GE HealthCare Technologies Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Auditors Third Quarter 2024 Earnings Conference Call. Today's call is being recorded, and we have allocated time for prepared remarks and Q and A. At this time, I'd like to turn the conference over to Maria Lycouris, Investor Relations for Audity. Thank you. You may begin.

Speaker 1

Thank you, operator. I'm joined by Ron Holtzman, Audity's Co Founder and CEO and Lindsay Drucker Mann, 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 opportunity, future financial performance and potential long term success. Forward looking statements involve risks and uncertainties, and actual results could differ materially due to a variety of factors.

Speaker 1

These factors are described under forward looking statements in our earnings press release issued yesterday and in our annual report on Form 20 F filed with the Securities and Exchange Commission on March 6, 2024. 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

Thanks, everyone, for joining us today. The beauty industry is transforming and audit is leading this transformation. The strength and resilience of our direct to consumer model is on full display in this market backdrop. In contrast to the most of our competitors who are experiencing slowing sales, weaker foot traffic and excess inventory, Audity is constantly delivering strong and profitable growth. Our 3rd quarter results once again demonstrate how Audity is leading in the most important vectors of growth in the global beauty market.

Speaker 2

First, the massive consumer shift online where Audity is already dominating as the largest direct to consumer platform online. And second, the consumer's increasing demand for high performance products. Results for this quarter show how our early investments in technology continue to pay dividends, allowing us to deliver yet another quarter of outstanding growth, profitability and strong cash flow. It creates a positive feedback loop for our business as we redeploy our strong excess cash flows to double down on investments in technology, science and building new brands, all of which will strengthen our competitive position and will continue to deliver our future growth. Turning to our earning results.

Speaker 2

We once again broke records across our P and L. For the 1st 9 months of this year, revenue increased 27% to $523,000,000 We delivered adjusted EBITDA of $135,000,000 and generated $119,000,000 of free cash flow, close to 90% of EBITDA converted to cash. To understand how strong those results are, this compares to mid single digit growth for our large cap competitors. Our numbers show once again the power of online and how strong our model is. As I've said many times before, the consumer shift online is a massive industry driver and therefore we believe that the majority of the softness in beauty numbers for our competitors is mainly due to channel mix.

Speaker 2

And just to begin, we believe online will quickly become the largest channel at 50% of the market. Those that told us in early days that beauty can't work online or questioned our D2C sustainable growth sits really now when we are one of the only public multi brand beauty companies that constantly grow revenue over 20%. It is now clear that the power and advantage of our direct to consumer model are very deep. We have massive engagement on a daily basis with our users directly with no one between us. We have the data to predict which consumers are in the market to buy and which products they are likely seeking.

Speaker 2

The direct interaction drives higher consumer satisfaction and enable us to have greater predictability in our business with ton of agility. We are not cared by retailer distribution and how they cycle brands in and out to drive newness. We control our destiny unconstrained and therefore can continue to grow our and therefore can continue to grow our brand even in tough market conditions. Our users, their desires and their data are the only things that drive our product development priorities and our launches. No retailers forcing our hand and no head stylist guessing trends.

Speaker 2

And this is why we are successful at launching new brands and new products. With our direct relationship, we know what users want and our product development muscle allow us to create the next winners to drive growth. So this is the huge advantage we have over our competitors with our direct to consumer model and why we will continue to win. I also want to address the questions we hear about the durability of direct to consumer. It's very important to understand why we continue to show again and again how our model is different than other D2C models that have struggled.

Speaker 2

Unlike others, our business is built around acquiring users, not around acquiring customers or acquiring revenue. Our user base today is over 50,000,000 in size and with the data that users have given us, we understand so much about them. We invest a lot in technology, built an R and D center in Tel Aviv by technology talent from the Israeli tech ecosystem. Our ability to attract top technology talent from the best Israeli intelligence units is a huge advantage. The tech team is still the largest team in the company representing approximately 40% of our platform headcount.

Speaker 2

This technology combined with our user data is essential unlock to building a profitable online business. Our unit economics work for online. This is why from the very early on, our cash flows were strong and enabled large and constant reinvestment in the future growth. For other direct to consumer businesses, the more they scale, the harder and more expensive it for them to grow. But for us, it's the opposite.

Speaker 2

The more we scale, the easier growth become for us. 1st, because we are growing with so much repeat. Repeat is over 50% of our revenue and increased as a percentage of our mix again this year, even though we continue to grow the business more than 25%. 2nd, because we know so much about our users, we are able to build brands and products they want. And then we build machine learning models to put those new brands and products in front of our users.

Speaker 2

Higher scale means for us more data, better conversion and greater share of wallet. All of this has continued to drive strong performance for us. In the last 12 months, we generated $621,000,000 of revenue, representing 30% growth with 24% of adjusted EBITDA margin. We generated $127,000,000 of free cash flow in the last 12 months, taking us to $248,000,000 of cash on our balance sheet with 0 debt, even after returning cash to our shareholders by repurchasing almost $50,000,000 of our stock this year. This is what happens when you add technology to one of the best consumer categories in the world.

Speaker 2

So this is the opportunity, the advantage of our model and how we position the business. I will now turn to our growth drivers for 2025 and beyond and why we continue to be so bullish. The first is our massive global TAM, a $600,000,000,000 global market with so many categories and subcategories for us to enter to. Every year, we show that we know how to do it, how to add more new products to capture higher share of this massive TAM. Next is the enormous growth runway for our existing brands, IL MAKIAGE and SPOIL CHILD, both on track to reach $1,000,000,000 of revenue over time and both are sustaining double digit growth rates today.

Speaker 2

IL MAKIAGE will cross the $500,000,000 mark this year, which makes it one of a very short list of brands to hit this milestone. Ilmakias and Spojal will continue to drive growth from their existing products from a pipeline of new products and categories and from scaling internationally. As you know, up to this point, we have been primarily focused on the U. S. Where we continue to see high growth runway and unlike our competitors, we have zero exposure to China's consumer slowdown.

Speaker 2

The next driver is new brands with Brand 3 and Brand 4 ready to launch in the second half of next year, while continuing to add additional brands to our future pipeline. Brand 3 is a direct to consumer telehealth platform for consumers with skin and body issues. We have made impressive progress in building the teams, the brand identity and the product offering, product line and ton of tech investments, including first of its kind vision technology for the brand. Our next growth driver is technology innovation where we continue to invest significant resources, expanding our teams, improving our algorithms, our computer vision tools and their integration with our platform. There is still a lot of work to be done.

Speaker 2

New models will continue to expand revenue and margins. And finally, the Oddity Labs to discover new proprietary molecules to drive product innovation and allow us to launch high efficacy science backed products. We are continuing to grow our teams, which now total 60 scientists with new talent across our bioengineering, computation, chemistry and deliveries teams. To accommodate the expansion, we recently opened our new lab in Kendall Square, Boston. I am fully committed to Audity Labs' success and believe it can help us become one of the largest beauty companies in the world if we succeed there.

Speaker 2

With all of these growth drivers, we have so much optionality over long term, so many different ways to grow. For 2025, we will enter the year with great momentum and strong positioning based on tons of preparation that teams did, like they do every year to ensure success. I am very confident in delivering our financial objectives and commitment, which we have done for the past 6 quarters since becoming public and also every single quarter before end. With that, I will turn over to Lindsay.

Speaker 3

Thanks, Arun. Let's turn to our Q3 results, which I'll refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. Audigy delivered another record breaking quarter across the board. We grew net revenue by 26% in the quarter to $119,000,000 The strength was driven by both Il Mare Quij and Spoil Child across a range of product categories.

Speaker 3

Net revenue growth was driven primarily by an increase in orders, while average order value increased 9% year over year. Average order value growth was driven both by an increase in items per order and positive mix shift to higher priced products like skin, partially offset by mix shift to repeat sales, which carry lower AOV. The 26% revenue growth we delivered this quarter beat our 22% to 24% guidance. This upside stands in contrast to concerns we hear from investors about weakening sales trends in other beauty businesses, including both wholesalers and retailers. As Aran said, our results are a testament to the strength and resilience of our direct to consumer model and how we've positioned our business to win in the most important vectors of industry growth.

Speaker 3

In fact, our business is firing on all cylinders. Let me give you some examples of how. Our latest customer cohorts are our strongest cohorts ever. Frequency of repeat revenue in our latest cohorts are the best ever. Repeat continues to increase as a percentage of sales.

Speaker 3

AOV continues to increase, including first order and repeat AOVs, which are our highest ever. We're scaling both brands across a wide range of demographics and consumers, old and young, high income and low income. Revenue growth is broad based across different categories and products. All of our product vintages are growing from the 2018 2019 product vintage to the 2023 2024 vintage. These individual data points of strength are not random and they don't exist in isolation.

Speaker 3

They're all related. They're all the outcome of a platform that is meeting enormous consumer demand, gaining share of wallet, selling more items per order and layering new product franchises on top of a growing core. This increases our surface area, expands the runway and drives customer happiness, all of which support a very attractive and durable financial model. Moving down the P and L, gross margin of 69.9% compressed 35 basis points and exceeded our guidance of 68%. We expect further normalization of our gross margin in the 4th quarter towards 68%, which is a level more consistent with our long term run rate.

Speaker 3

As a reminder, we don't manage our business to gross margin. We manage our business to direct contribution margin, otherwise known as DC margin. We calculate DC margin as gross margin minus performance media spend. Products with lower gross margin, but higher repeat frequency can deliver the same DC margin as a product with a higher gross margin, but lower repeat frequency. And this is a trade off for agnostic too.

Speaker 3

As we've said before, our gross margin in 2024 has been coming in higher than what we see as a sustainable rate based on our view of product mix. As a result, we do expect gross margin will compress in 2025 as it normalizes relative to a very strong result this year. We delivered adjusted EBITDA of $25,000,000 in the quarter and adjusted EBITDA margin of 20.8%, above our guidance in absolute dollars and in margin percentage terms. Adjusted EBITDA margin compressed by 112 basis points as we incurred planned incremental expenses in the quarter to drive future growth initiatives, including Brand 3, Brand 4 and Oddity Labs. The timing of some of these expenses shifted out of Q3 and into Q4.

Speaker 3

And as a result, we expect a bit more EBITDA margin compression in Q4 as those investments flow through. We delivered adjusted diluted earnings per share of $0.32 Our adjusted EBITDA and EPS exclude approximately $3,000,000 of share based compensation. We continue to deliver very strong free cash flow and free cash conversion, a clear reflection of the strength and quality of our business model. We delivered $119,000,000 of free cash flow year to date. We repurchased around 1,000,000 shares of our stock in the Q3 for approximately $37,000,000 and have around $103,000,000 remaining on our authorization.

Speaker 3

We will remain opportunistic on share buybacks based on our strong cash flows, ample cash reserves and attractive share price. We exited the quarter with $248,000,000 of cash, equivalents and investments on our balance sheet and 0 debt. Turning to our outlook, we're once again raising our 2024 full year guidance based on the better than expected Q3 results and a strong start to the Q4. We now expect net revenue between $642,000,000 $644,000,000 representing 26% to 27% year over year growth. We expect to deliver a 71.5 percent gross margin for the full year and we expect to deliver adjusted EBITDA between $147,000,000 $149,000,000 which includes a step up in growth investments for Oddity Labs and our new brands.

Speaker 3

We expect full year adjusted diluted earnings per share will be between $1.85 $1.87 Turning to the Q4 outlook. We're off to an excellent start and are pleased with the composition of growth across both brands and categories as well as our cohort repeat rates. We expect year over year net revenue growth in the quarter to be between 22% 24%. You can find more details on our Q4 outlook in our press release. Lastly, I'll reiterate the early thoughts on 2025 that we communicated last quarter.

Speaker 3

We expect to deliver net revenue growth of 20% and adjusted EBITDA margin of 20%, consistent with our long term algorithm. We plan to incur significant investments in Brand 3, Brand 4 and Oddity Labs and we do not expect to benefit from any material revenue contribution from these initiatives in 2025. With that, I will turn the call back to the operator for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from Dara Mohsenian from Morgan Stanley. Please go ahead.

Speaker 4

Thanks,

Speaker 5

operator. So Lindsay, can you give us a little more detail on that strong start in Q4 and any more info on what you're seeing in the business so far this quarter? And then also just looking ahead, can you give us an update on brands 34 when you really expect the revenue contribution from those brands to start to ramp up and the timing of the rollout as you look towards next year and any spending upfront ahead of that and how you think about the spending pre launch? Thanks.

Speaker 4

Great. Thanks, Sarah. So,

Speaker 3

Q4 started strong with continued good momentum from Q3. Q3 was an excellent quarter for us. As I talked about, really our cohorts are performing at their best ever. As you know, Q3, Q4 are mostly repeat business for us, but we do have a lot of signals based on how we see our customers behaving and our users behaving. And the customer behavior that we saw in Q3, which is very strong continued and that includes repeat rates being at their best, AOV being at its highest, both first order and repeat order AOV and that's because people are adding more items to their orders.

Speaker 3

So we're increasing order size in terms of numbers of items, but also we're getting a nice positive mix tailwind from skin in particular and just general trip to higher priced products, which is a great signal in terms of customer demand and their willingness to spend more for the value that we deliver. We're seeing growth in all of our product vintages. So our original 2018, 2019 product line up that we launched in the U. S. With continues to grow even as the newer product vintages that we released this year, last year, the year before, all of those new franchises that continue to layer on.

Speaker 3

But I guess what I would stress is that all of this really is according to plan. We have a lot of control over our business, as you know, and a lot of visibility and ability to predict and drive the ultimate outcome for the quarter. And so that's what we saw transpire in Q3, and that's exactly what we're seeing entering Q4 with high visibility to the strong finish that's reflected in our guidance.

Speaker 2

Yes. As for brand 3 and brand 4, both brands are being developed and progress according to the plan. Both will be ready second half of next year. The most important part is both brands, we continue to use the Imagination Spoil Child user base to create new segments and user segments for those new brands. So once we launch them, we are launching for existing user base, which is very important.

Speaker 2

And as for the progress, I will just give more sense about Brand 3. We are actively building and scaling the teams. We completed the branding process. We set up our telehealth infrastructure and training physician network and pharmacists to streamline our user experience and support delivery of personalized treatment. We continue to do very large scale consumer studies extensively testing our new product and treatment just because it's super personalized and customized.

Speaker 2

It requires a lot of work. Vision Technology has made great progress including intensity, localization, classification. We are working on this technology for more than 2 years and we see great results and this is before launch. And lastly, generative AI models are being built to show expected progression over multiple week. Horizon for the treatment, which is something that we added recently and we are very bullish about the ability to create better results and to set expectations better expectations with our users.

Speaker 2

Brand 3, we don't share much. We're also not sharing too much internally to be honest. Brand 4, sorry. And but everything is according to the plan, has its own team, has its own CEO already. And we are progressing and it will be a great brand.

Speaker 4

Let me just add one more thing

Speaker 3

to what Eran said. We said this, but it bears repeating because I've gotten this question before. For brand 34, we don't expect any material contribution to our revenue for 2025 as we've talked about achieving 20% revenue. We don't need brands 34 to achieve those targets either. As Aran said on the call, Il Makiage was very strong and Spoiled Child very strong.

Speaker 3

And we believe El Machias is on track to be a $1,000,000,000 business and same with Spoiled Child. So we still have tremendous amount of growth in our base. So the revenue contribution next year will be not material from any of our new initiatives. However, the cost structure will be material, which is why we're guiding to gross margin compression towards 20% next year.

Speaker 2

And the reason it's not going to be material, not because the brands are not going to be strong, just because when we launch it end of next year, second half, even if it starts really like great, still the base of what it is so is huge. So to move the needle, it requires more than just a few months of a new brand.

Speaker 5

Great. That's helpful. Thanks.

Operator

Thank you. Our next question comes from Andrew Boone of JMP Securities. Please go ahead.

Speaker 6

Thanks so much for taking my questions. Lindsey, can you help unpack the top line growth you gave us? Can we better understand the 9% AOV increase? And then if I think about unit growth kind of that's implied with that in the mid teens, how do we think about unit growth for 25% as we think about the 20% formula? And then, Ron, a bigger picture question on generative AI.

Speaker 6

AI. We're seeing major improvements with Meta and Google being more relevant. I'm assuming that also applies to the targeting that you guys are able to do in terms of matching consumers. Can you help us better understand what that technology has accomplished for you guys and how you're using it? Thanks so much.

Speaker 3

Great. Thanks for the question. I'll start on AOV. AOV has been an ongoing tailwind for us, although the primary driver of our revenue growth both this year, each quarter and looking back has really been order driven. However, we are seeing AOV growth despite the fact that we've had this pretty big shift from being a mostly first order business to now being a majority repeat business and repeat carries a lower AOV.

Speaker 3

So we've had AOV growth despite the headwind from that shift to repeat. And the driver has been mostly, people are we're growing order size. We're able to do that because we've expanded our product line and our models are doing a better and better job every single day, matching people with the right products so that we can increase things like upsells and bundles and we've been really effective at that. In addition, we've been able to increase AOV just based on mix. So a lot of the new product introductions we've had including in skin have higher price points associated.

Speaker 3

So it's been a lot of things and again it all kind of comes back to our model. We have not been big. These are not from like straight line price increases across products. We use that we have taken those in the past and we have that muscle and we use them judiciously, but that has not been a meaningful driver for us at AOV. Going forward, as we look into the future, primary driver of our revenue growth will continue to be orders.

Speaker 2

Hi. You're right calling out Meta and Google for Gen AI. We said multiple times like it's not only about the models, it's about the data. And what we have is so much data in our industry and it allows us to build models that will help us do better job in personalization and customization. We are working a lot in that regard for Brand 3 because it's a treatment and it's so important to set expectations and to make sure that we are doing a great job in customization, personalization.

Speaker 2

And but again, very early for us. We believe it's going to help us in multiple areas and the teams are testing. And when we have more to demonstrate and to showcase, we will. Thank you.

Operator

Thank you. For our last question, we have Youssef Squali from Trevis Securities. Please go ahead.

Speaker 4

Yes. Hi. Good morning. This is Nick Cronin on for Youssef. So as you think about the opportunity you had in international expansion, how do you think about that the size of that opportunity and when you think you'll start leaning into that?

Speaker 4

And then secondly, Ron, I think you mentioned skin and body issues for Brand 3. I'm just curious, does that imply you're considering offering GLP drugs or is it really more focused on the skin side of the house? Thanks.

Speaker 2

I will start with the second question. We don't have any plans to do now GLP. This so we started body and skin, but again, no intention for GLP at that point. What was the second question, Vijay?

Speaker 3

Well, just to follow, when we refer to body issues, it includes things like eczema and other body conditions, not weight loss.

Speaker 2

Yes, international, we are already very successful and high profitable in all geographies we've officially launched, which is Canada, U. K, Germany and Australia. International is a huge growth opportunity for us. Looking at our competitors, we think that international can be 50% of our business over time. And we totally localized experience in each geography based on what we know we are either number 1 or number 2 in each country that we opened so far.

Speaker 2

And what we continue to do is we have ready to go new markets that are fully localized, large geographies that the team already set up, test live in market in thousands of orders to make sure unit economic and satisfaction is strong. And we are waiting, we are waiting because we don't need them yet, but it doesn't mean that we are not going to use it in 2025. We have always slow played international markets expansion to when needed revenue wise and to make sure that we are very successful in those countries that we already opened. So again, international is a huge opportunity for us. I believe that over time it will be more than 50% of the business.

Speaker 2

But for now, we are still focused primarily on the U. S. And thank God, we don't have exposure to the China's consumer, which is tough now.

Speaker 4

Very helpful. Thank you.

Operator

Thank you. There are no

Speaker 2

Yes, please go ahead.

Operator

Thank you. So there are no further questions at this time. That concludes our Q and A session. I'd like to turn the conference over to Ryan Holtzman, Co Founder and CEO. Please go ahead.

Speaker 2

Thank you guys for joining and see you next quarter with another great quarter. Bye guys.

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