Rover Group, Inc. (NASDAQ:ROVR) Q4 2022 Earnings Call Transcript

Rover Group, Inc. (NASDAQ:ROVR) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good day. And thank you for standing by. And welcome to the Rover Fourth and Full Year 2022 Earnings Results Conference Call. As a reminder, today’s conference call is being recorded. I would now like to turn the call over to your host, Mr. Walter Ruddy, Investor Relations at VP Capital Markets. Please go ahead, sir.

Walter Ruddy: Good afternoon. Thank you for joining us to discuss Rover’s fourth quarter and full year 2022 earnings results. In this call, we will be discussing the results announced in our press release issued today after the market close, 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 our Investor Relations website shortly after this call. With me on the call this afternoon 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 on this call including future GAAP and non-GAAP financial and operating results, business performance in 2023 guidance, marketing and other strategies, future growth, prospects, profitability and liquidity, expected investments and initiatives, macroeconomic, public health and travel factors and trends, partnership and expansion opportunities, statements regarding our share repurchase program, other future events, industry and market conditions in domestic and international market growth opportunity.

These forward-looking statements are subject to known and unknown risks, 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 the caption risk factors and also in our Form 10-Q filed on November 10, 2022, and our upcoming Form 10-K. All forward-looking statements speak only as of today and based on current expectations, estimates, forecast and projections, and the beliefs and assumption of management. We undertake no duty to update these statements unless required by law. You should not place undue reliance on forward-looking statements as they are not guarantees of future performance. Certain information referenced in the presentation is derived from third-party publications and sources.

We have not independently verified such information. We also discuss certain non-GAAP measures to the most directly comparable GAAP financial measures in historical reconciliation to the most directly comparable measure can be found in the non-GAAP reconciliation supplement posted under News & Events Presentations section on our Investor Relations website. For the reasons disclosed in the non-GAAP reconciliation supplement we have not provided the most directly comparable forward looking GAAP measure or reconciliation of any forward-looking non-GAAP measures beginning in the third quarter of 2022, our adjusted EBITDA and non-GAAP general and administrative expense calculations exclude the amount of our previously announced legal settlement.

And our adjusted EBITDA calculations was updated to reflect the change in fair value of and amid the loss from an equity method investment. Non-GAAP financial measures provided should not be considered as a substitute for or superior to GAAP financial measures. Unless otherwise noted, we will compare all Q4 2022 metrics to Q4, 2021 and full year 2022 metrics to 2021 on 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. Thank you everyone for joining us today. I will start by outlining our high level fourth quarter and full year 22 earnings results, give a few highlights and then provide some comments on the year ahead. I will then turn the call to Brent to provide additional detail on our bookings and investments. Charlie will then wrap up the prepared remarks by walking through the financials and our detailed guidance before we take questions. Our fourth quarter cap off a great year at Rover with both revenue and adjusted EBITDA up year-over-year and above the high end of our guidance range. Full year gross booking value was just shy of $800 million while revenue was $174 million and adjusted EBITDA was $21 million or 12% margin.

Turning to the fourth quarter, we recorded revenue of $52 million, gross booking value of $218 million and adjusted EBITDA of $11.2 million or 22% margin. Of note, we had net income of $5.3 million in the quarter, a milestone I’m proud of, and look forward to repeating in the future. Behind these impressive results with the hard work of our team, who executed against several important focus areas. First, we attracted a record number of customers to Rover Group this year, in 2022, the Rover marketplace new customer bookings were 939,000, the highest level ever, up 17% year-over-year, we expanded our marketing mix, including opening up new distribution as a vehicle to drive customer acquisition. The Bright Horizons deal showed positive signs in Q4.

And we’re excited to continue this momentum in the employer sponsored care channel. We also added training as an offering with our acquisition of GoodPop, which we continue to integrate within the marketplace. GoodPop now obtains a significant percentage of its customers from the Rover ecosystem. And we expect the business to drive single digit millions in revenue in the coming year. Second, 2022’s cohorts have continued the record trajectory, resulting in our highest expected LTVs to date. This is a result of strong unit performance, take rate and ABVs. In the past year, we have focused on improving the booking experience, and we expect there to be opportunities for future gains. Third, we’re increasingly demonstrating the operating leverage in core business.

Adjusted EBITDA margins grew to 12% for the full year, but the effect was much more evident in the second half of the year as we near the end of our marketing and fixed cost normalization. Fourth quarter adjusted EBITDA margin was 22% compared to 20% in the year prior. Fourth, our international business continues to see strong GDP growth. Further evidence the Rover is not just a US phenomenon. Europe grew 78% year-over-year during Q4. Full year, GBV growth was particularly strong in the UK and France. If we look to 2023, we believe is prudent to plan for external economic and health related factors that could impact our business. While our 2023 base case includes impact from these potential external factors, we remain confident in our ability to grow profits, generate cash, and achieve our long term financial objectives.

In light of our strong operating results, and long term outlook, we’re also pleased to announce our board has authorized a $50 million buyback program. As stewards of the company’s assets we are committed to deploying capital strategically, in order to drive long-term value for stockholders. To do so, in general, our lean is to pursue opportunities to reinvest in our business through a combination of improvements in our technology, select expansions to our services, either organically or in organically, and calculate best accelerate new customer acquisition. As we concern our market opportunity, forward looking cash flow, strong balance sheet, needs for investment in the business in our current market valuation, we saw an opportunity to reinvest in our business and create value for stockholders.

We expect this program to commence shortly, but the overall execution will be dependent upon market dynamics. All-in-all, I’m proud of the team’s progress and the results Rover produced this year. As we look forward, there’s immense opportunity for Rover and we’re energized by our plans. Now I’ll hand the call over to Brent to provide more detail on our bookings and operational performance.

Photo by Karlo Tottoc on Unsplash

Brent Turner : Thanks, Aaron, and hello, everyone on the call. I’ll start by providing more color regarding the performance of the business and driving booking volumes. I’ll then turn to marketing expenses, both for the quarter and full year, and then provide a bit of an outline regarding what to expect from us in 2023. Finally, I’ll say a few things about our product investments during 2022 and our priorities for the coming year. With regard to bookings, in 2022, we continue to generate significant new and repeat business on the platform. Total bookings increased 32% year-over-year, including 939,000 new bookings. New bookings for Q4 specifically were up 9% year-over-year, demonstrating our continued growth as we passed the anniversary of 2021 peak of pent-up demand.

Turning now to marketing expenses, in Q4 2022, non-GAAP marketing expense was 18% of revenue, up from 16% in Q3, but still at the low end of our target range of 18% to 25%. This increase was consistent with our prior comments regarding our intention to accelerate marketing during Q4. For the full year, non-GAAP marketing expense was 20% as compared to 17% during 2021. This change reflected increased testing and implementation of up funnel channels such as YouTube, streaming video and linear television, as well as more forward linking approach during the year versus 2021. To provide a bit more color, in 2022, we reached conviction that committing to these videos enabled channels as ongoing parts of our marketing mix was the right move for Rover.

We made this conclusion after significant progress and understanding the value that video advertising can bring to our bookings growth over the short to medium term. We plan to build on this progress between in 2023 by converting our testing success into ongoing campaign spending. And we will continue testing additional media such as linear and streaming TV while further refining our measurement tools. One additional area I’m particularly excited about from 2022 is our expansion of partner channels. Our previously announced partnership with Bright Horizons is off to a promising start providing additional evidence that distribution channels generally, and the employer benefits space specifically, has solid potential. Our partnerships in this customer channel in the very earliest days, we’re excited about by the opportunity to generate value for our customers and accelerate our business in the future.

Turning to product development, in 2022, we continue to invest in improving the Rover platform experience for both care providers and pet parents. For pet parents, we focus on making our platform easier to use and more efficient in matching pet parents with care providers. We are particularly excited about the early success of our contact more sitters via mobile apps feature which allows pet parents to easily reach out to multiple care providers. We estimate that up to an additional 25,000 people will successfully book on Rover during 2023 with this product improvement. For care providers, we implemented a number of trust and safety improvements. In 2022 specifically, we expanded our monitoring capabilities on the platform, so we can spot and address potential problems more quickly.

As we look forward to product development in 2023, we remain focused on improving customer experience in several ways. We will continue to simplify the booking process to make it easier and more intuitive for pet parents to book with care providers. We will make appropriate further integrations of good stuff into the overall platform. And we will allow our customers to more naturally learn about and book all our services. And we will improve our effectiveness and helping care providers understanding how to unlock the value of the Rover platform. We’re proud of our progress and our results this quarter. The Rover team continues to execute well driving both new and repeat customer bookings in building scale. Now I’ll hand the call over to Charlie to provide further detail on our financial performance.

Charlie Wickers : Thanks, Brent. I’ll start by providing an overview of our financial results for the fourth quarter and full year 2022 followed by guidance. As Aaron and Brent have discussed, we have finished the year strong with Q4 results that exceeded our guidance on both the quarter and full year. And importantly, we finished the year with tremendous progress and showing our expense leverage including $5.3 million of net income in Q4. Further, as we continue to focus on achieving our goal of consistent GAAP profitability, we are already generating significant cash. For the full year, revenue was $174 million, up 58%. While adjusted EBITDA was $20.8 million both above our guidance range provided during our Q3 earnings call.

GBV was nearly $800 million, up 53% on the back of strong bookings and ABV growth. For the fourth quarter, revenue was $52 million, up 37% while GBV was $218 million, up 31%. The increase in revenue was primarily driven by the growth in bookings as Brent detailed and increase in average booking values and an improvement in cancellation rates. Our fourth quarter ABV was $150, up 10% year-over-year. This rate of growth has continued to moderate as expected since the peak increase in Q4, 2021. The core driver of ABV growth was an increase in average price per service with overnight services being the main contributor. Our fourth quarter cancellation rate was 14.6%, an improvement of 140 basis points year-over-year. Non-GAAP contribution increased to $43 million in Q4, 2022 from $32 million in Q4, 2021 driven by growth in revenue, partially offset by higher provider onboarding fees.

Moving to expenses. We believe our cost structure is generally right sized for the operating environment, and thus don’t anticipate significant changes. While labor costs in the market have trended upward, we have navigated that dynamic in our expenses through conscientious headcount management. However, as Aaron mentioned, our preferred investment path is in the core business and we will remain agile and consider incremental fixed cost investment if we expect they will produce attractive returns. For the fourth quarter, non-GAAP operations and support expenses were $7 million or 14% of revenue, flat compared to the third quarter of 2022 and up from 12% of revenue in Q4, 2021. The increase compared to the prior year is a result of the scaling of personnel in order to provide an appropriate level of staffing as we drive increasing demand on our platform.

We expect non-GAAP Operations and support as a percentage of revenue to remain at or below this level in the medium term. We continue to see leverage in non-GAAP product development expenses, which were $6 million or 11% of revenue, compared to $5 million or 14% of revenue in Q4, 2021. Fourth quarter non-GAAP general administrative expenses were $9.2 million or 18% of revenue compared to $9.8 million or 19% in Q3, and $10.1 million or 27% of revenue in Q4, 2021. As previously discussed, we ramped our public company cost during 2021 and into mid-2022. And we anticipate non-GAAP G&A to grow only modestly and absolute levels and decline as a percentage of revenue on a full year basis as the business scales. Adjusted EBITDA was $11.2 million or a margin of 22%, up from the adjusted EBITDA of $7.6 million, or a margin of 20% in Q4 of last year.

The improvement in adjusted EBITDA resulted from strong revenue paired with moderated fixed cost investments. In the recent periods, including Q4, since increasing our marketing spend to within our target range, and keeping an incremental fixed cost investments modest, we have demonstrated that incremental revenue can flow through to adjusted EBITDA. As discussed earlier, for the full year 2022, we achieved $20.8 million of adjusted EBITDA. We also generated $1.7 million of net cash from operating activities, and negative $6.5 million of free cash flow, which were inclusive of a $25 million impact due to our transition to a single payment processor, requiring it balance transfer from our cash and cash equivalents discussed on our Q3 call. Absent the payment processor transition, 2022 free cash flow would have been roughly in line with 2022 adjusted EBITDA.

In comparison, in 2021, we generated $12.4 million of adjusted EBITDA, $14.3 million of net cash from operating activities and $7.1 million of free cash flow. Moving to the balance sheet, our cash, cash equivalents and investments increased from $266 million at Q3, to $273 million at yearend 2022. As Aaron highlighted earlier, our strong balance sheet combined with our view of forward cash generation, gives us confidence in our ability to invest in the business, while also repurchasing shares at an attractive level. Additionally, at this time, we do not see a need to increase cash balances from current levels. As such, our board has authorized a 12-month $50 million share repurchase program that will be executed subject to our ongoing assessment of market conditions.

Alongside this authorization, we have made an adjustment from to cover to a net withhold mechanism for tax payments on employee RSU vesting. We believe both the buyback and this administrative change are the right investments for the business. In summary, our business delivered strong top and bottom line results during the quarter and year. And we are excited about the direction we are headed. Now turning to guidance. Given the positive context Aaron and Brent discussed and our overperformance for the full year and Q4, we are excited for the year to come. In 2023, we continue to balance growth of both the top and bottom line demonstrating progress toward our target adjusted EBITDA margin. as Aaron mentioned, we incorporated several factors that might impact our 2023 results into our guidance, such as a mild to moderate recession and other macro disruptions due to public health concerns or travel disruptions.

Our forward macro assumptions are layered into the guidance in both the top and bottom end of the range, the severity of each along with regular variations in the business performance guiding the spread. We also continue to assume elevated cancellation rates in line with Q4, 2022, adjusted for seasonality. Additionally, our cost structure for 2023 includes a full year marketing investment, more aligned with Q4 levels, which was in line with our target range, and our normalized G&A cost structure inclusive of modest annual growth that has been approximately flat since Q2 of last year. For the full year 2023, we expect revenue of $205 million to $215 million, which at the midpoint would be a 21% increase in revenue over 2022. And adjusted EBITDA of $25 million to $30 million, up from $20.8 million of adjusted EBITDA in 2022.

For the first quarter, we expect $37 million to $39 million in revenue, which at the midpoint would be a 37% increase in revenue over Q1, 2022 and negative $5 million to negative $3 million in adjusted EBITDA, reflecting the seasonally low nature of Q1. In summary, we are excited about the overall performance of the company in 2022. And look forward to executing against our priorities in 2023 to drive growth in the top line, while marching towards our long-term margin goals. We look forward to working with order to discuss our progress in Q1. With that, we will now turn to questions. Operator, can you open it up for Q&A?

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Q&A Session

Operator: Our first question comes from Maria Ripps of Canaccord.

Maria Ripps: Great, thanks so much for taking my questions. First, could you maybe share an update on any impact you’re seeing from the macro environment on either provider or customer behavior, anything sorts of in terms of pricing, stay, length of stay frequency, et cetera that’s what’s calling out.

Aaron Easterly: Hi, Maria, this is Aaron, good to hear your voice. Yes, on the macro side, we’re seeing a couple of things. Let me start with pricing. As Charlie mentioned, we are seeing the rate of price increases slowdown noticeably over the course of the last 12 months. We’ve also discovered through the process of experimentation, that we do see some price sensitivity in the marketplace. So prices have risen less quickly over the last 12 months, we would have seen a higher amount of rebooking and higher amount of new customer acquisition. With regards to the broader macro stuff, but it’s hard to say that there’s a large current impact, we are generally seeing relative strength in the travel sector. If you look at Expedia bookings in January, if you looked at TSA statistics, so we see positive signs there, although we may be a little bit sluggish, and just our own category growth.

Our modeling, our thinking is that the impact the macro side, we’ll probably hit peak in the second half of the year sometime.

Maria Ripps: Got it. That’s very helpful. Thank you. And then sort of given that you’re profitable, but the macro environment is uncertain. Could you maybe talk about some of the factors that could cause you to invest more or less aggressively in 2023? And then how are you thinking about prioritizing investments across product, marketing and international.

Aaron Easterly: So there are possibilities where we could invest both more or less. In the case that we see continued returns on our product investments that we think can be sustained over multiple engineering cycles of multiple years; we’d be inclined to up our fixed cost investment in the product side. In the case that we see our expansion in a new marketing channel continue to be effective, we could increase our spend there as well. We could see some attractive acquisition opportunities on the M&A side and go there and we could enter some new regions geographically, so enter new countries, for example. And finally, we could roll out just new product offering organically. Some things that could have us go slower if the macro environment is generally worse than what we’re planning for.

And we’re planning for mild to moderate recession. If we could pull back a little bit, if those distribution partnerships and the newer marketing channels are less effective, we could pull back a little bit. If we don’t see as much on the product side, we could continue to hold that pretty tight from a year-over-year perspective. Hope that’s helpful.

Operator: Our next question comes from the line of Ralph Schackart of William Blair.

Ralph Schackart: Good afternoon. And thanks for taking the question. First question just on the 2023 guide, I think Q1, some contemplate somewhere around the mid 30% range in terms revenue, and the full year is around 20% or so roughly speaking. So just curious sort of what’s implied in that guidance is the strong Q1 guide. Just sort of what you’re seeing now. And then that conservatism, perhaps for the full year that you called out potentially with a recessionary environment potentially just that’s the first question and I have a follow up.