Rover Group, Inc. (NASDAQ:ROVR) Q3 2023 Earnings Call Transcript

Rover Group, Inc. (NASDAQ:ROVR) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Good day and thank you for standing by. Welcome to the Rover, Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Walter Ruddy, Vice President of Investor Relations and Capital Markets. Sir, please go ahead.

Walter Ruddy: Good afternoon. Thank you for joining us to discuss Rover’s third quarter 2023 earnings results. In this call, we will be discussing the results announced in our press release issued today, which is available on our Investor Relations website at investors.rover.com. As a reminder, this call is being webcast live from our Investor Relations website and is being recorded and will be available for replay from there shortly after the call. With me today is Aaron Easterly, Chief Executive Officer and Co-Founder; Brent Turner, President and Chief Operating Officer; and Charlie Wickers, Chief Financial Officer at Rover. Before we begin, I’d like to remind everyone that management will make certain forward-looking statements within the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995.

These include future GAAP and non-GAAP financial and operating results, targets and trends, business metric performance and 2023 financial guidance, marketing, product investment and other strategies, anticipated future growth, prospects, margins, profitability and liquidity, expected investments and initiatives and their impact, macroeconomic, public health, pet care industry, residential real-estate and travel expectations, factors and trends, market growth and expansion expectations and opportunities, statements regarding our share repurchase program, and other future events, industry, and market conditions. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results or performance to differ materially from those expressed or implied during the call, including the risks and uncertainties included under risk factors and elsewhere in our most recent Form 10-K and recently filed Form 10-Qs. All forward-looking statements speak only as of today and are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management.

We undertake no duty to update this information unless required by law. You should not place undue reliance on forward-looking statements as they are not guarantees of future performance. We will also discuss certain non-GAAP financial measures. The most directly comparable GAAP financial measures and historical reconciliations to their most directly comparable GAAP measure can be found in the non-GAAP reconciliation supplement posted under News and Events, Presentations at investors.rover.com. For the reasons discussed in the non-GAAP reconciliation supplement, we have not provided the most directly comparable forward-looking GAAP measure or a reconciliation of any future non-GAAP measures. Non-GAAP financial measures should not be considered as a substitute for or superior to GAAP financial measures.

Unless otherwise noted, we will compare all Q3, 2023 metrics to Q3, 2022 in this call. With that, let’s get started. I’ll now turn the call over to Aaron Easterly, Co-Founder and CEO. Aaron.

Aaron Easterly: Thanks, Walter, and thank you everyone for joining us today. I will start by discussing our third quarter 2023 earnings results and give a few highlights before turning the call over to Brent to outline our booking performance and investments in marketing and products. Charlie will then wrap the prepared remarks by providing additional detail on the financials and our guidance before we take questions. We had a spectacular third quarter, reporting net income of $10.5 million and adjusted EBITDA of $17.5 million or a 26% margin. On the top line, gross booking value grew to $266 million, revenue increased to $66 million. As a result of our strong performance and reduced expected macro risk in the remainder of 2023, we are again increasing our revenue and adjusted EBITDA guidance for the year.

Beyond these headline results, we continue to build on our priorities. First, we demonstrated continued strong operating leverage in our business with substantial adjusted EBITDA and net income margin expansion. We were able to continue investing in product and marketing while increasing adjusted EBITDA margin from 20% in the prior year to 26% this year. These results suggest that the lower bound of our long-term adjusted EBITDA margin target should be higher than the 30% that we have previously communicated, and we are evaluating how much to increase it. Second, we achieved record new customer bookings of 290,000, up 8% over last year’s record levels. This result outpaced our measure of new business demand by approximately 20 points. Third, our non-U.S. markets had another quarter of strong growth.

GBV in Europe grew 71% and 35% in Canada, resulting in our non-U.S. markets representing 10% of the total. GBV for cat-only bookings continued its tremendous growth, up 134% in Europe and 58% in Canada, reflecting our continued strength with cat parents. Fourth, LTV from customers acquired in Q3 are pacing to all-time records, while the Q1 and Q2 cohorts have continued their record pace. Additionally, last year’s cohorts continue to surpass prior years. And finally, improvements to our product are driving top-line growth. We have continued to roll out more initiatives to help pet parents find their best match. We expect these changes to provide enduring benefits beyond this quarter. As we close out the remainder of the year, our Q3 performance improved outlook is evidence to the engagement we are driving.

While the broader environment remains challenging, with underlying weakness in multiple of the external drivers we track, we are encouraged and optimistic about our future. Our performance over the last two years is a testament to the fundamental power of the business model, our market position, the opportunity to continually improve the platform, and most importantly, the dedication and discipline of our team. We believe that we are well positioned to further our mission of making it possible for everyone to experience the unconditional love of a pet. Our opportunity for growth is tremendous, with approximately 87 million pet-owning households in the U.S. and a similar amount in Europe, and we are excited about what’s to come. With that, I’ll turn over the call to Brent to discuss our bookings and operational performance.

Brent Turner : Thanks, Aaron, and good afternoon to everyone. I will begin by providing a bit more commentary on our success in driving booking volumes. Then I will discuss the execution of our marketing strategy. Finally, I’ll wrap up by highlighting some of our product investments during the quarter. In Q3, we generated record levels of new and repeat business on the platform. Total bookings increased 20% versus Q3 2022. Repeat bookings were over 1.5 million, a 23% increase year-over-year. New bookings totaled 290,000, up 8% over our record third quarter in 2022. This new bookings performance is especially encouraging as it represents our highest level and the quarter to-date. It provides further evidence that our product enhancements and marketing efforts are continuing to drive gains in market share.

Turning to marketing, in Q3, non-GAAP marketing expense was 19% of revenue on the lower end of our target range of 18% to 25%. Our growth team was active in Q3 as we launched our latest video ad concept, To My Hooman, a spot that has become a celebrated discussion topic in several online magazines. This ad is yet another innovation in support of our strategy to cost-effectively drive new bookings and build the category through upper funnel channels. Further, continued maturation of our conversion drivers in our European markets has enabled us to expand our channel beds into up-funnel media channels, as well as helping to further accelerate new customer acquisitions. Now we’ll turn to product investments. In Q3, we continued to execute our strategy of driving new and repeat bookings by improving conversion rates and platform stickiness.

First, we were pleased to respond to pet parent feedback by launching a beta version of our Star Sitter program in select markets. This program helps Rover to better identify care providers who provide particularly exemplary experiences. Second, we addressed the pet parent Pain Point in Europe by rolling out recurring booking functionality. This capability allows them to easily schedule ongoing care for their pets, particularly for daytime services like daycare and dog walking. Third, we implemented refinements to our scheduling functionality, as well as the Contact More Sitters program. These improvements were in response to customer testing of recent enhancements to both capabilities. In total, we expect these changes to drive approximately 50,000 incremental bookings in 2024.

Importantly, I would like to highlight the product improvement efforts of our operations team. We have recently completed a global implementation of app-based support messaging for both pet parents and care providers, as well as a re-engineering of our self-service center. These improvements are responses to long-standing feedback from our community members who have wanted easier and more context-appropriate ways to contact us for help. Getting these capabilities to market has required non-trivial preparation and technical development on the part of our team. Adoption of this capability has been very strong, and we expect for it to enable us to accomplish those rarest of double wins, higher customer satisfaction, and improved efficiency at the same time.

I’m proud of our team’s accomplishments and momentum, and I look forward to more progress. Our work, though, is never complete, and we continue to test additional product improvements to drive both new and repeat bookings. Now I’ll turn the call over to Charlie to provide detail on our financial performance.

Charlie Wickers: I’ll start by discussing the quarter, followed by guidance. Rover produced phenomenal financial results during the quarter, including strong revenue growth, substantial net income, and continued adjusted EBITDA margin expansion. Further, as Aaron indicated, this success clearly demonstrates our ability to scale margins and gives us confidence to consider raising the low end of our adjusted EBITDA margin target. For the quarter, GBV was up 25%, while revenue was up 30% to $66 million. Increase in revenue was primarily driven by three factors. First, approximately two-thirds of the revenue increase was driven by the 20% growth in bookings that have been described. Second, approximately a fifth of the revenue increase was due to the higher recognized take rate of 23.6%, up from 22.4% a year ago, which benefited from the shift of all U.S. owners to the 11% fee structure and the 90 basis point cancellation rate improvement.

And third, approximately 13% of the revenue increase was driven by higher ABVs of $142, which were up 4% year-over-year. The main driver of ABV growth was an increase in average price per unit of service. Improvements in take rate and cancellation rate have driven both growth and revenue, as well as an expansion of our margins. In Q3, our non-GAAP contribution margin increased to approximately 82% from 81% in Q3, 2022. Moving to expenses, we continue to invest in up-funnel marketing through the summer peak season, while managing costs across the business. Beyond the strong revenue performance and contribution margin improvement, the bottom line beat for the quarter was driven by three items. First, continued leverage in operations and support.

In Q3, non-GAAP operations and support was 11% of revenue, an improvement from 14% of revenue in Q3, 2022. Second, efficient marketing investment continues to drive scale in our business. In Q3, we were able to invest in marketing, while keeping our non-GAAP marketing expense as a percentage of revenue in the low end of our target range. Third, our commitment to managing fixed costs and non-GAAP product development and non-GAAP G&A. Non-GAAP product development was 10.5%, and non-GAAP G&A was 15% of revenue, both decreasing from 11.4% and 19% of revenue, respectively, in Q3 of 2022. Continue to believe that there are additional investments that will allow us to drive incremental improvement in our current offerings. We believe it is best to sequence our investments and products, only adding additional investments if they were expected to be accretive to our medium-term trajectory.

With this approach, our year-over-year incremental margins have continued to demonstrate the high margin leverage potential of Rover, and our ability to generate enduring annual net income. Moving to an update on our buyback program. Through November 1, we have repurchased a total of 9.1 million shares for an aggregate purchase price of $49 million, nearing the full amount of our authorized program. As of November 1st, our shares outstanding is approximately $179.6 million, a decrease of $4.9 million from year-end 2022. We are happy with our current cash balance and the multi-year cash generation potential of the business, and we believe that a repurchase of our shares continues to be an effective investment of our capital. Accordingly, our board has authorized an extension of our repurchase program to February of 2025 and refreshed the available capital with an additional $100 million.

Now, turning to guidance. As Aaron discussed, we are excited by our performance as we head in the final few months of the year, and thus are raising our full year 2023 guidance. We continue to see that our performance has outpaced macro headwinds. As a result, the increase in guidance takes into account our overperformance in Q3 and our higher confidence in our ability to execute in the current environment. Similar to previous guides, we continue to account for potential illness-related impacts, and we are also keeping an eye on pet adoption and spend trends, home sales volumes, and leisure travel trends. The full year 2023, we now expect revenue of $230 million to $232 million, which at the midpoint would be a 33% increase in revenue over 2022, an adjusted EBITDA of $46 million to $48 million, or a 20% adjusted EBITDA margin at the midpoint.

Fourth quarter, we expect $64 million to $66 million in revenue, which at the midpoint would be a 25% increase in revenue over Q4, 2022, and $17 million to $19 million in adjusted EBITDA or a 28% adjusted EBITDA margin at the midpoint. In summary, Rover generated fantastic top-line growth, expanded adjusted EBITDA margins, produced net income, all while investing in our products and delivering capital to shareholders. These results are a demonstration of the focus and dedication of the Rover team and our ability to capitalize on the market opportunities. With that, we will now turn to questions. Operator, can you open it up for Q&A?

Operator: Thank you. [Operator Instructions]. Our first question will come from Ralph Schackart of William Blair. Your line is open.

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Q&A Session

Ralph Schackart : Good afternoon. Thanks for taking the question. First question, just on the really strong trends you’re seeing in new customer acquisition. But I think on the call, you talked about upper funnel media trends, accelerating the new customer growth. Maybe just a little bit more color on the media strategy. Are you finding more new channels? Are you becoming more efficient, it’s a combination of both? Then I have a follow-up, please.

Brent Turner : Thanks Ralph. Yeah, I think what we’re starting to see is the accumulation of efforts that we’ve had going for a while. I think we talked in previous calls about how the returns on the upper funnel channels, you get some of it immediately and then you get a lot of it in future months. And because we’ve had our upper funnel channels not only on, but accelerating or growing at a steady rate, we’re starting to kind of see kind of a rolling trend of increasing up-funnel bookings. We have an internal measure where we try to take a look at what we think the category is doing and then what we think we’re doing from a customer acquisition standpoint. And we’re staying well ahead of the category. And we think a lot of that is attributable to our momentum with up-funnel channels. Too early to say what the new spot is doing, although very early signals have been positive.

Ralph Schackart : Great. Maybe just a follow-up, kind of bigger picture. Aaron, I think you talked about just seeing still weakness in the drivers that you track, yet, you are still posting really, really strong growth. Maybe if you just sort of reconcile that as I’m guessing a lot of it is product driven. And then on the weakness in the drivers, are they still at the same level? Are they getting any better on a relative basis? Just any more color and that would be awesome. Thank you.

Aaron Easterly: Sure. So over the last several years, a lot of focus has been on travel and COVID, because that was kind of the dominating inputs into our business. But the reality has always been a lot more complex. People are more likely to consider a Rover sitter when they make a move and are moving to a place without the same network of friends, family and neighbors. So the housing market impacts Rover. Interest in pet adoption and kind of what people are willing to spend on their pets are also big factors. And we’re seeing that those are starting to matter a little bit more as the travel and COVID environment becomes a little bit steadier. The growth we’re seeing is really a testament to how well the business can work, especially as it scales.

We believe we have a competitive advantage in what we do. We are by far the largest share player in terms of an online transactional marketplace for pet services, and we have really good word of mouth. So we hope to continue to outgrow category, although all the different factors that contribute to category has become more complicated.

Ralph Schackart : That’s helpful. Thanks Aaron. Thanks Brett.

Operator: Thank you. One moment, please, for our next question. Our next question will come from the line of Andrew Boone of JMP Securities. Your line is open.

Andrew Boone: Thanks so much for taking the questions. I wanted to start with repeat bookings. Growth accelerated there in just another strong quarter. In addition to your comments to Ralph’s question, is there anything else that you can unpack to help us understand just the strength that you’re seeing?

Aaron Easterly: Sure. Repeat bookings is something that for our business has been kind of up continually year-over-year. If you look pre-COVID, our cohorts just go up every year. And the driving force varies a little bit year-to-year. Sometimes it may be a little bit more on pricing. Sometimes it may be more on bookings per customer, sometimes its better long-term retention, sometimes it’s the introduction of new services. But that’s kind of the normal trend we saw pre-pandemic. And so over the last three years, we’ve just kind of seen a return to the underlying fundamentals of the business around our cohorts. This quarter specifically, we saw a little bit of an acceleration in the bookings per customer compared to last year on our daytime services.

So the bookings per customer was up more year-over-year than the overnight services. It’s too early to say whether or not that’s a return to work phenomenon, but it’s nice to see. Hasn’t moved the overall mix that much yet a little bit, but we’re seeing that dynamic as well.

Andrew Boone: That’s helpful. And then I wanted to go to long-term margins. Incremental kind of EBITDA margins on revenue was I think 47% this last quarter. You guys have printed something over 40% throughout 2023. Understood it’s very early here and you guys may not want to give us that much guidance here, but is that the right way to think about the potential of long-term margins, is kind of look at the 2023 steady state of kind of that 40% plus and then imply from there or how do you guys think about it?

Charlie Wickers: Hey Andrew. Yeah, last couple of quarters, the incremental margins have been quite strong above 40%. I would say it’s too early for us to provide guidance on this at this time, but it is one of the main reasons why we’re looking at adjusting the low end of our long-term adjusted EBITDA guide. Previously that was set at 30%, but based on the performance this year, the wins that we’re getting from the product side, the health that we’re getting from new customer growth, as well as the repeat booking dynamic, it’s just causing us to take a step back and take a second look at that number, but too early to give you incremental guide beyond that.

Brent Turner: I’m just adding to Charlie’s point. The fact that we felt compelled to bring it up suggests that we believe it’s a material change to that lower bound. So we’re talking percentage points are more, not basis points. We think that your proposal in terms of looking at the incremental flow-through way is a very good way to think about the incremental flow-through and how that could drive our long-term margins. When we use the term long-term, we’re typically talk about three to five years. So that’s actually the work we’re doing right now is kind of saying, ‘hey, what do we think is appropriate range for the three to five-year time frame?’ But if you were to go out longer, yes, we think it could be even higher.

Andrew Boone: Thank you so much.

Operator: Thank you. One moment, please, for our next question. Our next question will come from Maria Ripps of Canaccord. Your line is open.