Rover Group Inc (ROVR) 2022 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rover First Quarter 2022 Earnings Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Brinlea Johnson.

Good afternoon. Thank you for joining us to discuss Rover's First Quarter 2022 earnings results. In this call, we'll be discussing the results announced in our press release issued today 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 I begin, I'd like to remind everyone that management will make certain forward-looking statements within the safe harbor provisions of the Securities Litigation Reform Act of 1995 on this call, identified by the words expect, believe, will, assume, ongoing, and similar expressions. Forward-looking statements are based on then-current expectations, estimates, forecasts, and projections, and the beliefs and assumptions of management and relate to our future financial performance, such as our second quarter 2022 and full-year 2022 financial guidance, transfer our GAAP and non-GAAP marketing expense as a percentage of revenue, marketing investments and initiatives, bookings upside, financial impacts of our warrant redemption, other future events, and industry and market conditions and forward-looking statements about Rover its platform and its domestic and international market opportunity. These forward-looking statements are subject to known and unknown risks and uncertainties and assumptions that could cause actual results or performance to differ materially from those expressed or implied in the forward-looking statements.

We strongly encourage you to review this 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 Form 10-K filed with the SEC on March 21, 2022, and those that will be disclosed in our first quarter Form 10-Q. These forward-looking statements speak only as of today. Rover undertakes 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 these non-GAAP measures to the most comparable GAAP measures in the investor presentation and non-GAAP reconciliation, which is posted under News and Events Presentations 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. Unless otherwise noted, we will compare all Q1 2022 metrics to Q1 2021 metrics in this call.

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

Thank you, Brinlea, and thank you, everyone, for joining us today. I will begin by discussing our high-level first quarter 2022 earnings results and some nonfinancial highlights. Then I will turn it over to Brent to provide you with more details on our bookings and marketing investments. Tracy will then conclude by walking through the financials and our guidance.

Overall, I am pleased with our results in the first quarter. Despite the impact from COVID, including the recent Omicron variant, the business slightly exceeded the high end of our guidance range. First quarter revenue of $27.8 million was up 128% year over year. Gross booking value, or GBV, grew 137% to $153.7 million. New bookings were up 76% to $179,000, and adjusted EBITDA was negative $4.8 million, which was a 19-point adjusted EBITDA margin improvement year over year.

At Rover, we remain focused on building long-term enterprise value. During the first quarter, we made significant strides in 2 areas that are important to that goal. First, given the TAM opportunity and our strong unit economics, we'd want to expand our market investments, but to do so cost effectively. This process has been so much slower than anticipated, due to the ongoing disruption by COVID variants. In Q1, our team made material progress on this front, and going forward, we expect to have a broad array of marketing channels we will be using to drive growth.

Second, we have viewed our international footprint, Canada and 8 countries in Europe, as an important element of long-term growth and value creation. In Q1, we saw our international sales grow to 7% of GBV, compared to just 3% in the year prior. As COVID recovery has progressed, it has enabled us to reaccelerate our investment in scaling the business in Europe. While there are small players in Europe, we believe a large percentage of the market opportunity is still untapped, and Rover has the balance sheet, technology, and data capabilities to drive significant gains. We hope to build on this progress in the coming quarters.

As we noted in our Q4 earnings call, we entered 2021 with a belief that the pandemic and impact on our business would have largely ended by the start of 2022. This did not happen, and instead, other sources of macroeconomic uncertainty have additionally emerged. Despite that, Rover commenced 2022 with strong performance and traction towards our longer-term goals, and the underlying trends in the pet industry remain very exciting. While we are cautiously optimistic about some of the trends other travel companies are seeing, it's worth knowing that the vast majority of pet parents book within a month of their service needs. Overall, though, we have confidence in our future and remain centered 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'll first start by adding a bit more color regarding the performance of the business in Q1. Then I'd like to communicate a reporting change that we plan to implement as it relates to our marketing spending.

We have continued to demonstrate strong performance in our marketplace. Perhaps most notably, total bookings increased 81% year over year to $1.2 million, which is a Q1 record. We view this result as an indication of Rover's increasing traction with both pet parents and care providers as we scale.

In Q1, worldwide new customer acquisitions were 179,000, an increase of 76% from Q1 2021. Most of our customer acquisitions were in the United States, but this quarter, we also saw accelerating growth in European new customer acquisitions, alongside strong growth in Canada. We view these results as encouraging signs that both regions can become material contributors to worldwide new customer acquisitions in future quarters.

Turning to customer acquisition costs, as communicated previously, we entered the year with the intention of increasing marketing activities significantly when compared to last year. Against that backdrop, worldwide CAC in Q1 increased to $16, compared to $7 in Q1 2021. While we are deliberately increasing our marketing investment, we continue to see strong efficiencies across paid and organic existing channels.

And now to give a little bit more context on our change in reporting, beginning with our Q3 earnings release this year, we are going to transition away from disclosing CAC. Instead, we're going to focus on marketing as a percentage of revenue. The disclosure of CAC, which is a calculation of the direct cost of customer acquisition, has been appropriate during the past 2 years when the dominating majority of our spending has been concentrated in direct-response campaigns. However, Rover's strategy is to leverage video, social, and similar media and creative types to drive measurable ROI, despite their longer return dynamics. Although some companies classify the spending as awareness or brand spending, at Rover, these expenses are important to capture as a way of evaluating our investment in demand generation. They're included in our advertising expenses line, along with the expenses historically thought of as CAC. Therefore, we believe that marketing expense as a percentage of revenue will be a more appropriate metric to focus on in the future, and we plan to do that, again, beginning in Q3.

On this note, looking ahead, I would like to provide some additional color on how we expect marketing as a percentage of revenue to trend. In Q1 2022, non-GAAP marketing, which excludes stock-based compensation, was 25% of revenue, up 400 basis points from Q1 2021. Long term and adjusted seasonally, we expect non-GAAP marketing as a percentage of revenue to be between 18% and 25%. The higher Q1 percentage is reflective of the impact of Omicron as well as seasonality on our revenues. Specifically, a portion of our revenue carries over to Q2 because of spring break and Easter timing.

I'd like to now turn briefly to our existing marketing investments. We are pleased to report that based on the results of tests that we conducted in Q4 and Q1, we expect to increase spending in Q2 on our video, social, and similar channels. Further, we also expect to conduct additional testing in future quarters as we continue to execute our learning road map.

While we are excited about the progress made in our new customer marketing initiatives, we are equally excited about repeat bookings, which were $984,000 for Q1, a year-over-year increase of 82%. And while we are pleased with this record Q1 performance, we also believe that further upside remains in the long term as macroeconomic headwinds ease. We continue to leverage our CRM channels as a cost-efficient way to invite our customers back to the marketplace.

In conclusion, we are pleased with the results of our investment to date and the strength of our results this quarter. Rover continues to execute nicely, attracting new customers and building scale. 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 first quarter of 2022, followed by guidance. Unless noted otherwise, I'll be comparing our first quarter results to the same period in 2021. As a reminder, our discussion of expenses will cover non-GAAP amounts, which exclude stock-based compensation expenses.

Revenue in the first quarter was $27.8 million, up 128%, while first quarter GBV was $153.7 million, up 137%. Our first quarter revenue exceeded our guidance, driven by strength in bookings in Europe and continued increases in seasonal ABVs. Brent already discussed bookings, but I want to give a little more color on ABV.

First quarter ABV was $132, up 31%, largely driven by a 15% average increase in price per service, with a skew of higher increases in overnight services. We believe this is due to a continuation of the more significant provider-initiated price increases that started in Q2 of 2021 and as a result of our extended state billing feature, which rolled out in Q4 last year.

Moving to expenses, cost of revenue in the first quarter was $7.8 million, or 28% of revenue, compared to $4.2 million, or 34% of revenue, in the prior-year period. The 600-basis-point improvement was largely 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.

Non-GAAP marketing expenses were $7 million in the first quarter, up 173% over the prior year, as we've continued to ramp our marketing investment in mid- and upper-funnel channels, as noted earlier by Brent.

First quarter non-GAAP operations and support expenses were $5 million, or 19% of revenue, compared to 18% of revenue in Q1 2021, driven by hiring ahead of the seasonal increases we expect for summer travel.

We continued to see leverage in non-GAAP product development expenses, which were $5.2 million, or 19% of revenue for the quarter, compared to 34% of revenue in Q1 2021.

First quarter non-GAAP general and administrative expenses were $9.2 million, or 33% of revenue, compared to $6.1 million, or 50% of revenue, in Q1 2021. The increase year over year in expense is a result of the investment needed to support our transition into the public markets, while the decline on a percentage basis is due to our scaling of revenues from our COVID-depressed Q1 2021. In addition, there was a sequential decline in expense from Q4 of $900,000. The sequential decline is due to the onetime costs in Q4 related to our secondary transaction.

Moving on to other income and expenses, in Q1 2022, we recorded a $4.6 million gain as we accounted for the remaining change in the fair value of the derivative warrants aligned with the redemption in January 2022. This change in fair value flows through other income during the period, resulting in a total net loss of $8.1 million. Now that the warrants have been redeemed, they will have no further impact to other income loss.

Adjusted EBITDA was negative $4.8 million, or a margin of negative 17%, up from the adjusted EBITDA margin of negative 36% in Q1 of last year. The improvement in adjusted EBITDA margin resulted from strong revenue, paired with ongoing operational expense efficiencies during the quarter. From a liquidity perspective, our total cash, cash equivalents, and investments of $279 million remained flat from Q4. In summary, our business delivered strong top- and bottom-line results during our seasonally low and Omicron impacted period.

Now turning to guidance, for the second quarter of 2022, we expect revenue of $41 million to $43 million and adjusted EBITDA of breakeven to $2 million. This guidance reflects expected ongoing growth of 67% to 76% in our top line, while continuing to invest in marketing initiatives ahead of the summer travel season.

For the full year 2022, we are reiterating prior guidance and expect revenue of $160 million to $180 million and adjusted EBITDA of $17 million to $21 million. We last had the chance to update you on March 7, which was 9 weeks ago. In that period of time, we have seen increasing case counts in the Northeast and continuing ebbs and flows in other regions. The low end of our guidance continues to assume material impact from new variants in 2022, in addition to the full-year impact related to Omicron. The high end of our revenue guidance assumes no material impact from new variants, but does include modest ongoing impact. The midpoint of our adjusted EBITDA range implies an 11% adjusted EBITDA margin, approximately flat with the full year 2021, and is inclusive of a normalizing investment in marketing, a scaling investment in product, and a full year of public company costs.

Looking ahead, we continue to be very excited about the underlying health of the business, the unit economics, and our ability to drive positive increasing adjusted EBITDA.

I'll now turn the call over to the operator for questions.

(Operator Instructions) Our first question or comment comes from the line of Andrew Boone from JMP Securities.

Matt Condon on here for Andrew, and just 2 for me here. Just to pick up the marketing spend in the quarter, can you just talk about where you guys are seeing success in what channels, and maybe which ones you're going to be testing going forward here? And then, just on another note, just given some of the success that some of your competitors have talked about subscription, can you just give your thoughts on subscription and if that makes sense, especially with your skew towards boarding?

Matt, Brent Turner here. I appreciate the question. We are -- I think we may have mentioned on the script, we are currently testing channels like video, social, video in all formats, streaming and linear, YouTube, with the intent of trying to drive demand. We did some of those tests in Q4. We stood some of the tests up in late Q4. We've done some testing in Q1. We're pretty encouraged about the results early going.

This is Aaron. On the second piece, I'd say that we already have a subscription-like offering with regards to our dog walking business. In late 2019, we allowed people to sign up for basically recurring dog walking that would just be auto-billed on a go-forward basis. That's about 50% of our dog walking revenue these days, so we've seen a lot of success with that.

With regard to the broader question around other forms of packaging, pricing, subscriptions, as you said, we expect to continue to test pricing models. Anything with regards to subscription, we want to make sure that the customer value proposition is right and that there is a good value exchange before rolling it out.

Our next question or comment comes from the line of Maria Ripps from Canaccord.

Congrats on strong numbers. First, can you talk about sort of what kind of seasonality you're expecting for the balance of the year compared to pre-COVID? And maybe related to that, can you talk about sort of dog working recovery more broadly in context of return to work and sort of normalizing behavior? And then I have a quick follow-up.

Sure. With regard to seasonality, our business is largely driven by the seasonality related to leisure travel. And so, typically, Q1 is our slowest quarter and typically has a higher mix of non-overnight services. That ramps into Q2 with spring break and Easter holiday. Then you see Q3 ramp again, which has the bulk of summer travel. And then, in Q4, we often see an increase as well with regard to sales, but sometimes the actual transaction volume is a little bit less than Q3, and that's because for Thanksgiving and Christmas travel, sometimes those are longer-stay durations, so the average booking values tend to be higher.

With regards to return to work, we continue to see some softness, at least relative to the other service lines with regards to dog walking. With regards to Q1, it's down modestly as the share of the business, up in absolute terms, but consistent with not having seen a broad return to work in Q1.

With regards to Q2, we see a little bit of acceleration in dog walking, but too early to develop a strong opinion on it.

Got it. That's very helpful. And then secondly, I appreciate all the color around your international markets. Can you maybe just talk about sort of the type of investments that you need to accelerate your growth internationally? And is that embedded in your guidance already? And maybe more broadly, can you talk about sort of where some of those markets stand in terms of product evolution and brand awareness?

Sure. So, it varies a little bit by market. I think our position in Canada is more similar to the U.S. We have a strong level of awareness in the U.K. Some of the other European countries are more nascent.

With regards to the investments, we have attempted to include those in our guidance, although if there are opportunities to accelerate further, we may accelerate some spending to drive additional growth as we see events unfold over there.

Overall, the investments required in international is around currency and language and marketing. We took the opportunity of the pandemic to kind of make investments in those areas to better set ourselves up on a go-forward basis. And it looks like that those have paid off, including revisiting some of our language support and looking on how to improve our strength in organic customer acquisition there.

Our next question comment comes from the line of Ralph Schackart from William Blair.

Tracy, I just want to go back on some of your comments. We talked about ABV, I think up about 15% year-over-year. Was that primarily just a mix shift in some of the services? And maybe just sort of more broadly, can you remind us if you're starting to see any inflationary impacts on the supply side, either potentially some of the costs going up or potentially them looking for opportunities to raise rates in an inflationary environment and how the marketplace will respond to that type of environment?

Sure, Ralph. We're definitely seeing increasing in pricing that's set by the service providers. we're seeing more significant increases there. We did see some last year, but I would say that it stepped up again in Q1. So, whether that's due to inflation or some other reason, I can't pinpoint their exact rationale for that, but we're seeing it across the board, and most pronounced in overnight services.

Okay. Great. And then just maybe on the international front, can you maybe give some perspective on -- I know it's early, obviously, but how the brand is resonating? Would the marketing campaigns have to change, either country by country or versus some of the leverage you might be able to get from the domestic marketing campaigns?

Ralph, Brent Turner here. Great question. We feel good about our progress thus far. To start with Canada, we're seeing quite a bit of growth in Canada. I think new customer growth in Q1 was up 220%, which is a Q1 record, which sets a Q1 record for us and is following faster than just the opening of the country in our view.

In Europe, we feel good about how our brand is resonating. I was just taking a look at -- we got some aided and unaided awareness stats in from Europe, and it's interesting that Europe fairly quickly from a -- from both an aided and unaided awareness standpoint, has snapped similar to where we are in Canada, about 11% unaided and bouncing between 20% and 40% in aided. And I think what we make of that is that the work that the Rover Blog has done before market entry, and then the investments we've made in our content practice, have really led the presence of the marketplace in terms of letting -- creating broad awareness of the Rover brand, and also allowing us to communicate what and who we are ahead of the marketplace.

This is Aaron. A little bit of color commentary on that. The investments in content marketing and the investments in organic customer acquisition are really kind of fixed-cost technology investments. There's a little bit of work to localize language and make sure that they're appropriately -- appropriate to be consumed locally, but those are more kind of fixed in nature. And then, the pushing on the accelerator with regards to advertising has been more of a country-specific dynamic. I hope that's helpful.

Our next question comment comes from the line of Lauren Schenk from Morgan Stanley.

I think, Aaron, you said in your prepared remarks, there are some other sources of macroeconomic uncertainty. Just wondering if you can maybe elaborate a little bit on that and whether or not you think that's had any impact on the business thus far. And then, Tracy, just remind us with the July 4 holiday, sort of the different moving pieces between 2Q and 3Q in terms of GBV versus revenue.

I'll take the first piece there. Lauren, great that you're on the call. With regards to sources of macroeconomic uncertainty, I'd say, let me start with inflation. The inflationary dynamic in the U.S. is, in some part, has some unknown effects and then some part some known effects. We have generally seen service providers increase their prices, which is kind of a natural inflation hedge, so the prices in the marketplace tend to drift up with cost of living and inflation. Whether or not that has settled longer-term effects on demand suppression, particularly in an environment of a slowing economy or of Fed tightening, is something that we don't have perfect visibility to yet.

The broader macroeconomic climate is also something in the second half of the year we have less visibility to, as well as geopolitical instability, how that may affect European growth. As a reminder, our business is really heavy in the second half of the year, which is our biggest period. And so, it's a relatively small portion of the expected revenue for the year that we've seen come through the marketplace so far.

And the second question around Fourth of July, great question. We know that's tripped up some forecasting in the past. This year, it's on a Monday, and so our best guess is that many of the stays will actually start on the first or the second. So, you'll see the GBV come in largely in Q2, but the revenue will likely get pushed to Q3.

Our next question comment comes from Mr. Tom White from D.A. Davidson.

I guess one on the kind of shift here to more brand-oriented spend or just kind of channels other than kind of pure performance. Maybe share with us, how should we think about kind of the payback on that spend relative to performance in terms of timing? Will there be sort of a lag there? Do you think you might be able to find some kind of lower funnel demand with those new channels that you've been testing? And then just a follow-up on the guidance. You beat the first quarter outlook by a couple of million, held the full year. I appreciate that it's a seasonally slow quarter, et cetera. But a lot of the travel companies talked about Omicron kind of coming in fast and leaving fast and travel kind of snapping back pretty quickly. Just curious whether there's some conservatism maybe kind of baked into the holding full year.

Tom, Brent Turner here. I really appreciate the question. Yes, the payback for the more, what we would call mid-funnel, what you call brand-oriented spend, is definitely longer. We are certainly able to find some lower funnel demand when we do that. But if you really, really think about a travel business and the number of weeks that the typical the family is in the market for travel, once you do the math, we're not really trying to do that. What we're trying to do is create a conversation or create a memory, such that we are part of the consideration for their pet care when they do travel.

With that being said, over the years, we've run enough of these campaigns that we sort of understand what the response curves look like, and we feel like we're getting better and better at calling those campaigns early in terms of where they're going. And so, that enables us to make decisions about whether to continue or whether to increase spend for those kinds of campaigns earlier. So, I wouldn't think about a longer return period, but we have -- we've spent quite a bit of time and investment platforming, from a data standpoint, in a way that makes us able to test and make decisions fairly quickly.

And with regards to the guidance, I'd say that in the first quarter, we saw strength on several fronts. We slightly exceeded the high end of our revenue guidance due to strength on ABV and take rate. We've seen a little bit fewer transactions on a per-customer basis for the newly acquired customers this year. From an LTV perspective, the LTVs of customers we acquired this year seemed to be trending to our best ever or close to it. So overall, positive, but slightly lower year over year on the transactions per. That could be a mix thing. That could be individuals getting sick with COVID or service providers being sick with COVID. That also could be some of the macroeconomic effects. So, we think it's appropriate to give the guidance range we give.

I'd say that we are cautiously optimistic about what some of the other travel companies are saying that they're seeing in Q3 and Q4, so that's the reason to be optimistic. But we tend to see that booking your Rover sitter is one of the last things you do before your travel. It's less likely to be booked months in advance in the way that a flight to Europe might be, for example.

(Operator Instructions) Our next question or comment comes from the line of Lamont Williams from Stifel.

Tracy, just first on the extended-stay feature, could you just give a little bit more color on how that affected -- or what was the impact on ABV and overall bookings? And then secondly, on the booking window, Aaron, I know you just said it's about a month. Has that changed at all as we see what's happening with bookings over the summer and with missed travel? Is that kind of normal -- more normalized, or did that start to increase a little bit?

So, I think we've talked about as a combination, the impact of providers increasing their prices, along with the extended-day billing feature. That resulted in ABVs being up 31% year-over-year. The largest piece of that increase was driven by the price-per-service.

Charlie, I don't know if you have any detail on the extended billing feature in terms of the number of nights or the number of units per booking.

Yes. Lamont, the way to think about that feature is it allows the provider, either at the time of pickup or during the stay itself, to extend the stay by up to a half day on a fractional basis. They could, of course, add additional days if the stays get a lot longer, but on a half-day basis on a fractional. And that really allows for that late pickup or that early drop-off dynamic that might take place when the stays actually take place. So, on average, on a fractional basis, it's less than a half to any state that's on the platform -- a half a day, sorry.

Lamont, this is Aaron. With regards to the booking window, the booking windows on average, maybe about 3 weeks right now. The vast majority happen within a month of the intended service delivery, sometimes shorter for our daytime services. That is up versus the trough of COVID, where everything was kind of booked last minute, but it still gives us visibility into the bulk of stuff within a month, and not necessarily super predictive beyond that.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Well, thank you very much for attending our Q1 earnings call. We are excited about the future of the company. In the quarter, we've made progress on some key priorities for us and are on track to meet our goals for the year. We believe that everyone deserves the unconditional love of a pet, and we look forward to continuing to operate against that mission.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.