Pattern Group Inc. (PTRN) Earnings Call Transcript & Summary

Yes. Well, I guess there's a few areas where we try to state because we're a thin layer that sits on top of any marketplace, we don't care who it is. We don't really compete for the consumer, which is great when you're in the room with Amazon, TikTok, Walmart, they don't see us as a competitor as they do each other. So a lot of them are building tools to try to enable brands, but no one's building 1 layer down where it's just helping brands across any geography. If you take Mexico as an example, Mercado Libre, Amazon is about 50-50 market share on each. From a Pandora perspective, as an example, they don't really care which, they just want to sell more of their products regardless of the platform. That's where pattern comes in. So that's where we've decided we aren't going to compete. We don't want to be a marketplace. And then if you think about our competitors, we have a logistics arm and we have a technology arm. The logistics arm, you would see largely with distributors and whatnot, but they rarely cross into the technology side. The opposite is also true. The people who are great at the technology rarely do anything on logistics. I think the technology folks will have to start moving a little bit more into the logistics side to protect their moat from an AI in a world where maybe, say, software becomes more commoditized, I think you'll have to move atoms. So pattern is -- it wasn't on purpose 10 years ago, but now we've positioned ourselves very well in that spot that where scale begets lower cost, lower costs means you sign more brands and keep more brands. And it's a flywheel that I think is -- right now, I can't see anyone that I'm scared of right now.

One of the other things that was unique as I learned more about the company is just maybe that in many ways, you're trying to displace the idea that brands can do this for themselves, right? You have a lot of examples of brands that try, hire a couple of people, give it a go, and it's really, really difficult to manage internally. Talk a little bit about how the conversation develops of when a brand is new to you, new to your platform of educating them about how you can deliver a return to them relative to almost the alternative is you have to do it for yourself and manage selling across all these channels and geographies.

Well, the brands are incredibly smart and they know what they're talking about. So I think premise number 1 is you almost have to start with this idea that the person across the table from you will understand very well what you do and what they are capable of doing and what they're not. And I think that has just continued to play out. The more conversations we have. A lot of times, we'll talk to our brand 2 years later, they'll call us up and they'll say, "Hey, we just can't scale this like you guys can. But they're usually good at something that brings them hundreds of millions of dollars. A lot of these brands will be built on 1 channel, 1 expertise. It might be a dynamic TikTok brand that literally goes from 0 to $100 million, and that's how they did it. And then they look around and they say, now that we've built a real brand here, let's take it worldwide. Let's take it across the marketplaces, maybe we get into retail. Some of those things we help them, we don't help them get into retail. We help them with the digital side. But usually, once they build a really innovative product, they do something. And then they realize, okay, we know what we're good at. Now we need help on the rest. And that's generally where we come in.

Okay. Sticking with that as a theme, though, when you talked about it earlier with relation to AI, when you have these conversations with your brands and you think about where you want to take the platform for the longer term, what's some of the technology innovations or prod roadmaps that you're the most excited about in terms of scaling and putting in front of brands the way you can when you think about how the nature of this business could change?

Well, probably 2 areas that I love right now. Well, there's a lot. But let's just take the advertising technology we've built. I think when you have a background just on the data side, you get talking to focus on the advertising side. And they start throwing around words like halo effect. But don't worry, throughout the road sign and once people drive by it 17x, something's going to they're going to -- that drives data people and saying. And so we've spent many years trying to figure out what is the true return on ad spend. And you know our business model. Our business model is generally not always, but we'll buy the product, and we will sell it across all these marketplaces. So I take inventory model. In those models, we don't care if the brand spends 25% or 2% on ad spend. We make no extra money. That's all pure pass-through. So 1 of our -- a case that we're -- we've made some great progress on. We finally got a patent to go through on what we call true rollout, so true return on ad spend. And it's a -- I think we're 1 of the few companies in the planet who don't care about how much our brand spends on advertising so we make no money that way. So we risk trend tell a brand, here's the answer. Here's the platform that we believe you're getting the best bang for your buck on. So the MMM, we believe we have some very interesting technology there, but we also just don't have a dog in that fight. We don't take a percent of ad spend. So that's very exciting. The logistics side has become literally heading up. We were quite anti robotics and, I guess, warehouse automation because a lot of people -- it's almost a cool factor. And we were more efficient than most everyone we talk to. And I mean our warehouses are quite automated in terms of conveyance and whatnot. But we're starting to see some real progress on robotics, I think, is interesting and could lower cost. It will only be for those at scale. So it positions us very well there. And then, I guess, lastly, conversion, when you get into the -- what causes a human or a robot, AI, an agent to make a purchase, right? And so analyzing that, and you have to cover all those surface areas been very fun as well.

Understood. Sticking with this theme of fulfillment, Talk to us a little bit about the competitive advantage that you think can be built around fulfillment over the medium and long term. From where you are today, where you want to take fulfillment and how that feeds back into the level of service offering that you can bring to the brands?

Yes. Well, I guess the landscape, where the landscape is changing the most probably in agentic commerce, even though it's a very small amount of purchases today. Well, I'll give you 1 example. We estimate about 20% -- 19.3% of all goods purchased are returned. So say you're open AI or you're facilitating a transaction where you, unlike an Amazon where they have a machine around returns and whatnot, say there's 14, 20 LLMs, where people make purchase decisions and possibly buy on those platforms. The rest of that infrastructure, so reverse logistics, consolidation say you sell a T-shirt and you can return the product to -- you can send a used product to a consumer need a link remover. If you have to make 1 more hop in that process of returns, you 0 out the shirt. It's worth 0 versus being worse, say, 50 months. So we believe that there's a pretty big opportunity there at scale, the whole reverse logistics piece because we're calling it most infrastructure as a service. You probably -- in our earnings, we're starting to talk about it more and more. So we believe that's interesting. Middle Mile is also interesting, where -- so if you take in the early days of when we started, you now have Amazon FBA, you have fulfilled by TikTok, you have fulfill by Walmart. So if you're a brand, just FBA, which is 1 of those 3 big ones, on a weekly basis, you have to send to -- it used to be one, then it became 3 locations. Now it's 14 to 18, everyone is trying to get it closer to the consumer. Even fulfilled by TikTok is getting more complex. So if you're a brand, you cannot afford to do that parcel or partial trucks, has to be full trust. That will require pretty incredible scale. Pattern will have that across its set of brands and then you go international. So just those 2 things, probably middle mile, reverse logistics, I think there's a big opportunity there for Pattern.

Okay. Good points. You sit at the intersection of what the consumer is doing. There's been a healthy debate here about the state of the consumer at this conference. We kicked it off with our global economist, and he and I had a conversation. From your vantage point, what does the consumer look like to you right now in terms of behavior patterns and shopping habits?

Honest answer probably is, I think we just -- it's hard to tell because we do about $3.5 billion in revenue. And we have an entire machine about winning. So the consumer looks very strong to us, but it's a biased view because we're optimizing traffic conversion. So what we're talking, everyone is very positive about the consumer, we think is great. But the broader -- we read all the same reports everyone reads in so far and everything looks pretty good and pretty healthy. I think the main concern is just inflation. I think we'll see where all that goes. But if you -- from our lens, which is a smaller piece of the big pie, and it's a piece we are optimizing looks great. So it's hard to dissect that and take -- get a view on the broader landscape upon being honest.

Okay. Totally understood. One of the debates into and out of the last earnings was we saw the acquisition of Thorne by P&G, and that raised some questions among investors about concentration of brands and what would happen if brands got acquired by larger companies. I thought you gave a really interesting answer to this on the last earnings call, but just to level set because I think it does come up as an investor question. How do you think about the array of brands on the platform and what the life cycle of brands are and how to think about what those opportunities and challenges are when you think about the size and scope of brands on the outside the company?

I think investors will probably go on the same journey I went on quite a few years ago. I thought our platform would be geared towards small midsized brands. I didn't really expect us to be able to provide a service at a price point where Procter & Gamble and Nestle, the big CPGs, the Panasonic, but we have a lot of those companies now working with us and have been -- like 1 of our other brands was acquired by Nestle in 2018, very large brand, and they're still with us today almost a decade later. I expect the same. It's just when you get into the nuances of what we do at the price point we do it, it's even for the mega CPGs they're pretty happy with the results at the price -- at that price point. And so I sort of expect us to expand into those areas more than to see any shrinkage. But it's a fair thought process an investor will have. I had it years ago. It's hard to imagine that a company of our size can provide that value, but I think we're going to prove it over time.

Okay. Maybe we only have a few minutes left, but maybe if I can squeeze in 2 more financial-oriented questions. Obviously, you've been producing better growth and better revenue retention than what people thought a year ago. When you think about the incremental dollar of growth and the choices between growth investments into the company is incremental margins, how do you think about striking the balance there in terms of producing outcomes for investors?

Well, I mean the space is huge. I think at the end of the day, an investor wants gross dollars to go up. We're continuing to get operating leverage. We're doing all of it. If you look at the numbers, we're 4 straight quarters now of 40% revenue growth, about 50% EBITDA growth, and that is at a point where we're investing more heavily in the technology than we have ever invested in a pure percent of growth, I think, mid-80% tech investment growth. And at the same time, we're still getting better overall margins to investors as a percentage. It's not really our focus. The focus is we have -- I mean, it's trillions of dollars of potential out there for us to chase. And if we provide a phenomenal solution at a great price point at scale, investors will have the sheer dollar growth. I believe we can do all of it at the same time, but the focus is on tackling the market and producing the gross dollars for investors. But we might be able to do more of it than people think at the same time.

Maybe the last 1 for you, just building on that. When you think about the allocation of capital inside the business, maybe frame it as an end question as what are you the most intrigued by investing in the business from a growth standpoint going forward. And the counterbalancing fact is how should investors and shareholders think about potentially getting capital return out of the business over the longer term.

Well, I mean, I think it's a pretty unique company if you look at it, for 1, we have $346 million as of the end of last quarter on the balance sheet. We have 0 debt. We have a $150 million revolver that we could tap into on credit. So cash is not an issue. And then you have the opportunity, and we're continuing to win. So we're producing cash, free cash flow, growing 40%. I think it's 1 of the -- and it's quite at scale. At 1 point, I had our BlackRock guys do because people like me love to compare themselves against other companies. So, like, hey, look at all the other public companies out there that are at scale, let's call it, say, $1 billion in revenue. What would be considered, say, the top 5% in terms of growth CAGRs over, say, a 3-year run once you hit that scale. And we estimate we're in the top few percent. And we're doing it with 0 debt, free cash flow. And I think it's a very compelling story with a TAM that is enormous. And then you have a shift that is, hey, if I was pure software before, is that scary? Maybe, maybe not. But if you -- 99% of our business is tied to moving at them, so we moved the box. We're 98-point-something percent of our revenue. So we are a bit AI proof wherever that goes, and I'm not making a prediction there, but regardless of which way it goes, I feel pretty good about where we sit. And so there -- the overall thesis, I think, is just pretty strong.

Okay. All right. Well, I think we're going to leave it there. Thanks so much for being part of the conference. I hope this will be the first of many appearances at Communacopia in the years ahead. Please join me in thanking Pattern for being part of the conference.