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

Good morning, and thank you for joining us for the Mad Paws Limited investor webinar. I'm Chloe Hayes, Investor and Media Relations Manager. And today, I am joined by CEO and Co-Founder, Justus Hammer; and CFO, Graham Mason. Today, we will be running through an investor presentation followed by a Q&A session. And to ask a question throughout today's webinar, please use the Q&A function at the bottom of your screen. And Justus, I'll hand over to you.

Perfect. Thanks, Chloe, and welcome, everyone. Yes, we're going to run through the presentation. We've also got Graham on the line who's going to run through the financials. For everyone who is new to the Mad Paws story, our purpose is, we exist to enable pets to live their life to the fullest, and we're on the way to become the leading provider of trusted pet products and services that enhance the health and well-being of all pets. Now how do we get here? A little bit of history on the Mad Paws Group. How do we get to the conglomerate of businesses that we are now? We started off with Mad Paws marketplace, which was purely a pet services marketplace focusing on boarding services, or overnight services when you need somebody to look after your pet. And we pretty quickly became Australia's #1 pet services marketplace, and we are by quite a margin now the #1, biggest pet services marketplace in Australia with over 60,000, how we call them, brand ambassadors on the site. So it's over 60,000 sitters all around Australia that can look after your pet and make sure they've got a great experience when you're on holidays or at work. Now over the last couple of years, we expanded the business then, and that was always the vision for the business as well. We wanted to use the big customer base that we've built on the marketplace and add additional revenue streams to it, namely those were Waggly and Sash beds, which are our specialized subscription and accessory retail businesses that we acquired over the last couple of years. And then the biggest part of the Ecommerce segment is Pet Chemist, which is now Australia's #1 online pet pharmacy, where you find everything from over-the-counter products, but also food -- specialized food. But then very different to kind of your traditional retail players, we've also got prescription drugs on the website. So if you go to your vet and you get a prescription, you can fill those prescriptions on the Pet Chemist website. Now what are some of the things that we've done along the way? One was to partner with some of the iconic brands in Australia. Qantas is not just a commercial partner for us, but also an investor in the business. They came aboard just about 6 years ago, and obviously, a great partner to have, particularly if you think of it from a strategic perspective, where the marketplace is very much around giving you an option on when you go on holidays. Lot of people go on holidays with Qantas. So that helped us not just from a customer acquisition perspective, but then also even more so from a trust perspective because if you build a marketplace, it is very much about building trust with your customers. Quick word about the industry. I don't think I have to say too much about it. The pet -- so the pet industry in general is, obviously, a feel good industry. We love being in that industry. We know about all the benefits of the industry. We've got plenty of dogs in the office every day and reap the benefits of having them there. And I'm sure all of you have heard about the positive things that come from being a pet owner. We all heard about the pet humanization and premiumization, which means pets are very much in the living room or even bedroom these days, and they are part of the family, which then is reflected in how much we spend on them. People spend a lot of money on their pets, which means it's a great -- it's not just a feel good industry, but it's a great business to be in. Dogs, people spend now over $3,000 a year and cats over $2,000. So, it's a -- we've seen a significant growth, not just in the number of pets, particularly through COVID, but also in how people spend on their pets, and that's something that we've obviously benefited from over the last couple of years. Now a couple of more words around the group, the Mad Paws Group. I've already mentioned the Marketplace and the Ecommerce side. Those are the 2 segments that we mainly report on. The services marketplace includes everything from what you think about in terms of boarding. So you need somebody to look after your pet from a holiday perspective or you're at work and need somebody to walk your dog or look after them during the day, those are the services that we provide there. We've also got a subscription service there now, where you can lock in your dog walker or your day care on an ongoing basis. That part of the business is a very profitable part and has been for the last 2-plus years. It contributes about 28% of the group revenue, but at an extremely high gross margin. You see that at the bottom of the screen, just about 95%. So it's an extremely profitable part of the business, a very fixed cost base now. And any dollar that comes in on top pretty much falls through to the bottom line, and a big driver for the profitability for the business going forward. On the other side, the Ecommerce business, I've already mentioned Pet Chemist, Sash beds as well as Waggly in that segment. The biggest part of the 3 is certainly Pet Chemist by far. It's the majority of the Ecommerce revenue in that segment. And the total Ecommerce segment contributes about 72% of the group revenue at a lower margin. So that runs around 27% traditional. Obviously, to retail players at a lower margin, but still a very attractive business for us, particularly in combination with the marketplace. And I think that's what we've been working on over the last couple of years to get these businesses closer together, work on the consolidation of those businesses because we've seen great advantages of running these businesses alongside. Now 1 or 2 more words around how the marketplace actually works. And I'm sure most of you understand how the retail side works from a revenue and revenue recognition perspective, but the marketplace is slightly different. Mad Paws is a traditional kind of hyperlocal services marketplace where we interact essentially as the agent between the service provider, the pet sitter and the pet owner, and we charge a fee for making that connection between the 2. Now simple example, if you find a pet sitter on the website for 2 nights, they might charge $50 a night, so $100 for that booking. We would charge the owner $112, the $100 sitter -- which the sitter charged and $12 booking fee that goes straight to Mad Paws and that $12 we recognize at the time of booking. We also then charge an additional 20% to the sitter. So that's our sitter fee, and that is recognized at the time that the booking starts. And at the end of the booking, we then distribute the remaining $80 to the sitter for providing those services, and we sit in the middle kind of making sure that the whole service is being provided, that there's no issues. We've got 24 hours customer support that they can get in contact with. And that business now, like I said, is extremely efficient in terms of how it's run. It's a very fixed cost base, and we can scale that business from here by adding next to no cost in terms of that cost base. Now, what's one of the biggest advantages that we have compared to kind of your traditional kind of retail players in the pet space? Quite simply, this is very much about data and kind of how we think about data. We've come from a place of being data obsessed. You can't run a hyperlocal services marketplace without being data obsessed. It is very much about finding the right fit between sitters and owners, and we've used that philosophy to now integrate the retail businesses alongside the services marketplace. And a huge advantage here is that we can capture a huge amount of data that a retailer would otherwise only dream of to capture about their customers. You can imagine it's very hard to ask you 100 questions about your pet if you're trying to buy the cheapest bag of kibble or food or toys. But if you're looking for somebody to look after your pet, we've got plenty of owners that are willing to sit through 100-plus questions about their pet so that we know not just name, breed and age, we know literally everything about that pet in terms of health history, medications they might take, what kind of food do they eat on an ongoing basis. And all that information helps us to cater the products and service that we can put in front of those customers and help us with cross-selling the products and services that we have on the platform. Now quick word around the platform and the scalability of the marketplace. We've spent a whole lot of time and money on the marketplace to get it to this point. Building a hyperlocal services marketplace is something that's quite difficult. But once you get to scale, it's a huge advantage and a very big barrier of entry for any other players to come into the market, simply because you've got to find a pet sitter and a pet owner that are in the vicinity of 1 or 2 kilometers. You probably don't want to drive much, much further than that, at least in the metro area. And you've got to build that demand and supply at the same time. It's something that takes a lot of time, and we've taken a lot of pride in. But now that we're at that point, we've got to scale. Over the last couple of years, we focused significantly on 2 things. One is improving our platform, making it as easy as possible for our customers to make bookings and also make the match between the sitter and the owner as good as possible. And we've gone through hundreds of iterations of our search algorithm. And we're now at a point where -- how you can see on the data here, where that conversion rate has consistently gone up. And not only have we gone better in matching our owners with our sitters, we've also got significantly better in identifying sitters that might not have the right behavior, for example, to take people off the platform. And we have a way to kind of rectify that or at the end of the day also take them off platform if that's what we have to do. But all those efforts plus the marketing efficiency that we've driven over the last couple of years, we're #1 in terms of SEO ranking. So all the organic traffic that we're getting to the platform is at all-time highs. All that comes through in some of those unit economics that you see at the bottom of the page, where we're now at kind of record highs in terms of our CAC to lifetime ratios, which is over 6x now, which is a very good metric if you compare that to a lot of marketplaces around the world and it's something we take a lot of pride in to continue that work and improve on that number. Now quick overview on the growth. We've seen significant growth over the last couple of years, close to 70% in group GMV going through the platform and $28 million in group revenue. And also from an EBITDA perspective, I think that's certainly been a focus for us over the last 2 or 3 years since being listed. Hyperfocused on getting to profitability last year. Already we were at -- we improved from $4.8 million negative EBITDA to $1.3 million, which now accumulated in the last quarter, which showed a $300,000 positive cash EBITDA for the quarter. So we've kind of bridged the gap now and gotten to the point where we're EBITDA positive for the whole business. We also had $1.7 million of operating cash flow for that quarter, so putting us in a very good position at the end of the year -- of the end of the quarter with $4 million in cash in the bank. Now one of the reasons why we've seen some significant growth in that time was certainly around the marketing campaign we ran. We did an equity-for-media deal with Seven West Media just about a year ago, and we've kind of really pushed that through in Q1, in particular Q2 of this quarter, where we spent half of the budget that we had with Seven West Media in that time. And we've seen some very nice growth over that period. You can see here, we've kind of seen that kind of turnaround where the weekly GMV has seen significant growth again for the marketplace, particularly towards the end of the year where we've pushed that media campaign, and we are particularly excited now about spending the second part of that media campaign over the next 2 months going into Easter, which again is traditionally one of our biggest growth periods for the marketplace. And so I think what that's given us is really the first time that we had the chance to step out of what we are very good at, which is performance marketing and get into a little bit more of brand building. And we've seen some good results already on our brand metrics that we're tracking. And we believe that the brand that we're building now will give us not just the benefit of the increased growth now, but certainly will have a longevity effect over the next year or 2 years where we see all our performance channels performing even better because of this campaign. And with that, I'm going to hand it over to Graham to run you through some of the financials.

Thanks, Justus. Good morning, everyone. I'm Graham Mason, the Group CFO of Mad Paws, and I will be providing an overview of the financial profile of the group. In this section, we'll take you through the key financial highlights for the quarter, which reflect the success of our focus on profitable growth since Q1 FY '24. This approach has driven strong improvements in both revenue and EBITDA across the group. The highlights for Q2 FY '25 were group operating revenues of $7.7 million, up 2% year-over-year and up 10% excluding Sash Waggly. Marketplace operating revenue reached $2.8 million, a 16% increase year-over-year, with Ecommerce revenue standing at about $4.9 million, down 4%, but 10% up excluding Sash and Waggly. More importantly, I think the group cash EBITDA was positive for the quarter, reflecting a 328% increase on the prior corresponding period. And in dollar terms that's a quite a significant $0.5 million improvement in that metric year-over-year and as that sort of delivered the first half of FY '25 breakeven EBITDA for the group. The group cash EBITDA position was largely driven by the improvement in the cash EBITDA of our combined segments, which hit $1.4 million, which is up 86% year-over-year. These results highlight the continued strength of our strategy. But now let's look at the financial profile of our 2 segments being the Marketplace and Ecommerce. The Marketplace segment continues to be a standout performer for the Mad Paws Group with strong revenue growth and a high-margin scalable business model. In Q2 FY '25, we saw significant improvements across key metrics, reflecting the effectiveness of our strategic initiatives and operational efficiencies. Here's a summary of the quarter's highlights. As I mentioned before, operating revenue reached $2.8 million, up 16%, driven by the successful second phase of our above-the-line campaign. New customer growth in that same period accelerated to 6% up compared to a decline in Q1, demonstrating the success of our marketing and acquisition strategies in the period. Booking growth also increased by 8%, driven by strong organic demand, and this, coupled with a 5% rise in our average prices, reflects a solid service demand and pricing optimization across the platform. Cash EBITDA for the Marketplace segment grew by 37% to $1.4 million, maintaining a healthy 49% margin with reduced employment costs contributing to improved profitability and that 49% EBITDA margin really reflecting the high operating leverage of the marketplace that Justus mentioned before. Marketing spend remained efficient with a 16% increase in expenditure, supporting the above-the-line campaign, while maintaining marketing as a percentage of revenue at 22%. These results reflect the continued strength of the Marketplace segment, which remains a key driver of the profitable growth for the group. Turning to our Ecommerce segment. Our Ecommerce segment is primarily driven by Pet Chemist along with Sash and Waggly. The group has prioritized profitable revenue growth across key business units in this segment. As part of this strategy, we have realigned our marketing focus away from business units with longer customer acquisition payback periods, which has resulted in slower revenue growth within this segment. However, over the last 12 months, we have worked to enhance profitability in Pet Chemist by focusing on health and medication products, improving gross margin through active rebate management and better supply selection. And additionally, we have implemented technology and AI solutions across our warehouse and customer service operations, leading to faster order dispatch times and reduced costs. This has had the benefit in the current quarter, excluding the Sash and Waggly businesses revenue being up 10%, but also EBITDA being up substantially year-over-year breakeven for the quarter in Q2 2025. The Q2 Ecommerce revenue was $4.9 million, a 4% decline, as I mentioned. However, excluding Sash and Waggly, this represents a 10% increase. But one notable item that we should cover off here is around our Ecommerce media revenues. This revenue stream was launched in Q1 FY '24, and it grew by 96% compared to the prior corresponding period, reaching $0.2 million. This high-growth, high-margin opportunity capitalizes both on our marketplace and Ecommerce platforms, leveraging the customer engagement and trust that we've built from the marketplace to those more regular purchases in the Ecommerce platforms and creates a significant new revenue stream with significant potential for the group. Ecommerce EBITDA was breakeven for the quarter, showing a $0.3 million improvement compared to Q1, and this highlights the success of our operational initiatives and the continued scaling of Pet Chemist despite the competitive market environment. I'll now hand back to Justus for an update on the strategy and outlook for the rest of the year.

Thanks, Graham. Yes, just a couple of words of kind of where we're going. You can see in terms of the group strategy, we're looking at this in a couple of horizons. We're at the Horizon 2, which is build the brand. I've already mentioned what we're doing here and what we have done with the brand build. There's more to come. As said half of the media budget is still to be spent. So we've got some good ammunition left to really kind of accelerate growth into Easter. And obviously, now with having the first interest rate cut, that should only help us as well in terms of the pressure that some people have felt with cost of living. We've done a lot of work around the single destination, bringing those 2 brands closer together and making it easier for us to cross-sell between the different brands as well as some big steps in terms of our home brand strategy, launching more products on the Pet Chemist side from a home brand perspective, which ultimately will help us from a margin expansion in the Ecommerce segment. And Graham has already talked about the media partnerships, which was very successful. And again, it's driven by the huge amount of customers that we now have on the database, but also by the depth and the data that we have about our customers. Now, where is this going? We certainly see some great expansion opportunities for us into international markets, but also using the data even more from a commercialization perspective. And then obviously, we want to get involved in more and more stages in terms of the pet life cycle stages, which also will help us to gain more volume and more growth, particularly on the Ecommerce side of things. Now, I've already talked about some of those numbers, 1.4 million subscribers, 60,000 pet sitters on the site. But some of the key metrics here are 70% repeat rates. So we've become really good in providing good services and products to our customers, and that shows -- apologies -- in them coming back to us and using our services over and over again. And the one metric I want to highlight here on this page maybe is the pet profiles. I've already talked about the importance of that. But just so you see, we've already built 460,000 of those pet profiles since November '22. And some of those pet profiles are well far beyond 100 questions answered on those pet profiles. So we know a lot about their pets, and there's a huge opportunity for us to utilize that data, commercialize it, but then also utilize it in terms of cross-sell and making sure we've got the optimized products and services in front of our customers at any given time. Now what's left for FY '25? I think we're laser focused on driving sustainable growth. I think we've shown over the last couple of quarters that we've continuously improved our EBITDA performance and performance of the business. I think there's some potential tailwinds coming our way in terms of growth for the Marketplace, but also the Ecommerce business. We've done a lot of work on the Ecommerce businesses for them to run as efficient as possible. As an example, we've halved the cost per order from an admin and warehouse perspective for Pet Chemist over the last 2 years, which now puts us into a position where we can really accelerate the growth and accelerate that growth sustainably. Driving growth, I've mentioned the $2 million that we still have spent in terms of the equity media deal with Seven West Media. The majority of that is going to be deployed before Easter, and we've got a very exciting campaign kind of lined up for that where we utilize some of the assets that we've built for the first part of the campaign. But this time, we're also driving a little bit more call to action, so we expect that, that drives even more instant kind of user interactions with the platform. And all that helps us to be as efficient as possible and get better in what we're kind of here to do, which is cross-sell more services and products and have more happy pet owners on our platform. And last but not least, I think it's worth mentioning that if you look at the -- some of our competitors or comparables, particularly around the world, Rover in the U.S. bought by Blackstone at a 28x EBITDA multiple. It feels there's a bit of a gap in between the MPA being valued by investors here at the moment and how parts of the business are being valued kind of overseas. And so with that, we've appointed Highbury advisory just about 3.5 months ago. Now, we're in the process of identifying some of those opportunities. And we'll have, I'm sure, more information about that kind of going forward. But we believe, obviously, there's a huge opportunity for us ahead of us. And it was great to kind of run you through the details of Mad Paws and the opportunity that's ahead of us. So with that, I'll hand it back to Chloe for the Q&A session.

Thanks, Justus, and thanks, Graham. I might get you to stop sharing the screen so we can jump into Q&A. And to get things started, I might start off with a broad overarching question, given we're at the start of our new year. As you've mentioned, this is the company's first quarter of positive cash EBITDA, what were the biggest contributors to reaching this milestone do you think?

Yes. So I think it's been a continuous -- if you look at kind of the history of the business, particularly over the last kind of 4 to 8 quarters, we've continuously kind of improved EBITDA. It wasn't kind of like a lucky one shot. We've worked very hard on, particularly the Ecommerce businesses to make them more efficient and more profitable. And so that's been, A, getting the structure of the businesses right, but also the technology right. We're using a lot more AI automation now in those businesses than we have ever before. And for the Marketplace, it's been really a continuation of the growth of that business. We've seen very stable growth for that business over the last couple of years since we're coming out of COVID. And we think there's much more growth to be had. And I've already mentioned the fixed cost base for that business, I think that's what makes it particularly attractive from an investor perspective because we can pretty much double that business by increasing the cost base of that business very, very small. The only thing we might need is 1 or 2 additional customer service people, but everything else in that business scales from here on out.

And what can you mention in terms of keeping that momentum up? How do you plan to sustain that positive cash EBITDA moving forward for the rest of the financial year?

Yes. So I think the -- again, it's kind of more of what we've been doing kind of very well. The Marketplace business, obviously, has some fluctuation in terms of the holiday times. But the good thing is, the big growth momentum for the Marketplace are pretty much in every single quarter because that's normally when you have a school holidays and people going away overseas or in Australia to enjoy some time off. So we always kind of get that. This quarter is actually -- or this Easter is particularly exciting because it's one of the few times where you've got Anzac Day, Easter long weekend and the school holidays all in the same 2 weeks. So I think it's -- you've got to take like 3 days off and you get 10 days of holidays. So if we look historically, that's always meant that we see some significant growth because everyone wants to get away in that period of time. And that, combined with the brand campaign that we've lined up with Channel 7 and the significant kind of equity spend -- equity for media spend that we have lined up there, should give us some very good growth perspective.

And yes, moving to marketing. Again, another big development you've already spoken about, but perhaps getting slightly more specific now. Mad Paws recently launched its first above-the-line campaign. What was the strategy behind this move? And how has it impacted brand awareness for the platform?

Yes. So we've always kind of been looking at what's the next step for us in terms of growth for the business. And I think we've been very good in growing the business. And you can't supercharge this business. You can't like just throw more money at a business like this because, like I said, particularly that the marketplace is hyperlocal. So you need to grow supply and demand at the same time. But we always kind of waited at that point where we had to right size, where we can step away -- where we can add to the performance marketing side of things and go into kind of more brand marketing. And so I've been kind of early investor and adviser in Airtasker, and so kind of I've seen that development very much with Airtasker back in the days when they did a similar deal with 7 as well, where they kind of really accelerated their growth through those brand campaigns, because you kind of got away from your kind of traditional early adopters that you can attract with performance marketing, where now we're kind of building much more of a brand in the pet space. And I think for that, you have to go to -- at some stage, you have to make some of those above-the-line channels work. And so that was the first opportunity to do that, and like I said -- and show them that one graph. We've seen that already working throughout the Christmas period with some accelerated growth in a tough period of time where people and the whole cost of living crisis really kind of was quite visible and some businesses kind of felt that quite heavily, we still accelerated our growth in that time. And so we're quite happy with that initial start, and we think that, that's going to last us for a long period of time, and we'll have the business at a -- kind of just a step up in terms of the performance marketing returns that we've seen before.

And a couple here about the platform itself and just the strategic decisions behind it. As you've spoken about Mad Paws becoming the single destination for pets and pet parents, how do you see the platform services and offerings evolving over time?

Yes. So because we've brought together a couple of different brands, it was very important for us to make sure that we, as a first step, kind of combine those brands from a data perspective, and that's kind of where we're at now. We've combined all the brands. We can -- we've got a single view of the customer, whether you buy something on Pet Chemist or Mad Paws or on Sash beds, and we can use that to kind of put products and services in front of you at the right time. The next step, which we've kind of finalized in the last half year, was to have a single platform. And so we now have essentially a carbon copy of the Pet Chemist platform available for our Mad Paws customers as well. And so what that means is we can really kind of push the Mad Paws brand now rather than having to push multiple brands, which, again, makes it much easier for our customers to kind of understand our offering. It's all under kind of Mad Paws. And again, makes it easier for us to cross-sell between our service customers and our product customers.

And a few questions here about our financial performance for the quarter. And a question or 2 here about the slight decline in Ecommerce. But then you also had a strong increase with the Marketplace when it comes to revenue. Perhaps can you walk us through the dynamics there, the difference between the 2 channels and the differences between where revenue is coming from?

Yes, sure. And maybe I'll hand it over to Graham as well. But just from a top line perspective, we've, obviously, got the Marketplace segment and the Ecommerce segment that we report on. The Ecommerce segment includes 3 brands essentially. We've seen a little bit of a slower quarter, particularly for Sash beds, which normally has a bit of a growth time going into Christmas. I think that had to do with, A, cost of living because that's a quite expensive premium product that we're selling there. And so, what we've done is kind of we invested a little bit less in that business. We've already made a strategic decision about Waggly to invest less into that business, into the growth of that business over the last year just in terms of driving profitability again. That's a good part of the business, but it needs a bit of cash investment at the beginning, because it's a subscription business. So you have to invest more money upfront to kind of get that money back over a longer period of time. And so we kind of park that for now and really focused on the Pet Chemist business, and the Pet Chemist business again has seen double-digit growth, and we're quite happy with that. But even more so happy with kind of the EBITDA performance of that business. Because, again, we've done a lot of work in terms of making that business as efficient as possible, making sure that operations at warehouse are set up correctly. We're now at a point where we've got 2 warehouses that we can use for some of our biggest SKUs, so we can send products to Melbourne or to Victoria from our Melbourne distribution center versus sending it all from our Queensland distribution center. So all those things and all the work that's kind of gone into that kind of got us to the point, I think, were now we're in a very good position where those businesses are set up as efficient as possible, and we can grow them from here profitably. Graham, I don't know if you want to add anything to that?

No, you really covered most of it off. I think the decline in Ecommerce is largely around the refocus from Waggly, as you mentioned, and the slight sort of underperformance we saw in Sash. I think -- if especially Sash had delivered what we wanted to, the EBITDA would have been pretty strong for not only the group, but for EBITDA on top of those the growth we saw in Pet Chemist and the operational efficiencies we made in that business. So yes, I think you've sort of outlined the key points.

So it's also not super straightforward when it comes to dissecting the figures. The report dives into the impact on those numbers from a couple of underperforming brands. And excluding those, you actually then get an increase. Perhaps you might quickly dive into your thoughts on handling various brands on the platform.

Yes. And I mean this is kind of talking a little bit to kind of what I just said around the Sash business kind of underperforming slightly compared to Pet Chemist. And I think, again, we've made the strategic decision to underinvest into some of those parts, particularly Waggly, simply from a profitability perspective, right? We wanted to make sure that we are, from a profitability and from a cash flow perspective, completely on track. It was very important for us also to make sure that we don't have to raise money anymore. And I think we're well beyond that now where we can -- where the business finances itself, and we don't need any additional cash for the business to grow from here on out. So that was particularly the strategic decision between -- behind Waggly to kind of underinvest into that business and forgo some of the growth that we could have seen. But on the other hand, making sure that we're not spending money there that we would have otherwise needed for other parts of the business that are just from a cash flow and profitability perspective giving us better return at the moment.