Leafly Holdings, Inc. (NASDAQ:LFLY) Q4 2022 Earnings Call Transcript

Leafly Holdings, Inc. (NASDAQ:LFLY) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good afternoon and thank you for attending today’s Leafly Fourth Quarter and Fiscal Year 2022 Earnings Call. My name is Jason and I’ll be the moderator for today’s call. I’d now like to pass the conference over to our host Keenan Zopf, with The Blueshirt Group. You may now begin.

Keenan Zopf: Good afternoon, and welcome to Leafly’s full year and fourth quarter 2022 earnings call. Joining me on the call today are CEO, Yoko Miyashita; and CFO, Suresh Krishnaswamy. Today’s prepared remarks have been recorded after which Yoko and Suresh will host live Q&A. A copy of our press release, along with an accompanying earnings presentation can be found on our website @investor.leafly.com. Today’s call will contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the services offered by Leafly, the markets in which Leafly operates; business strategies; performance metrics, industry environment; potential growth opportunities; and Leafly’s projected future results and financial outlook; and can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will.

These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations, and we caution you not to place undue reliance on such statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release, our Annual Report Form 10-K filed with the SEC on March 31, 2022, and on form 10-KA filed on May 2 — in December 2, 2022, and our other periodic filings with the SEC.

During the call we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website @investor.leafly.com. With that, let me turn the call over to Yoko.

Yoko Miyashita: Good afternoon. Amid macroeconomic and industry headwinds, we ended 2022 with meaningful progress against our key initiatives. We grew full year revenue 10% over 2021, and what overall has been a challenging environment with overall cannabis sales down 1% in the United States. Growth was primarily driven from retail revenue, which was $36.7 million, up 9.3% year-over-year. Revenue from brands was $10.6 million up 12.9% year-over-year. Ending retail accounts were up nearly 10% in 2022. We saw a stabilization of MAL to an average of $8 million monthly active users. Brand spend typically outside in the period between Thanksgiving and December holidays with more muted in 2022 and then in previous years, and we continue to see softness in brand advertising spend.

We focused on driving more value to retailers in 2022, contributing to growth in the year were the launch of new products, including our new delivery first shopping experience, prominent marque ad units, and improved functionality of our retailer platform and services. We also rolled out our enhanced bidding capabilities more broadly and our recent partnership with Uber-Eats in Ontario has been successful with delivering an increase in orders to Toronto retailers by 254%. Most notably, the actions we took to control costs in 2022, delivered an improvement in our adjusted EBITDA loss. We delivered negative $23 million adjusted EBITDA for 2022 above our expectations; much of this was done through a right-sizing of the business in October, meaningful cost cutting initiatives and tight spending controls across the company.

We continue to prudently manage expenses and protect cash and are implementing additional headcount reductions of approximately 40 positions expected to yield annual savings of $8 million beginning in Q2 as we continue to rationalize our cost base and be nimble in a difficult cannabis environment. Most notably, we are adjusting our go-to-market strategy to ensure we are allocating resources to our highest value clients, while maintaining our local approach, improving track record of bringing new retailers onto the platform. As market consolidation continues to accelerate, we are focused on building deeper relationships and increasing customer spend across Leafly’s full suite of products and services. As has been the case for the past many months, our focus will continue to be on prioritizing projects and product enhancements that will result in the highest returns and maximizing cost efficiencies across the business.

Our operational plan for 2023 builds on these priorities and we expect considerable improvement to adjusted EBITDA on an annual basis going forward. This plan also allows us to preserve capital as we seek an improved path to profitability. Despite headwinds, I want to highlight the continued success we’ve seen from our local market strategy, to enter less penetrated markets at lower price points with the focus on up-sell. Both New Mexico and Montana are great examples of this. These two recreational markets open last year, new stores opened and our sales team focused on getting them subscribed to the platform and up-selling them with our existing and new advertising products. This led our market penetration to reach 75% in both of these markets by the end of ’22, from just over 50% at the start of the year, as well as achieve increase in ARPA of greater than 50% in both markets.

This playbook is one that we’ve replicated multiple times. As new markets come online, we will continue to increase penetration in markets where we see the greatest growth opportunities, both in landing new retailers and through up-sell, which we believe will drive ARPA up in the long-term. In the short to medium-term with many markets still under penetrated, ARPA will vary market-by-market. As we look ahead to 2023, we continue to operate in a weak macroeconomic environment and a challenging cannabis vertical. We expect the environment to be similar to what we saw exiting 2022 with growth muted and high variability from market to market. Cannabis prices are down, economics are difficult. With some markets like Massachusetts, Oregon, and Arizona seeing significant reductions in the wholesale price flower, these dynamics certainly have an impact on the retailers and brands, who use our services.

With this in line, we continue to take a cautious and focused approach by managing the inputs we control, including cashflow and expenses and driving significant improvements towards profitability. Our approach for the new year is rooted in the successes we made in 2022, knowing that the product innovations we have brought to market over the last 18 months, along with the focus and discipline on our cost base, have set us up to sustain ourselves through this turbulence and thrive once it subsides. Despite some of these industry and economic challenges, consumer interest in cannabis is persistent and remains high with volumes of product order holding steady, but consumers are looking for deals in value, as we see them trading down to lower price point products.

What does this mean for us? Targeted solutions for the cost conscious consumer like price comparison and deal in discount discovery, to connect them with the same quality products they seek for less; we have a tremendously diverse set of products, more than 160,000 available on the platform today. This also provides us with an immense amount of data that we can share with our retail and brands customers to further establish trust and reinforce the value of our platform. Part of servicing the consumer means continuing to improve the consumer experience and increased retention, which is critical to our success. We’re focused on a couple of different things in 2023. First consumer enhancements. We’re building off our proprietary data to drive better personalization, creation, and effects based shopping, which allows consumers to shop based on how they want to feel.

We’ll also focus on getting more deals to consumers to deliver what they’re looking for in today’s market, and that is value In mobile apps, we’ve seen significant growth and we continue to emphasize native more than 1 million downloads of the Leafly app occurred in 2022 and 18 and a half percent increase year-over-year. Mobile is where our most engaged customers are. They search more, they shop more, and we have an easier path to retention and engagement. Our app creates a sticky closed-loop experience, where we can more freely interact through notifications, offers, and relevant content. Orders on mobile saw tremendous growth, 384% year-over-year, partially fueled by our Uber-Eat partnership announced in October. This relationship is an extension of our strong belief that mobile is a critical component to our strategy.

We are encouraged by early successes and continue to ramp-up in Ontario. While still in its , we think the Uber-Eats partnership and our belief in a delivery first shopping experience has tremendous opportunity as local markets embrace e-commerce and delivery. We also believe that reducing friction for our retail and brand customers will continue to demonstrate our commitment to making working with Leafly as easy and beneficial as possible, creating efficiency and value for our partners. We’re hearing from our customers more and more, that they want to understand how they can best leverage the Leafly platform to grow their business. We have a lot of information and data, and 2023 is about bringing that to life and making that data actionable for our customers and combining it with our expertise in know-how.

Third party integrations which are critical for reducing friction for our retailers will benefit from a new and more robust ordering API. We’ll improve ordering features with scheduled pickup windows, giving retailers greater control to manage their order flow and to deliver for shoppers. We’ll make it easier for retailers to create deals on Leafly and offer new deal types. We will continue to innovate, improve on our ad products, including the extension of our marquee ad units into our mobile ads, providing an increase in impressions on our most engaged platform. We will streamline the ad creation process through an improved ad builder giving retailers and brands greater control. Looking at 2023, we are seeking an improved path to profitability through sustainable revenue growth and cash conservation.

We see opportunities to rationalize our sales and support cost base by off-shoring some operational support tasks while focusing our talent on higher value activities, such as in-market activations and building stronger relationships with our highest value customers. We’ll continue to manage this year through a conservative approach as we seek a path to profitability, preserving cash, and targeting our resources against the key opportunities ahead. That’s in places like Missouri, which just recently opened their rec market. They have approximately 200 stores in market, that drove a hundred million in sales of cannabis in its first month. We are in that market in front of licensees, bringing them onto our platform and activating, ordering at full penetration across Missouri.

That’s a sizable revenue opportunity just by using our current ARPA rates. Cannabis with all of its regulatory hurdles and starts and pauses is a long game. We’re going to see for the first time how cannabis performs in a down economy and what we see gives us reasons for optimism. We’re adjusting to give consumers what they’re looking for – Value and providing retailer and brand clients with clearer and simpler paths to reach shoppers. We’ve positioned ourselves in the market to benefit as opportunities start to take hold, and we believe we’re positioned well for the year ahead and set up for success when the market re-accelerates. Now I’ll turn it over to Suresh.

Photo by CRYSTALWEED cannabis on Unsplash

Suresh Krishnaswamy: Thank you Yoko, and welcome everyone. As Yoko discussed, we’re operating in a difficult environment. We started to see a shift in our business in the second half of 2022, without budgets coming under increased scrutiny. This shift in the market impacted results in our sales growth slogan. Revenue in the fourth quarter was $12.1 million, essentially flagged year-over-year. Raising that down, revenue from retail was $9.5 million up to 4% year-over-year. Revenue from brands was $2.7 million down 12% year-over-year, reflecting the softening we started to see in the second half of last year. I’ll speak to our retail results first. During the fourth quarter, we continue to focus on growing our market share in both new and more established markets.

Our success in this area led to ending retail accounts growth of 10% year-over-year. We had bright spots with healthy account growth in Montana, New Mexico, and California. We continued to see softness in the same markets. We have called out previously, like Oklahoma and parts of Canada. Our retail ARPA in the fourth quarter was $554, a decline of 7% year-over-year in flat quarter-over-quarter. We expect to see continued pressure on ARPA this year. We’re prioritizing growth of accounts in newer markets, and these come on at lower average ARPA. We also continue to see industry and market dynamics put pressure on how customers approach ad spend. Turning to brands, on a sequential basis, revenue declined 3% compared to Q3. We started to see brands pulling back on advertising spend in the third quarter.

Given the importance of the holiday and the historical seasonality and brand spend, we had anticipated an uptake for December. However, the typical boost in ag spend in the period after Thanksgiving did not materialize. Looking at Q1 activity, brand spend continues to be soft, given the macro environment as brands are not activating at the same levels they were in 2022. Now turning to gross margin; total gross margin in the fourth quarter was 88% in line with levels reported in the year ago quarter. Our team is focusing on cost management measures and optimizing resources, and as a result, we expect gross margin to remain at similar levels in 2023. Moving on to operating expenses, our Q4 total operating expenses were $16.3 million, which was relatively flat compared to Q3.

Today we announced additional cost cutting measures in a reduction in force. The measures we are taking will align our cost structure to reflect the current industry and macroeconomic environment, while also focusing on our largest opportunities. We are reducing headcount by approximately 40 positions or 21% of the company’s workforce and expect a one-time cash restructuring charge for the layoffs of approximately $700,000 in Q1 of this year. We expect total annual cash savings of approximately $8 million with about half of that realized this year. Moving forward, we’ll be intently focused on three priorities, one, aligning all of our resources around one common theme, building a stronger marketplace, two, supporting the areas of the business that will provide the greatest return from a near term revenue perspective.

And three, continuing to improve operating efficiency and preserving cash. Our team is laser focused on managing costs in order to extend our cash runway and stay on chorus to achieve profitability as we have outlined previously. Now turning to the balance sheet, we enter the quarter with $24.6 million in cash. Our team has been diligent in managing our cash resources. We remain committed to prudently managing our capital and our cost reductions starting last October are a testament to this. We will continue to operate with this disciplined approach and focus on improving efficiency. In light of recent events, we wanted to inform investors that we do not have a banking relationship with SVB, Signature Bank or First Republic. We diversify our cash balances across several banking relationships to mitigate risk, and we’re actively evaluating options to increase cash protection.

Now to our guidance, given the challenging environment and the lack of visibility for the year, we have decided not to provide full year guidance at this time, and instead only provide quarterly guidance for the near-term. For Q1 ’23, we expect revenue of $11 million to $11.3 million and an adjusted EBITDA loss of negative $4.3 million to negative $4 million. We continue to focus on our path to profitability and are executing against our plans to achieve this in the next 24 months. Over 2023, we expect our annual cash burn rate to be approximately $10 million and our targeting a meaningful improvement over 2022 in full year adjusted EBITDA loss. While external factors are impacting our growth rates, we’re focusing on the things we can control and taking the opportunity to realign the business for greater efficiency.

The changes that we announced today are designed to better serve our customers, deepen our relationships, and help them navigate this challenging environment. We’ll now open up the call for questions. Operator?

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Q&A Session

Operator: Our first question is from Jason Helfstein with Oppenheimer. Your line is now open.

Jason Helfstein: Thanks. Hey everybody. So let, let’s do, may be help us think through this. So in some cases, one would argue that as there’s weaker demand, advertisers or retailers would want to lean into advertising to try to capture a greater share of that lower demand. Do, do you think that there is like a price point at which you know your products, if you lower the prices that, that, that start to unlock that? Or is it really on the retailer side? We’re just dealing with generally unsophisticated businesses and just, when their demand is shrinking, they are willing to spend more and I I would assume that on a brand side they’re more sophisticated, but just talk about how you think you can ultimately drive more demand through your platform from a revenue standpoint? Thank you.

Yoko Miyashita: Let’s break this up here between the brand side spend and the retail side. And as it relates to the brand advertising where we see the greater softness, I think, remember that’s not, that’s, that’s very much top-up funnel brand spend. It’s not the bottom of the shop funnel shopping type of spend where you can show that direct ROI and I think as pressure on brands and, MSOs to carry brands to show tighter path to profitability take over. You’re just seeing that general pullback in brand spend. So, I think you need to really differentiate between what’s happening on the brand side of this business and the retail side. So I do think there’s a macro aspect to this and price points, yes, have some sensitivity and can drive a little bit more of the demand, but I think what we just saw was that signaling from early on that they were pulling back on spend, they essentially sort of sat out the holiday seasons, slow start to ’23 on that end, and at the same time, see, we’re also seeing some of these brands come back into the market.

So that’s the brand side of things. And I think on the retail side, slightly different dynamics because of the products and services we have to service that account base. And for them it’s all about showing the actual shopping and ordering activity, what I call that bottom-funnel activity to justify that spin. And what we’ve heard consistently is when you can show that value to those retailers, they’re willing to put more money into the channel.

Jason Helfstein: So how do you, just to follow me, how do you draw, how — how do you generate more retail demand if, if the macro environment stays week?

Yoko Miyashita: So remember, more retail demand looks like two things in this space. One is, new licenses, new stores, and the other is increasing share of wallet with existing licensees. So we’ve talked at length about our land and expand capturing the new licensees that come into market. We don’t bank that simply because we don’t control when licenses are issued. At the same time, what we do have control over is the deepening relationships with retailers, building that stronger partnership to show them ROI on the platform, and also really working with them in that consultative capacity to show how we can make the platform work best for them. That’s not just being on the platform with a subscription. It’s about activating ordering, it’s about activating deals and it’s about activating advertising, as layers onto this to drive the kind of shopping behavior you want to see as a retailer.

And that’s like, think about that, that’s a consultative approach that’s very hands-on, which is what we’re very excited to be focused on as we come into ’23 and make adjustments to our go-to-market strategy.

Jason Helfstein: And then last question for me. Do you think the lack of enforcement around illegal dispensaries that is having an impact on your business?

Yoko Miyashita: I think as we recently published, there were two licensed stores in New York — New York compared to the 1200 unlicensed count in on, in a given week. So listen, this is all structural as we know, and I think what makes this space interesting isn’t the fact that the consumer demand isn’t there. It’s all about shifting that consumer demand that already exists into the legal space. And that’s why this partnership, this push the influence we need to continue the pressure we need to continue to put on regulators to issue licenses and open stores is so critical for the long-term success of this space.

Operator: Our next question comes from Vivien Azer with TD Cowen. Your line is now open.

Vivien Azer: So I wanted to start on the, the new incremental headcount reductions that, that you guys announced today is certainly encouraging that you continue to challenge the, the organization to work more efficiently as you strive towards profitability. I was wondering though, if you could offer us an incremental color around where in the organization which capabilities you’re, you’re finding opportunities to define more operating leverage? Maybe we can start there? Thanks.

Suresh Krishnaswamy: Yeah, sure Vivien. Today we announced the 21% headcount reduction, right, to align our construct with the current environment. To put that in context and we have been hyper focused on costs and conserving cash since last year, right? And so the cost reductions today reflect about $8 million of annualized savings, and this is after the $16 million of annual savings from the reductions we announced back in October that we said would take effect in January. So taking into consideration all of these efforts plus additional OpEx cuts, we expect annual operating costs, excluding stock based comp to be a little over 20% lower than last year in this cost level, we can support a similar revenue base and at the same time be well positioned to take advantage of the growth opportunities as they merge.

So to, to give you a little bit more color on that our OpEx structure really last year was about 40% each in sales and marketing and G&A. And with the, the cuts that that we have announced it’s more like 30% in sales and marketing, 30% in TDE and 40% in g n a of course with all, all the numbers coming down. So we have, as part of this sales restructure, really looked at how can we align our strategy with the environment that we’re operating in, continue to focus on our local go-to-market strategy, but again, how can we do that with smaller, tighter, more efficient teams that can respond more quickly on the sales side and just align more closely with customers.

Vivien Azer: That’s very helpful detail. Thank you very much for that. And, and just to follow up then on, on the sales re-alignment, considering the challenging operating backdrop, but does, does your field team have like different scorecard where they would evaluate current and potential new relationships? Obviously there’s, a fixed cost to onboard new relationships, either brands or retail? So I’m just wondering if you’re raising the bar, at all there so that you’re really maximizing the, the effort of that more efficient sales force? Thank you.

Yoko Miyashita: That’s fun. Vivian, and in terms of really thinking through, I’m talking about high, higher value clients, we’re really looking at the segmentation and the opportunity set that exists with Ben existing as on-boarding and on-boarding new retailers. So just getting smarter and more judicious and how we leverage our resources as it relates to on-boarding, as it relates to training, as it relates to client success is a key part of this strategy going forward. And we know based on the value we drive for retailers and brands, that there’s greater monetization opportunities. So how do we put those resources towards those opportunities as opposed to a more broad-based higher touch across many accounts approach.

Operator: Our next question is from Eric Des Lauriers – Craig-Hallum. Your line is now open.

Eric Des Lauriers: Great. Thank you for taking my question. So I know one of the key benefits of, your platform or subscriber base is that, there is a sort of, ongoing recurring payment to you guys that gives you some of that increased visibility. I’m just wondering if you could comment on the overall, kind of stickiness of the accounts that you continue to have, if you’re starting to see any turnover perhaps you know in addition to some of the license or I guess, lack of license renewals that some of these licenses kind of falling off. Just kind of speak to, some of the potential changes in the stickiness of your customers as this macro environment has kind of gotten a little tougher for cannabis? Thanks.

Suresh Krishnaswamy: Yeah, sure. Eric, I could, I could start off with some, some numbers there. overall, I mean retail is about 78% of our, our total revenue. And, and of that total over 80% is subscription like revenue, right? So I mean, half of that is subscriptions. The other half are advertising units that we have a really good history on in terms of placements, so they may change hands, but we have good visibility and, and confidence in that continuing and, and that really has led to sort of more predictability and, and stickiness on the retail side. And, and you kind of see that in the numbers, even though growth has slowed on the retail side and the numbers we continue to see quarter-over-quarter increases and, and we’re certainly projecting those, those increases this year as well.

The variability has been more on the brand side as we’ve talked about in the second half of, of last year we, we saw the slowdown that has continued into the first quarter so far. That being said, just to give some color it was mainly in January. I mean, from what we’ve seen so far in, March, I mean February and March things have seemed to have stabilized. It’s still very early to make any predictions on, on the brand revenue for the rest of the year, and that’s one of the reasons we’re not providing guidance. But in terms of just talking about the stickiness, we, we did see on the retail side churn continue in the same markets that we kind of saw last year. So, and we’d called out Oklahoma, we continue to see that in, in terms of last year we also saw Ontario, which had churn especially in Q1 of last year.

But it’s interesting that since our partnership with Uber and the value that that’s created for both our consumers and our retailers, we’ve seen little to no churn in Q1 this year in, in Ontario. So just wanted to, give a little bit of color around that.

Operator: There are no further questions, so I’ll pass the call back over to the management team for closing remarks.

Yoko Miyashita: Thanks everyone. We look forward to speaking with you throughout the rest of the year and excited with live ahead. Goodbye.

Operator: That concludes the conference. Everyone else has left the call.