Oddity Tech Ltd Q3 FY2023 Earnings Call

Good day, and welcome to the ODDITY Tech Earnings Call. At this time, I'd like to turn the conference over to Maria Lycouris, Investor Relations for ODDITY. Thank you. You may begin.

Thank you, operator. I'm joined by Oran Holtzman, ODDITY Co-Founder and CEO; Lindsay Drucker Mann, ODDITY's Global CFO. As a reminder, management's remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates including statements about ODDITY'S business strategy, market opportunity, future financial performance, and potential long-term success. Forward-looking statements involve risks and uncertainties, and actual results can differ materially due to a variety of factors. These factors are described under forward-looking statements in our earnings press release issued yesterday and in our prospectus filed with the Securities and Exchange Commission on July 18, 2023. We do not undertake any obligation to update forward-looking statements, which speak only as of today. Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business. Additional information about these non-GAAP financial measures, including their definitions, are included in our earnings press release, which we issued yesterday. I'll now hand the call over to Oran.

Thank you, everyone, for joining us today. We are glad to report our third quarter results today, which beat our guidance issued back in August on every metric and also exceeded the preliminary result we recently communicated in October. Revenue is growing faster. Gross margins are higher and adjusted EBITDA is better than we expected. This is despite our real effort to pace our growth and slow down, as we historically have done in H2. With this record-breaking quarter, we will deliver net revenue growth of 60% and adjusted EBITDA of $91 million for the first nine months of this year. We are scaling a dispute that beats legacy incumbents, but also the majority of internet consumer companies and with profit margins and cash flows that are rare in other growth companies. This outstanding financial performance reflects the strength of our platform, the health for brands, our strong disciplined teams, and the massive runway we have in front of us. Our large investment in technology and data capabilities over the past five years are enabling us to continue to grow fast without damaging our high margins and profitability. Our tech team is still the largest team in the company and represents approximately 40% of total headcount. At the center of our success is our powerful financial model, which from the beginning, we designed to deliver a real combination of scale, growth and profitability. On scale, we are breaking new records again in 2023, growing revenue more than 50% and with over 50% coming from repeat customers, which is very rare in our industry. We believe we are already the largest DTC platform in our industry and have a massive user base with over 40 million users while our design partners for future products, categories, and brand launches. On growth, we expect to deliver more than 50% growth this year after having delivered around 50% last year and 100% the year before that. But although our high growth, we could have done way more. We believe we have a massive runway ahead and have built so many engines to allow us to continue to grow. We believe both IL MAKIAGE and SpoiledChild will be $1 billion-plus brands, and we are building our future brands to have a meaningful addition to our company. On profitability, we continue to deliver margins and cash flows well ahead of other growth businesses. We expect to deliver over $1 million of adjusted EBITDA this year alone, which is a 21% margin. Before diving into the quarter, I want to discuss our industry and why I'm so bullish about the opportunity ahead of us. First, we operate in what we believe is one of the most lucrative terms in the world. The global beauty and wellness market is over $600 billion in size and dominated by offline legacy incumbents. There are a huge number of beauty and wellness categories for us to go after which are larger sizes and are waiting for proper online access. Second, consumers are shifting online, and this is our strength. Today, online is around 25% of the industry's sales, and we believe it will reach 50% in the next year, but in order to win online, you need to deliver an experience that is even better than a store, and therefore, data and technology capabilities are critical. With all due respect to my competitors, we are simply playing different games as it relates to technology, data, not to mention talent and operating structure. We believe we are simply years ahead but still running like a startup to ensure we preserve our lives. Third, we've been creating amazing brands and amazing products, and we have proved that ODDITY is a brand scaling machine. Our track record speaks for itself. IL MAKIAGE is the largest online beauty brand in the U.S. and either number 1 or number 2 in almost every international market it has launched. SpoiledChild is expected to achieve $100 million of net revenue this year after just launching in 2022. Multiple categories, hair and skin, and success across a very wide demographic, all of this with very high customer satisfaction, best-in-class repeat rates, and consistently healthy growing cohorts. Brand 3 and Brand 4 are already in the making with dozens of talented folks dedicated to develop it. Both brands will be launched in 2025 and are responsible for at least 40% of my time and focus. The next stage of our evolution is with ODDITY Labs and unleashing biotech for our industry to create the next generation of high-efficacy products. Consumers today are smarter than ever. They start to demand real high-efficacy science-backed products to solve their pain points. High-performing products are not new to us. They are already central to our model and a huge part of why we are so profitable. No quality means no repeat. No repeat means no profitability. Based on my knowledge, we have the best repeat rates in the industry. We operate a world-class in-house product development engine that I believe beats most of the brands in the industry. That's because we launched products based on data. We are not like other brands that launch based on what a head stylist says or based on what suppliers suggest. Data, no exceptions, no compromises. But as entrepreneurs, who luckily found themselves in building, we never stop and we are never satisfied. ODDITY LABS takes us to the next level in terms of physical products and innovation. It has always been my dream to use technology to develop high-efficacy products with stronger new ingredients. I was hunting for this opportunity for years and with Revela, we found the perfect match. Since closing the acquisition in May, we have made so much progress in building ODDITY LABS to beat the AI-based ingredient development platform of our industry, attracting amazing talent and moving fast across enrollment. ODDITY LABS will be one of our main growth engines for all brands. We are truly building something that has never been done before. You don't see its contribution in our current earnings today, it's just expensive, but we are more bullish than ever. It is the same feeling that I had when we started to build our R&D center in Tel Aviv. Before I hand the call over to Lindsay, let me touch on Israel, where we have our R&D center but most importantly where my heart and thoughts are in these sad days. First, the unwavering support I get daily from teammates, entrepreneurs, CEOs, and friends is unbelievable and I deeply appreciate it. So many people stand with Israel and we did try to defend itself and make it a bit more bearable in this insane situation. We at ODDITY are doing everything we can to support our people and the country at this time. This is our duty and we'll continue to do so. As for the business, there have been no meaningful disruptions; of course we are monitoring the situation very closely and we don't expect any material impact on Q4 or on 2024 results. Our teams in Tel Aviv are operating remotely since the beginning of the war, and we have had a limited number of employees called for reserves. And now I'll hand over to Lindsay.

Thanks, Oran. We're pleased with our third quarter financial results and the momentum that continued into the fourth quarter. Our business is firing on all cylinders and we are in excellent shape for 2024. Our teams achieved a number of unlocks through hard work, planning, testing, and iterating that are now in our arsenal for execution next year starting with a successful first quarter. We will issue 2024 guidance when we report Q4 results next year, and we're confident in our ability to continue to deliver strong growth across brands and product categories at attractive margins and with healthy user cohorts that fortify our overall model. Turning to the quarter, net revenue grew 37% year-over-year to $94.5 million, above the 18% to 23% guidance we communicated in August. Drivers of growth in the quarter are consistent with what we discussed on our October call. Both IL MAKIAGE and SpoiledChild brands exceeded our expectations. Repeat growth was stronger than we had originally modeled, which drove the upside versus our original guidance. Importantly, our revenue growth was of high quality and profitability, and generated across a range of products and categories. The successful expansion of new products and categories, including in skin and hair, are seeds that we planted less than two years ago and have grown today into powerful foundations off of which we're building large and dominant franchises. These are incremental to our existing products. They expand our overall TAM and create deeper relationships with our users. Moving down the P&L, we generated gross profit of $66.4 million, a 41% increase versus the prior year. This represents a 70.3% gross margin in the quarter, which is 280 basis points better than the 67.5% guidance we issued. Gross margin expanded 217 basis points year-over-year. The increase was driven by cost efficiencies at both brands which have benefited from specific cost optimization efforts relative to the prior year. While SpoiledChild has continued to make good progress in narrowing the gross margin gap to IL MAKIAGE, it still operates at a lower gross margin and will drive some negative gross margin mix shift as it becomes a larger portion of overall sales. Adjusted EBITDA increased 227% to $20.8 million in the quarter. This represents a 22% adjusted EBITDA margin above the 20% to 21.5% initial guidance we delivered back in August. Adjusted EBITDA margin in the quarter expanded 1280 basis points versus the prior year driven by our gross margin expansion as well as improved Opex efficiency, including improved efficiency on our marketing spend as we throttled back new user acquisition costs and generated the majority of our revenues from repeat customers. We reinvested a portion of these EBITDA tailwinds into future growth, including investment in future brands and products as well as ODDITY LABS. It's also worth noting that we delivered this robust EBITDA margin expansion despite higher revenue contribution from SpoiledChild, which today carries lower EBITDA margins than IL MAKIAGE. Adjusted pretax income increased 304% to $20.7 million driven by the adjusted EBITDA growth. Our adjusted tax rate was 37.1% in the quarter, a bit more favorable than the 43.5% rate we guided to. This elevated tax rate was driven by non-deductible expenses associated with our IPO. We delivered adjusted net income of $13 million and adjusted diluted EPS of $0.21. Diluted average shares were $61.4 million. Reported net income was $3.8 million and reported diluted earnings per share were $0.06 in the quarter. Adjustments to GAAP this quarter include $12.29 of stock-based compensation expense. As we mentioned on our 2Q call, our 3Q stock-based comp was elevated this quarter due to accelerated vesting related to our IPO. We continue to expect a step down in stock-based comp expense in the fourth quarter to $8 million. We exited the quarter with $164 million of cash, short-term deposits, and restricted cash on our balance sheet and zero debt. Our balance sheet strength is a function of our robust profitability and excellent returns on capital which yield attractive cash flows at high cash conversion. Year to date, we generated $78 million of free cash flow, driven by roughly $79.5 of cash from operations and $1.5 million of capex. Before I turn to our outlook, I want to touch on three big picture drivers. First, as it relates to the consumer broadly, there is no change to what we discussed in early October. We have not seen signs of macro softening in our business. Again, we do believe our model is relatively insulated based on our idiosyncratic growth drivers and our model's inherent agility, and also because of the beauty category's resilience and our broad demographic appeal, although we are, of course, watching closely. Second, as Oran mentioned, our business continues to be very strong, and we received significant near-term and long-term runway for growth and profitability. Third, we continue to find attractive high-return reinvestment opportunities to support the expansion of new brands and product categories across our platform and our discipline and success in building the high margin, cash-generative business today puts us in a position of strength to make these investments. We will continue to reinvest for the future, while maintaining revenue growth of at least 20% and EBITDA margins of at least 20% over the long term. Now turning to our outlook. For the full year 2023, we expect net revenue growth between 52% and 53% representing net revenue dollars between $493 million and $497 million. Our revenue growth outlook is an increase from our previous expectation of revenue growth between 46% and 48%. We expect growth margins of approximately 70%, an increase from a prior expectation of 59.5%. We expect adjusted EBITDA will be between $104 million and $105 million and we expect adjusted EBITDA margin of 21%, which is at the high end of our prior expectation for adjusted EBITDA margin in a range of 20% to 21%. We expect adjusted diluted EPS between $21 and $23, an increase from our prior expectation of $11 to $17. This assumes a tax rate of approximately 25.5% and average fully diluted shares of approximately $60 million. We also issued a detailed outlook for the fourth quarter, and you can find that in our press release. With that, I'll hand the call back to Oran.

Operator, we are now ready to take the questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey, guys. First, our thoughts are with you with the situation in Israel, so best of luck. And secondly, maybe if we could just focus on the molecule side of things and discovery there over time, can you just give us an update on your plans if they've changed at all and sort of the commercialization of that molecule discovery with ODDITY LABS and how you think about the pace of potential revenue payoff from that over the next couple of years here; and then second, just in terms of the higher repeat rates in the quarter and that driving upside as you look beyond this year and the higher revenue base, how does that impact maybe the way you think about the underlying growth of this business beyond this year?

Hi, Dara. Thank you for that. I'll start with ODDITY LABS and then we'll touch on the repeat rates. As I mentioned before, it was my dream to use technology to develop better ingredients and the industry still looks the same as when I started the company: same ingredients, same manufacturers, serving the same companies. With ODDITY LABS, we are doing something different and we are about to change it. Revela and ODDITY LABS are using the same technology being developed in pharma to develop higher efficacy molecules. This opportunity is endless, and this is why I spend so much of my time as the CEO around this topic. As I mentioned in the call, we see a way smarter consumer today. We see how much time she spends on our product pages and how many questions she asks, which leads us to believe that we are going to see a trend towards science-backed products regardless of the brand itself and quality product versus just brand love in beauty. In terms of how we market it - that's the magic because we are able to see a model we use our user base to build segmentation and profile, then we build the product. Then we go back to the consumer and offer that molecule on your product and if you want, but also when it comes to ODDITY LABS there is no change to the criteria of how we think about market opportunities: has to be huge terms where we see a demand opportunity, where the unit economics work for online and where we believe we can truly solve the consumer pain point. I'd love to make our life easier just because in the past I just had a user and I need to develop products based on the need. Now I have a huge engine for product development with science-backed products. Just like when meeting the teams and seeing the talent and the number of PhDs that we have now in Boston, it's something that is unrelated to the industry. Because so far we saw those talents simply just in pharma. It's the first time that I see a team that is working around beauty and building something better. So, as for the future, next year we are launching 10 products coming from ODDITY LABS, but this is nothing – the runway and the pipeline that we have with ODDITY LABS is huge. Therefore, we continue to hire and continue to spend a huge portion of my time around ODDITY LABS. Again, today you see two brands, Brand 3 and Brand 4 in the making, and Brand 3 is going to use the services of ODDITY LABS because part of a significant part of the product range are going to come from there. But it's also great for SpoiledChild and IL MAKIAGE for the first time both for the development teams that are working with ODDITY LAB for different products for things that we didn't believe that we could achieve in the industry because like that's what we were told by manufacturers, but now a new world is open to us. And again, it's very early, but I believe this is the future of the company. As for the repeat rate, again, repeat is going… when people ask me about our bid to predict the business, obviously it's easier because we are not relying on any third party. The DTC model is very easy to understand the cohorts and for the business and it's my decision where I want to turn on or off or cut back spend for new user acquisition. One thing I cannot see is with new products or new brands like the repeat rate and what we missed here, and again it’s not missed we beat, it’s – it’s like the repeat rate coming from SpoiledChild that exceeded my expectations and that's why the revenue came stronger this quarter. And I don't see any faltering; like every cohort is getting better and better. It's both because we are using our data better, but also because we are putting the right product in the right hands. And so we expect the repeat rates to continue to grow and to continue to see the vast majority of our revenue coming from repeat customers, which is very healthy and that's why we are able to generate cash every month, every quarter.

Hey, Dara. I'll just add quickly to what Oran said on your first question regarding ODDITY LABS. There is no change based on labs to our long-term algorithm of 20% plus revenue and 20% plus EBITDA margins and the way that we're driving that business is still in a very asset-efficient way, a cost-efficient way with high profitability and high cash flow. So despite the fact that that piece of the business is coming together even better and stronger than what we had anticipated, there's no change to how it affects us financially.

Great, thanks.

Thank you.

Thanks. Hi, team. Thanks for taking my question. I actually wanted to follow-up on ODDITY LABS as well. So just wanted to confirm I think last time you commented that there were 10 products coming out of the labs next year. And as a follow-up question, can you talk about how ODDITY LABS and the combination of your VisionTech will be deployed for diagnostics for your upcoming brands? Thanks.

Hi, Scott. Sure - yes so as I mentioned, 10 products are going to hit the market next year, coming from ODDITY LABS. To the second question, like the - the way that we do it in the - within the company, we have two types of labs: one is the tech side and the other one is the science in Boston, one in Tel Aviv, one in Boston. So the diagnosis of Brand 3 is going to be done with our computer - computer - by our computer vision technology from the - from the team in Tel Aviv, and the products are in development from ODDITY LABS. So both R&D centers are working to develop something better for Brand 3, which is a medical and great skin and body brand, which relies heavily on the diagnosis, which will come from computer vision.

Great. Can I ask just one more follow-up? Given the growth that you're seeing or the unexpected pace of advancement on the ODDITY LABS, can you talk about how Evan and his team are hiring? I know Lindsay mentioned that the margin profile and the cost controls will be in place to maintain your long term objective, but just talk to me about obviously you're hitting your target there faster than expected. What are the high, what's Evan and his team doing to have the labor behind that? Thanks.

Yeah. Sure. So, when we started we let you know we gave them a small amount of task that we had for both IL MAKIAGE and SpoiledChild. When we saw that they can do much more with more projects. Again, all projects came from true needs coming from users, as we see it in our platform. Then I asked Kevin if we could add more to increase the manpower and maintain the same level of talent, but let's grow the team and surprisingly we thought that we were able to do it. We grew the team 3x in just a few months. People are excited to work on something different than just pharma using the same technology. Talent attracts talent, and when you see that in - if you one day, I would like to visit them or if it doesn't happen you'll see the talent there. You will understand why it's easier for us to recruit. In addition, the biotech industry is not easy today. So we are leveraging the fact that we are profitable and we don't need external capital to continue to grow, which makes it very attractive for this talent who wants stability. So we continue to grow the team and since our margin is even stronger than what we envision, it allowed me to continue to invest; that's why we didn't come this quarter with a 25% margin. We invest in lab and we invest in building teams for Brand 3 and Brand 4.

Thanks for all that color. You know the biotech weakness should allow you to attract some very good talent. Thanks.

Yeah. Thank you.

Excellent. Thank you, guys, and congrats on a solid quarter. So a couple of questions, maybe starting with the 10 products, Oran that you talked about for next year. How meaningful are kind of these products? Obviously, they're not brands; they're extensions of the two existing brands. Can you just share some color there as to how potentially meaningful they are - they could be just for us to kind of get a sense of - of ultimately how impactful they could be to the revenue? And then, Lindsay, with such a high repeat rate, your market inefficiency must be going through the roof. So can you maybe talk a little bit about that and whether that's like a step up in your thinking about longer-term margins? Because if that repeat rate stays high and obviously your margins are going to be higher and your market inefficiency is going to be that much higher. So just is it just too early for us to get to that - to conclude that at this point? Thank you.

Sure. I will start with the first question. How are you first of all Youssef? I will tell you that the 10th products, we can beat the way that you operate, we never count on one thing. We can beat that. We always run with multiple levers to deliver our growth that we want to see next year. We don't need those 10 products to beat our plan. It's an addition, but I want to see like in SpoiledChild I could have done this year just with IL MAKIAGE, but I pushed more for SpoiledChild because I want to see diversity and to see more revenue coming from different sources. So I will do the same with the new products coming from ODDITY LABS, and for the sake of building this engine, but I don't need it to grow or to justify my plan for next year. The second question, I will hand it to Lindsay. I would just say that regarding long-term margins, in my school, you don't need more than a 20% EBITDA margin. I want to continue to invest in the business. We could have done like more than 25% this quarter. I intentionally decided to hire more people in Brand 3 and Brand 4 to better position ODDITY LABS, to ensure that we continue to hire the best people and to develop more products and to invest in our future but I will hand it over to Lindsay.

Yes, thanks. So Youssef, as we think about our repeat rates, as Oran mentioned, it was a key driver of the upside relative to our expectations in the quarter. We're thrilled to see the very strong repeat rates at both brands, IL MAKIAGE and SpoiledChild; for each of those brands, repeat revenue will be more than half of our revenue for this year, which is remarkable when you consider how young each of those brands is. IL MAKIAGE only having launched five years ago in the U.S. and SpoiledChild, which is less than two years old, and growing as much as it is as Oran mentioned, around $100 million in net revenue this year, and profitable to be able to deliver that kind of repeat is something we believe is unprecedented across not just beauty but any vertical in DTC. We love the repeat for a number of reasons. First of all, it reflects strong customer satisfaction; the fact that our customers love the product, they come back, and we're truly filling a need for them that's not being addressed elsewhere. Number 2, of course, repeat is very profitable for us. Because we don't have to, as you pointed to before, deploy any material Opex or marketing spend in order to generate it relative to our first purchases. The fact that our repeat rates are so high reflects those things, but they also reflect the fact that we've significantly underinvested in our potential for new customers this year as we purposely paced the business and tried to slow it down. So the fact that you've got a brand that's less than two years old with more than 50% repeat and nicely profitable in SpoiledChild means you could have grown a lot faster if you wanted to as Oran said. But based on the size of the opportunity ahead of us, we are operating in a massive $600 billion global TAM in beauty and wellness. It's dominated by offline incumbents, who we believe have significantly underinvested in technology. We think the category moves to 50% online before you know it and we believe we are way ahead of others in our ability to capture this. Our focus is very much on reinvesting that profitability in order to deliver against those goals. Our underlying business wants to be much more profitable than we're letting it, but we're disciplined about talking to that 20% EBITDA margin, which by the way, is still incredibly profitable relative to anything in our peer set. So we think that's a strong return. It allows us to generate a lot of cash to invest in the future, but doesn't change our overall thinking in terms of the algorithm, profitability, or growth algorithm.

Okay. Now that's understood, and impressive. Maybe just one or more before I let you go, Lindsay, can you just remind us please of the seasonality in the business? This is not similar to other DTC retail, just so that we kind of understand how the kind of the linearity throughout the year happens?

Yeah. So as you allude to Youssef, our first and second quarters of the year are much larger than the second half of the year, and that is unusual for lots of consumer companies—beauty companies, DTC companies where typically holiday is the biggest time of year. I think seasonality is a misnomer. It's really more about cadence and how we choose to pulse our business. Obviously, if you look industry-wide in those categories, holiday is naturally very large. There’s nothing that's naturally very large in our industry about the first or second quarter. This is really about when we go full power and take advantage of our opportunity to really dominate the market, and candidly too with very high visibility get the full year done. And I know that's unusual relative to what you typically see for other businesses that are going kind of as hard as they can all year long to sort of match the pace of spending of the consumer. For us, it's been really important for us to pace our growth. So we’ll do more than 50% revenue growth this year. That's on top of approaching 50% last year and 100% the year before. We've been growing at a very, very rapid pace, so we want to make sure that the way that we're growing allows us to deliver over the long term, compounding, durable, sustainable, and super high quality growth for many, many years to come. That's been our decision to restrain growth in the back half when we were able to overdeliver on our budget so early in the year. I think another thing that's important to point out is we don't participate in the holiday promotional fray. You won't see us discounting. You won't see us fighting in a low quality way like that. We are a full-price business and full-price brand, which is also why while the majority of the industry is 50% off, it doesn't make sense for me to compete in Q4.

That's why it doesn't make sense for me to compete in Q4.

Yeah. Correct. So again, this is really more about our decision on the timing of when we power the business versus any natural seasonality.

Yes, exactly. Awesome. Thank you, both.

Thank you very much.

Thank you. The next question comes from Andrew Boone with JMP Securities. Please go ahead.

Hey guys, thank you so much for taking my questions. Can you help us understand how top of funnel is trending? How has conversion trended last quarter? And is there any update on the 40 million users that you guys have?

Yeah. I would just say that when I slow down people tell me that it's because of the marketing - because it’s very - because of softness in marketing, but I can tell you that just in IL MAKIAGE, the user acquisition in Q3 was the lowest that we had in the past 14 quarters and since Q1 2020. Despite the fact that user acquisition efficiency in IL MAKIAGE was unbelievably strong, growth was 70% higher than Q3 of last year. And still I spent 40% less than Q3 of last year. Again, we don't see any softness in the upper funnel; we see very strong demand and we decide when to take it or not.

That makes sense. Thank you. And then as we think about really as a follow-on to Youssef's question, we're two months away now from January. Can you guys just talk about any features or new geographies that you guys may be launching as we think about Q1 ‘24 that give you the confidence to be able to really pull that growth forward in the first half of next year? Thanks so much.

Yes. I'll start by saying that we are in a very strong position entering 2024, and the plan is to execute well every quarter. We are not providing guidance for ‘24 and not for Q1, and you already know our algorithm, but I will try to touch on it more generally. Thanks to the huge terms of our industry and so many ways to grow, and my job as a CEO is to ensure we are spending time and resources going after the right targets and balancing between opportunity size and chances we can get it done. This is true for everything we do: new products, new brands, new categories, new tech products, new innovative molecules, and we are always working on all five, with massive pipelines. This strategy allows me to grow the business consistently from $110 million in 2020 to $120 million in 2021, $225 million in ‘22, and approaching $500 million this year with over $100 million of EBITDA. When we try to understand how we break it down, first is our existing brands, IL MAKIAGE and SpoiledChild, which are still small in market share and not even close to hitting the limits with the categories we are already in. This brand's pipeline comprises new products and new categories for both brands as well as new geographies, as you mentioned. The teams are already in market testing new product launches, and based on those early reads alone, we have a very good glimpse into 2024. For IL MAKIAGE, we have a number of exciting products in skin to expand our strong foundation there. In addition, IL MAKIAGE leadership is ready with new markets to launch in where our tests have come back very strong in terms of unit economics and customer satisfaction. We have slowed play these market expansions to ensure our users are happy in our current market, but we have those new markets ready to go, and it's multiple markets. For SpoiledChild, we have a pipeline of new products in both hair and skin to drive those two categories and to continue the hyper growth of the brand. I'm not concerned that meaningful growth will come from both brands.

Hi. This is Melanie on for Lorraine. I just wanted to touch on something you actually just said in your response about entering new markets. So do you have any update on your international expansion strategy for both brands? If so, what are some of those new markets that you look at? And is that embedded into any of your plans going forward? Thanks.

Yeah. Thanks. New markets outside the U.S. are a huge opportunity for us today and over the long term. Around a quarter, IL MAKIAGE is outside the U.S., SpoiledChild has not endeavored outside the U.S. yet. As you know, from our competitors, maybe 70% of their business is outside the U.S. So we know this is a significant opportunity for us. As part of our earlier pacing of growth, we have been really slow playing this opportunity in terms of actually unleashing it. That being said, we've set up significant infrastructure and capabilities to unleash it when we're ready. This includes conducting many tests in different markets, laying the groundwork, getting a read from the customer. What we see is basically all the markets that we're testing are seeing very, very good customer satisfaction, cohort data, the foundation of things that give us confidence that the unit economics will work and we can scale across a number of different markets that we're not in already. For SpoiledChild, international is not on the table in the near term. The teams have asked and want to expand more aggressively overseas. We’ve made sure that we're still focusing on the U.S., but we do see significant opportunity when we're ready to start building that overseas as well. We can leverage the infrastructure we've already built for IL MAKIAGE. It's part of as we think about reaching $1 billion for IL MAKIAGE. It will be crucial for SpoiledChild.

Thank you. The next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great, thanks. Good morning. We've covered a lot of ground, but I wanted to follow up on two things. First, regarding the repeat rates, how much visibility do you have into whether these repeat rates indicate existing consumers replenishing products they've previously bought at a higher rate than anticipated? Or is it more about basket size, meaning they're now purchasing more items from SpoiledChild or IL MAKIAGE while being existing consumers of other products in your portfolio? That's the first point. The second point is about the 10 new product launches featuring technology from ODDITY LABS. How does that compare to a typical year of new product activity? Is 10 products considered a lot, a little, or is there a benchmark to help us understand what 10 represents in the context of an average year? Thanks.

Sure. I'll begin with replenishment. Both average order value and replenishment are important, but we have less clarity regarding the new products, brands, or categories we've launched because we lack sufficient historical data to forecast repeat rates. This is why we anticipated a much higher return. However, we see growth across the board in IL MAKIAGE and SpoiledChild, with all cohorts expanding and a significant portion of revenue coming from repeat customers. Despite our substantial growth over the past two years, repeat purchases account for the majority of our revenue, demonstrating our strong market position. Regarding your second question about the 10 new product launches, I'm uncertain how that compares to other companies, but compared to us, it’s not a lot since we launch many more products, although not all are successful. We have many products in development and if we find that they perform well in terms of customer satisfaction and profitability, we will continue to promote them. We remain optimistic about these products as they may emerge from the labs.

Hey, Lauren. I'll just add quickly on your first question. As you know, our net revenue repeat rates have continuously improved since the first time we spoke to you was, I think, in December of 2021. We talked about net revenue repeat rates in the kind of low to mid 40s. Those net revenue repeat rates as of—you’ll see in our F1 for our IPO where I want to say around 80% on a 12-month basis; today, they are closer to 100%, and we don't see a ceiling. That has been an ongoing story for us, the continuous improvement in the repeat rate. It is so many factors that I have to call out our technology and how, for example, our machine models that support us in retargeting, and how we market while making sure we're maximizing things like bundles and up-sells and adding basket size in getting people to engage again with the products. We just continue to get better and better as we get more data and optimize for our models. So that's been a really important driver for us. And of course, now that we've layered SpoiledChild on top of IL MAKIAGE and we're building the platform, we're able to extract more from the same wallet, and that's part of the really strong financial profile of our business, which makes us more like what you would see in a software, land, and expand type of model where we know who the user is, we understand their profile, we understand so much about the products they need, and then we're building those products specifically for them that allows us to extract more from the same wallet and drive repeat. That's a lever for us that we only just started realizing really with SpoiledChild and to some degree with the launch of IL MAKIAGE skin; we're extracting more from that same user. But that will just continue to compound over time as we add more products and more brands to the platform. And then I guess one clarification—the 10 products are purely ODDITY LABS; that's not the full scope of products that we will introduce for IL MAKIAGE and SpoiledChild in total next year.

Okay, great. Thanks so much.

Thank you. The next question comes from Jason English with Goldman Sachs. Please go ahead.

Hey, good morning, folks. Thanks for letting me in. Interesting statistics you share on the acquisition expense behind IL MAKIAGE being down 40% year-on-year. When we look at SG&A ex the stock comp, it was still up substantially this quarter, up like 36% versus up 38% last quarter. It sounds like you're making capability in people investment, but maybe you can unpack that a little bit more for us. How much did, I suppose, the aggregate acquisition expense change year-on-year in the quarter? And for the remaining growth, how much is going against people in ODDITY LABS versus other capability building?

Yes. Thanks for the question, Jason. So you can see in our financial profile that we leveraged adjusted EBITDA in a very significant way versus the prior year. Part of that—a smaller part of it—was gross margin expansion, but the bigger piece of it was SG&A leverage, and a big part of that was our ability to leverage marketing spend and in particular user acquisition as we throttled back on our new user acquisition and delivered the majority of our revenue from repeat customers. We are making other Opex investments in support of building the business out for the long term, new brands, new product categories, etc., and Oran touched on that a little bit earlier in terms of the buckets that we're spending in.

Okay.

I would just add one more thing that media as a percentage of revenue was lower in Q3 '23 compared to '22. So we didn't spend the money against marketing.

That's helpful. Thank you, and impressive. Congrats, by the way. It sounds like you're continuing to make great progress on Brand 3 and Brand 4. I think you talked last quarter about even having brought the brand together and having some clarity on what the brand name is going to be. In light of the progress you're making, is there any chance that you'll be able to bring it to market in 2024? And if not, what are the gating factors that are extending the launch all the way out into 2025?

Yes. So our plan continues to be for 2025. I don't expect that to change. We've committed to, as we say, launching a new company every 18 months to 2 years, and we call it a new company because these are truly standalone businesses, stand-alone operating teams that we plug into our platform with shared technology, shared data, etc., so no change to that.

Okay. And last question for me, Oran, when I talk with investors, there's a lot of enthusiasm for the potential for your company, and obviously it is validated by the results you posted last evening. Where there's lingering questions are on your ability to get the sequential acceleration that's implied in consensus from 4Q to 1Q, which of course is the cadence that Lindsay was talking about earlier. Remind us, as you plan to drive that stepped-up acquisition into next year, what are the tactical steps you take that give you - that are going to catalyze that ramp into the first quarter?

So first of all, we are not discussing Q1 right now. I can just say that like every other year we have very strong visibility in Q4 into Q1, and we are doing lots of preparations in that quarter to ensure we hit our goals in Q1 and in Q2. Would you have any problem delivering in the past—I want to say three, four years—and we intend to continue to do so. The only reason that before being a public company, I had private equity investors who cared about yearly budgets, and we decided every year to go - to go with full power in the first half of the year to ensure that we have time to build engines for the next year. So that's how we started, but again we are not spending money on new user acquisition unless we see very strong efficiency. So even in Q1 and/or in Q2 in previous years, we had like a few weeks where we cut back and we ran the business with full visibility, and we decide in real-time any second what we want to do with the budget. So, it's our control. That's the best part of DTC.

Okay, okay. Thanks again, and congratulations once again on the results.

Thank you very much.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Oran Holtzman for any closing remarks. Over to you.

Thanks for joining us, and we'll speak to you when we report the fourth quarter. Have a great day, everyone. Bye.

Thank you. The conference has now concluded.