Wag! Group - Q2 2024

Executive Summary

• Q2 revenue declined 6% year over year to $18.65M as management deliberately scaled back marketing to prioritize profitability; Adjusted EBITDA reached a record $1.64M (8.8% margin), up from $0.11M (0.5% margin) a year ago.
• Management reiterated the July 10 reset of FY24 guidance: revenue cut to $92–$102M (from $105–$115M) while Adjusted EBITDA was raised to $4–$8M; Q3 guidance calls for $20–$24M revenue and $1.5–$2.5M Adjusted EBITDA, with expected positive free cash flow in 2H24.
• Balance sheet actions are the key near-term catalyst: $10M equity raise in July, planned debt paydown/refinance (current rate 15.8% targeted to ~10%), and ~$340K quarterly interest savings beginning in Q3; combined cash and AR ended Q2 at ~$17M.
• S&P Global consensus estimates for Q2 2024 were unavailable for PET; as a result, a formal beat/miss analysis versus Street consensus cannot be provided (estimates unavailable via S&P Global).

What Went Well and What Went Wrong

• What Went Well

  • Record profitability: Adjusted EBITDA of $1.64M (8.8% margin) on $18.65M revenue, driven by reduced/optimized marketing and operational efficiencies.
  • Disciplined cost structure: Platform ops 15% of revenue (vs. 18% YoY), G&A 20% (vs. 24% YoY), with AI and automation improving efficiency; S&M cut to 59% from 67% in Q1 2024.
  • Clear deleveraging path: $10M equity raise, debt paydown/refi expected 2H24, target debt rate ~10% (from 15.8%), ~$340K quarterly interest savings from Q3.
  • Quote: “Our results were highly intentional as we reduced marketing spend to increase profitability… our adjusted EBITDA increased to $1.6 million, a quarterly record”.

• What Went Wrong

  • Top-line contraction and engagement pressure: Revenue -6% YoY to $18.65M and platform participants -15% YoY to 467K as marketing was curtailed and mix shifted toward returning users.
  • Sequential revenue decline: From a record Q1 ($23.22M) to Q2 ($18.65M), reflecting deliberate pullback in spend and seasonality/mix.
  • Services headwinds and macro/marketing environment: Management flagged a tougher paid media backdrop (election-year CPM/CPC pressure) and is shifting toward partnerships and non-Google/Facebook channels.

Transcript

Operator (participant)

Good afternoon, and welcome to the Wag! second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer 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 (Head of Investor Relations)

Good afternoon, everyone, and thank you for joining Wag!'s conference call to discuss our second 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 are included in our filings with 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'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 second quarter of 2024. First, I will provide an overview of our financial results for the second quarter. Following that, Adam, our President and Chief Product Officer, will share brief updates on our strategic priorities for 2024 and beyond. Then Alec, our Chief Financial Officer, will provide a more detailed analysis of our second quarter results and discuss our capital allocation priorities. During the second quarter, our revenues decreased 6% to $18.7 million, while our adjusted EBITDA increased to $1.6 million, a quarterly record for Wag!. As we have communicated, these results were highly intentional as we reduced marketing spend to increase profitability in the short term.

As noted in our preliminary results released in July, our debt prepayment penalty expires this month, and our full debt becomes due a year from now. We are intensely focused on increasing adjusted EBITDA and free cash flow as we evaluate all options to refinance our debt. Strengthening our balance sheet and demonstrating consistent profitability is of the utmost importance. Additionally, we recently completed a $10 million registered public offering last month, and we will use the net proceeds to pay down a significant portion of our debt. We will refinance the remaining debt principal and strengthen our balance sheet, allowing us to generate substantial free cash flow. In fact, by lowering our debt principal and refinancing the remaining balance, we believe we'll be in a position to deliver positive free cash flow going forward.

Our adjusted EBITDA margin is improving, as indicated by our 8.8% adjusted EBITDA margin in second quarter, which is a significant improvement from the 0.5% a year ago and the 0.7% from the first quarter of this year. As we return to growth, we expect to maintain a healthy adjusted EBITDA margin to balance profitability and growth going forward. In second quarter, we delivered a quarterly record adjusted EBITDA of $1.6 million, which was driven by reduced and more efficient marketing spend and operational efficiency across all business units. In turn, second quarter platform participants decreased 15% year-over-year to 467,000. We remain focused on acquiring the highest quality customers.

On the operation side, we continue to benefit from AI and process automation tools, which we will lean into in order to increase the quality of our products while reducing overall OpEx. As we move in the back half of the year, we remain focused on reaching more U.S. households as the all-encompassing, trusted partner for premium wellness, service, and products. We expect to generate free cash flow as we benefit from lower interest expense on our debt, which ultimately provides us with increased flexibility to reward shareholders through opportunistic M&A, reinvesting in the business for further growth, and returning cash to shareholders through stock buybacks. With that, I will turn the call over to Adam to review our strategic priorities for 2024.

Adam Storm (President and Chief Product Officer)

Thanks, Garrett. Our strategic priorities remain unchanged and are as follows: building best-in-class software solutions for consumers and partners is core to what we do. We're focused on solving the needs of the premium pet household across wellness, insurance, prescription meds, and other solutions. Of note, we're very excited about the long-term growth prospects of our prescription B2B SaaS platform and expect to share a more fulsome update on our next earnings call. We continue to believe in the power of the veterinary channel and the opportunity in digitally prescribing vet medications to streamline the prescription process for pet parents and vets alike. Two, we're focused on growing our platform via product expansion, proprietary partnerships, and opportunistic M&A.

Our integrations of Dog Food Advisor, Maxbone, and Furmacy were seamless, and we're always looking for new opportunities that delight the premium pet parents and are a value add to the Wag! platform. On WeCompare, we remain confident in our ability to replicate our success with pet insurance and other insurance verticals, but we expect majority of the growth contribution to come in 2025, when we have more marketing bandwidth to allocate for a more robust launch. As Garrett mentioned, we're intensely focused on driving free cash flow, increasing profitability, and therefore have been more measured with our marketing spend. In short, the team at Wag! is performing exceptionally well, and we continue to advance against our core strategic pillars.

We remain excited about our company's future growth prospects and believe a strengthened balance sheet will allow us to return to growth and scale our business profitably and sustainably for increased shareholder value creation. I will now turn the call over to Alec to discuss our second quarter financials and 2024 forecast in more detail.

Alec Davidian (CFO)

Thanks, Adam. Our Q2 results, which were highlighted by our highest adjusted EBITDA profitability on record, are a result of our commitment to strengthening our balance sheet. Our results were driven by prudent cost management initiatives. As a result, Q2 metric growth follows: Revenue of $18.7 million, down 6% year-over-year, comprising of wellness of $11.5 million, services of $5.6 million, and pet food and treats of $1.5 million. Adjusted EBITDA of $1.6 million, representing a $1.5 million improvement year-over-year, and an adjusted EBITDA margin improvement from +0.5% to +8.8%. Platform participants of 467,000, a decline of 15% year-over-year, however, generating higher revenue per user statistic.

Our expenses when analyzed as a percentage of revenue, were as follows: Cost of revenue, excluding depreciation and amortization, totaled $1.2 million, representing 6% of revenue, staying flat to 6% a year ago. Platform operations and support expenses totaled $2.7 million, representing 15% of revenue, versus 18% a year ago. The decrease year-over-year was achieved through optimized technology benefits and headcount costs. Sales and marketing expense totaled $11 million, representing 59% of revenue, up from 54% a year ago, but down from 67% in Q1 this year. As mentioned earlier, we reduced marketing spend in the quarter to increase profitability in the near term, but expect to increase this investment once we refinance our debt. G&A expense totaled $3.8 million, representing 20% of revenue, down from 24% a year ago.

The reduction was driven by technology and headcount cost optimization and lower public company costs. From a balance sheet perspective, we ended the quarter with $17 million in cash, cash equivalents, and accounts receivable. As we mentioned, in July, we completed a $10 million capital raise that added approximately $8.5 million of cash to the balance sheet after expenses. We plan to use the proceeds to pay down high interest debt. This will generate approximately $340,000 of quarterly interest cost savings starting in Q3. With a lower debt balance and better cash to debt ratio, we are positioning ourselves for a debt refinancing that has the potential to generate further interest cost savings. We are actively exploring options and will provide an update at the appropriate time. Moving to our guidance for 2024.

Taking into consideration our results yet to date, we reiterate our guidance provided on July 10 of revenue of $92 million-$102 million, which represents growth of 10%-22% over 2023. Adjusted EBITDA in the range of $4 million-$8 million, representing drastic growth over 2023. This guide anticipates a 4%-8% adjusted EBITDA margin. In addition to our expected positive free cash flow in the second half of 2024. For our third quarter 2024 guidance, we expect revenue in the range of $20 million-$24 million and adjusted EBITDA in the range of $1.5 million-$2.5 million.

We are approaching Q3 from a position of strength, and we are seeing healthy competition in the pet category, alongside an improved consumer environment for the premium household compared to last quarter. In summary, our second quarter illustrates a commitment to strengthening the balance sheet, our ability to balance growth versus profit, and finally, confidence in the next stage of Wag's journey as a profitable growth company beyond 2024. Our operational discipline on headcount and automation will allow us to continue lowering OpEx and increasing profit for sustainable, profitable growth. With that, we now welcome Q&A. Operator, can you kindly open it up for Q&A?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jason Helfstein with Oppenheimer. Your line is now open.

Jason Helfstein (Managing Director and Head of Internet Research)

Hey, everybody. So now that you guys got that, that financing done, the equity financing, do you, how are you thinking about leaning back into marketing? Obviously, you didn't change the full year guide, but, you know, do we think about you leaning into marketing potentially in the fourth quarter, or we more think about that next year? And then, I guess, as we're just thinking about next year, like, how do you think about, I don't know, like, the priorities for growth? Is it like the same...

... kind of view as you came into this year, just with, you know, more money to spend? Thank you.

Garrett Smallwood (CEO and Chairman)

Hey, Jason. Thanks for the question. So as it pertains to growth, I really think that our first priority is the debt. So the financing was really about paying down debt and putting us putting the remaining debt balance. You know, this is after the prepayment penalty expires, putting the remaining balance in a place that we can refi. So as it pertains to growth, I think that we're first gonna refi the remainder of the debt, and then once that's behind us and we're really, you know, in a position where we're generating real cash, then we'll lean back into growth. And that'll happen in the back half of this year.

As it pertains to 2025, like, yes, we wanna return to being a growth company, but probably a little bit more balanced between growth and profitability than we came into this year. Our you know initial thoughts for this year was to kind of be very growth heavy and something like 3% or 4% EBITDA margins. Next year, I think that we wanna be, you know, more on the order of, you know, 8%, 10%, 12% EBITDA margin, somewhere in that range, and then kind of balance growth on top of that. Hope that answers your question.

Jason Helfstein (Managing Director and Head of Internet Research)

Yeah, super helpful. Thanks.

Operator (participant)

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

Jeremy Hamblin (Senior Research Analyst)

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

Garrett Smallwood (CEO and Chairman)

Sure. So thanks for your question, Jeremy. I don't think it's a surprise to anyone to say that the macro backdrop is a little bit shaky right now, like literally right now, this week. But, you know, broadly within the pet ecosystem, premium pet care, so that's kind of like all of the wellness categories, have been pretty durable. I don't think you know, NVIDIA trading off has a big impact on whether or not you're gonna get a pet insurance policy. So, you know, I don't think it's a shock to you or kind of anybody listening to this call to say that wellness and our kind of health-related businesses have been kind of the bright spot over the last 12 months. And I don't see that changing.

I think that's a pretty durable secular trend, and we're gonna kind of continue to play in that space.

Jeremy Hamblin (Senior Research Analyst)

Great. And then wanted to see, it looks to me like you saw pretty significant improvement in your ARPU, given the platform participants here in Q2, you know, double-digit increase, I think year-over-year on ARPU. And just wanted to get a sense for, you know, what you're learning as you've kind of gone through this process of getting more disciplined, you know, getting more profitable and squeezing a bit more out of the platform itself.

You know, as you reignite the growth engines here, post debt refinancing, you know, how, from a strategic standpoint, you know, what learnings have you had that you're gonna apply so that, you know, moving into 2025, as you invest dollars in sales and marketing, you know, to continue to get that good improvement in ARPU?

Garrett Smallwood (CEO and Chairman)

Yeah, that's a, that's a good, good question and a good observation, frankly. So any quarter where we pull back on marketing sequentially, the customer mix is gonna change a little bit, so there's more returning customers relative to new customers as a function of that spend. Those returning customers are gonna have higher ARPU, as you, as you've noticed. But it's also kind of actions that we're taking internally. So cross-sell and upsell becomes really, really important, when we're, you know, looking for growth outside of just deploying marketing dollars. So you're, you're gonna see more of that. I think that the, the roadmap and the customer acquisition landscape is gonna push us a little bit, harder on the upsell, cross-sell that you kind of observed in Q2.

Jeremy Hamblin (Senior Research Analyst)

Got it. And then, you know, with the, clearly the focuses on, debt refinancing here, as you start to think about the timing for that, I think the, the prepayment penalty expires here, you know, in the coming few days. What's the timing, that you think that that can get done? And then, you know, how much improvement do you think that you can get out there in the market, in terms of, kind of annualized interest rate reduction? I mean, are we looking at, you know, 400-500 basis points or something more than that, you know, based kind of, on the engagement you've had this year, thus far?

Alec Davidian (CFO)

Good question, Jeremy. So, definitely in the back half of this year, we're actively working on it at the moment and having a lot of good conversations with a lot of different parties.

... Some of this is outside of our control on paperwork and working through a process with, with parties, and, you know, typical timeline is not days, it's, it's weeks to, potentially months. But ultimately, we feel confident that we'll be able to close it in the second half of the year. From an interest rate perspective, we're currently at 15.8%, and we think that, and expect that we, we can get, to a rate closer to 10%, which would be a significant impact from a, interest expense perspective, together with, or compounded with a lower outstanding principal amount.

Jeremy Hamblin (Senior Research Analyst)

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

Alec Davidian (CFO)

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

Jeremy Hamblin (Senior Research Analyst)

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

Alec Davidian (CFO)

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

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

Jeremy Hamblin (Senior Research Analyst)

Great. Thanks, congratulations and best wishes.

Garrett Smallwood (CEO and Chairman)

Thanks, Jeremy.

Operator (participant)

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Matthew Koranda with Roth Capital. Your line is now open.

Matthew Koranda (Managing Director and Senior Research Analyst)

Hey, guys. Good afternoon. Can you just do the math on the refi for us? Just wanted to make sure I understood the working pieces. So I think $9 million in cash in the second quarter, $8.5 million added from the recent raise, and then, you know, repay all of the debt. Remind us the total principal out, and then what that mean for the size of the new facility that you're looking for?

Alec Davidian (CFO)

Yeah, absolutely.

Garrett Smallwood (CEO and Chairman)

Alec, do you want to take this one?

Alec Davidian (CFO)

We have $9 million in cash. The outstanding principal is $25.7 million. After the raise, we have added around $9 million in cash. So, and then with the clearing of the AR, we're at $18 million. So there's essentially a $7 million delta between our current cash and debt. So that puts us in a position to pay down the debt and refinance the delta, looking at a refinance at somewhere in the range of $12 million-$14 million, maybe $15 million, as the new debt amount versus the $25.7 million we have today.

Matthew Koranda (Managing Director and Senior Research Analyst)

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

Alec Davidian (CFO)

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

Matthew Koranda (Managing Director and Senior Research Analyst)

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

Adam Storm (President and Chief Product Officer)

I'm happy to jump into this one. Kind of a similar profile to Q2, frankly, but with a little bit more scale, hopefully coming from the seasonality of these different businesses. We're also, like, leaning into partnerships and different distribution channels that are not necessarily Google, Facebook, what have you, that you know kind of give us more bang for your buck. So, you know, it'll. It's kind of the change in gears from focusing on growth as the primary metric, like we came into the year with, and kind of having shorter payback windows, higher ROI bar for future growth.

And then finally, it's important to note that, you know, the debt refi is really our top priority right now and balance sheet health. And I don't think that we're gonna kind of really push the levers on growth until we have that refi kind of locked down or in its final stages.

Matthew Koranda (Managing Director and Senior Research Analyst)

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

Adam Storm (President and Chief Product Officer)

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

Matthew Koranda (Managing Director and Senior Research Analyst)

Okay, very helpful. Appreciate it, guys.

Adam Storm (President and Chief Product Officer)

Thanks, Matt.

Operator (participant)

At this time, this concludes our question and answer session. I'll now turn the call over to Garrett Smallwood for closing remarks. I'm sorry, Garrett Smallwood?

Adam Storm (President and Chief Product Officer)

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

Operator (participant)

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