant)

Our next question comes from Tom White from D.A. Davidson. Please go ahead, Tom.

Speaker 9

Hey. This is Wyatt on for Tom. Thanks for taking the question. I had one on Platform Participants. You achieved record Platform Participants this quarter. Could you talk a little bit about what drove that and then maybe some of your expectations for the balance of the year?

Garrett Smallwood (CEO and Chairman)

Yeah. I mean, 671,000 is a good number, we think. I mean, certainly, every quarter, we're looking for it to grow. There's two things that are working particularly well in terms of product portfolio growth. One is the breadth of products and services that we offer. It allows us to be very nimble in how we think about acquiring new customers efficiently. Two is we have a really unique we call it a spider web of products and services at this point, right, between WoofWoofTV and Petted and Dog Food Advisor. And they kind of cross-sell and upsell really well to each other. And we're getting better and better, I think, at the cross-sell and upsell. And so I think A is our ability to kind of lean into any given product or category depending on what the tailwinds are.

The second is our ability to kind of cross-sell and upsell. We'll continue to do both those things.

Speaker 9

Got it. Okay. That's helpful. And then just to follow up on Furscription, could you just kind of give some color on why you decided to launch it now and how you expect it to contribute over the next year, 18 months?

Garrett Smallwood (CEO and Chairman)

Yeah. Well, first, let me just take a step back. We have been talking about the veterinary clinic as the holy grail for pet parents. For what it's worth in our research and everything we understand, pet parents trust the vet office and specifically their individual veterinarian above anybody else. If you think about the advice they get from the vet, that is the advice they will take 78%+ of the time. And so for us, this is not a new thing. We've been thinking about the vet office for years, frankly. We bought a really small business called Furmacy, I mean, Alec can correct me. I think it's something like 18 months ago. And our whole plan with that business was to figure out the vet office with really sticky and beautiful software that simplified the pet parent's life.

And so as you all know, SaaS revenue is the best. It's sticky. It's recurring. That's going to be the structure of that product. And if we can figure out how to acquire these customers through the vet office, the cross-sell should be pretty incredible. And so the reason we launched it, to answer your question, is it's ready. If you go to Furmacy, our prescription software is ready to rock. It's going to be in the hands of vet clinics pretty quickly, as Adam mentioned. And it's actually a really awesome product. We believe it's the first of its kind kind of e-prescribing software for the vet clinic, thinking about Surescripts almost. And yeah, we couldn't be more excited to kind of enter this channel. So just another fast-moving water with a really sticky, durable revenue that we're excited to kind of surprise and delight.

Speaker 9

Got it. Okay. That's really helpful. Thank you.

Operator (participant)

Our next question comes from Greg Pendy from Chardan. Please go ahead, Greg.

Greg Pendy (Senior Research Associate)

Hi. Thanks for taking my question. Can you share any metrics that you might be seeing in terms of monthly engagement as you're adding more services to the platform? Has that been changing at all? I think you had people engaging maybe seven times per month on average with the app.

Adam Storm (President and CPO)

Yeah.

Garrett Smallwood (CEO and Chairman)

Hey. I mean, look, I'll go ahead, Adam. I'll hear you.

Adam Storm (President and CPO)

Okay. I can take this one. Broadly speaking, yes. The cross-sell tends to get better as we add more products to our product suite. I think that's what's kind of how we do these incremental deals is seeing how premium membership has driven additional usage of our wellness products or additional usage of our pet food and treat products. And I think that with the announcement of WeCompare and the announcement of Furscription, this spider web of products where you might not need any given product at any given time, but you need something we offer, that has all the internal metrics we looked at, it's like the more we offer, the stickier the entire platform becomes. So yes, I think that the platform approach is working.

Greg Pendy (Senior Research Associate)

Okay. Great. And then just one more follow-up. Have you seen any changes? It seems like things have stalled macro-wise on return to office just for the services side. Has that impacted your view, or has it stayed the same from when we last heard in the fourth quarter?

Adam Storm (President and CPO)

Yeah. Matt, maybe take this one.

Garrett Smallwood (CEO and Chairman)

Yeah. Okay. Sorry. I'm jumping first. I just have such strong opinions here.

I think Dara Khosrowshahi even said he'd love for more people to go back to the office. He'd love for people to be taking Ubers to and from. We said, I think, at the beginning of this year, even early last year, we don't really expect much change. If there's change, that's all upside. And so certainly, we think kind of Kastle back to work with the Kastle back to work barometer has kind of stalled out, frankly. And that's okay. We have other fast-moving water we're in and out of. But if it does accelerate, that would certainly be a great tailwind for the services business. Otherwise, services is great. We like that business. We're going to wait for the time and place to lean back into it. It just won't be until kind of more people are mobile and, frankly, more people are in the office.

Adam, you can add anything you want.

Adam Storm (President and CPO)

No. I think that's a good summary.

Operator (participant)

Thanks a lot. As a reminder, if you would like to ask a question, please press star one on your phone now. And our next question comes from C.J. Dipollino from Craig-Hallum. Please go ahead, CJ.

Speaker 8

Good morning, everyone. I'm on for Jeremy Hamblin this morning. Thanks for taking the question. Wanted to call out the severe weather that you highlighted in guidance. We know severe weather kind of lingered in Q1. Curious what you're kind of calling out moving forward? Maybe it's the tornadoes in the Midwest or sort of what you're seeing there?

Garrett Smallwood (CEO and Chairman)

Yeah. I mean.

Adam Storm (President and CPO)

Yeah. The nice thing about having significant geodiversification is that any given weather event does not materially move the whole business. That said, there was the West Coast got kind of Miami weather in Q1, and there's a number of important cities on the West Coast. So it can affect the overall numbers, but I wouldn't read too much into kind of just normal seasonal weather patterns. They're going to affect the cities that they hit like you might expect, but it's not something that we're overly concerned about. I think about it more as a risk factor than something that needs to be baked into guidance.

Speaker 8

Okay. Got it. Thank you.

Garrett Smallwood (CEO and Chairman)

The only thing I'd add there is if I wasn't making an example, but in Q3, if a bunch of important cities are seeing or even Q2, really awkward or incremental weather, you might see a little bit of a difference in services. But to Adam's point, you're talking a few percentage points, not 20 percentage points.

Speaker 8

Right. And so it sounds like you're not really seeing any lingering effects in Q2.

Garrett Smallwood (CEO and Chairman)

No. I mean, start of the quarter, it's a small part overall. Nothing crazy yet. But look, I don't want to jinx weather. I seem to have bad luck there. I've been in California. It's been raining a ton. So yeah, but nothing so far.

Speaker 8

Okay. Cool. Understood. And then one more, if you don't mind. I know you said WeCompare is not really baked into 2024 guidance. Just kind of curious when that's going to start showing up on the P&L.

Garrett Smallwood (CEO and Chairman)

Yeah. It really depends on how quickly we want to, frankly, put dollars to work in terms of growing that business. There's a bunch of ways we plan on growing it, whether it's through partnerships, whether it's through our own demand channels, whether it's through its cross-sell and upsell. But I think I made a comment earlier. This quarter is really going to be all about profitability, just as a function of August being our prepayment penalty expires for our debt repayment. And I think just getting off from this debt is going to be really a big enabler for the company and accelerate our path to Free Cash Flow. So we're experimenting with it. It's important. We like it. We're having fun learning.

But I think we really want to put our pedal to the metal in that business as soon as we feel really good about profitability. So more to come, I think, in the next quarter.

Speaker 8

Okay. All right. Thanks, guys. That's all from me. Good luck.

Operator (participant)

At this time, this concludes our question-and-answer session. I'll now turn it back over to Garrett Smallwood for closing remarks.

Alec Davidian (CFO)

Thanks, everyone, for the time today. I know you all have very busy schedules. You'll find the most recent management presentation, which we updated to reflect the new service and products we've launched, as well as our additional portfolio products on wag.co on the management presentation. Thanks so much.

Operator (participant)

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