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

All right. Good morning, everyone. Welcome to the Q2 FY '23 quarterly update for Mad Paws. Thanks a lot for joining us this morning. 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'll run you through our results for Q2, our focus for Q3 and we'll have time for questions at the end of the presentation. Please use the Q&A function on the bottom of your screen, if you would like to ask any questions, and we will get to them at the end of the presentation. And I think with that, we'll jump right in. As always, for anybody new on the call, I'll spend a quick moment to just explain to you a little bit more about Mad Paws. We exist to enable pets to live their lives to the fullest, and we are aiming to be the most trusted and convenient brand to rely on for all pet-related needs. Now what does this mean? Mad Paws at a glance, we're really building a pet services and product ecosystem. And you can see in the middle of the screen, we started with the Mad Paws brand, which is our biggest part of the business at the moment, our pet services marketplace, where you can find over 30,000 trusted local pet sitters with 5-star reviews that can look after your pets when you go on a holiday. You can find services like daycares, grooming as well as holiday care. But over the last couple of years, we've significantly expanded and changed our strategy in becoming much more a destination for customers where they find everything they need for their pet's lives. And you can see that from the left-hand side here, where we've added more and more products and services to our offerings along kind of the life cycle of pets and the needs that they have on a daily basis. We started -- you see on the left-hand side, your Pet Chemist, which is now the #1 pet pharmacy online. We've got Dinner Bowl, top-rated dog food subscription business as well as Waggly, high-growth toys and treats subscription box that we added as well as Sash Beds, which we call our curated e-commerce space where we are currently one of the biggest providers of premium dog beds in Australia. Now why we're getting excited about this? I mean, first of all, it's not about the individual pieces that you see there. In the individual businesses, it's all about bringing those businesses and verticals closer together, focusing on bringing together from a data layer so that we really understand our customers better and then, obviously, using that data to cross-sell between the different verticals, which ultimately is going to help the whole group to reduce our customer acquisition costs and be more competitive than stand-alone players. But you can see we're kind of on our way to making this successful. We've got over 328,000 customers now in the group, and just in the last quarter alone, we had 112,000 transactions going through the business. So we're really getting to scale with the business, over 2 million pet care services now being provided throughout the lifetime of group, and we're taking a much bigger foothold in the lives of our customers and their pets. And I think the numbers kind of speak for themselves. The growth that we've seen over the last couple of years has been significant. We've significantly accelerated that growth, 2021 with $3 million in group revenue, $10 million in '22, and we're now sitting at $30 million in -- as a revenue run rate for December with over $66 million in GMV going through the business. So a significant scale, obviously, from a revenue perspective. But why is this important to us? It's mainly important for us for target, which is getting to profitability mid-2023, and we're well on our way to kind of get there. Another point to kind of point out is the marketplace. Marketplace has a significant impact on our bottom line. It's the part of the business that's profitable already. We achieved positive EBITDA margin for the marketplace of 24%, which was another record for the group. And we see some more opportunities for the marketplace to grow and help us to reach our target of profitability within this year. Now what's driving that growth? I don't think it's a secret anymore that pet ownership has obviously significantly grown over the last 2 years through the pandemic. A lot of people got pets or if they had a pet already, they added a second pet. But it's not just about the number of pets that are out there that has grown so significantly. It's really about the change of relationship that's happened over the last 5 to 10 years but has been accelerated throughout the pandemic. And that is really that kind of human-like relationship with pets. Pets are part of the family now. And so we're kind of benefiting from a bit of a double whammy, which is more pets in the market, but people are also now interested in spending more on their pets because they want to make sure that their pets have a good life, have a long life and obviously a healthy life for as long as possible. So there's a huge opportunity for -- in this industry to not just grow, but significantly grow even faster than the industry by using the data that we have wisely and grown our customer base even faster. And I think the focus for us, and I talked about the pet ecosystem a little bit at the beginning. I think the focus for us is really and has been from the early stages of the company, focusing on that, driving that flywheel. And that started with the Mad Paws marketplace, where it was all about getting more pet owners and pet sitters onto the marketplace, which meant, obviously, we get more bookings, which meant we had more data about our customers which we can use to drive better matches, so make sure that we find the right sitter for the right owner, which ultimately obviously meant we have better retention. And you can see that in our data along the way, we have now over 70% of repeat rates on the marketplace, and that's been growing steadily. So this has always been a focus in the DNA of our company to focus on data and use that data. And now we've taken it one step further, learning as much about our customers, but not just using that data to present the best matches on the marketplace, but also now to present the best offers from a product and services perspective for anything their pet might be in need of. And [ that data ] strategy is working. I guess, as shown in the numbers now, we had significant growth again for revenue, $6.6 million, a record quarter by over $1.2 million. The year-on-year grew 200%, but there was obviously some M&A in the year as well. So if you look at it from a pro forma basis, 75% year-on-year growth. So you see there's a lot of organic growth for the company that's coming through, and we see that continuing going forward. Another key highlight certainly was a first for us and great to achieve that, which was positive operating cash flow of $200,000 for the quarter. And we ended the quarter with closing cash of $3.2 million, which again puts us into a position where we can get to profitability for the business within the year. A couple of other things to point out other than the marketplace growth and the e-commerce growth has certainly been the EBITDA performance of the business. We've improved that by another 10 percentage points to minus 17% now. So we're well on our way to get to EBITDA profitability. And you see the record numbers in terms of customers of 33,000 for the quarter. But I think that's even more impressive if you look at it on the backdrop of us focusing more on marketing efficiencies. Our marketing efficiency from year-to-year has improved from a marketing as a percentage of revenue, 47% last year to 17% this year. So even though we are much more efficient in terms of our marketing, we have obviously put some cost controls into play to make sure we can pull forward our EBITDA target. Our flow really hasn't slowed down in any shape or form, which is obviously exactly what we wanted to see. And then just quickly before I hand over to Graham, from an execution milestone perspective, what have we done in that quarter. I've talked about the marketplace already, achieving 24% EBITDA margin for the quarter, which is a very good result. It is obviously the best quarter for us from a marketplace perspective, from a seasonality perspective. But this is the third time in a row that we've improved EBITDA margins for the quarter. And this is a result of the team's focus on improving our search algorithm, working on the product to make it more flawless for our customers to go through and improve conversions, and therefore, improve retention rates and lifetime values. So we still see a lot of things we can do to improve on that side, but it's the pillar of giving us profitability over the next year. Now one thing to focus here before I hand over to Graham is certainly our kind of new strategy or realigned food subscription strategy. We've made a decision to discontinue a couple of lines within the Dinner Bowl business. And the reason for that was simple. We looked at all kind of high-margin lines, which in the Dinner Bowl business is the kibble line, and we made the decision to discontinue our lightly cooked as well as our raw line. Now we are in the process of finalizing a deal with -- commercial partnership with a local provider so that we can still provide a service to our customers or a similar product to our customers. But what we want to do as a business is focus on what we're best in, which is data and driving customers through online marketing, and then we can earn some money on this by earning a commission by driving customers to our partners. The reason for that was quite simple. We still believe it's a great business actually, but just from a cash perspective and investment perspective, that part of the business would have needed a significant investment over the next couple of months and years and would have also dragged us down from an EBITDA perspective. So we made the decision to carve that out. Now the result of that is positive for us, obviously, from an EBITDA perspective, we expect to save around $200,000 per quarter over the next couple of quarters, again, making sure that we can attain the target of getting to EBITDA profitability for the whole group within 2023. And with that, I'm going to hand it over to Graham, who's going to run you through a couple of details on the financial side.

Thanks, Justus. Good morning, everyone. I will be presenting the performance across our key growth metrics for the second quarter of FY '23. Our Q2 FY '23 has been a continuation of our focus around 3 pillars actioned in the second half of FY '23. These pillars are profitable revenue growth, prudent cost management and disciplined capital allocation. You will see through our Q2 FY '20 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 112,000, an increase of 109% on Q2 FY '22 and 9% higher on a quarter-on-quarter basis. Growth came across all verticals versus the prior corresponding period, including the Pet Chemist acquisition, which completed in Q4 FY '22. Excluding the impact of Pet Chemist, the group achieved 30% growth versus the prior corresponding quarter. Pet Chemist contributed 42,000 transactions in the quarter, an increase of 17% compared to Q2 FY '22, driven by range expansion, site and marketing optimizations as well as improvements in customer life cycle management. Group GMV was a record high for the fifth consecutive quarter, achieving $16 million. This represents an increase of 164% or an additional $9.9 million in GMV from Q2 FY '22. The December '22 exit GMV run rate, as Justus already mentioned, was $66 million at the end of the quarter. Moving to our customer acquisition and marketing efficiency. For our group customer acquisition metrics, we continue to see strong performance in the quarter. [ Certain ] new customers acquired of 33,000 plus 108% versus Q2 FY '22 and plus 7% on a quarter-on-quarter basis. The levels of customer acquisition are really pleasing, and 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 costs from the greater use of data analytics and cross-sell initiatives. Our headline marketing as a percentage of revenue was consistent with Q1 FY '23 at 16%. However, this includes additional expenses in relation to the rollout of our new branding across our sites. This impacted marketing as a percentage of revenue by approximately 1 percentage point. However, you can see from the chart on the right-hand side of this slide, the significant improvements in marketing as a percentage of revenue the group has achieved since Q2 FY '22. Now moving to our group operating revenue and operating EBITDA performance. [indiscernible] group pro forma operating revenue was $6.6 million, a new high for Mad Paws group. This represents 75% growth on a pro forma basis versus Q2 FY '22 and 232% growth on a reported basis to Q2 FY '22. The revenue growth versus the prior corresponding period as a result of the volume driver as previously highlighted, including efficient customer acquisition, high customer repeat rates. This, in conjunction with our prudent cost management, has led to 10% improvement points -- improvement versus Q1 FY '23 operating EBITDA margins to minus 17%, consistent with our breakeven trajectory of midway through calendar year 2023. As Justus has already covered, the outcome of our internal strategic review resulted in realignment of Dinner Bowl business, focusing on a lead generation model for our raw and lightly cooked offerings. Removing these operations in Q2 FY '22, we have improved group operating EBITDA margins by a further 2 percentage points. Moving to our performance at segment level [ to the ] marketplace. Performance was strong again on a quarter-on-quarter basis and versus year-over-year. The marketplace continued its strong growth in the quarter, driven by a continued rebound in domestic and international travel market, coupled with continued enhancements in our search ranking algorithm, SEO updates and product and customer experience investments, which drove growth across bookings, GMV and operating revenue. Marketplace GMV for the quarter was $8.5 million, an increase of 71% versus Q2 FY '22. This is driven by an increase of new customers of 9% and increase in repeat customer bookings of 26%. In addition to the volume growth we saw, average booking value increases due to a combination of the increases in prices per time unit as well as longer length of bookings. The GMV drivers, coupled with improving site take rate, increased operating revenue for the marketplace to $1.9 million in the quarter, an increase of 94% versus Q2 FY '22. The marketplace achieved operating EBITDA of $ 0.4 million over Q2 FY '23. Operating EBITDA margins [indiscernible] [ 24% ], up from 20% in Q1 FY '22, reflecting strong operating leverage and improving customer acquisition costs. Moving to our subscription and e-commerce vertical. Pro forma e-commerce and subscription revenues were $4.8 million, an increase of $1.9 million from Q2 FY '22 and 22% on a quarter-on-quarter basis. The Pet Chemist business acquired in April '22 continues to accelerate post acquisition with revenue increasing 69% on a pro forma basis and achieving a record month of $1.15 million in November '22. The Pet Chemist growth is due to a number of factors, including higher new customer acquisition plus 45% versus the prior corresponding period; improvement in repeat customer transactions, which were up 62% versus the prior corresponding period; as well as the implementation of our range expansion strategy, which increased the proportion of over-the-counter orders to 58% of total orders, up from around 50% at the point of acquisition. In addition, Waggly revenue increased by 50% versus Q2 FY '22, driven by the continued success in new subscriber acquisition and stable attrition rates. E-commerce and subscription operating EBITDA margins improved 6 percentage points to negative 16% due to the revenue growth outlined and marketing improvements explained earlier. Excluding the realigned Dinner Bowl operations, the margins would be at minus 13%. Moving to our Q2 FY '23 cash flow. Operating cash flow for the quarter was positive $0.2 million and in line with expectations provided in our Q1 update, reflecting the improving operating results, receipt of the R&D tax incentive and the favorable working capital dynamics of the marketplace. As previously highlighted, our marketplace business has a favorable working capital cycle with the customer paying for the service up front and payments to the pet sitter happening after the service has taken place. Mad Paws continues to invest in the key areas of the pet life cycle in the quarter with $0.4 million invested in product initiatives in our marketplace and $0.1 million in warehouse and general capital expenditures. At the end of the quarter, Mad Paws has a cash balance of $3.3 million and is in a strong position to continue to invest in the opportunity we have in front of us. I will now hand back to Justus for the group's strategic focus and outlook for the balance of FY '23.

Thanks, Graham. Just a quick couple of words on a little bit of what we've done. We were successful already with kind of increasing our EBITDA margin for the group. I've already mentioned that. And the key focus here, again, was really about using data and driving that flywheel that I've been talking about. We've obviously run the marketplace for a long time now, we know kind of how it works, but there's still continuous improvements that we can make, particularly from a data perspective, improving the search algorithm that we've been talking about before in previous calls, is one of our best weapons to make the marketplace better, work with the best sitters and again, drive retention through -- for the marketplace. Now from a group perspective, cross-selling, I've already mentioned is important, the identity layer that we've built has been a focus for the last half year. We're now taking that to the next level. I've kind of briefly touched on what we've done from a brand perspective. There's a lot more we want to do to make it more obvious to our customers to -- for them -- for customers of every single vertical to understand that we have more than just a vertical that they are a customer of already. So there's a lot more and a lot more that you're going to see over the next couple of months where we bring those brands closer together. Now from an upselling and margin perspective, this has been a focus for us, particularly for businesses like Waggly, but also Pet Chemist, and we've seen kind of the first successes in those areas. But we are really on the infancy of kind of what we're building here, right? And the opportunity that we have. We did our first endeavor into add to box. So this was where we give new customers for Waggly, for example, the opportune to add an extra product to the subscription box, and over 20% of our customers take up that offer. Now you can imagine it has a significant impact on the average value for each subscription box. It adds next to no cost to us from an operations perspective because we're already packing the box. So the margin of that extra toy that we're adding, for example, fall straight to the bottom line and again, helps us to get to our profitability target early. Now the other thing we've been focusing on is e-commerce efficiencies, but there's still a lot we can do better. So this is focused on looking at the operations that we have, looking at automations that we can put in place and systems we can put in place to, on the one side, obviously, improved margins, but on the other side, also just make sure that we can actually deliver on the huge volume increases that we've seen. I mean, Pet Chemist, for example, is now close to double the business that it was when we acquired it, and all that brings obviously a couple of growing pains with it. But the nice thing is we had no hiccups there, then a really good spot on delivering that increased volume. And the focus is now on improving those efficiencies to drive further margin improvements. And focus for FY '23. I mean, I've said it before, but I said again, this certainly remains profitability for the group and our efforts to consolidate our brands under the Mad Paws brand. We're doing this by redesigning our user experience. And you will see the first changes in that within the next couple of months, like I said, but the -- what we're really working towards is creating that single platform for customers to book and buy pet products and services with 0 frictions from a trusted source. And from a subscription business perspective -- or e-commerce and subscription perspective, very much the same thing. I've already mentioned, kind of add to box. The same is true for Pet Chemist. From an Auto Ship perspective, we're seeing the first real successes coming through for them to focus on that, making sure we can get customers and incentivize customers to get on to Auto Ship, which again helps us obviously on the retention side. And there's a huge opportunity for Pet Chemist also to get better with upselling to existing medication customers, where we still have a huge amount of customers that come through and buy medication products only. We're focused on making sure that they obviously add any of the products that they're offering now. And just to give you an example, they've got now over -- I think it's close to 800 kind of food-related products that they can add to their box. So a huge opportunity for us, again, to increase the average box value for Pet Chemist. And then just to finish it off, what are some of the drivers? We've touched on most of them. We talked about the huge increase in terms of pet ownership that the pandemic has driven and the humanization and premiumization we've seen even accelerated through the pandemic. And all that really comes together as the pet industry is not a small industry anymore. It's over $30 billion industry now just in Australia. So there's a huge opportunity for us to become a big business in this space. And we've seen the things that we've kind of been talking about for the last year really play out. The pent-up demand for travel has really kind of shown up marketplace with record numbers in December over $3.2 million in GMV, but there's still more to come. As you well know, international ticket prices were obviously at an all-time high. The capacity that was offered by airlines was about 70%, 75% of pre-COVID times. So not only do we have more pet owners out there, but there's still more of the market kind of to come back to normality and pre-COVID times, which would benefit obviously the marketplace significantly. And then we've talked about the balance sheet, $3.3 million of cash, only significantly lower than where we were in the -- after the September quarter. So it puts us into a very good position to, again, get to our key target, which is breakeven -- EBITDA breakeven in 2023. And with that, I think we're going to open it up to questions. Graham, do you want to take the first question maybe?

Yes, absolutely. So the first question is regarding just a bit more background on the [ $400,000 ] of intellectual property costs and the R&D spend in general. The cost relates purely to the marketplace segment of the business [indiscernible] internal technology development type only. And we have a really rigorous process around projects that make these definitions that would be capitalized. The focus is on anything that drives around the search ranking algorithm that we've talked about, which we see significant uplift in -- both from the customer acquisition side but also from the repeat rates that, that drives as a result, and there's other things around kind of [ sort of ] pricing initiatives and things like that. They are net kind of revenue generative. So we're really comfortable in terms of where that's sitting and the projects we're kind of working on. And we've got a big backlog of opportunities to really enhance the site. Do you think that rate -- there's another question follow-up on here around, is the level of spend expected to be consistent? Yes, I expect that would be largely consistent looking forward as where we stand today with the capital we have available.

Perfect. There's another question here. What were the main factors that drove the increase in prices of bookings? Yes. So a very good question. A couple of things come together here. Obviously, seasonality is the biggest part. So from a marketplace perspective, the Q2 quarter is always the quarter where people go on holidays, and particularly on longer holidays throughout the school holidays. So we always see -- even in the last couple of years, we've always seen an increase in terms of the length of the bookings. But then the other thing that we've done is also educate our sitters on kind of where they stand from a marketplace perspective in terms of pricing because, obviously, we are not setting the prices for our sitters. That is done in true marketplace fashion, where the sitters set their own prices. But obviously, we have some communications to our sitters in kind of making sure that they understand the marketplace pricing and the offering that they have. So you can imagine we've got a lot of data about our sitters down to a service-type level. So we know exactly how much you should charge if you're a particular sitter type or quality in a particular suburb for a particular service type, and we're getting better and better in communicating that to our sitters to make sure that the sitters are setting their pricing correctly. And that had an impact on the pricing on the marketplace, which obviously then ultimately benefits the marketplace and Mad Paws as well. There's another question about capitalized R&D [indiscernible] spend. Is $500,000 per quarter a good indication going forward?

Yes. I think I've covered that in the first response. Yes, that should be consistent going forward.

Yes. And so was the increase in lengths of sitting services mainly due to the holiday period as has been increasing consistently over the last year? I think I just answered that with the last question and very consistent over the last couple of years, and [ it's very ] seasonality driven in terms of the lengths of sitting. One interesting point there through -- we've seen kind of the what we call [indiscernible], which is kind of the number of time units. So how many nights, for example, does somebody book in a single booking? That has gone back to nearly pre-COVID times. It's not quite there. There's still a little bit of upside there, which again probably reflects the balance between national travel and international travel. The more international travel, the bigger the lengths of stay normally is. We've got another question here. Can you comment on the number of sitters on the marketplace, what the growth rate has been over the past 12 months compared to pre-pandemic? So yes, it's an interesting question because we've kind of gone from driving sitters as a pure number to really kind of looking at the quality of sitters that we have on the platform. So we have well over 30,000 kind of sitters on the platform now that are in different kind of segments for us in terms of the quality of those sitters, how available are they. We have some sitters that might just be available on holiday times. We have some sitters that are literally doing -- providing their services on a professional basis. That's how they earn their money. And so for us, it is really about looking at the quality of sitters on the site and making sure that we've got enough quality sitters on the site that are available at particular times. And maybe in terms of the history of that, we've definitely seen a -- times throughout the pandemic where it was harder to find new sitters getting on the site, and it was more expensive for us to get sitters on the site. But that has much more normalized now over the last 6-plus months, where people are obviously coming out again, having to find a little bit of extra cash or having to earn cash at all. And obviously, the borders opening up again, students coming back, immigration kind of going [ pick up ] has helped us as well to kind of getting back to more pre-COVID times in terms of customer acquisition numbers and customer acquisition costs. But again, our focus has also shifted from purely getting numbers of sitters onto the platform to really identifying quality sitters early, making sure that we promote those sitters heavily on the platform. So we'd rather have less sitters that earn more on the platform than a lot of sitters that earn less, right? So that's the balance we're trying to strike. And where we've been in a very good position over the last couple of months. We've got another question, one second. How is -- do you want to take this one, Graham? How has MPA been impacted by inflation, particularly in relation to freight and COGS, noting that the marketplace [indiscernible] may be a beneficiary of inflation. Are there any other costs where MPA is seeing inflation pressure?

Yes. I think on the -- on the freight side, we have seen some increased costs coming in. That was really kind of quite affecting the Dinner Bowl business. And obviously, we were realigned that business to be, I'd say, more with our overall strength in the business that will kind of drop off. And the other e-commerce businesses, while we're seeing increases at our supply level, we certainly then look to diversifying our freight providers, and that has one given us opportunity around either equalizing or lowering those inflationary rates we're seeing, also that the teams in those businesses were really kind of focusing on the small incremental margin changes we can do. So we operate in box size, how we actually ship that all the time. So we kind of at the very least, we'll bring net negative on that kind of freight cost across the group currently. But I think we should be able to manage the overall kind of freight increases from an inflation expected there. From other COGS perspective, not too much in the Pet Chemist side of the business. A little bit of price increases there coming through suppliers, which we've been -- from product costs that we've been able to pass on. In the Waggly business, there has been -- where we've used wholesalers to bring in those costs, we have seen price increases. But we're also, again, fairly early on in the journey of going direct to manufacturers on a lot of those products there. So we see actually -- we should be a net beneficiary of those changes from shifting our wholesale relationships to direct manufacturer relationships and therefore, we should be able to manage sort of margin pressures coming there. And other than that, we're not seeing -- I think we're seeing from a staff cost perspective. We've seen some of that kind of that was obviously going through the tech and digital space. There were challenges sort of getting new staff into that space. We are seeing that kind of normalize a lot in more recent times. And you just want to take the piece on the inflation on the marketplace side. I think you've really pretty already covered that with your kind of pricing.