Oddity Tech Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Audity Tech Earnings Call. Today's call is being recorded, and we have an allocated time for prepared remarks and Q and A. At this time, I'd like to turn the conference over to Maria Licoury, Investor Relations for Audity. Thank you. You may begin.

Speaker 1

Thank you, operator. I'm joined by Ron Management, Audity's Co Founder and CEO and Lindsay Druckermann, Audity'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 Audity's business strategy, market opportunities, future financial performance and potential long term success. Forward looking statements involve risks and uncertainties and actual results can differ materially due to a variety of factors.

Speaker 1

These factors are described under forward looking statements in our earnings press release issued yesterday and in our perspectives filed with the Securities and Exchange Commission on July 18, 2023. 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 Eran.

Speaker 2

Thank you everyone for joining us today. We are glad to report our 3rd quarter results today, which beat our guidance issued back in August on every metric and also exceeded the preliminary results we recently communicated in October. Revenue is going faster, gross margins are higher and adjusted EBITDA is better than we expected. This is despite our real effort to pace our growth and slowdown as we historically have done in H2. With this record breaking quarter, we will deliver Revenue growth of 60% and adjusted EBITDA of $91,000,000 for the 1st 9 months of this year.

Speaker 2

We are scaling at a speed that beats legacy incumbents, but also the majority of Internet consumer companies and with profit margins cash flows that are rare in other growth companies. This outstanding financial performance reflect the strength of our platform, the health of our brands, Our strong disciplined teams and the massive runway we have in front of us. Our large investment in technology and data capabilities over the past 5 years are enabling us to continue to grow fast without damaging our high margins and profitability. Our tech team is still the largest team in the company, represents Approximately 40% of total headcount. At the center of our success is our powerful financial model, which from the beginning we designed to deliver a rare combination of scale, growth and profitability.

Speaker 2

On scale, we Expect to break new records again in 2023, growing revenue more than 50% and with over 50% coming from repeat customers, which is very rare in our industry. We believe we are already the largest D2C platform in our industry and have a massive user base with over 40,000,000 users were our design partners for future products, categories and brand launches. On growth, we expect to deliver more than 50% growth this year after having delivered around 50% last year and 100% the year before that. But although our high growth, we could have done way more. We believe we have massive runway ahead and have built So many engines to allow us to continue to grow.

Speaker 2

We believe both Antiage and Spoiled Child will be $1,000,000,000 plus brands And we are building our Flusive Brands to have meaningful addition to our company. On profitability, we continue to deliver margin and cash flows well ahead of other growth businesses. We expect to deliver over $100,000,000 of adjusted EBITDA this year alone, which is a 21% margin. Before diving into the quarter, I want to discuss our industry and why I'm so bullish about the opportunity ahead of us. First, we operate in what we believe is one of the most lucrative times in the world.

Speaker 2

The global beauty and wellness market is over $600,000,000,000 in size and dominated There are a huge number of beauty and wellness subcategories for us to go after, which are large in size and are waiting for a proper online access. 2nd, consumers are shifting online and this is our strength. Today, online is around 25% of the industry sales and we believe it will reach 50% in the next years. But in order to win online, you need to deliver experience that is even better than a store and therefore data and technology capabilities are critical. With all due respect to my competitors, we are simply playing different games.

Speaker 2

And as it relates to technology to data, not to mention talent and operating structure, We believe we are simply years ahead, but still running like a startup to ensure we preserve our lead. 3rd, we've built amazing brands and amazing products and we have proved that Audity is a brand scaling machine. Our track record speaks for itself. Irma Kiyage is the largest online beauty brand in the U. S.

Speaker 2

And either number 1 or number 2 in almost every international market it has launched. Spoiled Child is expected to achieve $100,000,000 of net revenue this year after only just launching in 2022. Multiple categories, hair and skin and success across A very wide demographic. All of this with very high customer satisfaction, best in class repeat rates and consistently healthy growing cohorts. Brand 3 and Brand 4 are already in the making with dozens of talented folks dedicated to develop it.

Speaker 2

Both brands will be launched in 2025 and are responsible for at least 40% of my time and focus as CEO. The next stage of our evolution is with OLED Labs and unleashing biotech for our industry to create the next generation of high efficacy products. Consumers today are smarter than ever. They start to demand real high efficacy science back to solve their pain points. High performing products are not new to us.

Speaker 2

They are already central to our model and a huge part of why we are so profitable. No quality means no repeat. No repeat means no profitability. And based on my knowledge, we have the best repeat rates in the industry. We operate a world class of in house product development engine that I believe beats Most of the brands in the industry.

Speaker 2

That's because we launch products based on data. We are not like other brands that launch based on what head I said all based on what Sephora or supplier said, data drives us, no exceptions, no compromises. But as entrepreneurs who luckily found themselves in beauty, we never stop and we never satisfied. Audity Labs take us to the next level in terms of physical products and innovation. It was always my dream to use technology to develop higher efficacy product with stronger new ingredients.

Speaker 2

I was hunting for this opportunity for years and Rick Rivela will found a perfect match. Since closing the acquisition in May, We have made so much progress in building Oligity Labs to be the AI based ingredient development platform of our industry, attracting amazing talent and moving fast across the usual minutes. Audity Labs will be one of our main growth engines for all brands. We are truly building something that was never done before. You don't see its contribution in our current earnings today, just expensive, but I'm more bullish than ever.

Speaker 2

It is the same feeling that I had when we start to build our R and D center in Tel Aviv. Before I hand the call over to Lindsay, let me touch on Israel, where we have our R and D center, But most importantly, where my heart and thoughts are in those said days. First, the unwavering support I get daily from teammates, Entrepreneurs, CEOs and friends is unbelievable and I deeply appreciate it. Since so many people Stand with Israel and with its right to defend itself makes it a bit more bearable in this insane situation. We at Oddity are doing everything we can to support our people and the country at this time.

Speaker 2

This is our duty and we'll continue to do so. As for the business, there have been no meaningful disruption. Of course, we are monitoring the situation very closely and we don't Any material impact on Q4 or on 2024 results. Our teams in Tel Aviv are operating remotely since the beginning of the war And we have had a limited number of employees call for results. And now I'll hand over to Lindsay.

Speaker 3

Thanks, Aran. We're pleased with our Q3 financial results and the momentum that continued into the Q4. Our business is firing on all cylinders and we're in Our teams achieved a number of unlocks through hard work, planning, testing and iterating that are now in our arsenal for execution next year, starting with a successful Q1. We will issue 2024 guidance when we report Q4 results next year And we're confident in our ability to continue to deliver strong growth across brands and product categories at attractive margins and with healthy user cohorts that by our overall model. Turning to the quarter, net revenue grew 37% year over year to $94,500,000 above the 18% to 23% guidance we communicated in August.

Speaker 3

Drivers of growth in the quarter are consistent with what we discussed on our October call. Both Il Makiage and Spoiled Child brands exceeded our expectations. Repeat growth was stronger than we had originally modeled, which drove the upside versus our original guidance. Importantly, our revenue growth was of high quality and profitability and generated across a range of products and categories. The successful expansion of new products and categories, including in skin and hair, are seeds that we planted less than 2 years ago and have grown today into powerful foundations off of which we're building large and dominant franchises.

Speaker 3

These are incremental to our existing products. They expand our overall TAM and create deeper relationships with our users. Moving down the P and L, we generated gross profit $66,400,000 a 41% increase versus the prior year. This represents a 70.3% gross margin in the quarter, which is 280 basis points better than the 67.5 percent guidance we issued. Gross margin expanded 217 basis The increase was driven by cost efficiencies at both brands, which have benefited from specific cost optimization efforts relative to the prior year.

Speaker 3

While Spoil Child has continued to make good progress in narrowing the gross margin gap to Il Makiage, it still operates at a lower gross margin and will drive some negative gross margin mix shift as it becomes a larger portion of overall sales. Adjusted EBITDA increased 227 percent to $20,800,000 in the quarter. This represents a 22% adjusted EBITDA margin above the 20% to 21.5 percent initial guidance we delivered back in August. Adjusted EBITDA margin in the quarter expanded 12.80 basis points versus the prior year, driven by our gross margin expansion as well as improved OpEx efficiency, including improved efficiency on our marketing spend as we throttled back New user acquisition costs and generated the majority of our revenues from repeat customers. We reinvested a portion of these EBITDA tailwinds into future growth, including investment in future brands and products as well as Oddity Labs.

Speaker 3

It's also worth noting that we delivered this robust EBITDA margin expansion despite Higher revenue contribution from Spoiled Child, which today carries lower EBITDA margins than Il Makiage. Adjusted pretax income increased 304 to $20,700,000 driven by the adjusted EBITDA growth. Our adjusted tax rate was 37.1% in the quarter, A bit more favorable than the 43.5 percent rate we guided to. This elevated tax rate was driven by non deductible expenses associated with our IPO. We delivered adjusted net income of $13,000,000 and adjusted diluted EPS of 0 point $4,000,000 Reported net income was $3,800,000 and reported diluted earnings per share were $0.06 in the quarter.

Speaker 3

Adjustments to GAAP this quarter include $12,200,000 of stock based compensation expense. As we mentioned on our 2Q call, our 3Q stock based comp was elevated this quarter Due to accelerated vesting related to our IPO, we continue to expect a step down in stock based comp expense in the Q4 to $8,000,000 We exited the quarter with $164,000,000 of cash, short term deposits and restricted cash on our balance sheet and 0 debt. Our balance sheet strength is a function of our robust profitability and excellent returns on capital, which yield attractive cash flows at high cash conversion. Year to date, we generated $78,000,000 of free cash flow, driven by roughly $79,500,000 of cash from operations and $1,500,000 of CapEx. Before I turn to our outlook, I want to touch on 3 big picture drivers.

Speaker 3

First, as it relates to the consumer broadly, there is no change to what we discussed in early October. We have not seen signs of macro softening in our business. Again, we do believe our model is relatively insulated based on our idiosyncratic growth drivers and our models inherent agility and also because of the beauty categories resilience and our broad demographic appeal, although we are of course watching closely. 2nd, as Eran mentioned, our business continues to be very strong and we're seeing significant near term and long term runway for growth and profitability. 3rd, we continue to find attractive high return reinvestment opportunities to support the expansion of new brands and product categories across our platform And our discipline and success in building a high margin cash generative business today puts us in a position of strength to make these investments.

Speaker 3

We will continue to reinvest for the future while maintaining revenue growth of at least 20% and EBITDA margins of at least 20% over the long term. Now turning to our outlook. For the full year 2023, we expect net revenue growth between 52% 53%, representing net revenue dollars between $493,000,000 $497,000,000 Our revenue growth outlook is an increase from our previous We expect gross margins of approximately 70%, an increase from our prior expectation of And we expect adjusted EBITDA margin of 21%, which is at the high end of our prior expectation for adjusted EBITDA margin in a range of 20% to 21%. We expect adjusted diluted EPS between $1.21 $1.23 an increase from our prior expectation of $1.11 to 1 $0.17 This assumes a tax rate of approximately 25.5 percent and average fully diluted shares of approximately 60,000,000. We also issued a detailed outlook for the Q4 and you can find that in our press release.

Speaker 3

With that, I'll hand the call back to Eran.

Speaker 2

Operator, we are now ready to take your questions.

Operator

Thank you. We will now begin the question and answer to assemble our

Speaker 3

roster.

Operator

Question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Speaker 4

Hey, guys. First, our thoughts are with you guys with the situation in Israel. So best of luck. And secondly, maybe if we could just focus on the molecule side of things and discovery there over time. Can you just give us an update on your plans if they've changed at all And sort of the commercialization of that molecule discovery with ODDOBI Labs and how you think about the pace of potential revenue payoff from that over the next couple of years here.

Speaker 4

And then second, just in terms of the higher repeat rates in the quarter and that driving upside, As you look beyond this year and the higher revenue base, how does that impact maybe the way you think about the underlying growth of this business beyond this year.

Speaker 2

Hi, Dara. Thank you for that. I'll start with OTT Labs and then we'll touch Repeat, right. Look, as I mentioned before, it was my dream to use technology to develop better ingredients. Our industry still look the same as When I started the company, same ingredients, same manufacturers, serving same companies.

Speaker 2

And with Audity Labs, we are doing something different and we are about Change it. Trevala and Audity Labs use the same technology being developed in pharma to develop higher efficacy molecules. This opportunity is endless, and this is why I spent so much time of my time as the CEO around this topic. As I mentioned in the call, we see a way smarter consumer today. We see how much time she spend on our product pages and how many questions she asks, Which leads us to believe that we are going to see a trend towards size back products regardless the brand itself, call it product love versus just brand love In terms of how we market it, it's that's the magic because we are D2C model.

Speaker 2

We use our user base to build segmentations and profile, Then we build the product, then we are going back to the consumer and to the user and offering that new molecule or new product if you want. But also when it comes to Audigy Labs, there is no change to the criteria of how we think about market opportunities. Has to be huge time where we see real demand opportunity, where the unit economics work for online and where we believe we can truly solve the consumer pain point. We'd love it to make our life easier just because if in the past I just had a user and I need to develop Based on the need, now I have a huge engine for product development and we signed back products. Just like when meeting the teams and see the talent and the amount of PHDs that we have now in Boston is something that is It's unrelated to the industry, because so far we saw those talents simply just in pharma.

Speaker 2

It's the first time that I see a team, Tengal it's our team That is working around beauty and building something better. So as for the future, next year, we are launching 10 products coming But this is nothing that like the runway and the pipeline that we have with Oddity Labs is huge. Therefore, we continue to hire and Therefore, I continue to spend a huge portion of my time around Audity Labs. Again, today you see 2 brands, Brand 3 and Brand 4 in the making. Brand 3 is going to use the services of Audity Labs because part of And a significant part of the product range are going to come from there.

Speaker 2

But it's also great for Swartz, Shalini and Mackayage for the first time both for the development teams are working with OrityLab For different products, for things that we didn't believe that can be done in the industry because like that's what We were told by manufacturers, but now like a new world is open to us. And again, it's very early and but like I believe this is the future of the company. As for repeat rate, again, repeat like is going when people ask me about our ability to predict the business, Obviously, it's easier because we are not relying on any third party. It's a D2C model, very easy to understand the coherence in the business. And it's my decision whether I want to turn on or off or cut back spend for New Year's acquisition.

Speaker 2

But one thing I cannot see It's with new products or new brands like the repeat rate and what we missed here on again it's a missed we beat, it's Like the repeat rate coming from spoiled China that exceeds my expectations and that's why the revenue came Stronger this quarter, and I don't see any feeling like every cohort is getting better and better. And it's Both because we are doing we are using our data better, but also because we are Because you just put the right product in the right hand. And so we expect the repeat rate continue to grow and to continue to see The vast majority of our revenue coming from repeat customers, which is very healthy and that's why we are able to generate cash every month, every quarter.

Speaker 3

Hey, Daryl. I'll just add quickly to what Arun said on your first question as it relates to Ade Labs. There is no change based on Labs to our long term algorithm of 20% plus revenue, 20% plus EBITDA margins and the way that we're driving that business is still in a very Asset efficient way, cost efficient way with high profitability and high cash flow. So despite the fact that that piece of the business is coming together Even better and stronger than what we had anticipated. There's no change to how it affects us financially.

Speaker 4

Great. Thanks.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from Scott Schoonhaus with KeyBanc. Please go ahead.

Speaker 5

Thanks. Hi, team. Thanks for taking my question. I actually wanted to follow-up on Audity Labs as well. So just wanted to confirm, I think last time you commented that there were 10 products coming out of the labs next year.

Speaker 5

And as a follow-up question, can you talk about how Oddity Labs and the combination of your VisionTek will be deployed for diagnostics for your upcoming brands. Thanks.

Speaker 2

Hi, Scott. Sure. Yes. So as I mentioned, 10 products are going to hit the market next year coming from Quality Labs. And to the second question, like the way that we do it in the within the company, we have 2 types Of labs, and one is the tech side and the other one is the science in Boston, one in Tel Aviv, one in Boston.

Speaker 2

So the diagnosis of BAN3 It's going to be done with our computer by our computer vision technology from there and from the team in Tel Aviv. And the products In development from Audity Labs. So both R and D centers are working to develop something better for Brand 3, which is a medical Great Skin and Body brand, which rely heavily on the Agnosis, which coming from computer vision.

Speaker 5

Great. Can I ask you just one more follow-up? Given the growth that you're seeing or the unexpected pace of Advancement on the Audity Labs. Can you talk about how Evan and his team are hiring? I know Lindsay just You mentioned that the margin profile and the cost controls will be in place to maintain your long term objective.

Speaker 5

But just talk to me about obviously you're hitting your targets there faster than expected. What are the higher what's Evan and his team doing to have the labor behind that? Thanks.

Speaker 2

Yes, sure. So when we started, we let you know we gave them Like a small amount of tasks that we ask for both in Materials and Spoil Child. And when we saw that it's truly Like that they can do way more with more projects. And again, all projects came from true NIPs coming from users as we see it in our platform. And then I ask Kevin, like let's try to see if we can add More, like to increase the manpower and to have like to continue to have the same level of talent, but let's grow the team.

Speaker 2

And Surprisingly, we saw that you know that we were able to do it. We grew the team 3x in just few months. People are excited to work on something different than just Pharma using the same technology. And again, talent attracted talent. And when you see that in if you One day, I would like to visit all the hotels in Boston.

Speaker 2

You'll see the talent there. You will understand why it's easier for us to recruit. In addition, the biotech, It's not an easy industry today. So we are leveraging the fact that we are profitable, and we are we don't need external capital to continue to grow, Which makes it very attractive for this talent to want stability. So we continue to grow the team.

Speaker 2

And since our margin is even stronger than what We envision it allow me to continue to invest, and that's why we didn't come this quarter with 25% margin. We invest In lab and we invest in building teams of Brent 3 and Brent 4.

Speaker 5

Thanks for all that color. Yes, I know the biotech weakness Should allow you to attract some very good talent. Thanks.

Speaker 2

Yes. Thank you.

Operator

Thank you. The next question comes from Youssef Squali with Truist. Please go ahead.

Speaker 6

Excellent. Thank you, guys, and congrats on a solid quarter. So a couple of questions, maybe starting with the 10 products, Oran, that you talked about for next year, how meaningful are kind of these products? Obviously, they're not Brands, they're extensions of the 2 existing brands. Can you just share some Color there as to how potentially meaningful they could be just for us to kind of get a sense of of ultimately how impactful they could be to the revenue.

Speaker 6

And then Lindsay, with such a high repeat rate, Your market efficiency must be going through the roof. So can you maybe talk a little bit about that and whether that's like a step up In your thinking about longer term margins, because if that repeat rate stays high, And obviously, your margins are going to be higher and your marketing efficiency is going to be that much higher. So just or is it just too early for us to get to that to conclude that at this point. Thank

Speaker 2

you. Sure. I will start with the first question. How are you first of all, I will start with the first one. The 10th product, we can beat like the way that we operate, We never count on one thing.

Speaker 2

We can beat that. We always run with multiple levers to deliver our growth that we want to see next year. We don't need those 10 products to beat our plan. It's an addition, But I want to say like in spoil chart, I could have done this year just the plan just with Hillman Fjallaj, but I pushed more spoil chart because I want to see diversity and I want to see more like revenue coming from different sources. So I will do the same with the new products coming from Audity Labs just For the sake of building this engine, but I don't need it to grow or I don't need it for to justify my plan for next year.

Speaker 2

The second question, I will hand it to Lindsay. I would just say that regarding long term Margins like in my school, you don't need more than 20% EBITDA margin, and I want to continue to invest in the business. We could have done like More than 25% this quarter, and I intentionally decided to hire more people in Brantford and Brantford to be to make sure that we are better positioned in Audacity Labs and To make sure that again also in the tech on the tech side that we continue to have the best people and to develop more products and doing like to invest in our future. But I will hand it over to Angela.

Speaker 3

Yes, thanks. So, Youssef, as we think about our repeat rates, As Aran mentioned, it was a key driver of the upside relative to our expectations in the quarter. We're thrilled to see the very strong repeat rates at both brands, Il Makiage and Spoil Child for each of those brands repeat revenue will be more than half of our revenue for this year, which is remarkable when you consider how young Each of those brands is, Il Makiage only having launched 5 years ago in the U. S. And Spoiled Child, which is less than 2 years old And growing as much as it is, and as Arun mentioned, around $100,000,000 in net revenue this year and profitable to be able to deliver that kind of repeat Is something we believe is unprecedented across not just Beauty, but any vertical in B2C.

Speaker 3

We love the repeat for a number of reasons. First of all, it reflects the strong customer satisfaction, the fact that Customers love the product, they come back and we're truly filling a need for them that's not being filled outside. Number 2, of course, repeat is very profitable for us Because we don't have to as you were sort of pointed to before, we don't need to deploy any material OpEx Or marketing spend in order to generate it relative to our first purchases. The fact that our repeat rates are so high reflect those things, but they also reflect the The fact that we have significantly under invested in our potential for new customers this year as we purposely pace the business and try to slow it down. So the fact that you've got a brand that's less than 2 years old with more than 50% repeat and nicely profitable and spoiled child means you could have Growing a lot faster if you wanted to as Arun said.

Speaker 3

But based on the size of the opportunity ahead of us, we are operating in a massive $600,000,000,000 global TAM in Beauty and Wellness, it's dominated by offline incumbents We believe have significantly under invested in technology. We think the category moves to 50% online before you know it. And we are, we believe, way ahead of others in our ability to capture this. Our focus is very much on reinvesting That profitability in order to deliver against those goals, our underlying business wants to be much more profitable than we're letting it, but we're disciplined about Talking to that 20 percent EBITDA margin, which by the way is still incredibly profitable relative to anything in our peer set. So we think that's a strong return.

Speaker 3

It allows us to generate a lot of to invest in the future, but doesn't change our overall thinking in terms of the algorithm, profitability or growth algorithm.

Speaker 6

Okay. No, that's understood and impressive. Maybe just one more before I let you go. Lindsay, can you just remind us please of the seasonality in the business? This is not similar to other kind of DTC retail, just so that we kind of understand how the kind of the linearity throughout the year happens.

Speaker 3

Yes. So as you alluded to Youssef, our first and second quarters of the year are much larger than the second half of the year And that is unusual for lots of consumer companies, beauty companies, D2C companies were typically holiday in the 4th quarter is the biggest time of year. I think seasonality is a misnomer. It's really more about cadence and how we choose to pulse our business. Obviously, if you look industry wide in those categories, holiday is naturally very, very large.

Speaker 3

There's nothing that's naturally very, very large in our industry about the first or 2nd quarter, so this is really about when we go full power and take advantage of our Opportunity to really dominate in the market and candidly to with very high visibility, get the full year done. And I know that's unusual relative to what you typically see for other businesses that are going kind of as hard as they can All year long to sort of match the pace of spending of the consumer for us, it's been really important for us to pace our growth. So we'll do more than 50 Revenue growth this year, that's on top of approaching 50% last year and 100% the year before. We've been growing at a very, very Rapid pace, so we want to make sure that the way that we're growing allows us to deliver over the long term compounding durable, sustainable and super high quality growth for many, many years to come. That's been our decision to restrain growth in the back half when we were able to over deliver on our I think another thing that's important to point out is we don't participate in the holiday promotional fray.

Speaker 3

You won't see us fighting in a low quality way like that. We are full price businesses and full price brand,

Speaker 2

which is also why While While the majority of the industry is 50% off, so that's why it doesn't make sense for me to like to compete in Q4.

Speaker 3

Yes. Correct. So again, this is really more about our decision on the timing of when we power the business versus any natural seasonality.

Speaker 6

Yes, exactly. Awesome. Thank you, both.

Speaker 2

Thank you very much.

Operator

Thank you. The next question comes from Andrew Boone with JMP Securities. Please go ahead.

Speaker 7

Hi guys. Thanks so much for taking my questions. Can you help us understand how top of funnel is trending? How is conversion trended last And is there any update on the 40,000,000 users that you guys have?

Speaker 2

Yes. I will just say that when I slow down, people tell me that it's because of the market. It's because it's very Because of the softness in marketing, but I can tell you that just in Mackayage, the user acquisition in Q3 was the lowest that we had in the past quarters since Q1 2020 and despite the fact that the acquisition efficiency in Enmaquilla was Unbelievable strong growth was 70% higher than Q3 of last year. And still, I spent 40% less than Q3 of last year. Like we don't see any softness in the upper funnel.

Speaker 2

We see very strong demand and we decide when to take it or not.

Speaker 7

That makes sense. Thank you. And then as we think about really as a follow on to Youssef's question, We're 2 months away now from January. Can you guys just talk about any features or new geographies that you guys may be launching As we think about 1Q 2024 that gives you the confidence to be able to really pull that growth forward in the first half of next year? Thanks so much.

Speaker 2

Yes. I'll start by saying that we are in a very strong position entering 2024 And the plan is to execute well every quarter. We are not providing now guidance for 2024 and not for Q1 And you already know our algorithm, but I will try to touch it more generally. And thanks to the huge TAM of our industry, we have So many ways to grow and my job as the CEO is to make sure we are spending time and resources and going after the right targets and balancing between Opportunity size and chances we can get it done. And it's true to all we do, new products, new brands, new categories, New tech products, new innovative molecules, we are always working on all 5, but with massive pipelines.

Speaker 2

And this strategy allow me to grow the business consistently, EUR 110,000,000 in 2020, EUR 220 €1,000,000 in 2021, €325,000,000 in 2022 and approaching €500,000,000 this year, we're talking €100,000,000 of EBITDA. But when we try to understand like how we break it down, first is our existing brands, Ilmatias and Spoil Child, which are Still like small in the market share and not even close to hitting the limits with the categories we are already in. And this brand's Pipeline comprised of new products and new categories for both brands as well as new geographies, as you mentioned. The teams Already in market testing new product launches and based on those early reads alone, we have a very good clinical about 2024. Ilmakias, we have a number of exciting products in skin to expand our strong foundation there.

Speaker 2

And in addition, Ilmakias Leadership is ready with new markets to launch in where our tests have come back very strong in terms of unit economics and customer satisfaction And we have slowed play these market expansions to ensure our users are happy in our current markets, but we have those new markets ready to go and it's multiple markets. And spoil child, we have a pipeline of new products in both hair and skin to drive those 2 categories and to continue the hyper growth of the brand. And so I'm not concerned at all that meaningful growth will come from both fronts.

Speaker 7

Thank you.

Operator

Thank you. The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Speaker 8

Hi, this is Melanie on for Lorraine. I just wanted to touch on something you actually just Said in your response about entering new markets. So do you have any update on your international expansion strategy for both brands? If so, what are some of those new markets that you look at? And is that embedded into any of your plans going forward?

Speaker 8

Thanks.

Speaker 3

Yes, thanks. New markets outside the U. S. Are a huge opportunity for us today and over the long term. Around a quarter of Il Makiage is outside The U.

Speaker 3

S. Boyle Child has not endeavored outside the U. S. Yet. And as you know from our competitors, call it 2 thirds, maybe 70% of their business It's outside the U.

Speaker 3

S. So we know this is a significant opportunity for us. As part of our what I mentioned before in terms of pacing our growth, We have been really slow played this opportunity in terms of actually unleashing it. That being said, we set out significant set up significant infrastructure and Structuring capabilities in order to unleash it when we're ready. And that includes conducting many, many tests in different markets, laying the groundwork And getting the wheels in motion, getting a read from the customer.

Speaker 3

What we see is basically all the markets that we're testing, You're seeing very, very good customer satisfaction, cohort data, the foundational things that give us The unit economics will work and that we can scale across a number of different markets that we're not in already. For spoiled child, international is really not on the table in the near term. The teams have asked and want to expand more aggressively over But we've made sure that we're still focusing on the U. S, but we do see significant opportunity when we're ready to start building that overseas And it's easy for us based on the infrastructure we've already built for Il Makiage to leverage that. It's part of as we think about the build to 1,000,000,000

Operator

The next question comes from Lauren Lieberman with Barclays. Please go ahead.

Speaker 9

Great. Thanks. Good morning. Covered a lot of ground, but two things I wanted to follow-up on. First was on the repeat rates.

Speaker 9

I was just curious The degree which you have visibility or can we visibility into everything. But through you, Jun, you can comment on these repeat rates being Existing consumers replenishing products they've already bought in the past and are coming back at a higher rate than you had forecast? Or is it a basket size thing, right, that they are now buying more things from spoils or Il Makiage, but we're existing consumers of other products within the So that's kind of number 1. And then number 2 was on the 10 new product launches with tech from Oddity Labs. I shouldn't know how that compares So a normal year of new product activity is 10 products a lot, a little, just some sort of benchmark for thinking about what 10 means in the context of a typical year.

Speaker 9

Thanks.

Speaker 2

Sure. I'll start by talking about replenishment. It's both, both AOV and both like new products and also both like replenishment. But Like the less visibility that we have is mainly around new products or new brands or new categories that we launch, And we don't have enough history to predict the repeat rate. And that's why we thought that we will be in X and we are coming back Way higher, but you could see it across the board in Inmacayaga and Spoelchild both all cohorts are growing and The percentage of revenue coming from although we grew massively in the past 2 years, the majority of the revenue is coming from repeat.

Speaker 2

So it just showed the strength. As To the second question, 10 products, I don't know comparing to who, comparing to us, it's not a lot because we launched way more and We are not always successful, so we have way more than 10 products. We test them, and then if we see that everything works, both Satisfaction and unit economics, then we continue to push. So we have more than 10 products, but we are very bullish about those products because they came from labs.

Speaker 3

Hey, Lorna. I'll just add to on your first question. As you know, our net revenue repeat rates have continuously improved Since the first time we spoke to you was I think December of 2021, we talked about net revenue repeat rates in the kind of low to mid-40s. Those net revenue repeat rates as of you'll see in our F1 for IPO were I want to say around 80% on a 12 month basis today or closer to 100%. We don't see A ceiling that has been an ongoing story for us, the continuous improvement in repeat rate and it is so many factors, but I have to Call out our technology and how, for example, our machine models that support us in retargeting and how we market And making sure we're maximizing things like bundles and upsells and adding basket size, in getting people to engage again with the products.

Speaker 3

We just continue to get better and better and better as we get more data and optimize for our model. So that's been a really important driver for us. And of course, now that we've layered spoiled On top of Hillmanc Gyage and we're building the platform, we're able to extract more from the same wallet and that's part of The really strong financial profile of our business, which makes us more like what you would see in a software land and Expand type of model where we know who the user is, we understand their profile, we understand so much about the products that we need and then we're Building those products specifically for them that allows us to extract more from the same wallet and drive repeat. That's a lever for us that we only Just started realizing really with Spoiled Child and to some degree with the launch of Il Makiage Skin, we're extracting more from that same user, but that will just continue to compound Over time as we add more products and more brands to the platform. And then I guess one clarification, the 10 products Our purely Oddity Labs, that's not the full scope of products that we will introduce for Eelmachiage and Spoil Child in total next year.

Speaker 9

Okay, great. Thanks so much.

Operator

Thank you. The next question comes from Jason English with Goldman Sachs. Please go ahead.

Speaker 10

Hey, good morning folks. Thanks for stopping me in. Interesting statistics you share On the acquisition expense behind El Makiage being down 40% year on year. When we look at SG and A ex the stock comp, It was still up substantially this quarter, up like 36% versus up 38% last quarter. And it sounds like you're making a lot of And maybe you can unpack that a little bit more for us.

Speaker 10

How much did I suppose the Aggregate acquisition expense change year on year in the quarter. And for the remaining growth, how much is going against people in Audiology Labs versus other capability building?

Speaker 3

Yes. Thanks for the question, Jason. So you can see in our financial profile that we leveraged our adjusted EBITDA in a very significant way versus The prior year, part of that, a smaller part of it was gross margin expansion, but the bigger piece of it was, SG and A leverage. And a big part of that was our ability to leverage marketing spend and in particular user acquisition as we throttled back on our new user acquisition and delivered the majority of our revenue from repeat customers. We are making other OpEx investments in support of Building the business out for the long term, new brands, new product categories, etcetera.

Speaker 3

And Eran touched on that a little bit earlier, in terms of the buckets that we're spending in.

Speaker 2

Okay. I would just add one more thing that media as a percentage Revenue was lower in Q3, 2023 compared to 2022. So we didn't spend the money against marketing.

Speaker 10

That's helpful. Thank you and impressive. Congrats by the way. It sounds like you're continuing to make great progress on Brand 3 and Brand 4. I think you Talked last quarter about even having kind of brought the brand together and have some clarity on what the brand name is going to be.

Speaker 10

In light of the progress you're making, Is there any chance that you'll be able to bring it to market in 2024? And if not, what is what are the gating factors that are And in the launch all the way out into 2025.

Speaker 3

Yes. So our plan continues to be for 2025. Don't expect that to change. We've committed to, as we say, call it launching a new company, every 18 months to 2 years and we call it new company because these are Truly standalone businesses, standalone operating teams that we plug into our platform with shared technology, shared data, etcetera. So no change to

Speaker 2

Okay.

Speaker 10

And last question for me. Arun, when I talk with investors, there's A lot of enthusiasm for the potential for your company and obviously it's validated by the results you posted last evening. Where those lingering Questions are on your ability to get the sequential acceleration that's implied in consensus from 4Q to 1Q, which of course is the cadence that Lindsay was talking about earlier. Remind us, as you plan to drive that stepped up acquisition into next here. What are the tactical steps you take that give you that are going to catalyze that ramp into the Q1?

Speaker 2

So first of all, we are not discussing now Q1. I can just say that like every other year, We have very strong visibility in Q4 into Q1 and we are doing lots of preparations in that quarter to ensure that we hit our goals in Q1 And in Q2, we didn't have any problem to deliver in the past, I want to say, 3, 4 years, and we intend to continue to do so. The only reason that Before being a public company, I had a private equity investor. They care about yearly budget and we decided every year To go with full power in the first half of the year to ensure that we have time to build engines for the next year. So that's how we started.

Speaker 2

But again, we are not spending money on new user acquisition unless we see very strong efficiency. So even in Q1 And on Q2, in previous years, we had like a few weeks that we cut back and we run the business with full visibility And we decide in real time any second what we want to do with the budget. So, it's our control. That's the best part of B2C.

Speaker 10

Okay, okay. Thanks again and congratulations once again on the results.

Speaker 2

Thank you very much.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Oran Holzman for any closing remarks. Over to you.

Speaker 2

Thanks for joining us and we will speak to you when we report the Q4. Have a great day guys. Bye bye.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Oddity Tech Q3 2023
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