$ODD Oddity Tech Q1 2024 Earnings Conference Call

Good morning and welcome to Oddity's first quarter 2024 earnings conference call. Today's call is being recorded and we have allocated time for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Maria Lores, Investor Relations for Oddity. Thank you. You may begin.

Thank you, operator. I'm joined by Oran Holtzman, Oddity's co-founder and CEO; Lindsay Mann, Oddity's Global CFO; and Dr. Evan Rieder, Oddity's Chief Science Officer. As a reminder, management remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates, including statements about Oddity's business strategy, market opportunity, future financial performance, and potential long-term success. Forward-looking statements involve risks and uncertainties, and actual results could differ materially due to a variety of factors. These factors are described under forward-looking statements in our earnings press release issued yesterday and in our annual report on Form 20-F filed with the Securities and Exchange Commission on March 6, 2024. We do not undertake any obligation to update forward-looking statements, which speak only as of today. Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business. Additional information about these non-GAAP financial measures, including their definitions, are included in our earnings press release, which we issued yesterday. I'll now hand the call over to Oran.

Thanks, everyone, for joining us today. The first quarter was once again another record-breaking quarter for us. We achieved massive scale online, growing revenue 28% to $212 million, and we did it very profitably with 23% adjusted EBITDA margin, generating $79 million of free cash flow, a massive record cash generation quarter. We continue to deliver above our plan, beating our guidance for the first quarter on every metric. This is what we have done every single quarter since we went public, and every single quarter even before that as a private company. During our IPO last summer, many investors told us that they had concerns that we would not be able to lap our enormous revenue performance in Q1 2023, where we grew more than 80%. And we tried to explain why we had full confidence in our ability to continue to grow on top of it. Now we are here today after growing 28% against that order, and we achieved it with record profit margins. It is another proof that the demand online for beauty is very high and that our platform allows us to capture this demand and enable profitable growth. I will provide a few data points that show the demand and the strength of our platform. Q1 2024 revenue is more than double our revenue for the first quarter two years ago. In Q1 2024, with $212 million of revenue, we delivered almost the same amount of revenue that we delivered for the full year of 2021. And Q1 2024 is more than double our revenue from Q4 2023, just a quarter before it. We have shown once again that we can power our business up and down on a dime, a huge advantage for us and something almost no other business can do. We are in full control of our growth pace. This efficiency is what makes our model so attractive and profitable. And even with this growth, we don't see a ceiling. In my view, we didn't even come close to reaching our limits, and this is our strategy to ensure very strong, profitable, cash-flowing growth for many years to come. With the huge success of Q1 and the great results we have already seen in Q2 so far, we are even more confident in our outlook for the full year and raising guidance on revenue, profit, and earnings per share for 2024. I would like to take a moment to touch on our industry. Over the last couple months, we have heard some of our competitors talk about their business slowing. I want to be clear: we don't see any signs of slowing down in our platform, not in new users and not in existing user behavior. What we do see is that the industry is transforming, moving online and moving to science-backed products. This is a transformation that Oddity is leading and investing a lot behind it to win in both. We believe our investment will allow us to continue winning for the long term. Our data and massive investments in our future give us high confidence in our long-term financial targets of more than 20% revenue growth and 20% adjusted EBITDA margin. Our results in 2024 will be even stronger than this, and Lindsay will explain soon. This makes Oddity a real outlier in our industry, growing three to four times faster than our main competitors, which means we are taking market share and strengthening our competitive advantage every day. Our rule of 40 growth algorithm is among the best that exists in consumer and tech businesses, and it's a function of three powerful drivers. First, we are competing in a massive global market with great economics that work online while still being dominated by offline incumbents. Second, our huge technology advantage over incumbents who are behind the curve allows us to win in the online arena, which we believe is the most important channel of the future and will make up at least 50% of the market. Third, we have proven again and again that our platform is a scaling machine. It's the power of our more than 50 million users and over two billion data points that we already acquired in the past five years. This combination of data, technology, and category with high online demand has enabled us to consistently win across the board. It only took us a few years to scale IL Makiage to be what we believe is the largest online beauty brand in North America. We scaled our second brand, Spoiled Child, to be the most successful D2C brand launch of all time, crossing $100 million in revenue profitably in less than two years. Also, in just two years, we scaled IL Skin to be 20% of the brand revenue in 2023, and we expect it to scale further to be 25% of the brand revenue in 2024. It is 25% of a massive base due to our existing color business. Our powerhouse brands, IL Makiage and Spoiled Child, both had very strong results in the first quarter and both are on track to my goal, which is $1 billion for each brand. We will scale new brands and new categories in our future. Brand three and four are being built in two large categories in beauty and wellness. We believe the opportunity is massive for each of them, and we are spending a lot of time and focus to make sure we'll capture this massive opportunity. After addressing the core trends in beauty, I want to touch on a point that many people are worried about, which is the viability of the D2C model. As we all have seen, for most D2C businesses, the more they scale, the harder and more expensive it is for them to grow. But for us, it's the opposite: the more we scale, the easier growth becomes for us. This is for two main reasons. One, because we are growing with so much repeat, and that repeat compounds. Repeat was over half of our sales last year, and it will be an even greater portion of our sales this year. Two, because we know so much about our users, we are able to build brands and products that we know they want and build the machine learning models to put those new brands and products in front of those users. Higher scale means more data, means better conversion, and greater share of wallet. Let me give you one example of this with IL Makiage. Our customers who started with us in color but then they try skin shop more than twice as frequently and spend more than twice as much with us over the next 12 months. This is the magic: offering multiple products into the same user base while leveraging the data, and a clear example of how a platform allows us to gain share of wallet. This is why we deliver one of the best margin profiles across all D2C, even if we continue to scale and invest in future growth. So while many other D2C businesses rely on external capital to grow, we do the opposite. We have a cash balance of $252 million, which we generated with zero debt. We did 23% of EBITDA margin and generated almost $80 million of free cash flow in Q1 alone. So to summarize, we are very pleased with how we delivered in Q1 and have total confidence in achieving our plans for the full year. But as I've said many times previously, what is most important is our future. We do not rest and enjoy the massive margin and high growth. We are executing a long-term plan with huge investments across current and new brands, technology, vision, and of course Oddity Labs, where we are growing the teams massively as we speak, and other domains to ensure we continue to win and build a large company. With that, I will hand it to Lindsay.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Dara Mohsenian with Morgan Stanley.

Hi, guys. Can you give us an update on the Labs side and molecule development and what you're expecting in terms of commercialization the rest of this year and then looking out to next year? And then also, just a couple months later after the last earnings call, can you give us an update on any plans for brands three and four and any more insight you can give us there? Has anything changed on that front? And then I'll come back with one more question if that's okay.

Sure. Hi, Dara. Oran Holtzman. Thanks for the question. For those who don't remember, Oddity Labs uses the same technology being deployed in pharma to develop higher efficacy molecules. I view the opportunity as endless. This is why we spend so much time around it. We are building systems, we grow the teams, we invest a lot in the infrastructure. It takes more time than I initially projected. It is really hard, but you know, also building the tech in Israel six years ago was really tough for us, and but we made it. It will continue to be an investment in the next three years, and we will never launch a single product from Labs without being 100% sure about its efficacy and safety. In terms of product range, a range of categories including skin, especially for brand three, color, and hair, and many other things that we are working on now. We are working with a team to ensure we have the capacity to support our pipeline and to ensure we are delivering the highest efficacy product. It means we need to transition from a research lab to a factory output model, and this is what we do as we speak. To achieve this goal, we are focusing on two things. Number one is massive recruitment, and number two is building a full operating system with process and control. In terms of recruitment, bioengineering and chemistry teams are where we spend most of our recruitment focus. Those are the teams that are doing the research and running the actual lab work, as the development in virtual molecule screening to develop the molecules. We plan to grow the team to 75 to 100 people, mostly PhDs, in the next 12 months. Second area where we focus a lot is building methodology and validation, a complete system to ensure we remain the highest standards and quality as we scale. And we are adding protocols, we are building something again very deep there to make sure that we can scale it up. But at the same time, we are not letting quality be secondary. We are adding a lot of systems there. My sister and I are there almost every month, and it's not easy. I fully believe in it, but it requires a lot of work and to build it properly. But you know, like we never tried to do something that was easy. We never followed any playbook. And when we started to build the tech team and the data usage in Tel Aviv, we didn't have any playbook there and we started from scratch. The beginning was tough. It's the same here. But we already have products that are ready to go, and since we don't need the growth in like in this quarter, we are improving again and again and using them as use cases to shape the system and to build something that actually works at high scale. So I'm very pleased with where we are today. Again, it takes more time. I feel very confident that we'll make it. But thank God, as I said in the previous calls, like it will be our number one focus, but it's what we don't need for the near-term growth. Second question is brand three and brand four. Brand three, as a reminder, is a medical-grade skin and body brand. Issues like acne, eczema, and other skin issues are huge pain points for our users, and the majority of them tell us they are unsatisfied with the current solution. And in my view, the user experience out there is really bad. With brand three, we are building an end-to-end solution that positions us to win, in my view. This includes a platform that uses data, machine learning, computer vision to deliver diagnosis and a precise treatment and coaching to ensure compliance and success. As we are today, the team is being built. We have a strong CEO for brand three, Tom Amsterdam. We already have a large team. We completed brand three branding process and with defined identity and brand name, not like that, that is already on track. Physical product line development of a wide range of products across OTC and prescription products is in place. In terms of vision technology for the diagnosis and treatment tracking, we are working on that front for the past two years and building machine learning vision capabilities for AR diagnosis, including severity and localization and classification. We have already built algorithms that can classify severity with 86% accuracy, and we are currently improving lesion localization accuracy from 77% to 90%. Again, another domain that doesn't exist in the market. We are building something from scratch. When we started two years ago, building like working on those machine learning, like it was really tough. It was very hard to get and like to get a read. But we already have machines in place ready to go with very high accuracy. So those things take time, but we believe that brand three will be massive. As for timeline, no change, still plan to launch it next year.

Great, that's helpful. And then Lindsay, can you just give us a little more insight on the revenue upside in the quarter? Where did you come in better than expected at the brand level in terms of IL Makiage versus Spoiled Child, or skin versus color, however you break it out? And was the upside more existing customer upside or new customers? Just basically looking for a bit more insight under the hood there and then implications in terms of the way you think about the business and balance of the year after that Q1 upside from a revenue perspective.

Great, thank you. Our next question is from Andrew Boone with JMP Securities.

Good morning, and thanks so much for taking the questions. One for Lindsay and one for Oran, please. Lindsay, guidance suggests an expansion in Q2 EBITDA margins and then an investment in the back half of '24. Can you talk about where you're spending those dollars in the back half of the year and how we should think about that? And then Oran, you talked earlier about a greater penetration of repeat rates for 2024. Can you help us understand the drivers of that comment and then what you're seeing maybe at a cohort level in terms of repeat rates? Thanks so much.

Hey, as for repeat, as I mentioned before, like most D2C companies, we generate most of our revenue from repeat. And this is although we grew 28% in Q1 2024 comparing to 80% growth last year in Q1. This is why the business is so profitable, and we continue to see the repeat percentage of revenue grow consistently. There is nothing more impactful and meaningful to the business strength than this. And by the way, this is why you will see Q2 guidance for EBITDA margin so strong, because we enjoy a lot of repeat coming from new users from Q1. Currently, 12-month net revenue repeat rate is around 100%. This compares to less than 50% two years ago and still getting better every cohort. What are driving it is like three main things. Number one, more repeat SKUs for the same product. Number two, expanding wallet share with new products. And number three, now that we are getting cross-selling from IL Makiage to Spoiled Child, in the future new brands, where it will go again. 100% today is already the best that I've seen in any D2C, and this is why we are profitable. But I didn't see any ceiling for that. We continue to improve the cohorts. More products and more brands that people love means higher repeat. As we use the same user base and same customer base, and basically we are taking more share from others under the same user base. That's it. Lastly, I would say about repeat, again, very hard to grow against that quarter last year with having still more than 50% coming from repeat. And this is what we saw, and that's why we could grow again this quarter with such strong profitability.

Thank you. Our next question comes from Yifan Zhang with Jefferies Securities.

All right, thank you. Good morning. Two questions here, please. Lindsay, can you please talk about return rates in the quarter and kind of what, how do you see those kind of progressing in Q2? And then Oran, maybe going back to the Oddity Labs topic. So just trying to get a sense of when do we start seeing new products coming out of that. Should we be thinking that brand number three will be kind of the official kind of launch of the new pipeline coming out of Oddity Labs, or have you already started, you know, kind of infusing existing products within the two brands with some of the Oddity Labs innovation? So, and if so, is it in skin, is it in color, is it in hair? Thanks.

I will touch one thing regarding the return rate. Look, I never view it as improvement because don't forget how we work. When I want to launch a new product or a new category, I start to train the machine learning. In order to train the machine learning, I need to see, like, I need to be wrong. I need to send the wrong product to the wrong person, and then, and that's the way that we train the machine. So if I decide to invest now in building more machine learning for new products, it means that I will have higher return rate. But like, that's like we are prepared for it, and this is not an outcome that's like it was our decision. And so that's why like, just like pay attention to the return rate doesn't represent anything about the business. As for Oddity Labs, for sure you will see it in brand three. You will, we will start to do things even before that when we need. And just to be clear, if we wanted or needed products out there in the market, they would have been ready, V1 in some projects and even V2 already. But we are already, you know, pacing the growth without it. So I didn't need to do it. You know, I don't, for new products, I don't need 50 or 100 PhDs in Boston, and I don't need to spend my time there. We build labs to build something that never existed before. We build labs to take the business five or 10x. And therefore, another year or another quarter, if I don't need it, like I'm not putting pressure. I do put a lot of pressure around way higher efficacy in terms of products and very high safety through protocols. So if we need before we launch it, probably we will start launching products to see the action. But a meaningful wave should come with brand three.

All right, thank you. Thank you both. Our next question is from Lauren Lieberman with Barclays.

Miss Lieberman, your line is live in conference.

Our next question is from Lorraine with Bank of America.

Hi, this is Melanie on for Lorraine. Thanks for taking our question. I wanted to talk about the marketing strategy that you guys implemented in 1Q, just how that looked versus prior years, and that it drove such a strong start to the quarter that you, you know, ended up pulling back a bit. You know, just any context on that strategy. Thanks.

Same strategy. We put a lot of attention in Q1 for new user acquisition. That's how we did historically. Acquisition environment was very, very favorable for us, and you can see that in the strong margins that we just printed. Again, we grew with new users and without damaging, improving the EBITDA margin went from 17% to 23% from Q1 to Q1. We have a very different approach from other companies, which makes us more efficient. We use a lot of data. We're acquiring users, we're not acquiring customers. And therefore, when we hear a lot of like problems around acquisition with other companies, we still continue to acquire at very high scale new users. It's very strong metrics.

Next question, please. Our next question comes from Javier Escalante with Evercore.

Hi, good morning, everyone. Oran, Lindsay, how are you? I'm kind of new, so would like to explore your business model a little bit better. It's proving, it's quite idiosyncratic, it's proving advantage in our neck of the world. $200 million per quarter is quite a scale, and you did it very rapidly. So two-part from me. I guess, Lindsay, if you could give us some more color on the repeats if you have it. Was it particularly in Makiage? Was it led by new product launches or repurchase of so-called hero products or your best sellers? And then I have a follow-up to Oran.

Now, yes, this is all very impressive, and I like the fact that you kind of like link it back to the business model that is so unique. But Oran, more strategically and in the context of your business model and your solid repeat and new users at a time when traditional companies spoke of a market deceleration. So going forward, there's going to be changes in digital marketing. So do you expect your business model to prove as advantage or even more advantage relative to your beauty peers if and when programmatic advertising or cookies go away, as people, there is this rumor. Thank you.

Thank you, and welcome. Look, I cannot answer it. The only thing that I can say that when iOS 14 took place, most of my competitors had really like bad quarters trying to navigate, and we didn't see any problem. I think the main reason is because we use data, and the main reason, and the second main reason is because we are not acquiring customers. Actually, I'm not acquiring revenue, okay? I'm acquiring users, then I'm enriching the data, then I'm building products, and I'm converting them based on what I believe is the best thing for them. And the biggest question, if people continue to use like social media and search, and I believe it's going to grow every year, we have more people on those platforms. So as long as they are there, I don't see any problem.

So conceptually, you are basically personalizing beauty products to your existing user base. That's kind of like the secret sauce, if you will.

Learning a lot about them, trying to understand what is missing in their routine, building machine learning models that actually can work to send the right product for them, and then matching it with the right physical product to send them. Because at the end of the day, you can have all the technology in the world, but if you don't have very strong beauty products that matches them and they're happy with, then they will return and the repeat will not be high. So continue to increase our machine learning capabilities, but at the same time continue to add more and more products for those users who did not convert three or four years ago. That's why the business continues to be so strong, because we have such a strong and large user base from that we built in the past five, six years. One last thing that I would say, building a business like this today would be way harder because every day marketing is getting more expensive, and to acquire 50 million users today with cost fortune, and with like, again, this is an advantage that we had as a first mover.

Good stuff. Thank you so much. Thanks a lot.

Our next question is from Lauren Lieberman with Barclays.

Hey, thanks. Sorry about that before. My phone was on mute. Oran, notwithstanding what you said earlier about return rates and in certain respects as part of the process, I was just curious if you're seeing any tick up in return activity as we're kind of in a, you know, a tougher consumer environment, an environment where consumers are reallocating their spending and making different decisions. So any uptick in that type of, if you will, return rate? And then also any change in the mix in terms of demographics of your consumers? That was my first section of questions.

Sure. Hi, Lauren. Look, I almost think that people want me to say that we see softness, but the answer is no. Look, like we were trying to get as much data as we can internally, learning the course, learning the return behavior, learning the repeat, and we didn't see softness. We see the same metric. In terms of acquisition, we didn't see any problem acquiring new users at high scale this year again, although the consumer is a bit more challenging based on what we hear from others. So no, the answer is no. So far, so good.

One last thing, Q1 2024 comparing to Q1 2023, return rates was better this year. So again, for your question, we don't see it.

Okay, great. And then second thing was just on the decision and timing on new launch activity. And it's very consistent what you said this quarter is what you said last about timeline for launching products from Labs. But one of my questions was if some of these products have such, you know, demonstrable efficacy and improved quality versus anything in the market, let alone versus what you've already got in the market, why wouldn't you be looking to launch right to raise the profile? Like Lindsay said, you're tiny, you know, but like raise the profile, raise the word of mouth that exists around some of your products. So if you've got things that you know that work better than anything else, why wouldn't you want those in the market sooner rather than later?

Because I want to be sure 100% that it's way better than others. Okay, that's my honest answer. I want to make sure that we have a system that is very strong. We build protocols, we make sure that again, we are doing it for the first time. I don't want to go to market when I know, when I don't need it, with something that is better but slightly better. I want to go with product that way better, and it takes time.

Okay, I appreciate that. Thank you so much, guys. Thank you.

Our next question is a follow-up from Dara Mohsenian with Morgan Stanley.

Hey, so Lindsay, we're more focused on the top line side, but gross margins are really notable in Q1 at record levels. It looks like you're expecting a solid Q2, but that implies the back half will decelerate sequentially and on a year-over-year basis. So just try to understand that implied guidance for the back half. Perhaps it's just conservatism, but help us understand the pacing of gross margins as we go through the year. And I'm just wondering if that has implications for the out years, the back half, or how we should think about that. Thanks.

Great, that makes sense. Thanks. Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Oran Holtzman for closing remarks.

Thank you very much, guys. See you next quarter. Have a good day.

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