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

All right. I think we are good to start. Thanks again for joining for the Q2 FY '24 results presentation. We're going to go through the results, a quick presentation. On the call today, Graham Mason, the CFO of Mad Paws, and myself, I'm co-founder and CEO of the business. At the end of the presentation, as always, we're going to have a chance for you to ask questions. So please use the Q&A function on the bottom of your screen, so if you have any questions and would like to ask them. So let's get right into it. Mad Paws is Australia's #1 pet services ecosystem, particularly if you look at it from a product and services perspective, we run Australia's #1 pet services marketplace, now with the over 53,000 pet sitters on the site live, and we've got a significant gap between us and the #2 in Australia. We also run Pet Chemist, Australia's #1 online pet pharmacy, where we are selling everything from food all the way to medication, prescription medication. You can save a lot of money if you get your prescription medications for your pets on Pet Chemist compared to when you buy them straight at your vet. We're also running Waggly, which is Australia's #1 toys and treats subscription box, and SASH, which is our premium dog beds and accessory business, which has seen some significant growth over the last 2 years since we bought it. We've also had some nice awards coming on our way this year, which we're quite proud of, and the team is very proud of. We've achieved #16 in the Deloitte's Tech Fast 50 awards and #5 in the 2023 AFR Fast 100 awards. So something that we're certainly proud of, and I think that shows the growth of the company over the last couple of years. Now, probably don't have to tell you much about the pet sector and why it's so interesting. I mean, it's not only a feel good industry, because we're doing something that actually helps the community and pets are a great addition and help a lot of people in our community to have a better life, but it's also from a commercial perspective extremely important, and it's kind of the double whammy, not only a lot more pets in Australia since the pandemic and still growing, but also the relationship that we have to our pets has significantly changed and that obviously has a huge impact on the spend. So people are spending significantly more on their pets now. They want to make sure that they're not just fit, but they are fit, healthy, that they stay alive and happy as long as possible, and we've seen that in the spend per pet going up to over $3,000 for dogs and over $2,000 for cats. Overall, a huge industry now and we think we're very well positioned to take advantage of that over the next couple of years. And now a quick couple of words on kind of why we're different to your traditional retailers in the pet space. And I think it all comes down to data, and we've always been data-obsessed. You can't run a pet services marketplace -- no, a hyperlocal services marketplace without being data-obsessed. So very early on, we kind of learned that it's very much about aggregating the data, using the data, using the data to make better matches between our owners and sitters. And we've kind of taken that logic now into the next journey of Mad Paws, which is the cross-sell journey, using that data to put the right products and services in front of our customers at the right time. And we've seen some significant success with that already, but we're still scratching the surface. We are now -- in the short future, we're going to come to the point where we're not just talking about introducing the different brands that we have to our customers, but we're getting closer and closer to the consolidation of those brands, closer under the Mad Paws banner, and we're also going to integrate some of the cross-sell journeys into the actual customer journeys and in the UX of Mad Paws, and we see huge potential for that to give us further uplift in what we're trying to achieve, which is become the #1 pet destination in Australia. Now a couple of highlights for Q2. Graham is going to run you through some more detail, but I think overall I'm very, very happy with the results. Every single number you see here is a record, at least for the Q2 quarter, operating revenue is at all-time high at $7.6 million, up 21% year-on-year. Marketing as a percentage of revenue still down 13% compared to 16% last year. And all that while we're getting more and more efficient in our marketing mix and how we're driving the business, we still achieved a record number of new customers with over 33,000 customers for the quarter, and all that kind of equates to our operating EBITDA loss of just $100,000 for the quarter. So that's $1 million better than last year and a big improvement, and obviously, going in the right direction for the company. Also, second positive operating cash flow quarter, which is huge for us as you can imagine, and I guess as a result, and testament to the team of all the different things that we've put in place over the last 6 to 9 months. Now a couple of words on the marketplace and the -- particularly the product initiatives that we've made on the marketplace. We invest quite heavily in the marketplace and I think this kind of shows why this is so important and the results that we're seeing here. So number one, the thing that we try to do is always have the right number of pet sitters on the platform. Obviously, we've got to keep the right liquidity between demand and supply. And you can see there that we've got a huge kind of leap -- jump here in the last quarter because we really focused on this topic, trying to drive more sitters to the platform, and not only have we driven more sitters to the platform, over 70% -- 77% up compared to last year, but we've also done that while at the same time reducing the cost at 77%. So that really puts us into the position where we can easily kind of scale our sitters on the platform in the right areas to make sure that we can cover demand, which is still growing on the platform, in particular in times like Christmas where there's peak demand, extremely important for us to kind of be able to do that and do that cost effective. And then we've talked about the search algorithm quite a bit in the data and how we're using the data to kind of get better in connecting our sitters with our owners. I think this is kind of a testament to how this is working. So this is essentially the year-on-year conversion rate improvements from a booking request to a paid booking. And you can see there a couple of the iterations that we've made. We've gone from our search algorithm, which was already smart, but now is kind of machine learning. We've focused on a couple of things like making sure that the distance function feature is integrated, so it makes a big difference on kind of what type of service you're looking for, how many sitters are available, and on how far you're actually willing to drive for that sitter. And so we've built all these things into the search algorithm now, and you can see that we've seen improvements on a year-to-year basis of over 10%, which you can imagine has a huge impact on the business from a CAC perspective, but also from a retention perspective. And that result, ultimately, you can see on this slide, I think something that we're quite proud of in terms of the improvements that we've seen over the last couple of years. Some of the key metrics that we're looking at. One is acquisition cost payback in months, so how long does it take us to actually pay back the acquisition cost after we acquire a customer. And you can see that it's gone down from 4 months to 2 months to now zero, because with the first transaction we essentially recoup the acquisition cost and so the customer acquisition is instantly profitable from a marketing perspective. And that is then also reflected, obviously, in the lifetime values. So you can see there, from 2015 all the way up to 2023, other than in the COVID times where the marketplace was obviously impacted in terms of booking numbers, but other than that, we've seen a constant improvement every year in terms of the lifetime value and how that is up, and we're now a 1.6x improvement in lifetime value, and that's reflected in the lifetime value-to-CAC ratio, which we've kind of seen a huge improvement over the last 2 years, we've gone from 2x in 2019 to 6x in 2023, which is really kind of, compared to our peers, very much up there in terms of performance. Now we do feel there's still huge potential for us to improve on that. We certainly haven't reached kind of the end of that journey, and we continue to invest in that area and expect to see further improvements in this coming up. A couple of highlights on the e-commerce operations side. I think the ones to highlight is particularly recurring revenues. So we've had a huge focus for Pet Chemist on making sure that we can drive autoship customers. So make it more attractive for our customers to get on to autoship, put your dog food or supplements that you're giving to your dog on a monthly, weekly subscription, whatever you need and it automatically ends up on your doorstep. We've seen a 34% increase on that for -- quarter-on-quarter for Pet Chemist, which is a result of, a, the new platform that we've launched at the last Q1, and then the marketing activities and how we've driven that in Q2. Now this still remains a focus for us, and we still see some huge potential there for growth going forward. We've also worked hard on some operational efficiencies in the warehouse as well as with our customer support team. Now 85% of our total volume of request is actually handled by our offshore team without losing -- with actually improving the customer service, wait times and so forth, so overall a great result. And I think one interesting to mention is the internationalization of SASH. So we've successfully tested the SASH business in the U.K. market, we've now set up a 3PL partnership which then allows us to profitably scale that business probably from Q4 onwards. So a couple of really good things happening in the e-commerce space as well. And I think the basis is kind of laid for further growth in that space. And with that, I'll hand it over to Graham to give you some more details on the numbers.

Thanks, Justus, and good morning, everyone. I am pleased to present the financial results and key growth metrics for the Mad Paws Group for Q2 FY '24. You will see through our Q2 FY '24 results, Mad Paws continues to make progress to its EBITDA breakeven target as well as continuing to show strong working capital dynamics with a second consecutive quarter of positive operating cash flow. I will firstly look through the group performance and cash flow and then move into our marketplace and e-commerce divisions. Firstly, looking at our group transactions and GMV for the quarter. Group transactions for the quarter were 122,000, an increase of 9% on Q2 FY '23 and a record high for the group. Headline transaction growth was affected by the closure of Dinner Bowl products since Q2 FY '24 and the group's focus on profitability, which lowered our customer acquisition investment in Waggly due to the longer payback in this business. Excluding these items, transaction growth was 20%. Growth came across both our marketplace and the focused e-commerce businesses versus the prior corresponding period. In our marketplace, our transactions increased 15% with Pet Chemist and Sash increasing by 29% and 42%, respectively. I will provide more detail regarding the transaction drivers when covering the divisional performance later on. Group GMV was $18.5 million. This represents an increase of 15% or an additional $2.5 million GMV from Q2 FY '23, reflecting our continued transaction growth and higher average order value businesses increasing our share of the pet owner's wallet. Marketplace GMV increased by 20% versus the prior corresponding period, and e-commerce excluding Dinner Bowl [ closed ] product lines was 14%. Now moving to our customer acquisition and marketing efficiency. The group acquired 33,100 new customers in the period, marginally ahead of the prior corresponding period. The prior period includes new customers acquired in our now closed Dinner Bowl product lines as well as new customers acquired for our Waggly business. As previously mentioned, in our last 3 quarters, we have focused our customer acquisition activities in areas with a shorter payback period, which impacts the level of customer acquisition in Waggly. Excluding the impact of these items, new customers would have increased approximately 21% versus the prior corresponding period. As a group, we have been focused on maximizing our new customer acquisition while driving down our customer acquisition economics. As a result of this focus, we saw a 3 percentage point decrease in marketing as a percentage of revenue to 13% in Q2 versus -- Q2 FY '24 versus the prior [ corresponding ] period. I will now move to group operating revenue and operating EBITDA performance. Unaudited group operating revenue was $7.6 million. This represents 15% growth versus Q2 FY '23 and 21% growth, excluding discontinued Dinner Bowl product lines. The revenue growth versus the prior corresponding period is as a result of the focus on sitter supply and conversion improvement in our marketplace as well as range expansion and autoship growth in e-commerce. This quarter, Mad Paws continues towards the goal of operating on an EBITDA positive basis. Overall group operating EBITDA was negative $0.1 million, a $1 million improvement year-over-year. The EBITDA margins were negative 1%, an improvement of 16 percentage points versus the prior corresponding period. The improvement in operating EBITDA margins was largely driven by both segments versus the PCP. However, we did see slightly lower e-commerce EBITDA quarter-on-quarter due to SASH seasonality, investment in SASH International and slightly softer trading. Looking at our Q2 FY '24 cash flow drivers. Operating cash flow before the sitter liability movement was negative $0.2 million, reflecting the improved operating performance of the group quarter-on-quarter. The marketplace has a favorable working capital cycle with the customer paying for the service upfront and payment to the sitter made after the service has been provided. The sitter liability movement was $1.2 million positive in the quarter, resulting in $1 million in positive operating cash flow in the period. Mad Paws continues to invest in key areas of the pet life cycle in the quarter with $0.3 million invested in product initiatives in our marketplace vertical, specifically the launch of the new native app, pricing improvements and the release of the new sitter application process. During the quarter, Mad Paws repaid $0.1 million of its borrowing facility in line with the terms of the facility. At the end of the quarter, we had $0.75 million of the facility undrawn. I will now turn to performance at a divisional level. The marketplace continues to perform strongly in the quarter. Marketplace revenue increased by 31% versus Q2 FY '23 with $2.5 million. As Justus highlighted, our continued investment in platform improvements, namely sitter supply, conversion optimization and the release of our new native app, were the key drivers of booking performance in the quarter, with the UX improvements supporting takeaway enhancements also. Market-based transaction growth was 15% versus the prior corresponding period, with average order values increasing through growth in both the number of time units per booking and the prices per time unit. These both increased 3% versus the prior corresponding period. We have made a number of optimizations in our marketplace in the quarter, which resulted in new customers increasing 18% versus the prior corresponding period while decreasing marketing as a percentage of revenue to 22% versus 27% in Q2 FY '24. As highlighted in our Q1 update, a portion of our development effort has optimized our hosting and customer messaging costs. With the latter, we have reduced message length, message frequency, and with the launch of our new app, the delivery mechanism of our owner and customer messaging. During the quarter, we saw technology costs as a percentage of revenue decrease by 3 percentage points to 9% of revenue. The marketplace achieved operating EBITDA of $1 million for Q2 FY '24. Operating EBITDA margins were a record high of 42%, further demonstrating the high operating leverage of this segment. Looking at our e-commerce division. E-commerce revenues were $5.2 million, an increase of 9% versus the prior corresponding period and 21% excluding the closed Dinner Bowl operations. The growth was largely driven by the transaction growth that excluding Dinner Bowl closed product lines and Waggly changes is [ 20% ]. In Pet Chemist, we specifically focused on leveraging our improved autoship functionality to drive transaction volumes. E-commerce operating EBITDA improved by $0.5 million today to $0.3 million versus the prior corresponding period, however, decreased by $0.2 million compared to Q1 FY '24. The improvement versus the prior corresponding period was a result of the continued revenue growth in SASH and Pet Chemist during the quarter, plus the benefit of operating efficiencies [indiscernible] a strong margin growth in Waggly toys and treats subscription business. The lower EBITDA performance compared to Q1 FY '24 was partly due to the SASH business slowing as it enters the warmer sun period in Australia. This is historically a low season for SASH. In addition, the investment in our SASH international offering in the U.K. and our launch to extended marketplace channels like eBay and Amazon affected profitability in the quarter. That concludes the division performance review, and I will now hand back to Justus for the group's strategic focus and outlook for the balance of FY '24.

Thanks, Graham. Yes. Just a quick outlook. Some of you might have seen this before, but we're obviously on the way to become Australia's leading pet ecosystem. And we're kind of in the transition at the moment between Horizon 1 and Horizon 2. We're on track to have our single destination for our customers. Done a lot of work on the technology side to actually fulfill that to get to that destination. We've done a lot of work on the data integration between the different verticals that we run, and so we're seeing already the success of our cross-sell, but we see a huge potential there by actually accelerating that cross-sell once we can integrate the cross-sell into the user journeys rather than just talking about it and selling it through communications. Home brand strategy is something that we're focusing on, and we've got the first test coming up with Pet Chemist and media partnerships already -- we're already working on, and we've already sold some of those to partners as well. Now we are at significant scale, as you can see on the numbers here. I think the number that's moved the most is the pet sitter numbers now at 53,000 total pet sitters on the site. But even more importantly, we now got over 32,000 active sitters, AAA sitters on the site. So these are sitters that are most of the time available and kind of really drive our marketplace. One of our key focuses to have more and more of those sitters on the platform, making sure that they grow with us, and we've been very successful over the last couple of quarters to improve that number and improve the way we work with those sitters on an ongoing basis. And I think that's reflected in the numbers of the marketplace with record EBITDA numbers and record growth as well. Now what are we focusing on? Nothing has really changed on the focus for us going forward. I think the marketplace we see huge potential, particularly on the retention side and the product and tech team is laser focused on making sure that we particularly used the new app that we've released in the last quarter to use that to our advantage and drive even better retention than we've already seen to improve on those cohorts that we've looked at before even further. The other thing, I think, which is a key focus going forward is the recurring revenue side, particularly for Pet Chemist as well. We've already got our subscription businesses for Waggly, but we've seen that we can really change the dial for the Pet Chemist business by focusing on driving autoship. We've now got a lot more functionality that we have in terms of offering customers incentives to get onto autoship subscriptions with Pet Chemist, and I've already said, we've seen a huge increase quarter-on-quarter on autoship customers and we see further improvements on that to come, certainly a key focus for the team. And last but not least, scale private label productions. I mean this is obviously particularly important for the Pet Chemist business from a margin perspective; the more home brand we can drive, the better for the overall margin for that business. And we're going to see the first product hit the online shelves, so to say, in January most likely. So this is something that we're looking forward to, to launch that product and then build on the learnings that we have from that going forward. And I think last but not least, maybe, to mention is -- been a lot of activity lately in the space. A couple of our peers have gone through transactions and that's obviously quite promising for us. If we look at some of the valuation that was achieved by our peers, I think we've got to kind of actively now work on closing that valuation gap between them and us, and I think there's some very promising kind of future for the whole Mad Paws business just based on that coming forward. So this is kind of what we're focusing on over the next quarter and thereafter. And with that, I wanted to say thank you, but obviously now we've opened up lines for questions, so if you have any questions, please use the Q&A function on the bottom of your screen, and we will get to those questions in no time.

And there's one question here that came through the investor poll: when do you expect to operate on an EBITDA positive basis full year? I'm -- asking for full year EBITDA positive. So Graham, maybe you want to take that?

Sure. I think there's no change to what we said probably last quarter around we expect FY '25 to be the first full year of EBITDA -- trading on an EBITDA positive basis, and there's no change in that target now.

A question here: how much of the cash balance available for use versus sitter liability? Graham, do you want to answer that?

I mean the whole -- as I think we've said before, that sitter liability is used partly for sort of working capital facilities. We are going into sort of the weaker period for that sitter liability, sort of all the cash comes in from the December quarter. So yes, we'd [ only ] use that for working capital, and that's been consistent with how we've operated in the past.