Wag! Group Co. (NASDAQ:PET) Q1 2024 Earnings Call Transcript

Wag! Group Co. (NASDAQ:PET) Q1 2024 Earnings Call Transcript May 12, 2024

Wag! Group Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Wag! First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I’ll now introduce your host, Greg Robles, with Investor Relations. Thank you. You may begin.

Greg Robles: Good afternoon, everyone, and thank you for joining Wag!’s conference call to discuss our first-quarter 2024 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman; Adam Storm, President and Chief Product Officer; and Alec Davidian, Chief Financial Officer. Before we get started, please note that today’s comments include forward-looking statements. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of these risks and uncertainties are included in our filings within the SEC. We also remind you that we undertake no obligation to update the information contained on this call.

These statements should be considered estimates only and are not a guarantee of future performance. Also during the call, we present both GAAP and non-GAAP financial measures. Reconciliations to the most direct comparable GAAP financial measures are available in our earnings release, which we issued today. The earnings release is available on the Investor Relations page of our website and is included in exhibit and Form 8-K furnished to the SEC. These non-GAAP measures are not intended to be a substitute for our GAAP results. Lastly, you can find our earnings presentation posted on our IR website and with the SEC. And with that, I’ll now turn the call over to Garrett Smallwood.

Garrett Smallwood: Good afternoon, and thank you for joining us today to discuss our financial performance for the first quarter of 2024. First, I will provide a brief overview of our financial results for the first quarter. Following that, Adam, our President and Chief Product Officer, will share updates on our strategic priorities for 2024 and beyond. Then Alec, our Chief Financial Officer, will provide a more detailed analysis of our first-quarter results and discuss our capital allocation priorities. We’re excited to announce another successful quarter for the Wag! team in line with our expectations for revenue and ahead of our expectations for adjusted EBITDA in addition to achieving positive cash flows from operating activities.

During the quarter, revenue grew 13% year over year to $23.2 million, which was a new quarterly record. This growth was driven by the success of our wellness business, fueled by pet parent demand for pet insurance, wellness products, and veterinary needs. Following the quarter close and more recently, we announced the launch Furscription, digital e-prescribing and prescription management SaaS tools for veterinary staff across the US with a robust waitlist of veterinary clinics. We also announced WeCompare, a new consumer brand that aims to be the easiest way to compare insurance products starting with auto. Adam will discuss these launches in greater detail. On the operations side, we have found success in AI and automation, ending Q1 ’24 with 78 employees, down 8% from 84 in Q4 ’23.

This has been achieved within customer success, QA, marketing, and design. We have found that senior employees equipped with AI are on order of magnitude more productive than those without. As a result, we reached nearly $1.2 million in annualized revenue per employee in Q1 ’24, up 23% year over year. Finally, we are showing that 78% of revenue in Q1 ’24 was B2B revenue, which is defined as revenue generated by business partners such as pet insurance companies, pet food companies, wholesale distribution partners, and pet treat companies, which demonstrate the growing value of our platform and creates predictability for future revenues. Our adjusted EBITDA was $0.2 million, an increase from a loss of $0.4 million in the same period last year.

Our priorities continue to center around achieving a sustainable equilibrium between growth, profit, and margin. In the first quarter, platform participants increased to 671,000 an increase of 10% year over year, and Wag! fame and penetration continues to hover around our 50% target. In regards to sales and marketing and overall consumer trends, we see CPCs and CPMs continue to be elevated through the end of the year as a result of the election, a competitive consumer environment, and elevated competition in the pet category. We’ve seen upwards of a 90% change in spend across key marketing partners and platforms. Accordingly, we will continue to invest in proprietary customer acquisition with initiatives such as WeCompare and Furscription, which we expect to accelerate in the back half of this year.

We remain focused on profitable revenue growth and reaching more US households as the all-encompassing trusted partner for premium wellness, service, and products. We will do this by reinvesting free cash flow into growth, which we expect to achieve in the back half of this year. We believe in early innings of a secular growth trend in the premium wellness, service, and product categories in which we operate. In summary, the team at Wag! continues to execute against our goals and deliver strong and sustainable growth. Our first-quarter results demonstrate our ability to scale our platform profitably and show the effectiveness of our strategy and business model to become the number one platform for premium US households. And with that, I will turn the call over to Adam to review our strategic priorities for 2024.

Adam Storm: Thanks, Garrett. I’m excited to outline the strategic priorities that will create profitable growth and shareholder value in 2024 and beyond. One, best-in-class technology. As a technology company, we are excited to continue building proprietary solutions to capture the hearts and minds of our customers. As an example, we’re thrilled to launch Furscription, which comes after years of real-world experimentation and user research under the pharmacy umbrella. Furscription is a revolutionary SaaS tool for veterinary clinics designed to streamline the prescription process, ensuring pet parents can obtain their pets medication faster and easier than ever before. Veterinarians can electronically prescribe medications directly through Furscription, eliminating both the need for and risk with handwritten prescriptions and manual prescription management channels such as fax and phone calls.

Today, we have an LOI in place with a veterinary software distributor to provide prescription access to thousands of clinics, a significant waitlist of independent clinics who want to join our beta, and pharmacies who are ready to fulfill orders. And beta went live in early May, and we’re excited to continue updating you with our progress on the newly launched veterinary channel. Two, platform expansion and M&A. As evidenced by our successful acquisitions and seamless integrations of Dog Food Advisor, Maxbone, and Furmacy, we’ll continue to pursue opportunities that expand the scope of our offerings for our customers. As Garrett mentioned, we recently announced the launch of WeCompare, a new consumer brand tends to be the easiest way to compare insurance products.

WeCompare will start by providing auto insurance comparisons with other verticals on the horizon. We’re confident we can replicate our success with in the pet insurance category in the broader insurance market. For some context, the auto category is a $360 billion TAM of 215 million policyholders in the US, representing a large opportunity to surprise and delight customers with our technology and easy-to-use software. Three, operational efficiency. We believe a hallmark pillar of a successful technology company is the ability to scale revenue without a corresponding increase in headcount. As Garrett mentioned, we ended Q1 with 78 employees, down 8% from 84 in Q4 of ’23. Despite the reduction in head count, annualized revenue per employee hit a record $1.2 million, demonstrating the power of embracing new technology and tools.

To wrap up, Wag! is firing on all cylinders with significant progress across the three strategic pillars we reviewed. We are extremely excited about the growth potential of these new business lines. We’ll continue to provide updates as they scale. And I’ll now turn the call over to Alex to discuss our first-quarter financials and 2024 forecast in more detail.

Alec Davidian: Thanks, Adam. Our strong Q1 results, which include all-time record high platform participants and record-high revenues while achieving positive cash flows from operating activities, are a result of our continued execution on our vision of success, which we define as consistent profitable growth and disciplined capital deployment. Specifically, revenue of $23.2 million, a new record, represents 13% year-over-year growth; adjusted EBITDA of $0.2 million represents 142% year-over-year improvement; and adjusted EBITDA margin improvement from negative 2% to positive 1%. Platform participants of 671,000, a new record, represents 10% year-over-year growth, and positive cash flows from operating activities of $0.2 million.

Delving deeper into the financial results, revenue category results were as follows: wellness, driven by a proprietary comparison engine technology for insurance and wellness plans was $15.8 million, growing 14% from a year ago. Services was $5.3 million, consistent with a year ago. And finally, pet food and treats was $2.1 million, growing 55% from a year ago. As mentioned on our year-end earnings call, we experienced record demand coming into the start of 2024 and opportunistically deployed capital to take advantage of this demand while not losing sight on profitability. Our expenses, which illustrate operational excellence and scaling when analyzed as a percentage of revenue, were as follows: cost of revenue, excluding depreciation and amortization totaled $1.6 million, representing 7% of revenue, up from 5% a year ago and is in line with 2023 average of 7% and recent trends.

The increase compared to Q1 ’23 is driven by incremental costs from various new product launches during 2023 as we continue to innovate in building out the robust platform of pets and households. Platform operations and support expense totaled $3 million, representing 13% of revenue versus 15% a year ago. The decrease year over year was achieved through the deployment of a highly efficient process automation, AI, and software tooling that has allowed us to do more with less. Sales and marketing expense totaled $15.7 million, representing 67% of revenue, up from 64% a year ago. As mentioned earlier, we thoughtfully deployed capital to take advantage of demand while still aiming to be profitable for the quarter. G&A expense totaled $4.2 million, representing 18% of revenue, down from 24% a year ago.

This is an outcome of the revenue scale, operating leverage, and now as we enter our third fiscal year as a public company, public company costs begin to plateau as we establish efficient processes and muscle memory. Public costs are a significant part of G&A at approximately $1.3 million in Q1, which equates to a 6% drag on our adjusted EBITDA margin. Additionally, this quarter, the P&L includes a $0.7 million charge related to the $5 million debt paydown that we executed in March ’24. The charge relates to the accounting acceleration of debt discount related to the prepayment and fees for the early principal payments. The $0.7 million charge had a $0.02 impact on EPS, moving EPS from minus $0.09 to minus $0.11. From a balance sheet perspective, we ended the quarter with $24 million in cash, cash equivalents, and accounts receivable.

This balance also reflects the completion of an initial $5 million debt paydown. The $5 million debt paydown has the needed impact of saving approximately $800,000 of interest expense over an annual period and contribution to our path to achieving free cash flow. Moving to our guidance for 2024. Taking into consideration our results year to date, we reiterate our 2024 full-year forecast of revenues of $105 million to $115 million in 2024, which represents growth of 25% to 37% over 2023. Adjusted EBITDA in the range of $2 million to $6 million, representing growth of 177% to 731% over 2023. This guide anticipates a 2% to 5% adjusted EBITDA margin together with positive free cash flows in the second half of 2024. We are approaching Q2 cautiously as we are seeing increased competition in the pet category alongside a competitive consumer environment for the premium household we serve.

Accordingly, we anticipate revenues to be weighted to the back half of 2024 alongside the growth of WeCompare, Furscription, and easing CPCs and CPMs post-election. In summary, our strong first quarter illustrates best strong demand and tailwinds within the pet category As reflected in our Q1 results. We are tracking ahead of Morgan Stanley’s estimated CAGR growth of 8%. Second, management’s ability to execute and drive consistent disciplined growth, which we have now executed for eight consecutive quarters. As we progress into the back half of 2024, we are focused on generating free cash flow while maintaining our growth trajectory. In fact, confidence in the next stage of Wag!’s journey as a profitable growth company beyond 2024. We’ve shared our plan to simplify e-prescribing with Furscription, expand our propriety comparison technology, WeCompare, and integrate leading technologies like AI into our workflows.

Across our platform, we continue to believe we’re just getting started at Wag!. I wake up every day, excited to delight customers and create shareholder value. And with that, we now welcome Q&A. Operator, can you kindly open up the Q&A?

Operator: [Operator Instructions]. Our first question comes Matt Koranda from ROTH.

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Q&A Session

Matt Koranda: Hey, guys, good morning. Thanks for taking the question. Just wanted to start off with WeCompare. I guess, how is that built into the guidance for the full year? And does this sort of change that pet platform approach that you guys have historically stated as your strategy? I guess, are there other comparison verticals that may now be in play beyond auto?

Garrett Smallwood: Hey, Matt. Happy — thank for being here. Yes, two good questions. One, the first is how does WeCompare fit into guidance? I think it’s too early to update kind of how we’re thinking about 2024. I think it’s certainly more important probably for 2025, but we think it’s a big opportunity. Second question is, how does it change a pet proper approach? I don’t think it does. I think, we made it pretty clear since the beginning that we want to serve the premium household needs. And we’ve certainly started with pet. But broadly speaking, the premium household is kind of the target audience for us, the common chief household officer, the 27 to 44 usually have two kids in one or two dogs, like 1.25 times on average for what it’s worth. And I certainly think there’s a ton of opportunity as we think about WeCompare broadly, but we’ll start with auto and see how it goes.

Matt Koranda: Okay, got you. And then just more specifically on the ’24 outlook. I guess the — what you guys have alluded to in the prepared remarks is that there’s an acceleration in growth in the back half of the year. Just curious, what gives you the confidence there that we’re going to see a reacceleration in the back half? And then maybe just any update on sort of how we’re growing quarter to date in the second quarter so we can kind of level set expectations around the current quarter here?

Garrett Smallwood: Yeah, absolutely. This really comes down to — we have a debt that’s we think kind of holding us back, frankly. And there’s a big question we get pretty frequently from investors and shareholders as to when we’ll achieve free cash flow kind of free ourselves from the debt. And the net debt, the prepayment penalty expires in August of this year. And so I think we’re putting more emphasis, frankly, on EBITDA generation. This quarter than maybe we would otherwise. So just to put it into context or frame it in terms of April, April, preliminary April numbers shows have been kind of highest monthly adjusted EBITDA in company’s history. So I think we’re going to be really focused this quarter on profitability, on adjusted EBITDA, and then seeing how that enables us to refinance or consider other options for our debt, which in the long term, enables quicker path to free cash flow generation because, frankly, it just frees us up to make more bets.

That’s the reason generally for why we think it’s more of second-half things than a right-now thing. We know if we wanted to — if we could kind of deploy dollars to grow.

Operator: The next question is from Jason Helfstein from Oppenheimer.

Jason Helfstein: Hey. Thanks everybody. So just to keep going with that, so while you did highlight CBC is being kind of high in the pet category and the other factor is that some of your competitors may be doing the kind of bail themselves out decisions, et cetera. Your point is that you could lean into growth if you wanted to. But the point is, again, you’re kind of focused on EBITDA in the short term so that you have maximum balance sheet flexibility. And then once you start to see how the some of the newer products resonate with customers, then you can kind of prioritize where you want to lean in because there may be certain areas that will be more efficient to lean into that other. Is that the right way to think about the outlook right now?

Garrett Smallwood: Yes, I could have said it better myself as a great summary. The only thing I’d add in terms of the pet category generally is we certainly think there is a trend of a year-over-year decline, maybe in pet adoptions, and more people are leaning into spend to manage their business. And so you’re seeing a little bit more competition and generally not in categories that we’re super dependent on. I generally think you’re seeing that in pet land. So that’s a great summary.

Jason Helfstein: And then just to follow up, I mean, you guys originally got started is that with the sitting in boarding and walking whatever — walking sitting boarding, and then you’ve kind of more expanded on like using like a top of funnel to kind of sell a whole lot of other things. I guess, are you thinking has the strategy shifted as we think about like what the business is going to look like,12 to 24 months from now, and the mix, obviously, it’s going to be a higher mix of wellness, but just broadly like how that strategy has evolved since you guys came public?

Garrett Smallwood: Yeah. I mean, look, if you think about when we took over this business at 2019, there was primarily almost exclusively an on-demand dog walking business. And every year, we’ve kind of jumped into the fast-moving water where we think consumer demand is, frankly, and what matters to the audience that we’re serving, which is a premium household. And every year, we make a couple of new bets, which we’ve been working on, frankly, for the year before. And so really, it’s about expanding the set of problems we’re tackling. And right now, that’s e-prescribing for vets, that’s WeCompare, which is comparing other products for insurance, and we’ll continue to do that. Our plan is really just to address the chief household officers needs and do that in a way which we think we have a proprietary advantage for that’s distribution or technology.

Operator: The next question is from Tom White from D.A. Davidson.

Unidentified Analyst: Hey. This is on for Tom. Thanks for taking the question. I had one on platform participants. You achieved record participants this quarter. Could you talk a little bit about what drove that? And then maybe some of your expectations for the balance of the year?

Garrett Smallwood: Yeah. I mean, 671,000 is a good number we think. I mean, certainly, every quarter, we’re looking for it to grow. Two things that are working, particularly well in terms of platform participant growth. One is the breadth of products and services that we offer. It allows us to be very nimble in how we think about acquiring the customers efficiently. Two is we have a really unique, we call the spider web of products and services at this point between WoofWoofTV, Petted, and Dog Food Advisor, and they kind of cross-sell and upsell really well to each other. And we’re getting better and better, I think, at the cross-sell and upsell. So I think is, a, our ability to kind of lean into any given product or category depending on what the tailwinds are, and the second is our ability to kind of cross-sell and upsell. And we’ll continue to do about those things.

Unidentified Analyst: Got it. Okay, that’s helpful. And then just a follow up on Furscription. Could you just kind of give some color on like why you decided to launch it now? And how you expect it to contribute over the next year, 18 months?