Oddity Tech Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 6, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to Audity's 4th Quarter and Full Year 2023 Earnings Conference Call. Today's call is being recorded, and we have allocated time for prepared remarks and Q and A. Please note that prepared remarks for this morning's call have been posted to Audity's Investor Relations website for reference. At this time, I'd like to turn the conference over to Maria Liqueurs, Investor Relations for Audity. Thank you.

Operator

You may begin.

Speaker 1

Thank you, operator. I'm joined by Eran Holtzman, Audity Co Founder and CEO Doctor. Evan Dao, Audity's Chief Science Officer and Lindsay Druckerman, Oddity's Global CFO. As a reminder, management's remarks on this call that do not concern past events are forward looking statements. These may include predictions, expectations or estimates, including statements about Audity's business strategy, market opportunity, future financial performance and potential long term success.

Speaker 1

Forward looking statements involve risks and uncertainties and actual results could differ materially due to a variety of factors. These factors are described under forward looking statements in our earnings press release issued yesterday and in our annual report on Form 20 F filed with the Securities and Exchange Commission on March 5, 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.

Speaker 1

I will now hand the call over to Eran.

Speaker 2

Thanks, operator, and thanks, everyone, for joining us today. Our Q4 was another record breaking quarter to cut off a record year. We continue to deliver very strong financial results that are ahead of what we promised. In 2023, we reached 2 important milestones. 1, surpassing $500,000,000 of revenue and 2, generating over $100,000,000 of adjusted EBITDA.

Speaker 2

We did it via our online platform that was launched only 5 years ago in a category that everyone told me doesn't and cannot work online. The Audity platform has today over 50,000,000 users and over 2,000,000,000 data points that fuel our business and are responsible for the strong financial results. Our financial results for 2023 were outstanding. We grew net revenue 57 percent to $509,000,000 and adjusted EBITDA 173 percent to $107,000,000 achieving 21 percent of adjusted EBITDA margins. Once again, beating our guidance across revenue, profit and earnings per share, not just for the full year, but every single quarter.

Speaker 2

We basically grew way more than I wanted us to grow. In my view, there is no good reason to grow 50% at our scale. But due to both, SpoilChild's ability to bleed scale and Ilumakiage stronger than expected repeat rate, we landed at 57% growth rate in 2023 full year. Drilling down to the brands, ILUMACIAR has delivered a very strong year in both color and skin. Skin grew to around 20% of ILUMACIAR sales in 2023, which is very high rate of category expansion for any beauty brand.

Speaker 2

It is a testament to our data driven platform to the strength of the brand, its enormous potential reach and quality of its products. Ilmakias is well on its way to achieving my target of $1,000,000,000 of sales within the next 5 years. Boyle Child scaled insanely fast in 2023. Since it was a 1 year old brand, I wanted to test the brand strength and its limits and therefore I allowed the hyper growth. Pollchart grew 3 25 percent from last year to $110,000,000 of net revenue and we did it profitably across multiple categories and with more than half of our sales from repeat customers.

Speaker 2

We believe spoil child success is unprecedented anywhere in direct to consumer and it just showed again the strength of Audity and the demand for beauty online. Most importantly for 2023, we've built strong foundation to drive our future. The Revel acquisition and establishment of Audity Labs is a game changer for the industry. We are all in building the biggest and most advanced platform for new molecule discovery. I believe it will be a huge growth engine for all our brands and therefore is a top priority and focus for me and for my sister, Shiron.

Speaker 2

But I'll touch it more shortly. New brands are another massive growth engine for us where we made big investments in brand 3 and brand 4, which are on track to be launched in 2025. Finally, we took Audity public. Again, we did it to build something huge and because we believe there is unlimited growth potential for us. So to recap, 2023 was a very, very strong year for Audity.

Speaker 2

We delivered 57% growth and 21 percent EBITDA margin, top percentile of public companies out there. We beat every quarter of 2023 with scale, growth and profitability. We crossed the $500,000,000 milestone of net revenue. We crossed the $100,000,000 milestone of adjusted EBITDA. We established Oddity Labs as an industry leading molecule discovery platform, followed by the acquisition and integration of Revela.

Speaker 2

We took the company public with an amazing shareholder base and we finished it with a very strong balance sheet, including $168,000,000 of cash and short term investments with 0 debt. This is oddity we work really hard to do more than most other companies out there. The hunger, the startup DNA and our always on competitive mode are our biggest assets that allow us to keep on delivering. So 2023 was amazing, but it's already the past and what's most important now is our future. Our laser focus in 2024 is on executing opportunities that we believe will drive our business for many years.

Speaker 2

Let me walk through the biggest priorities forward in 2024. 1st, continuing to grow Irma Casualty Child. As I said before, our goal for both brands is to grow $1,000,000,000 revenues for each brand with strong separated leadership team for each brand, which huge visible market with massive advantage online where the demand is only growing, it can and should be done. So many ways to grow, adding new products, expanding to new categories, opening up new markets. All growth initiatives are in place and ready for pulling the trigger.

Speaker 2

So I feel very confident in the ability of my team to deliver. Both in Matias and spoil child are off to a strong start in 2024 based on our performance in just the 1st 2 months of 2024 combined with our outlier repeat rates, we have visibility into delivering our goals in 2024. So that was about spoilage and in the package. 2nd is new brands, Brand 3 and Brand 4, which we are building to be our next in house engines. Both brands have separated leadership teams to ensure they win without distracting the existing brands runway.

Speaker 2

As a reminder, Brand 3 is a medical grade skin and body brand. Issues like acne, eczema and other skin issues are huge pain for our users and the majority of them tell us they are unsatisfied with the current solution. The user experience is bad and the products on the market don't work well. With Brand 3, we are building end to end solution that position us to win. This includes a third of a kind mobile platform that uses data, AI and computer vision to deliver diagnosis, a precise payment protocol and a coaching to ensure the user compliance and success.

Speaker 2

It also leverages Quality Labs to develop high performing products from our proprietary molecule that truly solve consumer skin issues and concerns. Brands 4, we have not yet announced the category, but we are confident in its ability to grow very fast. Last but top priority and potential is Oddity Labs. What we are building in labs is full disruption. If we do it right, Oddity Labs will change our industry and our company.

Speaker 2

The potential is unlike anything that I saw in the industry, even more than unlocking online 5 years ago. With my focus, our suite as a company and Audity Labs talent, we have a 1st mover advantage and we will see the results in 2, 3 years from now. Big bet, but you'd swing. To summarize, I remain very bullish about what we are building here at Auditing. Beauty and wellness is one of the most attractive markets in the world, huge, growing, profitable with so many categories to drive our business.

Speaker 2

At the same time, the market is held back by legacy models that are completely stuck in the past. I see 2 unstoppable pillars of transformation in our industry and we have positioned Audity far ahead in order to win in both. The 3rd pillar is online. I believe online will be the largest channel in the category at 50% or more. And we made massive investment in technology, in data, in AI in computer vision in the past 6 years to ensure we have what we need in order to win.

Speaker 2

This muscle is what allows us to lead online and to build a portfolio of large D2C brands with very strong financial profiles. So the shift to online is the 3rd unstoppable trend I see and we are already leading on this front. The second pillar of transformation in our industry is the shift towards science backed products. The consumer today is smarter than ever. We can see it in how they engage in our platform, the amount of time they spend reading about our products and how much they care about our ingredients.

Speaker 2

Although pharma and biotech had the same progress in the past 2 decades, the beauty industry, even us have fallen short. We're mixing all ingredients in new packaging. This creates an incredible opportunity and this is what we are doing with Oddity Labs using digital biology to discover and own the next generation of size category killers that consumers love. What we are doing with labs in Boston is the same of what we did with our R and D center in Tel Aviv. But this time, instead of transforming experience, we are transforming the products themselves and I believe it will be huge.

Speaker 2

So with that, let me hand the call over to Doctor. Evan Zao, our Chief Science Officer to dive deeper into what we are building in that.

Speaker 3

Thanks, Eran. I'm Doctor. Evan Zaff, Chief Science Officer of Audity and I lead the team at Audity Labs. I joined Audity with the acquisition of Ravella, which is a biotech that my co founders and I started while doing research at Harvard. At the time, we were pioneering digital biology for therapeutic development at the Wyss Institute.

Speaker 3

We saw what we thought was a once in a generation opportunity to close a huge technology gap, really a gaping deficiency of science in the beauty and wellness industry. We are living in the golden age of science, where new technology has allowed pharma and biotech to innovate at an unprecedented pace. Yet, the beauty and wellness industry is still living in the dark ages. No molecule innovation, totally commoditized, just old ingredients repackaged and not addressing consumer problems. It doesn't make sense given the size of the beauty industry, a huge tan with 0 real time.

Speaker 3

So this is the massive opportunity we are running at with labs. Unleashing the full power of technology and digital biology to discover groundbreaking ingredients that really perform, that really solve consumer pain points and can power the next generation of category killers. This is what consumers want. Based on data we see in Auduby's massive user base, the consumer is way smarter than before, cares less about brands and more about efficacy. But we are still in early days.

Speaker 3

The shift will be enormous over the next decade. Few words about the field, so it will be easier to understand what we do at Audio Labs. Digital biology is the marriage of breakthrough technologies, including AI and synthetic biology. It is widely used across pharma today, but not in our industry. And these technologies allow us to do 3 things that were never before possible: 1, measure data at scale 2, analyze massive datasets at scale and 3, bioengineer solutions based on this data.

Speaker 3

The discovery process in digital biology is revolutionary compared to the status quo. The status quo today is basically the same ancient approach used with Chinese herbal medicine of trial and error. Let me give you an example starting with skin aging. The dominant solution for skin tightness on the market for decades has been retinol. Retinol discovery was an accident.

Speaker 3

It was originally used to treat blindness, but like so many solutions in our industry, it was meant for something else and repurposed for skin. Along the way, scientists optimized using chemistry and formulations to make it the best skin tightening solutions it could be, which by the way is not a great one, which means we are left with an ingredient that doesn't work that well, that has all kinds of side effects and has a bad user experience because it causes skin peeling and purging. Now you can't even use if you're pregnant. This is what consumers have to settle for. So let's compare that discovery process with how we did it at Audity Labs and how we discovered FibroQuint, our proprietary skin health molecule, which is phycineinv1 already outperforms retinal with stronger efficacy, making skin tighter and bouncier and higher user satisfaction.

Speaker 3

Instead of trial and error, we start with the skin itself. We make biological models, which are essentially pieces of skin in a dish, modified so they can give us measurable data. We take thousands of these pieces of skin and then expose them each to thousands of different molecules And we measure and track how each skin piece interacts with each individual molecule. We then feed that information into an AI that simulates how that same skin would interact with not a 1,000 molecules, but with a 1,000,000,000 different molecules. We then identified dozens of molecules that make the skin better.

Speaker 3

And from these dozens of hits, we test for things like toxicity, efficacy, safety and specificity until we find the absolute winner. The difference in these two approaches, the industry standard trial and error approach versus our digital biology discovery platform is revolutionary. We are catalyzing a pace of discovery and innovation that our industry has never seen with massive benefits for consumers. Fibroquin not only is twice as good as retinol and double blind clinical trials for increasing skin elasticity. It is also substantially safer than retinol in every single test we've run, including how it affects other cells in the body and assays mimicking long term effects.

Speaker 3

Plugging into Ateez's massive user platform allows us for the first time to bring consumers in as our design partners. We have a direct dialogue to understand not just their pain points, but also how they want the product to work, what the form factor should be, what attributes matter in the formulation in order to make for the best user experience. Over the last year, since joining forces with Oddity, we have dramatically scaled our capabilities. We are growing a super elite team of PhDs and scientists from top institutions who are empowered by our entrepreneurial culture and the chance to see their ideas make real change for tens of millions of consumers around the globe. We have massively expanded our roadmap to address huge market opportunities.

Speaker 3

We believe we can dominate in hair. We believe we can dominate in skin, face and body. We believe we can create a next generation of high performance cosmetics. And this is just the beginning. We are making big investments in our team, in our lab, in our product development capabilities, in our tech and in extensive focus groups and trials in order to support this effort.

Speaker 3

In 2 to 3 years, you will see real science backed products for full disruption to take massive market share. And with that, I'll hand over to Lindsay.

Speaker 4

Thanks, Evan. Let's turn to our 2023 results, which I will refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. Oddity delivered a record breaking year on all accounts. We grew net revenue by 57 percent to $509,000,000 This strength was driven by both Il Makiage and Spoiled Child across a wide range of product categories.

Speaker 4

We grew net revenue 44% in the 4th quarter, driven similarly by growth across products and brands. For the full year, revenue growth was driven mostly by increased orders, although we continue to see improvements in average order value driven by order size and product mix. More than half of Audity full year revenue was driven by repeat sales, which is remarkable when considering our scale and the speed at which we're growing. Our revenue mix continues to evolve with the addition of new brands, categories and products. In 2023, new categories like skin and hair increased materially as a percentage of our overall revenue mix.

Speaker 4

And we continue to see excellent growth and have enormous runway in color even as we push to scale new categories at a faster pace. Expansion into new products and categories makes us even stronger. It allows us to understand our users better, so we now know not just their makeup routines, but also we have a holistic skin, hair, makeup and wellness 360 degree view. We're gaining shared user wallets and doing it for very attractive incremental costs. This allows our financial model to deliver the kind of outsized returns we see in other land and expand models like software.

Speaker 4

In addition, we're bringing new users and converting new customers who are now finding the products they want with treatment before get them from our brand. It's a flywheel that's accelerating as our platform grows, our users grow, our data capabilities and technology grows, brand awareness grows and brand love grows. We're seeing this benefit in increasing basket size, higher average order value and further improving repeat. And of course, it increases the surface area that we operate in and extends our runway for growth. Il Marciage delivered double digit profitable growth in 2023 across cosmetics and skin.

Speaker 4

And as Elan mentioned, Il Marciar Skin is now 20% of the brand sales. Spoiled Child came in at $110,000,000 of net revenue, ahead of our expectation of $100,000,000 in net revenue for the year, increasing more than 4x from 2023 and doing it profitably with more than 50% of sales coming from repeat customers. It's an incredible accomplishment for a brand growing so quickly and less than 2 years old. Gross margin expanded 3 20 basis points for the year and 400 basis points for the quarter. This better than expected gross margin expansion was driven by specific supply chain and logistics efficiency initiatives at both brands.

Speaker 4

Adjusted operating expense grew 42% for the full year, slower than sales growth of 57%. We were able to nicely leverage operating expense despite stepping up investments in future growth drivers like Oddity Labs and new brands due in large part to the higher proportion of repeat sales in our overall revenue mix, which are more profitable. We also made investments to drive increased business efficiency. We expanded our use of generative AI across multiple consumer touch points, including advertising, user experience and customer service. We're still very early in implementation here, but are seeing improvements across the P and L from better conversion to operating cost efficiencies.

Speaker 4

And we have not yet implemented generative AI to support coding and development, which we believe will save costs and drive efficiencies in the future. We delivered adjusted EBITDA of $107,000,000 for the full year and $16,000,000 for the quarter. Full year adjusted EBITDA margins of 21% expanded 900 basis points from the prior year, driven by gross margin expansion and higher mix of repeat, offset by increased investment in future growth drivers. We delivered adjusted diluted earnings per share of $1.31 for the full year and $0.17 for the quarter and reported diluted earnings per share of $1.08 for the same period respectively. Our asset light model and strong returns on capital once again supported very strong cash generation.

Speaker 4

We delivered $85,000,000 of free cash flow in 2023 and we exited the year with $168,000,000 of cash, equivalents and short term investments on our balance sheet and 0 debt. And we strengthened our capital position early this year with $100,000,000 credit facility that we can use for general corporate purposes, buybacks, acquisitions and other uses. Turning to our outlook. We remain committed to our long term target of 20% plus revenue growth at a 20% adjusted EBITDA margin. To reiterate the purpose of our 2020 strategy, for revenue growth, 20% is 2 to 3x faster than what legacy competitors are growing.

Speaker 4

As for 20% margin, the business is more profitable on an underlying basis, but in our view, there is no reason to deliver more than 20%. We're here to build something huge. That for every excess dollar of margin we have, we invest in big bets that can change the industry and support our long term growth. In fact, this has already proven to be a great use of our capital. Our track record of reinvestment is very strong, not just because our business already generates high returns on invested capital, but more specifically recall that we launched Spoiled Child with around $20,000,000 of upfront investment.

Speaker 4

And as Aron said, we expect Spoiled Child will be a $1,000,000,000 brand. In 2024, specifically based on our very strong start to the year, we expect to do even better than these long term targets. We expect net revenue will increase between 22% 24% for the year, driven by robust growth at both brands. In terms of pacing revenue, we plan to deliver relatively consistent low to mid 20s year over year growth every quarter across 2024. Turning to profitability, we expect to deliver 70.5% gross margin for the full year and we expect to deliver adjusted EBITDA for the year between $136,000,000 $140,000,000 which will include a step up in growth investments, including labs and new brands.

Speaker 4

The timing of these growth investments is skewed to the last 9 months of the year with limited impact on the Q1. We expect adjusted diluted earnings per share to be between $1.49 $1.54 for the full year of 2024. Turning to the Q1, as we discussed last year, we deliberately slowed the business down in the back half of twenty twenty three in order to pace our growth, while our teams focus on huge preparations for 2024. We entered January with incredible strength and delivered a large acceleration in the business, more than doubling the Q4 pace and doing it very profitably. We quickly began to pace our sales ahead of plan, which because of our strong repeat already puts us in a position to secure our full year objectives and also leaves us the flexibility to once again begin holding our revenue growth back to leave more room for the future.

Speaker 4

The muscle and control our teams have to flex the business with Precision is a huge strength for us and something really unique to Oddities. Given the very strong start to the year, we expect Q1 net sales growth between 23% 25%. You can find more details on our Q1 outlook and our press release. And with that, operator, we're ready to take questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Speaker 4

Thank you. Good morning, everyone. I wanted to ask about some of the newness that you were planning to roll out this year. I think you had talked about 10 new molecules or products. How many of those are out there already?

Speaker 4

And is there any initial commentary on how those are performing?

Speaker 2

Hi. Thanks for the question. So I'm thinking that you're referring to Labs. In general, just for better understanding, each brand, aside from lab, each brand has its own NPD departments, and they work constantly on developing new products new categories for the existing brands. So they have way more than 10 products launching this year.

Speaker 2

Aside from that, we have what we are building labs, which are new molecules that we referred in the call. Labs in the development wise on track and will be ready for this year. It doesn't mean we launch them this year. We always have engines we keep ready to be launched based on revenue growth needs. If we see that we need more revenue power, then we launch them.

Speaker 2

This was always my approach with products, with categories, with the old brands and with other growth engines. 2 or 3 products are going to be launched shortly. And again, we launch them, we test, we see the satisfaction, and then we go back and decide at what scale we want to see from this product in the quarter or for the rest of the year. So yes, all the 10 products will be ready to be launched. If we launch them, it's up to us.

Speaker 4

Lindsay, I wanted to clarify a point that you made, talking about entering January with incredible strength. I think you said you doubled the 4Q pace. So can you square that commentary with the revenue guidance, which implies slower growth than that? I guess, how much did you pull back on acquisition spending? And yes, any other color you can give on rest of the quarter after that strong start to January?

Speaker 4

Sure. Happy to. So, I think one important differentiator between our model and many of the sort of legacy consumer models or beauty models that you're familiar with is the sort of requirement as having stores or being brick and mortar to have a constant flow of inventory onto the shelves which is really matched up to where customer traffic and demand is. For us, because we're direct to consumer and because we have full control over our pace of acquisition, we set that pace, we pulse that spend. And so what you've seen us do in the past is come out really swinging in the Q1 and then significantly dialing down and really shutting off all new user acquisition into the back half of the year and that's why our first half has been so front loaded relative to our second half.

Speaker 4

It's not because Beauty is big in the Q1. In fact, the opposite, if you look at all of our competitors, it's the opposite 4Q is the biggest. And so for us to what I was referring to is in the Q3, we delivered $97,000,000 of sorry in the Q4 $97,000,000 of net revenue and you know what our 1Q guidance is, we're significantly we basically on a dime turned the business back on, which is not easy to do and again something that we have particular strength. And so that we really, really ramped up and we saw demand explode, which was amazing. We had been preparing for it and expected it, but it's always fun to watch the business really rip.

Speaker 4

And we were so pleased with Jan and Feb and what we've seen in early March because of all the repeat in our business we have very high visibility into achieving our full year objectives now. 2024 is basically in the bag which is great. And so I wouldn't I think you may be referring to the year over year growth rates, which is not the right way to think about it since we're really managing this in terms of demand pull. So we increased 44% on a year over year basis for Q4. It's a much smaller quarter for us.

Speaker 4

That's almost entirely repeat sales for us in Q4 and now we really turn the business on and we're managing to try to get much closer to that kind of our 20% long term target for 2024 although we're slightly ahead of that at 22% to 24%. That's the type of growth rate we think is appropriate for the business to sustain and we plan to deliver in that range every quarter of this year.

Speaker 2

I would just add one more thing that again in Q1 the beginning of every Q1 we start again opening user acquisition. And despite the high scale that we had in the past 2 months, we have seen an improvement in our marketing efficiency KPIs in terms of ROAS in Q1 of 2020 4 comparing to 2020 3. So although we like we pushed and we started again and to acquire new users, the results are very strong. And we don't do it just because we need. We do it when the market allow us and we see massive demand out.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Scott Schoenhaus with KeyBanc Capital Markets. Please proceed with your question.

Speaker 5

Hi, team. Thanks for taking my question. I wanted to focus on Audity Labs and the expansion of team and the expansion of scope in the projects that you mentioned that was in the release. Are these expansions more related to products within the current brands, Macquarie, Spoil Child? Are they for the new brand 3 launch related to acute skin and brand 4?

Speaker 5

Just kind of understanding where these investments accelerated investments are going to? Thanks.

Speaker 2

Hi. So it's both and for earmatitis and squalid child. Lots of work is being done through in labs now is for which is a medical skin and body, which we are planning to launch many products from labs for Brand 3. In overall Labs, we're building full power. As a reminder, like what we do there is exactly as Evan mentioned, there is somewhat developed by the same.

Speaker 2

And I'm absolutely number 1 focus now. I'm literally trying to boss today after we finish the call. In terms of investments, we say investment, it's about people. I want to double the PhDs, the number of PhDs that we have done this year. We are now around 30 people and the target is to be more than 60 people by end of the year.

Speaker 2

We are putting a lot of investment in labs today, both capable in the way that protocols in building the lab to make sure that we have now that the pipeline will be sufficient for both in X and Yolngin. We will have products ready this year at Bellaghe, that we built, it doesn't mean that we launched them as I mentioned before. We always keep engines ready to be launched based on where we need. So if we see that they need more power, I already have few products out there ready to be launched within Inamakias' spoilage, both and coming from lab, but it's going to be our decision. And it's every product they're working on.

Speaker 2

It takes time. It's a long and deep process. And it takes around 2 years to develop product that obviously led from idea to molecule discovery, all the way through incorporation into the highest efficacy product that exists in the market. We are using the best molecule discovery methods for bioengineering, synthetic biology, computational chemistry and artificial intelligence. And it starts all the way from the idea from where we've seen the user base.

Speaker 2

We see a segment that is craving for something better. Then we go back to lab. We ask them if something can be done to create something better in terms of efficacy, and then we start developing it and do them and use the power of labs. So again, multiple projects, more than 20 projects that labs are now working on, and not all of them will be successful, but we don't need all of them because each and every one of them can be a category killer.

Speaker 5

Thanks, Oren. And just a follow-up there. Can you remind us on average how long it takes from the initial idea and molecule discovery through any kind of regulatory process and then full commercialization on the molecule side?

Speaker 2

Thanks. Sure. So it's around 2 years. I can give a bit more background, so maybe it's going to help you understand what we're doing in labs for the future. It starts by developing advanced biological models for specific user pain points, replicating the underlying cause in a cell based assay and evaluating specific physiological cells response.

Speaker 2

We've then used a computational screening to search for molecules that will drive the desired cell response. We use deep learning models to predict which molecules have the highest chances of working with our target. And we then perform a series of in vitro cell antigen assay to validate the traditional predicted molecules and then we go to safety. And then all identified lead molecules are evaluated in human trials to ensure our findings in lab transfer to real results on the people and outperform all existing materials in the market. We have that's the way that we put it.

Speaker 2

It sometimes takes 18 months. It can take 2.5 years. But in average, it's 2 years from the moment that we give them the task to go to market. Thank you.

Operator

Our next question comes from the line of Youssef Squali with Truist Securities. Please proceed with your question.

Speaker 6

Great. Thank you very much. Lindsay, can you help us think through your marketing spend cadence in 2024 overall and across both brands? And then Oren, Spoiled Child at $110,000,000 in its first calendar year is really impressive. And I believe it's actually tracking headwear of where Ilmaquillage was back in 2019.

Speaker 6

It was launched in 2018, I think. So do you think that kind of ramp for, spoil chide in particular can continue at a kind of a faster rate than what you've seen with Ilmaquillage considering the much more developed platform now that you're running? Thank you both.

Speaker 4

Okay. I'll start with the marketing question. So we have, Mark, we started the year with a significant ramp up in our acquisition spend or user acquisition spend versus the 4th quarter and generate very, very effective returns on that marketing spend. As Arun said, our ROAS in the Q1 of 2024 improved versus the Q1 of 2023. In general for the year, we expect marketing will grow generally in line with sales.

Speaker 4

And in terms of pacing, what I would say is we typically have more repeat in the back of the year than in the early part of the year. And as a result, that is sort of how the cadence of marketing spend across the year flows. We won't comment by brand, but very big expectations for both brands this year, expect a very strong performance driven in part by the excellent execution on marketing among other things.

Speaker 2

Sure. I will touch the cadence and then we'll connect you to Spoiled Child. In Q1 2023, I did a mistake and grew too much. We grew 83%, which led to an insane growth of 57% for the full year. And we decided not to do it again, although I strongly believe we could.

Speaker 2

The goal for the long term is, again, as we mentioned before, we call 20 plus 20% EBITDA margin. And by pacing the growth, I'm ensuring it will happen and we continue to build the same way. And for Q1, we built the model and managed to grow to support a 22% to 24% year over year. And I will say it again, and pacing growth is my decision. But even when we are pacing the growth to 20% plus, we are growing way more than my legacy competitors, which are in single digits.

Speaker 2

We are still securing the business early in the year. Age 1, it's still the most important period for us. In 2023, 60 percent of our revenue was captured in H1. And in 2024, we expect H1 to represent a very similar number to 60%. But we don't need to increase Q1 or the first half as a percentage of total year to do so.

Speaker 2

As for Spoiled Child, I believe Spoil Child in 2023 to see what the brand potential was. It's a new brand. You don't know like what are the limits, and we wanted to get more data. So I allowed the reason for the blitz came from all the 300% growth, it was purely my decision. So I let them grow.

Speaker 2

No plans and no need to blitzscale again in 2024. So if you ask about the comparison between Enemakias and Sportage, it grew faster than Inmacaj because that allowed it to grow faster. Then Inmacaj early days, I limit their growth and but that for that reason, it was very consistent for $25,000,000 of revenue to $400,000,000 around $400,000,000 of revenue this year. And we're planning to continue to do the same with Spoiled Child. So after blitzscaling now, we go back to normal growth rates with the brand to make sure that everything is supporting their growth level quality.

Speaker 2

Okay. Thank you, both.

Operator

Our next question comes from the line of Andrew Boone with JMP Securities. Please proceed with your question.

Speaker 6

Good morning. Thanks so much for taking my questions. International grew 13% year over year in 2023, this is below El Makiage's total growth of 33%. Is there anything to call out there or is that one example of you guys holding back on growth initiatives? And then Lindsay, stepping back, you guys have beaten the guidance by about $10,000,000 each quarter.

Speaker 6

Is there something unique in 2023? Or is there a way that we should be thinking about the conservatism that you're setting out in the guide and how we set expectations for 2024? Thanks so much.

Speaker 2

Sure. I will start with international and then Lindsay, you can refer to the guidance. We see a massive opportunity in international. I said it before, for our competitors, it is 2 third of their business, but we have not finished growing in North America yet either. We are building out very strong localized experience for each market we enter, which gives us strong and profitable performance from day 1 when we launch new markets.

Speaker 2

And this is a big lever for us, and we want to continue to use it. Again, it's my decision how quickly we want to pace this growth and to prioritize it. Due to the fact that we are fully direct to consumer, I can decide at any given moment where I want to spend the next dollar, meaning, under which brand, in which brand and under which brand, again, which category, product and geography, all it's being measured daily and GalloCare based on that. We have more than 10 I want to say more than 10 countries that are already tested that we know as a fact that we have we saw very strong results, very strong unit economics, very strong scale and we pause in order to ensure that we have a significant runway ahead and that's it. When we need those markets, we're going to open them.

Speaker 4

Great. I'll continue on the question about our guidance. So you're right, as a public company and every time we've spoken to you, we've over performed on every metric achieved or mostly exceeded on every single metric that we committed to delivering. This is one of the favorite things about when I first met Eran, he told me I've never missed a budget and I never plan to. And obviously, as a CFO and for us and our team, that's really important in terms of building confidence with our investors that we do what we say we're going to do.

Speaker 4

And that's 100 percent, how we think about the business. We set out very, very big goals internally and we ensure everything possible that we achieve them. And then we also make sure that we're delivering to our investors a framework that we know we can always make good on. And that's why we have so much conviction in our guidance for 2024 and our long term guidance because on an underlying basis, if we wanted to, we could be delivering faster top line growth. We can see it.

Speaker 4

I mean, it's very obvious that's based on how the Q1 has come together that we could do nicely ahead of the numbers that we're laying out for you today. We could also be a lot more profitable, but that's not the right way for us to approach this we want many, many years of steady durable compounding. As it relates to 2023, we did over deliver by a pretty wide margin. Some of that is because we ramped so much in the first quarter and the first half of last year. We had a sort of a big wave of first orders that came in and we got a big wave of repeat in the back half of the year.

Speaker 4

And we always try to take a conservative approach to modeling, but we were overly conservative in modeling repeat. And so ultimately that and repeat is quite profitable. So we ended up delivering ahead of plan. Our objective for 2024 and our 2nd year as a public company is to try to land the plane much more closely to our targets. And so as you guys think about your models, number 1, from a revenue perspective, we plan to land the plane much more in line with the guidance that we set out.

Speaker 4

In addition, every incremental dollar of revenue upside, we plan to reinvest in the business. As I talked about in my prepared remarks, we think that's the amazing use of our capital for future value creation.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Speaker 7

Hey guys, good morning. So we spent a lot of time on Audity Labs, but obviously you guys are very excited about it. Can you just give us an update on how much of a revenue driver you expect that to be along with Vision Technology in 2024 and just what's embedded in the revenue guidance? And then as you think about the commercial development of the business over time, looking out beyond 2024, how important each of those areas might be conceptually? I know you probably won't want to give us exact numbers, but how do you think about it looking out over the next few years each of those areas?

Speaker 7

Yes.

Speaker 2

I can start and maybe Evan or Lindsay you can join me. Look, we can deliver the results or the guidance for this year without any product for Modity Labs. We are the teams are ready. The product, the market, everything is ready to deliver everything without LAVA. Having said that, we will move to test labs, labs, audit for labs and it means that probably some of the revenue will come from

Speaker 3

Yes. Hi. I just wanted to reemphasize one point, which is, all of the projects that Labs is working on, we think are very high impact. We have an amazing commercial team that works with the Lab crew to decide what projects, we want to work on, and we really only target the markets we think could be huge revenue drivers. So think about things that could replace entire sections of the business.

Speaker 3

And so it gives you an idea of what we expect the impact we're working on to be.

Speaker 7

Great. And then can you touch on Vision Technology a bit? Sorry, my phone cut out for a second, but just cover how important that might be as you look out over the next few years?

Speaker 4

Great. I'll take this one because I think Arun is having trouble with his line. So vision technology is the capability that we established with the acquisition of VoyaDiddy 1 in 2021. There are so many applications for this technology. We really have the team prioritizing 2 objectives.

Speaker 4

The first is to make our existing matching capabilities stronger and the second is to build really new diagnostic tools. As it relates to making our existing matching capabilities stronger, Right now, for example, in our Power Match engine, we're making product recommendations based on data alone, what the user tells us about themselves. But of course, there's information that we can glean above and beyond that, sometimes things that they don't know about using vision. And so incorporating vision into Power Match was something that we really have been working on from the beginning. Last year, we had some more implementation.

Speaker 4

This year, we're going to take it even further. We're still in pretty early days as far as how much vision we can use for to do better matching, but we're already seeing the benefits for sure. And even though we've got 90% accuracy already in shade matching, every incremental 50 basis points, 100 basis points effectively flows through for us to the bottom line. So that's already in process. You're already seeing it in our products today.

Speaker 4

You're already seeing it in our results for existing brands, but we expect more of that in the future. The next really big and transformational innovation for Vision is how we implement it in Brand 3. And as Ron talked about it, with Brand 3, we're really creating a first of its kind mobile platform that will number 1, support full diagnostics, so what are your skin issues and concerns using machine models, data and AI and computer vision to do it. Number 2, what's the right treatment protocol? So what do you use to fix the issue?

Speaker 4

And again, using our machine learning models for those product recommendations. And then finally, coaching and upkeep which will support compliance. So oftentimes for example with an issue like acne, your problem might get worse before it gets better. And so that coaching component is really important for churn and vision is of course an integral part in helping people understand how they're progressing and their improvement. So those are 3 applications for Brand 3 Envision that we think are truly groundbreaking and you'll hear us talk a lot more about that in when we launch Brand 3 and have it on the ground running.

Speaker 2

Guys, can you hear me?

Speaker 4

Yes.

Speaker 2

Yes. Cool. I would just add to that that we have around 30 people on the computer vision side. Around 20 out of the 30 are working on brand 3 for diagnosis and for the mobile application that we are building there. And the rest of the people are working for brand 1, brand 2, which is in my case and spoil child.

Speaker 2

And we already see results better matching and better unit economics just based on the addition that we had with Ecogito Vision.

Speaker 7

Great. And then if I can slip one more in, you talked about managing the pace of revenue growth to a bit more manageable level this upcoming year versus 2023 when you obviously have very outsized growth. Can you just talk about sort of how you think about that conceptually in terms of what level of growth is healthy for the business from a top line standpoint and how that impacts the long term revenue opportunity of the company and how you think about that relative to profitability? Yes.

Speaker 2

So the way that we measure everything is based on our contribution, meaning EBITDA level based on the brand. We don't spend media dollars against product that we don't see very strong results in terms of 12 months 24 months direct contribution margins. So every dollar that you spend is more or less equal, otherwise, you will spend against something else. In terms of visibility and managing the growth, again, last year was something unique for the 3rd year of full scale or full scale that I allowed for Squail Child. And again, it's something that we didn't have this because we didn't know the repeat numbers that we are going to see from this brand.

Speaker 2

And the results were very, very strong. That's the main reason for the additional dollars that we had against our guidance. And we hope that we are modeling this now better. Again, it's a good problem to have, but repeat rates are the main driver for our bids. And it's less about new acquisition because in Q4, even in Q3 last year, we almost like we cut and spent way less than what we are going to spend.

Speaker 2

So it's purely about repeat.

Speaker 7

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Speaker 8

Great. Thanks. Hey, good morning. So I know in the prepared remarks and through the conversations since you talked a lot about where you're reinvesting in proactive reinvestment and then the incremental dollar goes back into reinvesting for future growth. But we have gotten asked by people prior to the call just about sort of cost of growth and thinking back, Lindsay, to your earlier of like the high return model of a software business.

Speaker 8

So if we look out over, let's call it the next 5 years, maybe you guys tell me what the right time frame is. When should we think about that sort of high incremental returns business model being more apparent externally? Again, I understand the notion of investing for future growth, but just putting together the high return model and that being completely visible externally versus the continuing to invest for future growth?

Speaker 2

Yes. I could just say that, look, we even now for this year, if you asked me a few months back, I would say that I want to guide for 20% EBITDA margin, but we thought that the business is way more profitable and there is a limit of how much we can invest in future initiatives this year. And therefore, we guided for around 22%. So the business is already with even with all the investments that we are doing, it's already way more profitable. And but again, if you ask me what I want to do, I want to stick with this number.

Speaker 2

I want to continue to invest in the future. There is so much to be done. Again, there are 2 massive transformations in the industry that we see. One of them is online, which is technology. That's why we need to continue to invest in our tech team to ensure that we are way ahead in terms of our competitors.

Speaker 2

And the second is Audity Labs. I believe that the opportunity there is massive. Adding to that brand 3, brand 4, every new brand that we launched, the first year to we need to invest. And therefore, as we continue to invest around tech, as we continue to invest around Audity Labs, as we continue to build more brands, this is the future of the company and this is why I'm still here. This is like we are here to build something, otherwise I would sell the business.

Speaker 2

So the plan is 100% to continue to invest and there is no reason in my view to deliver more than 20%. The business is already generating so much cash. We have 0 debt and I don't see a reason to deliver 30% EBITDA margin.

Operator

Let me just

Speaker 4

add I'll just add one thing, Lauren, to that. So as you think about, again, the returns on our business, one important differentiator versus any big beauty or consumer conglomerate is our ability to build brands organically. And as I mentioned, we launched Spoiled with $20,000,000 of upfront investment. Spoiled is over $100,000,000 of net revenue. Today for us, if you were to apply a Beauty M and A multiple of 5 to 10 times revenue, you'd have to pay $500,000,000 to $500,000,000 to $1,000,000,000 to $1,000,000,000 to acquire that.

Speaker 4

And so without opining specifically on spoil, but just to kind of measure the return on capital for us building brands organically versus a big legacy conglomerate, you can see there's just a sort of step function change on the type of ROI you can deliver with our model as a land expand type model as we're gaining a new share of existing wallets at very, very high incremental margins. So sort of at maturity, we believe our model lends itself to higher return profile versus the legacy model. That being said, we are a fraction of market share of a massive global market and there are so many ways for us to grow. We could be growing like this for many, many, many years before we're even close to hitting a wall. So it's really hard to say at any point in the forecast horizon you're going to see us actually deliver those types of returns because we the higher margin profile specifically because we have so many ways to grow.

Speaker 4

It's just I don't see anywhere in the forecast horizon where we're going to actually be delivering that because we have so many ways to invest for growth.

Speaker 2

I just want to add one more thing regarding margins. When we launched FullChild, although it was an amazing success, the 1st year, 2022, it had single digit EBITDA margin. And 2nd year was already double digit, but it was Latin America. Now they're running very strong EBITDA margin, but again, it takes time. So when we launch Brand 3, for example, like it will be it will cost us in terms of margins.

Speaker 2

And therefore, every brand that we launch, it damages short term our margins. But long term, it supports high growth and with very healthy margin, otherwise we will not spend against it.

Speaker 8

Okay. That's really helpful. One more quick thing on brand 3 on the acne. I think at one point you talked about having sort of a pharmacy element to this and now you're seeing medical grade. So I just wanted to check-in on that.

Speaker 8

Is there still sort of an online or a pharmacy function that's going to be part of this? Or is it, medical grade something different?

Speaker 2

Yes, yes. It's going to be both, OTC and Rx. We are not going to start with our own pharmacy. We'll start with 3rd party just because of the regulation, because we want to see what works and what doesn't before we invest so much against it, but it's going to be both.

Speaker 8

Okay. And then when can we expect to hear more about Brand 4, just that we're beginning of March 2024. Just curious how to think about when you'll give us an update on what category or anything more specific about what Brand 4 will look like?

Speaker 2

First, I need to tell my team. My team don't know yet. But again, there is a reason why we are working on those things quietly. And 3 brands now, brand 4 is in the making. Both my sister and I are involved.

Speaker 2

There is already a team there. And once we have something to share, we will.

Speaker 4

Okay. Sounds good. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Eran Holtzman for closing comments.

Speaker 2

Thank you very much guys for joining and we'll talk with you when we report the Q1. Have a great day. Bye bye.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Oddity Tech Q4 2023
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