Rover Group Inc (ROVR) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by, and welcome to Rover's Fourth Quarter and Full Year 2021 Earnings Results Conference Call. (Operator Instructions) I would now like to turn the conference over to your speaker host today, Brinlea Johnson of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us to discuss Rover's Fourth Quarter and Full Year 2021 Earnings Results. In this call, we'll be discussing the results announced in our press release issued after the market close, which is available on our Investor Relations website at investors.rover.com.

As a reminder, this call is being webcast live from our Investor Relations website and is being recorded and will be available for replay from our Investor Relations website shortly after this call. With me on the call this afternoon is Aaron Easterly, Chief Executive Officer and Co-founder; Brent Turner, President and Chief Operating Officer; Tracy Knox, Chief Financial Officer; and Charlie Wickers, VP of Finance at Rover.

Before we begin, I'd like to remind everyone that management will make certain forward-looking statements on this call that reflect our current views and expectations related to our future financial performance, such as our 2022 financial guidance, future events and industry and market conditions as well as forward-looking statements about Rover, its platform and its market opportunity.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. We strongly encourage you to review the information that Rover files with the SEC regarding specific risks and uncertainties, in particular, those that are described in the Risk Factors section of Rover's final prospectus filed with the SEC on November 22, 2021, and in Rover's Form 10-K to be filed for the year ended December 31, 2021.

These forward-looking statements apply as of today, and we undertake no obligation to update these statements to reflect subsequent events or circumstances, except as required by law. You should not place undue reliance on our forward-looking statements as they are not guarantees of future performance.

Finally, during the course of today's call, we will discuss audited and unaudited GAAP and unaudited non-GAAP financial measures. We provide a reconciliation of the non-GAAP measures to the most comparable GAAP measures in the investor presentation, which is posted under News and Events on the Investor Relations section of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to GAAP financial measures. Also to note, while our year-over-year comparison to 2020 shows a dramatic improvement, what is most notable are robust results relative to pre-COVID levels during 2019. Therefore, unless otherwise noted, we will compare all Q4 and full year 2021 metrics to Q4 and full year 2019 in this call.

And with that, let's get started. I will turn it over to Aaron Easterly, Co-Founder and CEO. Aaron?

Well, thank you, Brinlea, and thank you, everyone for joining us today. I will begin by discussing our fourth quarter and full year 2021 earnings results, followed by outlining 5 key aspects of our business that I believe are critical to understanding Rover's business model and opportunity. Then I'll turn it over to Brent Turner to provide you with more details on our bookings, marketing and operations. Tracy Knox will then conclude by walking through the financials and our guidance.

Overall, I am thrilled with the results the team delivered in 2021. Despite multiple material COVID waves in the second half of the year, a time in which we believe there will be a general easing of pandemic headwinds, the business performed better than we had expected. This overperformance was across many key metrics, including revenue, customer acquisition costs, unit economics and profitability.

Revenue of $110 million was up 125% year-over-year and up 16% over 2019. Gross booking value, or GBV, grew 124% versus 2020 and 20% over 2019. Additionally, we generated our first full year of positive adjusted EBITDA, reporting $12.4 million. I am really excited about the operating leverage in the business as we scale and our ability to generate positive cash from operations. Despite Omicron we reported strong fourth quarter, with revenue up 189% over Q4 of 2020 and up 41% over Q4 of 2019.

Fourth quarter GBV was $166 million, our largest GBV quarter ever, driven by both an increase in total bookings to 1.2 million as well as increasing average booking values. While we continue to manage for long-term profitability and enterprise value, not short term, the recent gains in profitability demonstrate our strong operating leverage as the business scales. In the fourth quarter, we delivered adjusted EBITDA of approximately $8 million, marking Rover's third consecutive quarter of positive adjusted EBITDA.

Now I'd like to highlight 5 key realities that gives us confidence in our ability to achieve our long-term goals. First, Rover operates in a large market segment in a rapidly growing industry with several natural tailwinds. The backdrop of our business is incredibly positive. U.S. pet ownership is at an all-time high, spend per pet increases over time, pet services are expected to grow noticeably faster than the category in general, and we expect the shift towards digital will continue. Rover benefits from all of these trends. Second, we are the clear category leader with strong competitive modes.

Our proprietary data assets and technology fuel network effects. We have spent 10 years collecting data on a broad and unique set of service providers, this allows us to optimize the marketplace and improve our matching algorithms. Third, our margins are high and expanding. In 2021, our non-GAAP gross margins expanded to 83%, up from 81% in 2019. We have not seen inflation impact our gross margin. Our marketplace is about mass customization of pet care and pet care providers are empowered to set their own prices based on the specifics of their operates. Our experience has been that these prices increased naturally with inflation, which we believe will be a natural inflation hedge.

Fourth, our business model has limit CapEx requirements. Our ability to service an increasing number of pet parents is based on attracting and retaining pet care providers, not building more facilities in new locations. As such, over time, we expect a material portion of our incremental revenue to translate into free cash flow as opposed to being reinvested in capital expenditures.

And finally, we have strong unit economics driven both by high gross profit per customer and low customer acquisition cost dynamics. Despite Delta and Omicron gross profit trajectories per recently acquired customers are at or near all-time highs, which drives increasing customer lifetime values. Customer acquisition costs for 2021 were an all-time low, driven by optimized marketing spend and the word of mouth dynamics. While we expect to reinvest some of these gains in marketing, the combination of high LTV and low customer acquisition cost allows us to continue to scale customer acquisition efficiently.

Rover is haying into 2022 stronger than ever. We are incredibly optimistic about the opportunities ahead of us. We have high confidence in our ability to execute and believe we can move the needle on our mission, making it possible for everyone to experience the unconditional love of a pet.

And now I'd like to hand over the call to Brent to provide more detail on our bookings and operational performance.

Thanks, Aaron, and greetings to everyone on the call. I'd like to provide a bit more color regarding the performance of the business and areas of recent investment for Q4 specifically, but also for the full year 2021. I'd like to start with a few comments about new customer acquisition. In Q4, worldwide new customer acquisitions were 215,000 and an increase of 30% from 2019. Put another way, Q4 growth over 2019 was roughly steady to that of Q3, notwithstanding the emergence of Omicron in the back half of the quarter. As we mentioned on our Q3 call, the vast majority of our customer acquisitions are currently in the United States. It is worth noting, however, that Q4 saw a very meaningful acceleration in growth in European new customer acquisitions alongside a small amount of cooling in Canada. We believe that COVID case dynamics roughly explain both results.

Turning to customer acquisition costs. Worldwide CAC in Q4 was $13 compared to $42 in Q4 2019, and a modest step-up from $10 in the previous quarter. As we mentioned in our Q3 call, we believe the continued durability of our organic channels and word of mouth have been very helpful in keeping customer acquisition cost efficient as we increase marketing spend. The enthusiasm with which new customers tell others about their experiences on Rover is amazing and a very strong validation of our efforts to ensure that every single service goes well.

However, I would like to say a few additional things about marketing investments that we made during the pandemic to shed more light on our marketing efficiency today, especially compared to 2019. We embraced 2020 and 2021 as an opportunity to make meaningful improvements to our marketing platform and measurement approaches. Here, our goal is to make investments that would improve the efficiency of our paid marketing in the post-pandemic period. We also made significant investments to improve our organic ranking in search. We combine these improvements with a near total reduction in spending in video and social channels that made less sense to run during the pandemic. This overall approach provided fantastic early returns for the full year 2021. Worldwide new customer acquisitions were 804,000, up 21% from 2019, while worldwide customer acquisition costs were $10, compared to our 2019 cost of $39, a dramatic reduction of 74%.

As we move into 2022, these improvements, especially in combination with the strong financial performance of our recently acquired customers, create an exciting prospect for us. Specifically, we expect to be able to accomplish record levels of new customer acquisitions at unit economics that are meaningfully better than our pre-2020 norms. Before discussing total bookings, it is helpful to narrate the seasonal differences of booking volumes. We historically experienced seasonally high bookings in Q3 during peak summer travel.

Total bookings then stepped down slightly for Q4 for the holidays, stay approximately flat in Q1 before ramping again in Q2 as summer travel starts. GBV, however, tends to peak in Q4 and not Q3 due to higher average booking values associated with longer duration stays. Against that backdrop, total bookings in Q4 were 1.2 million, up 10% compared to 2019. Repeat bookings were 998,000, up 6% compared to 2019. Here, strong repeat performance from new customers has offset a shortfall from pre-pandemic customers that have yet to fully return.

I'd like to now share some highlights from our product investments during 2021. In short, our product marketplace and engineering teams were quite productive throughout the year. Most importantly, we listen to our owner and provider customers carefully and delivered several enhancements to our marketplace experience that were among the most often requested. For example, we rolled out a tipping functionality that enables owner customers to tip their care providers without their tips being subject to our take rate.

We implemented a capability for owners to pay for partial days of care at the beginning or end of overnight stays, addressing a major pain point for care providers. We enhanced our care provider listings to do a better job of highlighting newer providers to help them get their businesses started, addressing requests of new provider entrants to the marketplace.

And we made usability improvements across all of our apps. These reduce friction and are always appreciated by our community. Finally, our trust, safety and operations team is focused primarily on rescaling our team, while meeting our customers with excellence at every touch. For example, we have completely retooled our employee onboarding and training process to be remote friendly. This has been critical in preserving our momentum.

We are also making improvements to our policies to make our marketplace safer. For example, we upgraded enhanced background checks to be compulsory for every new service provider versus as an add-on to the basic check. In short, we are pleased with the results of our investments to date and the quality of our execution in 2021. We feel we have put Rover in a position to continue to pursue our goals in 2022.

And now I'll turn it over to Tracy to walk through our financial performance.

Thanks, Brent. I'll begin today by providing an overview of our financial results for the fourth quarter and the full year of 2021, followed by guidance. Unless noted otherwise, I'll be comparing our fourth quarter and full year results to the same periods in 2020, and also to 2019, a more relevant comparable period in 2020, due to the impact of the global pandemic. At the highest level, we had a year of strong revenue and achieved our first full year of positive adjusted EBITDA and free cash flow.

Now let me get into the details. Revenue in the fourth quarter was $38 million, up 189% from the prior year and up 41% over 2019, while fourth quarter GBV was $166 million, up 193% over the prior year and up 44% over 2019. Fourth quarter 2021 revenue and GBV were the highest in any quarter in Rover's history. Further, full year revenue of $110 million came in at the top end of our guidance range, despite the surge in COVID with the Omicron variant in the back half of December.

Brent already discussed bookings, but I want to give a little bit more color on ABV. We had material growth in ABV, which was $137 for the quarter, up 35% over 2020 and 31% over 2019. We attribute approximately 60% of the ABV change to increases in the prices set by our care providers and a higher mix of new versus repeat bookings. 35% to longer duration bookings compared to the prior period and the remainder from the increase of our take rate structure that we implemented for new pet parent customers that we acquired since January 2021.

Moving on to expenses. Cost of revenue in the fourth quarter was $8 million or 21% of revenue compared to $3.9 million or 29% of revenue in the prior year period and $6.4 million or 24% of revenue in Q4 2019. The 800 basis point improvement compared to Q4 2020 was driven by the scaling of revenue and leverage achieved on the portion of costs that are more fixed in nature, namely amortization of internally developed software and certain technology platform costs. When compared to Q4 2019, cost of revenue as a percentage of revenue improved 250 basis points, primarily driven by improvements in background check costs, as well as technology, platform and customer claims expenses.

As we turn to our other expense line items, I will be discussing non-GAAP amounts, which excludes stock-based compensation expense, as this expense increased significantly in Q4 due to catch-up, granting and vesting of our annual equity grants to employees, which was delayed by the closing of the SPAC transaction and subsequent filings required by the SEC. Non-GAAP marketing expenses were $5.9 million in the fourth quarter, up 148% over the prior year as we've continued to ramp our marketing investments. As Brent mentioned, we have seen strength in our organic acquisition channels, primarily word of mouth and free search listings.

As a result, our marketing expense, excluding stock-based compensation has remained very efficient, improving from 18% in Q4 2020 to 16% of revenue in Q4 2021 and is down 32 points compared to 48% of revenue in Q4 2019. Fourth quarter non-GAAP operations and support expenses were $4.6 million or 12% of revenue compared to 18% of revenue in both Q4 2020 and Q4 2019. The 600 basis point improvement is driven by the leverage achieved on our increasing revenue base. We saw even more leverage in the non-GAAP product development expenses, which were $5.3 million or 14% of revenue for the quarter compared to 31% of revenue in Q4 2020, and 24% of revenue in Q4 2019.

Fourth quarter non-GAAP general and administrative expenses were $10.1 million or 26.6% of revenue and included $1.5 million of one-time stack and secondary offering transaction-related expenses. While we did see leverage on these G&A expenses relative to 2020, the improvement was offset by the increase in public company-related expenses, which include a new D&O insurance program, increased professional services, as well as additional headcount needed to support our operations as a public company.

Moving on to other income and expenses. In Q4 2021, we accounted for changes in the fair values of the earnout and warrant liabilities associated with the merger, which resulted in Q4 other income of $39.6 million. This change in fair value flows through other income during the period, resulting in a total net income of $33.9 million. Now that the remaining earnout liability is accounted for under the equity method, it will have no further impact to our other income loss. The final surge value adjustments for the warrants were recorded in January of 2022 aligned with their redemption. In summary, with our strong business performance on both top and bottom line and our minimal CapEx requirements, we delivered free cash flow of $7 million during 2021 and ended the year with approximately $279 million in cash and cash equivalents on our balance sheet.

Now turning to guidance. For the first quarter of 2022, we expect revenue of $25 million to $27 million and negative adjusted EBITDA of $5 million to $7 million. As a reminder, Q1 is our seasonally low revenue period. Additionally, Omicron's persistence into Q1 resulted in an estimated $6 million reduction of revenue due to softened demand and a higher cancellation rates. Furthermore, the Easter holiday is mid-April this year versus early April in 2021, which will likely result in a portion of the GBV booked in late Q1 to be recognized upon the actual start of holiday stays in early Q2. Given the high gross margin and flow-through of revenue to our bottom line, this reduced revenue also has a noticeable effect on adjusted EBITDA for the quarter.

For the full year of 2022, we expect revenue of $160 million to $180 million and adjusted EBITDA of $17 million to $21 million. Overall, the pandemic has persisted longer and varied more than we had originally anticipated, and it continues to bring uncertainty in the near and medium-term. As a result, the lower end of our full year revenue guidance assumes material impact from potential new variants in 2022 in addition to the full year revenue reduction related to Omicron.

The high end of our revenue guidance assumes no material impact from new variants, but it does include modest ongoing impacts. We believe that as the pandemic had ended in the back half of 2021, like we had originally hoped, we would be well positioned to deliver revenue exceeding $200 million in 2022. With that said, we continue to be very excited about the underlying health of the business, the unit economics and our ability to drive positive adjusted EBITDA and ultimately, free cash flow.

Before I turn it back to Aaron to open it up for Q&A, I did want to take a moment to address the news announced today regarding my upcoming retirement later this year and the planned transition of the CFO position to Charlie Wickers on September 1. I want to thank you all, Aaron and the leadership team, our talented set of employees and our shareholders for your continued support. I can't emphasize enough how much I've enjoyed my time at Rover and the opportunity to help build this amazing company. And I'm committed to ensuring we have a seamless CFO transition. Charlie continues to impress us all with his financial acumen, his strategic mind and his outstanding leadership skills, and I'm beyond excited to watch Rover continue to prosper and grow.

With that, I'll turn it back over to Aaron.

Thank you, Tracy, and thank you again for being part of our team. Rover changed for the better the day that you joined. While I knew Rover was likely to be your last full time role before retiring, it is still incredibly sad to see that day actually come to fruition. We are thankful for the 5 years you have dedicated to the company. Your commitment to the company is a testament to who you are as a person. We truly appreciate all that you have done.

Operator, can we please now open it up for Q&A.

(Operator Instructions) Now first question coming from the line of Ralph Schackart from William Blair.

First question, just on guidance, I want to make sure that I fully appreciate this. So you talked about had it not been -- I'm sorry, Omicron or COVID ended in the back half of last year, you would have done, I think, about $200-plus million in 2022. But if you sort of annualize the low-end of the guide, it contemplates roughly about a $10 million or so headwind, I guess, from COVID. Just want to be clear that the low-end of the guide would contemplate, I guess, another variant or a continuation of a more prolonged COVID environment. Any more color you could add that would be great.

So it absolutely does assume ongoing -- a couple of ongoing variant waves. So Omicron impacted Q1 by about $6 million, but we estimate that it would have 2x to 3x more impact annually. So for the next 12 months is 2x to 3x that. So the low-end of guidance assumes another 1 or 2 of those variant waves. The high-end of guidance still is impacted by the ongoing pandemic. It might be helpful to think back to last year when we went into 2021, we had projected 2 things would happen. One was that we projected the vaccine would be fully rolled out by the end of summer. And the second thing was that the pandemic would be completely over by the end of the year. So not only was the pandemic not over, but we had the Omicron impact on top.

So the guidance incorporates 3 things. One is that the pandemic is ongoing and we're going to see ebbs and flows from that, modest impacts from that. The second is that Omicron impact, which is factored into the full year. And the third, which is what causes the variation between the low and high is the potential for a couple more variants this year. Does that help?

It does. Just a follow-up, if I could, please. So I guess we're sitting here in kind of early-ish March. Just curious sort of what activity you're seeing that states with the strictest mandates are easing, people are going back to work. Just curious what activity you're seeing now and just in terms of activity of the customer base and cancellations.

Sure. Maybe I'll just say the guidance takes into account what we had been seeing through the end of February, like, as of a week ago. But I can ask Aaron to expand a little bit more on what we've seen in recent weeks and...

We are definitely seeing recovery from Omicron, and we're starting to see more seasonal ramp as well. We continue to perform better than the travel industry as measured by TSA data. So on a good trajectory, but still some uncertainty in the future.

And our next question coming from the line of Maria Ripps from Canaccord.

Tracy, best of luck going forward, and Charlie, congrats on your new role. A couple of questions here. First, I just wanted to follow-up on your full year outlook, sort of, what's embedded in your full year guidance both from paid marketing investment standpoint and maybe other investments? Are there any sort of benefits from those investments that you are incorporating in your kind of full year outlook -- revenue outlook? And then I have a quick follow-up.

Sure. In terms of what's embedded in the guidance, there are 3 things in the operating expense line items. One is within marketing, we do expect to continue re-ramping that spend. I think in 2021, it was 17% -- we ended around 17% of revenue. And if you think back to our longer-term targets have us more at that 25% range. So as we re-ramp, we'll be somewhere in between those 2 numbers. And then we also noted, we're going to be investing in tech and product enhancements throughout this year. It takes -- those product enhancements will launch throughout the year, and then you get the benefit in the go-forward period. So our guidance includes the benefit from the product enhancements that we made last year. And the benefits from those product investments will be go-forward.

The third component is the public company costs within the G&A line item. And you saw that G&A pop in Q4. Part of that was just due to transaction expenses related to the SPAC and the secondary that we did, that was about $1.5 million. And then we also had the increase in stock comp. If you strip those 2 things out, you can see what the fully loaded -- the mostly fully loaded G&A expense was with the public company costs. Hopefully, that's helpful. Go ahead.

That's very helpful. And my second question is, can you maybe just talk about your partnership with Petco? And I guess a couple of questions here. One, from the consumer standpoint, is this offering going to be in any way different from sort of what consumers can see on your core platform? And then secondly, how should we think about sort of the economics and incrementality of this partnership?

This is Aaron. Maria, thanks for the question. So the Petco deal will promote Rover initial benefit as part of their vital care package. In general, we think it will be incremental, and we expect those customers to be profitable for us. We do not envision a lot of risk to that partnership not being profitable. We're excited in general. Rover has built a really unique asset within pet services, and one that we don't think is particularly easy to replicate. So when the companies that are innovating in the pet space like Petco, feel like Rover is an important element of their go-forward strategies. We view that as a sign for optimism and we feel honored to be approached by and large players in the industry when they come to us.

(Operator Instructions) Our next question coming from the line of Tom White from D.A. Davidson.

Congrats on a nice end of the year, and congrats Tracy on your retirement, and to your new role, Charlie. I had one and then just a quick follow-up if I could. I guess the first one is for Aaron. I was hoping you could talk a little bit about kind of balance in the marketplace entering 2022. I feel like over the last several months, you guys have talked about feeling really good about the amount of supply and the number of caregivers in the marketplace. But from what I understand, it's really sort of a market-by-market kind of optimization kind of problem for large marketplaces like yours.

And you've had a lot of people kind of moving around the country over the last couple of years due to work from home and work from anywhere and all that stuff. So maybe just comment a little bit about kind of how you're feeling about having appropriate supply of caregivers in the right spots. And then just secondarily, can you maybe talk a little bit about how you're thinking about higher gas prices and kind of the impact on travel and how that might be reflected in the guidance?

Sure. Let me start with the first one around the caregivers. At the high level, we are -- feel like we're better positioned on the supply side than we've been in years and that we're well positioned to scale the business appropriately. So we don't see any additional headwinds than we have seen in the past and if anything we feel better about it. And there is a couple of dimensions to that. We've gotten smarter about how we manage our service providers and how quickly we can activate new ones and get them involved in doing business. And so that's positive.

The people moving around the country, we also think is positive for us too. In general, Rover is something as people move, they can build a new book of business pretty quickly on the supply side. And on the demand side, if people move around the country, they are more likely, we believe, to seek out our services to begin with, because they may have less of a social network of friends, family and neighbors in their new location to lean on, which has been historically the primary method of care provided to pets when their owners are away.

So the last dimension on the supply sides, we're talking about is our cat business continues to grow nicely. The share of our bookings that involve a cat or cat only continues to increase, and it's an even larger share of first-time customers. The supply side attached to cat scales even more nicely than boarding, because typically, that's service through a drop in offering where someone comes in for half an hour, changes the litter box, puts out food. And so a single service provider can service many customers in a given day. So overall, we feel good about our supply position and the travel around the country dynamics, move around the country, we think is probably positive for our business.

With regard to the second question, gas prices. Well, it's definitely the case that gas prices can affect the economy, I would say that we are not in a position to understand exactly how that may or may not affect travel. The amount that actual ticket prices go up or the amount people will engage in travel, the function of the ticket prices is probably beyond our area of expertise. And that being said, I think our baseline assumption is that easing of pandemic headwinds is probably more important to our business as it relates to travel dynamics than gas prices.

And our final question comes from Lamont Williams at Stifel.

How are you thinking about new services? I know last quarter, we talked about grooming. Is there anything reflected in the guidance for next year for any new service lines?

Lamont, yes, we -- from a very long-term perspective, we are uniquely positioned in the industry become the only scale player that does what we do. And we think that uniquely positions us to expand into other categories and other service offerings. That being said, when -- in our guidance that we've given, we're only including those businesses that we're in as of today and have not considered incremental revenue that may come from additional or new offerings.

And then that's kind of a separate question. Have you seen the cancellation rate start to normalize as you come through February and entered March?

Lamont, this is Charlie. From a cancellation rate perspective, we did see it elevated in Q4, and we did see that continue at least through the start of the year, and that's partly what has informed our guidance. So it has remained elevated relative to pre-pandemic norms, which is typically 9% to 10%. Q4 just as a reference was all the way up at 16%.

And I'm showing no further questions at this time. I will now turn the call back to Mr. Aaron Easterly for any closing remarks.

We deeply appreciate everyone taking the time to again update on the Rover's performance over the fourth quarter and for the full year. We remain incredibly excited about the future of the business. We have natural tailwinds and a privileged competitive position with powerful leverage as we scale the business and incredible unit economics. We look forward to the future. Thanks again.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.