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

All right. I think we're good to go. Welcome to the Q3 FY '23 results presentation for Mad Paws. Thanks again for joining us today. My name is Justus. I'm the Co-Founder and CEO of Mad Paws; and we also have Graham Mason, CFO, as always on the call. We will run you through our results for Q3, and Graham will then give you some more details on the financial performance in the last quarter. And as always, we will also have time for questions at the end of the presentation. If you can please use the Q&A function on the bottom of your screen if you would like to ask a question, and we'll get to them at the end of the presentation. All right. So let's get right into it. Just a quick refresh. Most of you are probably know the story, but we exist to enable the pets to live their lives to the fullest and it's our goal to become the most trusted and convenient brand to rely on for all pet-related needs. Now let me start with a quick overview of the Mad Paws business. Over the last 2 years, we've executed in line with our strategy, expanding our initial pet services marketplace into other pet offerings, particularly in the food, health and pet products space. We're now a business with 4 key verticals. We run Australia's dominant pet services marketplace, where we built a community of over 40,000 trusted local pet sitters will provide 5-star services like pet sitting, walking, day care and grooming to pet owners in the communities around the country. We also run Australia's #1 online pet pharmacy with Pet Chemist as well as our subscription business in the treats and toys space called Waggly and SASH., our premium dog beds and accessory business. And the strategy is really working. We've built a significant and very loyal customer base, attracting now more than 1.3 million monthly website visits and achieving a repeat customer rate for the group of over 70%. Our current focus is really all about brand consolidation. We've talked about this in the last couple of quarters. And as you can see, we've got a couple of brands that we work with now. Going forward, the key thing that we're working on is consolidating those brands under the Mad Paws brand make it even easier for our customers to understand that we're not just about 1 particular vertical, but you really find anything you need as a pet owner within the Mad Paws ecosystem. And this is obviously driven by us increasing the share of wallet for our customers, providing them with great services and products going forward. Now the pet industry is really a very exciting industry to be a part of, particularly at the moment, not just in terms of growth. There's obviously been a huge amount of growth in terms of pet ownership compared to pre-pandemic, but we're also seeing the relationship that we have with our pets changing. Pets are now truly part of the family, and I'm sure all of you know a story or 2 about that. So we not only have 25% more pets now in Australia, but we also see that pet owners are spending significantly more in the pets. They're much more concerned about the health and safety of their pets and the quality of products that they're buying for their pets. And I think particularly in these days, quite an exciting industry to be in from a point of view of a recession resilience. We've seen this in the last recession that people and spent on pets really reduced very, very slightly through the last recession. So it's an industry that's very recession proof. And I think the results speak for themselves as well that we've seen significant growth even in the last quarter. Now we're seeing a huge amount of spend in real numbers. Pet owners now spent over $3,000 on the dogs and over $2,000 on the cats per year. And even though it's great for us that there's more pets there and they're spending more on the -- sorry, more pet owners out there with more pets, but the real opportunity for us lies in a huge amount of data that we collect on our customers and even more important on their pets. So we've recently launched what we call the Pet Stepper product, which we used to improve our services and products for our customers. It guides essentially customers through a series of questions and gives us an incredible amount of data to work with and to drive our cross-sell strategy. To give you an idea, we've acquired over 70,000 -- now the 70,000 [data rich] pet profiles where we have -- and [60%] of those pet profiles actually have more than 50 data points on their pets. So we're not just talking about name and breed, we're really talking deep knowledge about their pets in terms of behavioral data, certain health issues they might have, which again, all helps us to drive to cross-sell between the group. So that's the network effect we're really excited about, and we're focusing on providing as many touch points for our owners as possible. And this is also the reason why we're so focused on heavily focused on our data layer, learning as much about our customers with every interaction we have and using that information to tailor better products and services for them when they're using the Mad Paws pet ecosystem. Now just a couple of highlights. Graham is also going to give you a lot more detail, obviously, on the financial side. But we've achieved fixed lines of $1 million in revenue for the quarter, which is nearly 190% up year-on-year and 53% up on a pro forma basis if you take the acquisitions into consideration. So there's a lot of organic growth still for the group. $4.7 million of that revenue came from e-commerce and $1.4 million from the marketplace. And we're still acquiring customers at a very high rate with over 30,000 customers acquired for the quarter. And all that puts us into a position of being still on track for the target that we set ourselves to be operating EBITDA breakeven by mid-2023. No, I think 1 thing to mention, which is important, just to -- in terms of understanding the marketplace and how -- what kind of seasonal effects we're seeing. So you can see here the last couple of years, the quarters and the growth that we've seen for the marketplace from a GMV perspective, and we're seeing now the marketplace going back to what we call a more pre-COVID growth profile where we see huge spikes, particularly in the holiday season. And you can see that Q2 is kind of the Christmas quarter, obviously, the biggest growth quarter for us. And then we see a slight drop off in Q3 for the marketplace because seasonally, people are already on holidays. In particular, from a revenue perspective, we only recognize the revenue once the service is provided in Q3. The biggest growth we see is always towards Easter. And Easter, for example, this year fell into Q4. So most of the revenue that is recognized actually in Q4. So a bit of normalization back from kind of the slightly different growth profile that we've seen throughout the COVID impacted quarters. And then just a couple of points around execution milestones and what we've been doing over the last quarter. I think the team has done an incredible job. We're getting more and more efficient, I think, in setting our targets and following through with that. We've launched as 1 of the key highlights for the marketplace. We've launched a new homepage, Mad Paws homepage, if you have a look at it now, it's much more obvious that we're not just about the pet services marketplace. We're really about our health products with Pet Chemist, our subscription offerings and so forth. That is much more obvious to our customers now. This is only the first step. We've seen some very promising signs here in terms of the cross-sell coming from that homepage already, but there's more for us to do in particularly in making it more obvious for our customers that we have multiple offerings, and we want to do everything we can to keep them within the ecosystem. The other thing to highlight is certainly Dinner Bowl. We've mentioned that in the last quarterly update that we're looking to shut down 2 of the food lines that we have simply due to the fact that the -- they had a very low margin profile, and it would have taken us a long time to get to our EBITDA profitable targets. So we've closed our likely cooked and raw offerings in the last quarter. This is all done now. The kitchen is closed. And we're seeing some -- even though this had a negative impact on the top line, as you can imagine, we've seen a very positive impact from an EBITDA perspective going forward. Last but not least, I think team has done exceptionally well in building our retail offering and our health offering. One of the exciting things is we've got a new warehouse identified in terms of agreed for Pet Chemist. We've seen huge growth over the last 12 months, and the business now needs more space to provide the same level of service to our customers and for us to operate it as efficient as possible. And last not but not least, we've actually done -- the team has done an exceptional job on Sash beds as well where we've seen some very profitable growth, and we see some huge growth potential for that business going forward. So overall, I think a very positive quarter for us, particularly from an execution point of view, team is highly motivated to get us to kind of our #1 target, which is the EBITDA positive -- breaking EBITDA positive met this year. And with that, I'm going to hand over to Graham to run you through some details of the finance side.

Thanks, Justus, and morning, everyone. I will be presenting the performance across our key growth metrics for the third quarter FY '23. The Mad Paws Group continued to focus on 3 strategic pillars of profitable revenue growth, prudent cost management and disciplined capital allocation. You will see through our Q3 FY '23 results that Mad Paws continues to risk towards its EBITDA breakeven target. Firstly, looking at our group transactions in GMV for the quarter. Group transactions for the quarter were 109,000, an increase of 99% on Q3 FY '22 and 3% lower on a quarter-on-quarter basis, reflecting the lower seasonal booking period for the marketplace. Growth came across all our verticals versus the prior corresponding period, including the Pet Chemist acquisition, which completed in the fourth quarter of FY '22. Excluding the impact of Pet Chemist, the group achieved 20% growth versus the prior corresponding quarter. The transaction growth was impacted by the exit of our [all inline] Dinner Bowl product lines and the realignment of the way we shop offering to the Pet Chemist platform, and these changes reduced transaction growth by approximately 10 percentage points, but ultimately resulted in a more profitable, sustainable business. Headcounts contributed 43 transactions in the quarter, an increase of 59% compared to Q3 FY '22, driven by range expansion, site and marketing optimizations as well as improvements in customer life cycle management. Group GMV was $14.4 million. This represents an increase of 130% or an additional $8.1 million in GMV from Q3 FY '22, reflecting our continued transaction growth as well as increasing all the values and share of the pet owners' wallet. Moving to our customer acquisition and marketing efficiency. For our group customer acquisition metrics, we continue to see strong performance in the quarter. Total new customers acquired 30,000 plus 90% versus Q3 FY '22. The levels of customer acquisition are pleasing, and we consider that the performance marketing cost of acquisition trends we continue to see. Our headline marketing as a percentage [of our] decreased 1 percentage point to 15% of the group operating revenue for the third quarter of FY '23, representing disciplined management of the marketplace customer acquisition costs in a seasonally lower demand period as well as a number of optimizations and [cross-sell issue here] across our e-commerce vertical. Now moving to our group operating revenue and operating EBITDA performance. [indiscernible] Group pro forma operating revenue was $6.1 million. This represents 53% growth on a pro forma basis versus Q3 FY '22 and 189% growth on a reported basis for Q3 FY '22. The revenue growth versus the prior corresponding period as a result of the volume driver as previously highlighted, efficient customer acquisition and high customer repeat rates. The group operating EBITDA was a loss of $1.1 million, representing a negative 19% operating EBITDA margin. This represents a $1.1 million improvement in the prior corresponding period and in line with Q2 FY '23. The quarterly group operating EBITDA is expected by the seasonally [lower working] period for the marketplace, which resulted in non-marketplace revenues quarter-on-quarter of [$0.5] million, in line with our expectations. This seasonal effect marked a significant improvement in e-commerce EBITDA margins in the quarter from 16%, so from minus 16% to minus 9%, representing a $0.4 million improvement versus Q2 FY '23. I'll expand further on the drivers of this improvement in our segment performance. Moving to our performance at a segment level. The marketplace continued to perform strongly in the quarter. And as Justus outlined earlier is transitioning back to a pre-COVID growth profile with growth peaks aligning to travel and holiday periods. Marketplace revenue increased by 44% versus Q3 FY '23 to $1.4 million, driven by continued rebound in domestic and international travel, coupled with continued enhancements in our search algorithm, SEO updates and product and customer experience investments, which drove growth across bookings, GMV and operating revenue. Marketplace GMV for the quarter was $7.1 million, an increase of 41% versus Q3 FY '22. This was driven by an increase in new customers at 10% and an increase in repeat customer bookings of 9%. These bookings having a high length of booking, which resulted in a 28% growth in timing unit volume growth. In addition to the volume growth, we saw average booking value increases from higher average prices per time unit. The marketplace achieved operating EBITDA of $0.1 million for Q3 FY '23. Operating EBITDA margins improved to 7%, up from minus 9% in Q3 FY '22, although decreasing from Q2 FY '23 high of 24% due to the lower seasonal booking profile reducing Marketplace revenue by $0.5 million versus Q3 FY '23. Again, this is in line with our expectation. Our marketplace vertical is expected to see EBITDA margins return to those levels seen in Q2 FY '23 in Q4 due to the busier Easter holiday booking period, lower seasonal impact and continued growth in new and repeat customers. Moving to our subscription and e-commerce vertical. Pro forma e-commerce and subscription revenues were $4.7 million, an increase of $1.7 million from Q2 FY '22, representing 55% pro forma growth. E-commerce revenues were impacted by the exit of lower-margin Dinner Bowl product lines, the realignment of the Waggly shop to the Pet Chemist platform. This impacted PCP growth rates by about 8%. All these initiatives were net EBITDA positive and a key driver of the improvement in the e-commerce EBITDA margins quarter-on-quarter. Pet Chemist revenue increased 66% on a pro forma basis due to several factors, including high new customer acquisition, which is plus 31% versus the prior corresponding periods. In [indiscernible] transactions, which were up 69% versus the prior corresponding period as well as the [indiscernible] of our range strategy, which increased a portion of over counter orders to 58%. In addition, Waggly subscription revenue increased by 95% versus Q3 FY '22, driven by the continued success in our new subscriber acquisition and stable attrition rates. The e-commerce and subscription operating EBITDA margins improved quarter-on-quarter by 7 percentage points [ the ] minus 9% due to Dinner Bowl and Waggly strategies previously outlined and gross margin improvements in Pet Chemist, Waggly and Sash quarter-on-quarter. Moving to our Q3 FY '23 cash flow. Operating cash flow before it liability movement and nonrecurring items was $0.5 million, reflecting the seasonal booking period for our marketplace vertical. The group incurred $0.2 million nonrecurring cash outflows in the quarter relating to the exit of Dinner Bowl [indiscernible] products as well as other restructuring costs. As previously highlighted, our marketplace is a favorable working capital cycle with a customer paying for the service upfront and payments of the [petting] happening after the service is taking place. As Q3 FY '23 follows the Christmas and store holiday booking peak, the cash impact of the seasonal liabilities negative in this period, but it's expected to be mutual by the end of Q4 FY '23. And if you look across the last 4 quarters, the seasonal liability movement has provided $0.9 million in positive benefit to operating cash flow over a 12-time period. Mad Paws continues to invest in key areas of the pet life cycle in the quarter with $0.4 million invested in product initiatives in our marketplace vertical. Specifically, the launch of our new homepage, foundational rebranding work across our other sites and work to introduce machine learning and AI into our search ranking algorithm. During the quarter, the group completed a placement in SPP raising $3.4 million ARPA related costs. At the end of the quarter, Mad Paws [closes] a cash balance of $4.4 million. Based on current trading expectations in conjunction with the group's [prude ]cost management and the revalue seasonal liability as well as system in capital allocation, the target is still to achieve EBITDA breakeven in mid-2023 with the cash we have available. I will now hand back to Justus for a group's strategic focus and outlook for the [indiscernible] of FY [ '23. ]

Thanks, Graham. Perfect. So let's just have a quick look at our strategic focus. Nothing much has changed here. I think our strategy is still working. We've got the clear target of getting to EBITDA profitability. And I think that the whole company is very much laser-focused on that target. And I think the marketplace is going to be key to that. The nice thing about the marketplace is very mechanical for us now come to growth is very predictable. We now have to run the marketplace for years. And like I said before, the trading conditions are now kind of more normalizing to what we've seen in kind of pre-COVID times. So we're very comfortable with kind of where the marketplace is, and it's been performing very well. There's still a huge opportunity for us to improve the marketplace with Graham has mentioned, we've invested into -- and still investing into the technology and particularly, one of the key things that we keep on working on is our search ranking algorithm with a new technology that we're integrating, which is going to make it a lot easier for us to test and improve our search algorithm, which gives us a whole lot of opportunities in terms of improving retention for our customers, increasing lifetime value, and ultimately, obviously, using those data rich user profiles, as I mentioned before, to improve cross-sell to the other verticals that we have. Cross-sell nothing much has changed there. We stand the first step with the new homepage where we've seen very positive signs of the cross-sell and picking up and working. Now the next step for us is, like I mentioned before, in particular, the loyalty, giving our customers more reasons to stay within the ecosystem and making sure that they take advantage of all the services and products we're offering within the Mad Paws ecosystem. Upselling and margins, this is something that we've been focusing on, and it's something we will be focusing on for the next couple of quarters. We've had the first couple of tests with [ ad to box ] with a particularly Waggly. And I think now that we've [ done the ] more from moving the Waggly shop into Pet Chemist, which helped us again from an operational efficiency point of view. We can now kind of laser focus on making sure that we give our customers more options to add to their box. As you can imagine, this will have a very positive effect from a bottom-line perspective, any item we can add to a subscription box, the margin pretty much falls to the bottom line. So something the team is very excited about and it's something that we're going to work on this quarter in particular. And then last but not least, e-commerce efficiencies. I've mentioned already the new warehouse. We've talked about the -- moving the Waggly shop into Pet Chemist. All those things -- we're doing to improve our kind of operational efficiencies, reduce costs and run the business as efficient as possible to again get to our target of EBITDA profitability. And I think we're on a very nice track to get there. Last but not least, some of you might have seen this slide before. We've touched on all those points, but it is quite incredible as you think about how many kind of positive tailwinds the business has. We've talked about pet ownership from a numbers perspective. This is not really slowing down. It's not a -- it's certainly not a COVID [indiscernible] that goes away. Pets are here to stay and pet ownership is still growing. That, on top of the humanization and premiumization, we've talked about, it's a huge opportunity for us to increase our kind of share of that $30 billion company -- a $30 billion industry, so that the pet industry now is in Australia. One thing to mention, we've talked about travel and the marketplace kind of normalizing. And we've certainly seen kind of travel normalizing, particularly national travel. If you look at international travel, there's still some growth for us to be had. International travel last quarter was around 70%, 75% of pre-COVID levels. Air tickets are still incredibly expensive. So we assume that this will improve over the next couple of quarters, which again should help the marketplace and give it some kind of natural push when people are going back more on kind of overseas holidays, which means longer holidays, which means our marketplace will benefit from that. And last but not least, Graham has mentioned this already, we've got a strong balance sheet now with $4.4 million with the last phase. We're very comfortable with kind of getting to profitability with that. And I think the next couple of quarters with kind of the marketplace now going into the growth quarters, particularly in Q1 and Q2, obviously, towards the -- our golden quarter in Christmas, we were comfortable kind of getting there soon. And with that, I'd like to close it and open it up to questions.

So if you'd like to ask a question, please use the Q&A button on the bottom of your screen, and we can pick up the questions from there. We got 1 question actually coming to the chat. That is around how do we kind of manage, kind of leakage on the marketplace and how does the search algorithm play into that. So good question. So leakage is obviously something that the marketplace always has to work with. I think we're in a very good position to kind of tackle that problem, and we have been over the last couple of years. One of the key things, and this is more kind of what we call our kind of hygiene factors is all around giving people an incentive to stay on the marketplace. And for us, this means, obviously, making the experience as soon as possible but also providing insurance. For example, insurance the particularly important for a service like pet sitting because the pet sitter is ultimately responsible for the pet and any damage that occurs going through our marketplace means that they are insured and we're going to help them through if there are any issues. But the other side, I think, is -- the more important side and that's the data piece. So we've got data scientists pretty much exclusively working on the search algorithm now. And search algorithm, obviously very important for us just from a matching perspective, making sure we can match the right sitter with the right owner but even more so important for us to get better and better in identifying the sitter that are doing the right thing to us, identifying the sitters that keep business on the platform, making sure that they want to grow with the platform. We've got a lot better at that, and every new search are going to help us to get better at that, identifying those sitters early and making sure we [downlist] that are taking business off the platform. So I hope that answers the question. We have another question here. That's probably Graham, if you answer that. What was the revenue contribution of Dinner Bowl second quarter 2023?

[indiscernible]

Yes. So the question was for the second quarter.

Yes, yes.

These are perfect. So are you planning to pay dividends or have share buybacks in the future? Yes, please.