Wag! Group Co. (PET) Earnings Call Transcript & Summary

Hi, everybody. This is Kaumil Gajrawala, the newish Jefferies consumer staples pet and wellness analyst. Excited here to have Garrett Smallwood on, Chairman and CEO of Wag! Group. I don't exactly know how to say it with the exclamation mark, moment to like screen it or something will -- I'll figure that out next go.

Why don't we just kick off with a brief sort of business introduction and including kind of business philosophy, what problems are you looking to solve for pet owners?

Of course. Well, first off, thank you for having me. Always good to see you. I'm the CEO of Wag! My name is Garrett Smallwood. And if you think about Wag!, I want everyone to think about it as the button on the phone for the paw for the premium Pet Parent. So we believe that there's about -- well, you know this, there's about $140 billion of forecasted pet spend this year. And we actually think a lot of that, maybe even the majority of that, is driven by the premium Pet Parent, maybe 10% to 15%, even 20% of households in the U.S. that really love their dogs, their cats, maybe even their pigs. And they spend a lot on their dogs and cats and pigs. They have things like pet insurance and wellness plans. They maybe do weekly dog walks. When they travel, the dog stays at a premium boarding place, whether that's with a friend or a family member or a facility. And we want to capture all those dollars. So WAG!'s goal is to be the destination of choice for the premium Pet Parent on the mobile device.

Can you maybe go over -- you went over some of the occasions where the product is used or, I guess, platform is used. Forgive me, I guess you don't call it a product anymore. Yes. Can you just maybe go over the sort of suite of offerings.

Yes, absolutely. So I think Wag! and, as you said it right, I should say Wag! really loud, but we're on a call, so I'm good, is most famous for the on-demand dog-walking product. And so that business kind of started in 2015, it's right when Uber was really heating up. And it was like, well, if you can do it for rides and black cars, why shouldn't you do it for your pet? As most people know, dog walking historically is a service that requires usually a big budget and a real commitment, right? It's $500, $600, $700 a week. It's every day at 2:00 with the same person and a group of dogs. In a lot of people, that doesn't necessarily work, right? So the on-demand dog-walking product for Wag! is really amazing. It is basically real time, you can find a great walker in your neighborhood in less than 15 minutes. You submit a request at the Wag! mobile app, it goes out to the network of caregivers. Believe it or not, there's more than 450,000 background checks of preapproved caregivers in the Wag! platform. And that's kind of the headline most famous Wag! product. And since then, we've expanded a bunch of other products and services because we have this high-frequency use case. So think of things like one-on-one dog training, overnight sitting and boarding while you're away, wellness and insurance plans with our partners like Lemonade and then, most recently, pet food and treat advice through Dog Food Advisor. So we really, again, want to capture the full circle of pet spend. And the way we can do that is because it's just a high-frequency use case. The average Wag! customer is using us something like 4 to 5 times a month. And the premium customer uses us like 7 to 8 times a month.

All right. Got it. Who would you say you compete with?

Yes, there's 2 big players. The first is going to be all of those families and friends and kids and neighbors on places like next door. And I'm sure when you walk down the street in New York, you might see it on a flyer, right? Even Craigslist still is somewhat of a competitor we think about. But most of the market is still off-line. Most of the market for sitting and boarding and walking and training and everything else is found through kind of these local pros or even friends and family. The second is going to be some of the online aggregators. So we think certainly about Care.com, Yelp, Rover, who have kind of a listing engine, but we're really like the booking experience engine. So it's very different, right? I think those are very like Web 1.0 products. We're very like Web 2 or 3.0. Our product is really managed, holistic, you pay for the product, you pay for the platform. You get a really consistent experience. It's something like, at this point, 12 million-plus reviews and the average rating on the product, on the service is 4.97. So like just you can't compete with that.

Yes. Yes. Well, you brought up something which I think is important because a lot of investors seem to compare you quite directly to Rover. If you'd like to just compare and contrast the business offering, might be helpful.

Yes. Yes, I mean, Rover has got a really great, I think, like travel business. It's much more akin to maybe an Airbnb, right? The majority of that business is going to be sitting and boarding. The majority of that business is going to be long-duration overnights, 3, 5, 6, 7 nights away. But the frequency is actually pretty low. I think it's something like 2 to 3 times a year at best. Wag!, on the other hand, is super high frequency, majority daytime services. So 5 to 7 times a month, 50-plus times a year, really like mobile first use case where you just get a great person that show up at your house, no one is there. And that allows us the optionality for things like Wag! Premium, which is our subscription product, a lot like Amazon Prime. For $14.99 a month, you get a bunch of other benefits. That product is subbed by something like 50-plus percent of the Wag! audience, the Services audience. So just there's a bunch of other things that are corollary but not quite the same. I think about it as like Uber and Airbnb, right? They're both like products that you might have on your mobile device or you search on the web for, but they're ultimately different fundamental use cases. And I think Uber is a great example of building a great platform. I think it's a little bit tougher to do that when you don't have the frequency. So we really lean into the fact that you're using Wag! every week.

All right, I see. And so how do you -- I guess it must be very difficult to know that what share you're taking in a market or so much as friends and family or whatever you want to call it. But maybe versus the things that you can look at, whether it's Rover or anything else that's kind of available, how has share been trending? And what are your plans to keep gaining share?

Yes, I mean we're really early. So I think it's important to note, as I said earlier, Wag! is a majority daytime use case, right? So it's like, hey, you're at the office and your poor pup is alone at home all day today. So you're going to book a Wag! walk today to get that dog outside for 20, 30 or 60 minutes. The catalyst for the majority of services are things like back to work, back to office, back to some level of travel. And those are all future tailwinds for us, which we're really excited about. And when you take those things into account, we're still less than kind of 5% of Services spend in terms of the total category this year. Meanwhile, I think like travel is certainly back, probably stronger than ever, and all those tailwinds have kind of been recognized. So we think about it as like certainly a lot of room to run as people resume back to normal life post-pandemic. And I know those tailwinds are really like back to office, back to conferences, back to living their life and taking trips. Yes, that's how I think about the use -- the kind of trigger of the use case.

Got it. How do you -- and maybe we connect this to customer acquisition costs, but how do you increase brand awareness? How do you get people on to the -- like initially get that app downloaded? Perhaps what it costs and then we can get into kind of LTVs and such.

Yes, yes. So we have a $350, 3-year LTV and growing. It's something up -- it's up something like 3x in the last 2 or 3 years. And that's a function of us capturing more share of wallet and experience and transaction count from the customers that we have. Majority of customers are going to find us through the Google Play Store and the Apple App Store. We're a top 50 or 100 travel app at any given time. We have tens of thousands of ratings. People love it. The other thing that's actually really interesting is we have a lot of caregivers who refer their friends and family. So the caregivers on Wag!, it's really important to note this, they're not a professionalized supply. They're not like a professional dog walker in New York who now wants to walk dogs on Wag!. That's not how it works. What it normally is, is it's a person who loves dogs. It might be a college-aged female who would never drive for DoorDash or Uber, but really wants that gig economy income, and Wag! is a perfect way to do that. It's a daytime use case. It's usually in the middle of the day. No one is usually home, and you walk a really cute dog or take care of a really cute cat for 20, 30 or 60 minutes. There are other corollaries like these seniors, maybe these retirees who are very active. They love taking care of pets. And they don't really want to manage a book of business. They actually love referring customers to Wag! for us. And our LTV to CAC last quarter was something like 7:1, so we actually have a lot of room to run there. We've been very focused on profitability. It was our first quarter of kind of EBITDA profitability, so -- adjusted EBITDA profitability, I should say. So I hope that answers your question.

Okay. It's a good lead to the next question. The question we've been asking everybody really during the conference, which is balancing growth versus profitability. The opportunity is logical. It makes sense and substantial. We're in a different world than we were in maybe 3 years ago, 2 years ago. How are you managing that balance? Where are some of the key areas of focus to continue along the path of profitability, which you're there now or you've started, but it's a path? And then what needs to come off the top? How long do you expect it to impact top line?

Yes. I think last quarter, we're still guiding to 50% year-on-year growth for the year with now adjusted EBITDA profitability. We have not seen a significant impact to the premium Pet Parent that maybe others might be seeing. So that's an important first note. We've been really focused on these Tier 1, Tier 2, even Tier 3 markets. You're talking to places like New York City, Denver, Seattle, those Pet Parents are very resilient and committed to dollars. Now meanwhile, I think that you're certainly right, 3 or 4 years ago, I remember everyone telling me it was grow, grow, grow at all costs. That was a crazy time to be operating. It certainly feels like now it's growth, margin and profit. We have something like 95-plus percent gross margins. We've guided this year to more than 1% of EBITDA profitability, but we still feel like there's a lot of room to run for growth. I don't think that's going to change. I think growth, margin and profit is going to be next year's goal and the year after. I don't see us returning to growth at all costs in this current environment anytime soon.

When I think about where you're spending money, areas of investment, whether it's marketing and cash in right now or capital outlays, what are some of the big areas of focus?

Yes. We're really focused on building delightful products, first and foremost. So I think we've really led the charge on inventing the category and then finding new and innovative ways to deliver great experiences to Pet Parents. Where that's the fact that we basically invented on-demand dog walking, we recently acquired Dog Food Advisor and then scaled that to Cat Food Advisor. We operate the largest pet insurance marketplace in the U.S. We haven't talked about that, but we partnered with the leading pet insurance companies to help them find great Pet Parents. And we have a business that we work with called Paw Protect, which is literally one of the most amazing pet insurance products in the U.S. generated by Embrace, provides instant pay at the time of transaction, you have to deploy your credit card. It's such a phenomenal product. These are all things that are a function of R&D. Sales and marketing will obviously follow, and we'll lean into sales and marketing as efficiently as we can. I think we've generally guided to 3 to 5:1 LTV to CAC depending on the quarter, and we have some seasonality broadly in the business. And then finally, I think we'll continue to be thoughtful about opportunistic M&A. It's a very difficult fundraising environment for the majority of companies. And we've been really privileged now being an adjusted EBITDA profitable company, we're guiding to free cash flow at some point next year. And so I think we'll continue to be really thoughtful about opportunities to acquire small assets that we think we can kind of integrate into our ecosystem and platform and build it into something really special.

I want to get back to M&A, but you mentioned something, which I think is important, is a lot of the market is concerned about what's happening with discretionary spending in the pet space. You mentioned earlier that hasn't impacted you much. So can you just maybe build on that a little bit? Why do you think that is different from many? And so anything you can -- any insights there would be helpful.

Yes, it's really fascinating. So when times get tough, most people, most Americans, most households are actually like doing things that they didn't do during the pandemic. So let me give you an example. When times get tough at work, you actually start showing up at the office more and maybe traveling for work more and being more visible. Those are catalysts for Wag!. You're now out of the house. And it's a forced use case. I think about it like when your toilet stops working, you're not just going to leave it. You have to call the plumber. When your dog is inside and they're stuck inside for 9 hours a day, you have to call somebody. We are that call metaphorically. The other things are true. Like I think we have not been dependent on travel broadly, but as business travel comes back, it's a great use case for Wag!. These are Tier 1, Tier 2, Tier 3 premium households. They're not going to downgrade their pet spend. It's not an option. There's nowhere else to go. And we don't see it really impacting things like generally wellness or pet food because, again, we're selling premium products. People that are buying pet insurance are probably very interested in services or premium pet food or premium treats or CBD or whatever it might be. So we've been really intensely focused on assets and products that appeal to those consumers for that particular reason. Maybe you just look at the pet spend between, let's say, '07 and '09, it wasn't really that different. Sure, the mix changed a little bit, but the numbers still kept growing. And so I think we continue to be bullish on the category.

How should we be thinking about -- let's get back to M&A. So EBITDA positive, free cash flow is still coming. Can we talk about your cash balance? And you're kind of alluding to M&A. Is it contingent on when you get to free cash flow positive and then something to look at and we're kind of talking about it now? Or is -- do you see something...

No. I mean if you just look at the business in our history, we've been generally acquisitive, whether that's small tuck-ins or even some bigger stuff. Cash is not the hindrance for us, it's really the quality of the asset. What's really interesting for us is there's very few pet businesses like us who can absorb smaller assets and give them a fantastic reach, ultimately. It's not really a fit -- these smaller assets aren't really a fit for private equity. They're not really a fit for retailers. They're not really a fit for these huge companies, maybe like a Chewy, I don't speak for them, but they haven't been super acquisitive. Meanwhile, us, our customers expect lots of new products. They love e-mail offers. They love hearing from us and trying new things in the app. We have a thing called the Premium Benefit Center. We integrated products from maxbone recently, the premium pet retailer, which is like leashes and harnesses and other awesome little products. So our customers have come to expect it, and the buyers aren't necessarily there for these assets. So for us, it's just about being picky. We want to find the right asset, give our shareholders the right level of return and make sure it's not going to be a drag on the P&L. So we can't buy these cash-incinerating machines, right? We need to buy things that are fundamentally sound and we can help accelerate, but ultimately at, hopefully, some level of profitability.