Mad Paws Holdings Limited (MPA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Q2 FY '23 results presentation from Mad Paws. Thanks very much for joining us today. My name is Justus, I'm the co-founder and CEO of Mad Paws, and we also have Graham, our CFO, on the call. Today, we will run you through our results for Q1, our focus for Q2, and we will also have time for questions at the end of the presentation. [Operator Instructions] And with that, let's get started. So just a quick recap for those of you who are new to the Mad Paws story. We exist to enable pet to live their lives to the fullest, and our goal is to become the most trusted and convenient brand to rely on for all pet-related needs. A quick history on Mad Paws. Mad Paws is Australia's dominant pet services marketplace, where we have built a community of over 35,000 trusted local pet sitters who provide 5-star pet sitting, walking, daycare and grooming services to pet owners in their communities around the country. And over the last 2 years, we've executed in line with our strategy, expanding into other pet offerings, like food, health, and pet products, which allowed us to grow our customer base from 85,000 at the time of our IPO to now over 295,000 paying customers, who made over 660,000 transactions with the Mad Paws Group, which is obviously a significant growth in that period. I'm not telling you anything new when I say that the relationship we all have with our pets have significantly changed over the last couple of years. Pets are now part of the family, and that is really reflected in the pet industry growth numbers. We do not only have more pets in Australia. Pet ownership is up over 25% since the pandemic. But we also see that pet owners are spending a lot more money with their pets, and they're much more concerned these days about the quality of products they're buying for their pets. So we have more pet owners that care more for their pets, and more pet owners means more opportunity for us to learn about our customers, get better in providing them with products and services they're looking for, which, ultimately, will result in a better experience for our customers and fast -- and a fast-growing business from Mad Paws. We're laser focus on building this network effect by focusing on providing as many touch points for owners as possible, and this is the reason why we're focused so heavily on our data layer, learning as much as possible about our customers with every single transactions we have with them and using that information to tailor better products and services for them in the process. And you can really see on this slide that Mad Paws is already providing products and services to pet owners in a lot of different verticals, and our focus is on delivering best-of-class products services. We are the clear #1 in the pet services marketplace. We offer the #1 rated pet food with Dinner Bowl. We're running the leading toy subscription service of Waggly as well as having the leading online pet pharmacy with Pet Chemist. And there's obviously still room for us to grow and touching our customer experiences in more areas, which will allow us, again, to learn more about our customers and take them on to the journey within the Mad Paws ecosystem. So why we're so excited about the strategy? We see a huge opportunity to become the leading destination for customers to get educated about being a pet owner and incentivizing customers to stay within the Mad Paws ecosystem of products and services, which ultimately will allow us to be more successful than a standalone player. And we are on track to deliver on our promise. Graham will run you through the results in detail in a second, but a couple of highlights from my end. Even though we've focused the company on -- or refocused the company on growing even more efficiently with a goal to pull profitability off the company forward, we've delivered continuous record growth, while even improving marketing efficiencies, which ultimately is a result of our network effects and the cross-selling strategy working. So a couple of highlights for you. Revenue, up 301% to $5.4 million with a group operating revenue run rate in September of $23 million. 30,000 new customers as a record, which is up 335% year-on-year. Operating EBITDA significantly improved by 12%,as well as marketing efficiency, as I've mentioned before, something that we really focused on, improved by 3% now as a percentage of revenue to 16%. And the marketplace has been profitable. We've talked about this before, but what we're seeing is operating EBITDA significantly improving now as a percentage of revenue, improved to 20%, which is always significant, and we see that dynamic going forward and improving that number even further. So this, I think, is a very nice visualization that shows you the scale of Mad Paws we've been achieving over the last couple of years and the accelerating growth we're seeing. And this is really -- it's not just growth driven by M&A, but it's also organic growth, as you can see from the uplift in revenue comparing our FY '22 pro forma numbers against our revenue run rate in September '22, now sitting at $23 million in terms of revenue and $58 million in terms of group GMV. So significant scale that we can obviously benefit from going forward and even more exciting going into one of our strongest growth quarters in Q2. So what do we focus on to achieve these results? For the marketplace, the focus remains unchanged. We're at a stage where we're reaping the benefits from the scale we achieved, which resulted in significantly improved EBITDA margins, and we foresee this trend to continue over the next couple of years, while we increase the size of the marketplace, still not being anywhere close to saturation for our offering. And we remain focused on improving the customer experience and customer retention by using the huge amount of data we have now on our customers. And with over 15,000 transactions per month, we're getting obviously more and more of that data, and that really kind of feeds that flywheel that I've mentioned before. For e-comm and subscription segments, we are mainly focused on 3 things: improving margins, and we do that through better buying and better processes, but last but not least, through expanding our product offerings. Secondly, accelerating growth efficiently. So this is our focus on cross-selling the different brands between each other as well as the use of our first-party data that we have on our customers. And last but not least, improve our processes. There's obviously still things we can improve on and get better in terms of cost management and efficiencies of the processes that we run. And with that, I'll hand it over to Graham, who will run you through our financial results in a little bit more detail.

Great. Thanks, Justus. Good morning, everyone. I will be presenting the performance across our key growth metrics for the first quarter FY '23. Q1 FY '23 has been a continuation of our focus around 3 pillars actually in the second half of FY '22. These pillars are profitable revenue growth, prudent cost management and disciplined capital allocation. You will see through our Q1 FY '23 results. Mad Paws has performed across all pillars and is in line with its breakeven trajectory. Firstly, looking at our group transactions and GMV. Group transactions for the quarter were $102,000 -- sorry, group transactions for the quarter were $102,000, an increase of 193% on Q1 FY '22 and 14% higher on a quarter-on-quarter basis. Growth came across all our verticals versus the prior corresponding period, including the Pet Chemist acquisition, which completed in the fourth quarter FY '22. Excluding the impact of the Pet Chemist, the group achieved 9% growth versus the prior corresponding quarter. Pet Chemist transactions increased 23% compared to Q4 FY '22 driven by a range expansion, sites and marketing optimizations as well as improvements in customer life cycle management. Group GMV was a record high for the fourth consecutive quarter, achieving $13.3 million. This represents an increase of 358% for an additional $10.4 million in GMV from Q1 FY '22. With the Pet Chemist integration complete, we exit Q1 FY '23 with an annualized GMV run rate of $58 million, representing a step change in the share that pet owners' wallet transacted through our platform since the IPO in March 2021. Moving to our customer acquisition, our marketing metrics. For our group customer acquisition metrics, we continue to see strong performance in the quarter. Total new customers acquired were 31,000, plus 355% versus Q1 FY '22 and plus 19% quarter-on-quarter. The levels of customer acquisition are pleasing when we consider the performance marketing cost of acquisition trends we continue to see. Across the group, we continue to see improvements in our customer acquisition cost, with the greater use of data analytics across our initiatives and the integration of Pet Chemist into the Mad Paws marketing ecosystem. This resulted in further improvement in marketing, as you can see on the right chart, as a percentage of revenue, which decreased 3 percentage points to 16% in Q1 FY '23. Now looking at our group operating revenue and EBITDA. [indiscernible] group operating revenue was $5.4 million, a new high for the Mad Paws Group. This represents 301% growth from Q1 FY '22. Following the completion of the Pet Chemist acquisition in the quarter, the scale of Mad Paws increases significantly. As an indication of this, the group has an exit run rate of $23 million, up on an 85% on a pro forma basis. Revenue growth versus the prior corresponding period, and on a quarter-on-quarter basis, this allowed for the volume drivers previously highlighted, efficient customer acquisition costs and higher fee growth. This, in conjunction with our proven cost management, has led to a 12% improvement in our EBITDA margins to minus 27%, consistent with our breakeven trajectory of midway through calendar year 2023. Now breaking those results down to the segment level. The strong revalue in the marketplace continued in the quarter. This, coupled with continued enhancements in our search ranking algorithm, [ SER] updates and product and customer experience investments growth across bookings, GMV and operating revenue. We achieved GMV of $2.7 million in September '22, a record high to the marketplace. Overall for the quarter, GMV was plus 293% to $7.1 million. We saw growth across bookings in the average price of customer time unit, and we see further potential to increase booking growth from adding additional supply to the marketplace in Q2 FY '22 -- 2023, sorry, and this has been an area of focus throughout Q1 FY '23. Operating revenue increased 290% to $1.5 million in the quarter, benefiting from the GMV drivers outlined as well as improving take rate on a paid basis, which improved to 25% from 24.2%. The marketplace achieved operating EBITDA of $0.3 million for Q1 FY '23. Operating EBITDA margins improved to 20%, up from 9% in Q4 FY '22, reflecting strong operating leverage and improving customer acquisition costs. Looking at our e-commerce and subscription performance. E-commerce and subscription revenues were $3.9 million, an increase of $2.9 million from Q1 FY '22 and now represents 72% of overall operating revenue. The acquisition of the Pet Chemist is a key driver of the growth versus the prior corresponding period. Pet Chemist's revenues increased 22% quarter-on-quarter due to a number of initiatives, including cross-sell, range expansion and customer life cycle management improvements. Waggly, our toys and treat subscription business accelerated its momentum from Q4 FY '22, achieving record levels of customer acquisition at a lower cost of acquisition costs. As a result, Waggly revenues increased 45% versus the prior corresponding period. E-commerce and subscription operating EBITDA margins improved 6 percentage points to 22 -- to minus 22% due to improving gross margins across all businesses as well as marketing efficiency improvements from a customer acquisition perspective. Moving to our Q1 FY '23 free cash flow. Operating cash flow before seasonal inventory buildup and sitter liability movement was $1.6 million, including seasonal inventory buildup and the favorable sitter liability movement. Operating cash flow was $1.5 million for the quarter. As previously highlighted, our marketplace business has a favorable working capital cycle and the customer paying for the service upfront and the payments for the pet sitter are happening after the service has taken place. There was a favorable cash flow of $0.3 million due to continued growth in the marketplace business and GMV. We continue to invest in key areas of the pet life cycle in the quarter, with $0.1 million invested in expanding our warehouse capabilities supporting Pet Chemist and Waggly growth. In addition, we continue to invest in our technology platform to enhance the user experience across our marketplace platform, totaling $0.3 million in the quarter. Overall capital expenditure decreased by $0.2 million on a quarter-on-quarter basis. At the end of the quarter, Mad Paws has a cash balance of $3.5 million. With the group's efficient revenue growth, improving cost management and disciplined capital allocation seen in Q1, we are on the right trajectory to achieve breakeven with the capital available. In addition, Mad Paws expect Q2 cash flow to be between breakeven and a low cash outflow due to the receipt of the R&D tax incentive of approximately $0.4 million, continued improvements in EBITDA and favorable working capital dynamics for the marketplace into Pet Chemist. I will now hand back to Justus with the group's strategic focus and outlook for Q2 FY '23.

Thanks, Graham. Perfect. All right. Let's have a quick look on our outlook. Our overall focus really has not changed for the business. The whole company is pushing towards efficient growth with the ultimate target, as already mentioned by Graham, of getting to profitability mid-calendar year 2023. One thing we're very excited about is the rollout of our new brand strategy. We talked about this in the last update, but this brand strategy will ultimately bring all our brands closer together and make the different offerings we have for pet owners easier to understand for our customers. We'll be working on the first phase of this project this quarter. Now Q2 is arguably our golden quarter, especially for the marketplace. We were -- where we traditionally see the biggest growth with Christmas around the corner. So the team is focused on our Christmas playbook in order to maximize the growth for the business in that time period. The growth on the right is a great representation of the growth we're expecting in the coming months. We're very satisfied with the growth for our e-com and subscription vertical, where we continue to see record customer acquisitions at record low customer acquisition costs. Especially, Pet Chemist has seen accelerated growth over the last quarters, which is a result of the team's effort of integrating the business into the Mad Paws ecosystem and efficiently accelerating marketing activities. So to finish the presentation, I'd like to just reiterate a couple of the key thematics and tailwinds we've been talking about for a while, but you can really see kind of play out in our results over the last couple of quarters. Number one is pet ownership, we talked about this, has dramatically increased. And together with the pet humanization and premiumization we're seeing, it has given us really that double whammy of growth, of people spending more on their pets and having more pets, which resulted in the pet industry now being at a size of over $30 billion just in Australia. And then obviously, the impact of COVID that we've seen, which first was a negative to the business in terms of reduced travel. But now the pent-up demand that we've seen in travel playing out in the results, I'm sure you've seen with Qantas on how strong travel is coming back in current times. And we see that kind of continuous -- to continue in the future, and the marketplace is particularly benefiting from that significantly. And then last but not least, Graham has already mentioned our still strong balance sheet of $3.5 million, with a very positive quarter coming up with the positive impact of the sitter liability coming through as well as EBITDA improvements that we're working for, for the company, we should be coming in or around cash flow neutral for the next quarter, which puts us into a great position to achieve our target of achieving profitability for -- EBITDA profitability for the business around half year next calendar year. And with that, I think we're opening it up to some questions.

[Operator Instructions] Here's a question from James. He's just typing, let's give him a second. Yes. So one of the questions from James, his first question is around to give a little bit more detail on the changes that had been made to Dinner Bowl and what this could mean for margins going forward. So I mean, I'll take it from the top line. Maybe Graham wants to add a little bit more detail. But essentially, what we're working on with Dinner Bowl, obviously, is we've reduced the marketing spend on Dinner Bowl slightly simply due to the fact of the cash profile for that business, where it takes a little bit longer for the cash to come back when we acquire customers. We're actually acquiring customers very efficiently for that business now, and we think there's a huge opportunity for this business going forward. But what that has done and what we've focused on for the business over the last kind of 2 quarters is particularly improving our processes, improving our buying for the ingredients for the pet food that we're delivering. And all that together puts us into a much better position now to scale that business once we're in a position for the whole business to kind of do that. Graham, do you want to add anything to that?

So I just want to add a few other things in that margin. We really look to that -- the operational effect of that business and the kind of the product set we've got. So just to remind you, we have raw products and kibble products likely cooked. The raw products, putting margins targets aren't really where we think they're going to be. So we're going to slowly kind of ramp that product down. The team had done a great job in terms of sourcing better inputs, looking at the operational efficiency in those areas and just getting those supplies really well as well as how the labor works in terms of manufacturing that and kind of optimizing [indiscernible], et cetera. Now they've done a great job on that, but we're probably at the point where that business is kind of going to need more machinery, that type of stuff, to really grow. So we're kind of holding that off just to -- in the current operating environment and kind of allocating capital to more immediate return businesses. But where those margins are, they have improved quite a bit. But I think they'll improved much more without the need for additional investment in the production [ facility ].

Perfect. I hope that answers it. Second question here which, I guess, is a very timely question around customer data. As mentioned several times, how are you protecting it from being hacked or leaked? So obviously, with the backdrop of what happened to Optus, it's certainly something that we're concerned about, and we're looking into it quite closely. I think we're in a better position than other businesses because, if you think about the type of data that we're talking about, we're talking mainly about your pet's data really. So anything we know about your pet in terms of age, constitution, what they're interested in, name, all the way down to kind of health issues and so forth is obviously something that's not quite as interesting to hack us, fortunately. So we're not in a position like an Optus, for example, where we're holding data that is interesting to hackers. And so the other piece on this is obviously that all the data that we're holding around payment dollar for our customers and so forth is normally held within third-party systems that we're using, payment systems and so forth. And obviously, they're running their own security around that. But then we also have a task force now within the company that looks at potential data leaks or vulnerabilities for us as a company. And we're doing a lot to -- even though we think our risk is lower, we're doing everything we can to obviously protect our customer data and protect ourselves from being hacked. So I hope that answers the question. And then here's a second question from James. So can you please give a bit more detail on the rationale of rebranding and how you envisage this working in terms of sales and CACs? Yes. So the whole kind of rebranding, the strategy for us was not just that we wanted a new logo. I think it was about time to update the logo just to be a bit more modern. But the benefits that we're seeing and really kind of the reason on kind of why we started that project is much more focused around functional reasons on bringing the different brands that we have closer together. If you look at the different brands that we have now, Dinner Bowl, Waggly and so forth, they all have their own personality. But it is a lot harder for customers to actually recognize that this is coming from the same family of brands, which is Mad Paws. So essentially, the journey we're on now is lifting up the Mad Paws brand and making it more apparent for customers that Mad Paws is driving these products and services, and that Mad Paws has more than what we're well known for now, which is the products and services -- which is services side from a marketplace perspective, make it more apparent for customers that we have different products and services that they can use within the Mad Paws service. And that, obviously, from a branding perspective is needed a rebrand to make sure that those brands fit under one roof. But there's also a lot of functional things that we're working on from a website functionality point of view and discoverability point of view, where we're bringing all these products and services closer together and make them more discoverable from the Mad Paws website and all that. Because you asked about sales and CAC, obviously, so customer acquisition costs, all that will help us to, again, increase cross-sell between the different brands and, therefore, reduce CAC. I mean, this goes back essentially to our most basic investment thesis, which is if we can be a brand that makes it obvious for customers and easy for customers to discover new brands and needs that they have for their pets, and we can cross-sell between the different verticals, we should be in a much better position in a single standalone player that has to acquire every single customer one by one. And so we've seen that now, I think, playing out over the last couple of quarters with the significant improvements that we've seen on marketing efficiencies kind of coming through and record-high customer acquisitions at record-low customer acquisition costs. So that's, I think, the result of that strategy, and the rebranding and consolidation of the brands is the next step in that process. And we've got another question here. So the cash flow statement suggests you have just over 2 quarters of cash left. Do you anticipate you'll need a capital raising before profitability? If not and it will be achieved by cutting certain spending, where would that be marketing spending and how could that impact users? So yes, I'll give the short one. Graham can probably take it in a little bit more detail then. But we're absolutely forecasting that we do not need another cap raise to get us to that point. We're seeing significant improvements for our cash flow in the next couple of quarters. And it's not so much about cutting spend to get to that point, but it's really a function of the sustained growth that we've seen over the last couple of months and quarters, which you can obviously go back and look at, which will get us to that point where we can cover the current cost. We're kind of in a position now where we can scale all the businesses that we're working on now with a very consistent cost base, and there's not much more cost that we have to add to deliver on the growth that we've foreseen for the next couple of months. Maybe Graham, you can probably answer that in much more -- much better than me.