Earnings Call Transcript - ODD Q4 2023

Operator, Operator

Good morning. And welcome to ODDITY’s Fourth Quarter and Full Year 2023 Earnings Conference Call. Today’s call is being recorded and we have allocated time for prepared remarks and Q&A. Please note the prepared remarks for this morning’s call have been posted to ODDITY’s Investor Relations website for reference. At this time, I’d like to turn the conference over to Maria Lycouris, Investor Relations for ODDITY. Thank you. You may begin.

Maria Lycouris, Investor Relations

Thank you, Operator. I’m joined by Oran Holtzman, ODDITY Co-Founder and CEO; Dr. Evan Zhao, ODDITY’s Chief Science Officer; and 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 could 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 Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 5, 2024. 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 the business. Additional information about these non-GAAP financial measures, including their definitions, are included in our earnings press release, which we issued yesterday. I will now hand the call over to Oran.

Oran Holtzman, CEO

Thanks, Operator, and thanks everyone for joining us today. Our fourth quarter was another record-breaking quarter to cap off a record year. We continue to deliver very strong financial results that are ahead of what we promised. In 2023 we reached two important milestones; one, surpassing $500 million of revenue; and two, generating over $100 million of adjusted EBITDA. We did it via our online platform that was launched only five years ago in a category that everyone told me doesn’t and cannot work online. The ODDITY platform has today over 50 million users and over 2 billion data points that fuel our business and are responsible for the strong financial results. Our financial results for 2023 were outstanding. We grew net revenue 57% to $509 million and adjusted EBITDA 173% to $107 million, achieving 21% adjusted EBITDA margins. Once again beating our guidance across revenue, profit, and earnings per share. Not just for the full year, but every single quarter. We basically grew way more than I wanted us to grow. In my view, there is no good reason to grow 50% at our scale, but due to both SpoiledChild’s ability to blitzscale and IL MAKIAGE’s stronger than expected repeat rate, we landed at a 57% growth rate in 2023 full year. Drilling down to the brands. IL MAKIAGE delivered a very strong year in both color and skin. Skin grew to around 20% of IL MAKIAGE’s sales in 2023, which is a very high rate of category expansion for any beauty brand. It is a testament to our data-driven platform, to the strength of the brand, its enormous potential reach, and the quality of its products. IL MAKIAGE is well on its way to achieving my target of $1 billion of sales within the next five years. SpoiledChild scaled insanely fast in 2023. Since it was a one-year-old brand, I wanted to test the brand strength and its limits, and therefore, I allowed the hyper growth. SpoiledChild grew 325% from last year to $110 million of net revenue and we did it profitably, across multiple categories and with more than half of our sales from repeat customers. We believe SpoiledChild’s success is unprecedented anywhere in direct-to-consumer and it just showed again the strength of ODDITY and the demand for beauty online. Most importantly for 2023, we built strong foundations to drive our future. The Revela acquisition and establishment of ODDITY LABS is a game changer for the industry. We are all in in building the biggest and most advanced platform for new molecule discovery. I believe it will be a huge growth engine for all our brands and therefore it is a top priority and focus for me and for my sister, Shiran. But I’ll touch on it more shortly. New brands are another massive growth engine for us, where we made big investments in Brand 3 and Brand 4, which are on track to be launched in 2025. Finally, we took ODDITY public. Again, we did it to build something huge, and because we believe there is unlimited growth potential for us. So to recap, 2023 was a very strong year for ODDITY. We delivered 57% growth and 21% EBITDA margin, top percentile of public companies out there. We beat every quarter of 2023 with scale, growth, and profitability. We crossed the $500 million milestone of net revenue. We crossed the $100 million milestone of adjusted EBITDA. We established ODDITY LABS as an industry-leading molecule discovery platform, powered by the acquisition and integration of Revela. We took the company public with an amazing shareholder base, and we finished the year with a very strong balance sheet, including $168 million of cash and short-term investments with zero debt. This is ODDITY, we work really hard to do more than most other companies out there. The hunger, the startup DNA, and our always-on competitive mode are our biggest assets that allow us to keep on delivering. So 2023 was amazing, but it’s already the past and what’s most important now is our future. Our laser focus in 2024 is on executing opportunities that we believe will drive our business for many years. Let me walk you through the biggest priorities for our team in 2024. First, continuing to grow IL MAKIAGE and SpoiledChild. As I said before, our goal for both brands is to grow to $1 billion revenues for each brand. With a strong separated leadership team for each brand, with a huge addressable market, with a massive advantage online where the demand is only growing, it can and should be done. So many ways to grow, adding new products, expanding to new categories, opening up new markets. All growth initiatives are in place and ready for pulling the trigger, so I feel very confident in the ability of my teams to deliver. Both IL MAKIAGE and SpoiledChild are off to a strong start in 2024. Based on our performance in just the first two months of 2024, combined with our outlier repeat rates, we have visibility into delivering our goals for 2024. Second, new brands. Brand 3 and Brand 4, which we are building to be our next in-house engines. Both brands have separated leadership teams to ensure they win without distracting the existing brand's runway. As a reminder, Brand 3 is a medical grade skin and body brand. Issues like acne, eczema, and other skin issues are huge pain points for our users, and the majority of them tell us they are unsatisfied with the current solutions. The user experience is bad, and the products on the market don’t work well. With Brand 3, we are building end-to-end solutions that position us to win. This includes a first-of-its-kind mobile platform that uses data, AI, and computer vision to deliver a diagnosis, a precise treatment protocol, and coaching to ensure the user's compliance and success. It also leverages ODDITY LABS to develop high-performing products from our proprietary molecules that truly solve consumer skin issues and concerns. Brand 4 we have not yet announced the category, but we are confident in its ability to grow very fast. Last, but top priority and potential, is ODDITY LABS. What we are building LABS is full disruption. If we do it right, ODDITY LABS will change our industry and our company. The potential is unlike anything that I saw in the industry, even more than unlocking online five years ago. With my focus, our speed as a company, and ODDITY LABS talent we have a first mover advantage and we will see the results in two years, three years from now. Big bet but huge swing. To summarize, I remain very bullish about what we are building here at ODDITY. Beauty and wellness is one of the most attractive markets in the world. Huge, growing, profitable, with so many categories to drive our business. At the same time, the market is held back by legacy models that are completely stuck in the past. I see two unstoppable pillars of transformation in our industry and we have positioned ODDITY far ahead in order to win in both. The first pillar is the consumer moving online. I believe online will be the largest channel in the category at 50% or more. And we made massive investments in technology, in data, in AI, and in computer vision in the past six years to ensure we have what we need in order to win. This muscle is what allows us to lead online and build a portfolio of large DTC brands with very strong financial profiles. So the shift to online is the first unstoppable trend I see and we are already leading on this front. The second pillar of transformation in our industry is the shift towards science-backed products. The consumer today is smarter than ever. We can see it in how they engage in our platform, the amount of time they spend reading about our products, and how much they care about our ingredients. Although pharma and biotech had insane progress in the past two decades, the beauty industry, even us, have fallen short, remixing old ingredients in new packaging. This creates an incredible opportunity, and this is what we are doing with ODDITY LABS, using digital biology to discover and own the next generation of science-backed category killers that consumers love. What we are doing with LABS in Boston is the same as what we did with our R&D center in Tel Aviv. But this time instead of transforming experience, we are transforming the products themselves, and I believe it will be huge. So, with that, let me hand the call over to Dr. Evan Zhao, our Chief Science Officer, to dive deeper into what we are building at LABS.

Dr. Evan Zhao, Chief Science Officer

Thanks, Oran. I’m Dr. Evan Zhao, Chief Science Officer of ODDITY and I lead the team at ODDITY LABS. I joined ODDITY with the acquisition of Revela, which is a biotech that my co-founders and I started while doing research at Harvard. At the time, we were pioneering digital biology for therapeutic development at the Wyss Institute. We saw what we thought was a once-in-a-generation opportunity to close a huge technology gap, really a gaping deficiency of science in the beauty and wellness industry. We are living in the golden age of science, where new technology has allowed pharma and biotech to innovate at an unprecedented pace. Yet, the beauty and wellness industry is still living in the dark ages. No molecule innovation, totally commoditized, just old ingredients repackaged and not addressing consumer problems. It doesn’t make sense given the size of the beauty industry, a huge TAM with zero real science. So this is the massive opportunity we are running at with LABS. Unleashing the full power of technology and digital biology to discover groundbreaking ingredients that really perform, that really solve consumer pain points, and can power the next generation of category killers. This is what consumers want. Based on data we see in ODDITY’s massive user base, the consumer is way smarter than before, cares less about brands and more about efficacy. But we are still in early days, the shift will be enormous over the next decade. A few words about the field so it will be easier to understand what we do at ODDITY LABS. Digital biology is the marriage of breakthrough technologies, including AI and synthetic biology. It is widely used across pharma today but not in our industry. And these technologies allow us to do three things there were never before possible; one, measure data at scale; two, analyze massive data sets at scale; and three, bioengineer solutions based on this data. The discovery process in digital biology is revolutionary when compared to the status quo. The status quo today is basically the same ancient approach used with Chinese herbal medicine of trial and error. Let me give you an example, starting with skin aging. The dominant solution for skin tightness on the market for decades has been retinol. Retinol’s discovery was an accident. It was originally used to treat blindness, but like so many solutions in our industry, it was meant for something else and repurposed for skin. Along the way, scientists optimized using chemistry and formulations to make it the best skin tightening solution it could be. Which, by the way, is not a great one. This means we are left with an ingredient that doesn’t work that well, that has all kinds of side effects and is a bad user experience because it causes skin peeling and purging. That you can’t even use if you’re pregnant. This is what consumers have to settle for. So let’s compare that discovery process with how we did it at ODDITY LABS and how we discovered Fibroquin, our proprietary skin health molecule, which despite being in V1, already outperforms retinol with stronger efficacy, making skin tighter and bouncier and higher user satisfaction. Instead of trial and error, we start with the skin itself. We make biological models which are essentially pieces of skin in a dish modified so they can give us measurable data. We take thousands of these pieces of skin and then expose them each to thousands of different molecules, and we measure and track how each skin piece interacts with each individual molecule. We then feed that information into an AI that simulates how that same skin would interact with, not a thousand molecules, but with a billion different molecules. We then identify dozens that make the skin better, and from these dozens of hits, we test for things like toxicity, efficacy, safety, and specificity until we find the absolute winner. The difference in these two approaches, the industry standard trial and error approach versus our digital biology discovery platform is revolutionary. We are catalyzing a pace of discovery and innovation that our industry has never seen, with massive benefits for consumers. Fibroquin is not only twice as good as retinol in double-blind clinical trials for increasing skin elasticity, it is also substantially safer than retinol in every single test we’ve run, including how it affects other cells in the body and actually mimicking long-term effects. Plugging into ODDITY’s massive user platform allows us, for the first time, to bring consumers in as our design partners. We have a direct dialogue to understand not just their pain points, but also how they want the product to work, what the form factor should be, what attributes matter in the formulation in order to make for the best user experience. Over the last year since joining forces with ODDITY, we have dramatically scaled our capabilities. We are growing a super elite team of PhDs and scientists from top institutions, who are empowered by our entrepreneurial culture and the chance to see their ideas make real change for tens of millions of consumers around the globe. We have massively expanded our roadmap to address huge market opportunities. We believe we can dominate in hair. We believe we can dominate in skin, face, and body. We believe we can create a next generation of high-performance cosmetics, and this is just the beginning. We are making big investments in our team, in our LAB, in our product development capabilities, in our tech, and in extensive focus groups and trials, in order to support this effort. In two years to three years you will see real science-backed products for full disruption to take massive market share. And with that, I’ll hand over to Lindsay.

Lindsay Drucker Mann, CFO

Thanks, Evan. Let’s turn to our 2023 results which I will refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. ODDITY delivered a record-breaking year on all accounts. We grew net revenue by 57% to $509 million. This strength was driven by both IL MAKIAGE and SpoiledChild across a wide range of product categories. We grew net revenue 44% in the fourth quarter driven similarly by growth across products and brands. For the full year, revenue growth was driven mostly by increased orders, although we continue to see improvements in average order value driven by order size and product mix. More than half of ODDITY full year revenue was driven by repeat sales, which is remarkable when considering our scale and the speed at which we’re growing. Our revenue mix continues to evolve with the addition of new brands, categories, and products. In 2023, new categories like skin and hair increased materially as a percentage of our overall revenue mix and we continued to see excellent growth and have enormous runway in color, even as we push to scale new categories at a faster pace. Expansion into new products and categories makes us even stronger. It allows us to understand our users better. We now know not just their makeup routines, but also we have a holistic skin, hair, makeup, and wellness 360-degree view. We are gaining share of user wallets and doing it for very attractive incremental costs. This allows our financial model to deliver the kind of outsized returns you see in other land-and-expand models like software. In addition, we are bringing new users and converting new customers, who are now finding the products they want but couldn’t before get them from our brands. It is a flywheel that is accelerating as our platform grows, our users grow, our data capabilities and technology grow, brand awareness grows, and brand love grows. We are seeing this benefit in increasing basket size, higher average order value, and further improving repeat, and of course, it increases the surface area and extends our runway for growth. IL MAKIAGE delivered double-digit profitable growth in 2023 across cosmetics and skin. And as Oran mentioned, IL MAKIAGE Skin is now 20% of the brand sales. SpoiledChild came in at $110 million of net revenue, ahead of our expectation of $100 million of net revenue for the year, increasing more than 4x from 2023 and doing it profitably with more than 50% of sales coming from repeat customers. It’s an incredible accomplishment for a brand growing so quickly and less than two years old. Gross margin expanded 320 basis points for the year and 400 basis points for the quarter. This better-than-expected gross margin expansion was driven by specific supply-chain and logistics efficiency initiatives at both brands. Adjusted operating expenses grew 42% for the full year, slower than sales growth of 57%. We were able to nicely leverage operating expenses despite stepping up investment in future growth drivers like ODDITY LABS and new brands, due in large part to the higher proportion of repeat sales in our overall revenue mix, which are more profitable. We also made investments to drive increased business efficiency. We expanded our use of generative AI across multiple consumer touchpoints, including advertising, user experience, and customer service. We are still very early in implementation here but are seeing improvements across the P&L, from better conversion to operating cost efficiencies, and we have not yet implemented generative AI to support coding and development, which we believe will save costs and drive efficiencies in the future. We delivered adjusted EBITDA of $107 million for the full year and $16 million for the quarter. Full year adjusted EBITDA margins of 21% expanded 900 basis points from the prior year, driven by gross margin expansion and higher mix of repeat, offset by increased investment in future growth drivers. We delivered adjusted diluted earnings per share of $1.31 for the full year and $0.17 for the quarter and reported diluted earnings per share of $1 and $0.08 for the same periods, respectively. Our asset-light model and strong returns on capital once again supported very strong cash generation. We delivered $85 million of free cash flow in 2023 and we exited the year with $168 million of cash, equivalents, and short-term investments on our balance sheet, and zero debt. And we strengthened our capital position early this year with $100 million credit facility that we can use for general corporate purposes, buybacks, acquisitions, and other uses. Turning to our outlook. We remain committed to our long-term targets of 20%-plus revenue growth at a 20% adjusted EBITDA margin. To reiterate the purpose of our 20/20 strategy. For revenue growth, 20% is 2 to 3 times faster than what legacy competitors are growing. As for 20% margin, the business is more profitable on an underlying basis, but in our view, there is no reason to deliver more than 20%. We are here to build something huge, therefore every excess dollar of margin we have, we invest in big bets that can change the industry and support our long-term growth. And in fact this has already proven to be an excellent use of our capital. Our track record of reinvestment is very strong, not just because our business already generates high returns on invested capital, but more specifically recall that we launched SpoiledChild with around $20 million of upfront investment, and as Oran said, we expect SpoiledChild will be a $1 billion brand. In 2024 specifically, based on our very strong start to the year, we expect to do even better than these long-term targets. We expect net revenue will increase between 22% to 24% for the year, driven by robust growth at both brands. In terms of pacing revenue, we plan to deliver relatively consistent low-to-mid 20s year-over-year growth every quarter across 2024. Turning to profitability, we expect to deliver 70.5% gross margin for the full year and we expect to deliver adjusted EBITDA for the year between $136 million and $140 million, which will include a step-up in growth investments, including LABS and new brands. The timing of these growth investments is skewed to the last nine months of the year, with limited impact on the first quarter. We expect adjusted diluted earnings per share will be between $1.49 to $1.54 for the full year 2024. Turning to the first quarter. As we discussed last year, we deliberately slowed the business down in the back half of 2023 in order to pace our growth, while our teams focused on huge preparations for 2024. We entered January with incredible strength and delivered a large acceleration in the business, more than doubling the Q4 pace and doing it very profitably. We quickly began to pace our sales ahead of plan, which, because of our strong repeat, already puts us in a position to secure our full year objectives and also leaves us the flexibility to once again begin holding our revenue growth back to leave more room for the future. The muscle and control our teams have to flex the business with precision is a huge strength for us and something really unique to ODDITY. Given the very strong start to the year, we expect Q1 net sales growth between 23% and 25%. You can find more details on our Q1 outlook in our press release.

Operator, Operator

Thank you. Our first question comes from Lorraine Hutchinson with Bank of America. Please proceed with your question.

Lorraine Hutchinson, Analyst

Thank you. Good morning, everyone. I wanted to ask about some of the newness that you were planning to roll out this year. I think you had talked about 10 new molecules or products. How many of those are out there already and is there any initial commentary on how those are performing?

Oran Holtzman, CEO

Hi. Thanks for the question. So I think that you’re referring to LABS. In general, just for better understanding, each brand, aside from LAB, has its own NPD department and they work constantly on developing new products and new categories for the existing brands. So they have way more than 10 products launching this year. Aside from that, we have what we have built in LABS, which are new molecules that we are starting to call. LABS and in the development-wise on track and will be ready for this year. It doesn’t mean we launch them this year. We always have engines we keep ready to be launched based on revenue growth needs. If we see that we need more revenue power, then we launch them. This was always my approach with products, with categories, and with other growth engines. Two or three products are going to be launched shortly. And again, we launch them, we test, we see their satisfaction and then we go back and decide at what scale we want to see from this product in the quarter or for the rest of the year. So, yes, all the 10 products will be ready to be launched. If we launch them, it’s up to us.

Lorraine Hutchinson, Analyst

Okay and thank you. Lindsay, I wanted to clarify a point that you made, talking about entering January with incredible strength. I think you said you doubled the 4Q pace. So can you square that commentary with the revenue guidance, which implies slower growth than that? I guess, how much did you pull back on acquisition spending, and yeah, any other color you could give on the rest of the quarter after that strong start to January?

Lindsay Drucker Mann, CFO

Sure. I'm happy to explain. One significant difference between our model and many traditional consumer or beauty models is that we do not rely on physical stores to constantly replenish inventory based on customer traffic and demand. Since we operate direct-to-consumer and control our acquisition pace, we set our own spending rhythm. Previously, we've started strong in the first quarter and then reduced our user acquisition efforts in the latter half of the year, resulting in a front-loaded first half compared to the second. This pattern doesn't occur because beauty sales spike in the first quarter; rather, it's the opposite for many competitors, whose biggest sales occur in the fourth quarter. In the fourth quarter, we achieved $97 million in net revenue, and for our first-quarter guidance, we swiftly turned the business back on, which is challenging but a strength of ours. We ramped up significantly and saw a surge in demand, which was exciting. We had anticipated this growth and were pleased with our performance in January and February, as well as early March. Due to the repeat nature of our business, we now have strong visibility into reaching our full-year goals. Essentially, we've secured 2024's targets already, which is promising. I understand you might be referring to year-over-year growth rates; however, we manage our business based on demand pulses. For Q4, we experienced a 44% year-over-year growth, but this quarter is primarily driven by repeat sales. Now, we've reactivated the business and are trying to align closer with our long-term growth target of around 20% for 2024, although we are slightly ahead of that between 2022 and 2024. We believe that growth rate is suitable for sustaining the business, and we aim to deliver within that range each quarter this year.

Oran Holtzman, CEO

I would just add one more thing that, again, in Q1, the beginning of every Q1, we start again opening user acquisition and despite the high scale that we had in the past two months, we have seen an improvement in our marketing efficiency KPIs in terms of ROAS in Q1 of 2024 compared to 2023. So, though we, like, we pushed and we started again, and to acquire new users, the results are very strong and we don’t do it just because we need, we do it when the market allows and we’ve seen massive demand out.

Lorraine Hutchinson, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Scott Schoenhaus with KeyBanc Capital Markets. Please proceed with your question.

Scott Schoenhaus, Analyst

Hi, team. Thanks for taking my question. I wanted to focus on ODDITY LABS and the expansion of the team and the expansion of scope in the projects that you mentioned that was in the release. Are these expansions more related to products within current brands, IL MAKIAGE, SpoiledChild? Are they for the new Brand 3 launch related to acute skin and Brand 4? Just kind of understanding where these investments, accelerated investments are going to? Thanks.

Oran Holtzman, CEO

Hi. So it’s important to understand for IL MAKIAGE and SpoiledChild, a lot of the work that is being done through LABS now is for Brand 3, which is a medical skin and body, and we are planning to launch many products from LABS for Brand 3. And overall, LABS is built in full power, and as a reminder, like what we do there is exactly as Evan mentioned, and I am absolutely number one focus now. I’m literally trying to bust today after we finish the call. In terms of investment, we say investment is about people and I want to double the PhDs, the number of PhDs that we have done this year. We are now around 30 people and the target is to be more than 60 people by end of the year. We are putting a lot of investment in LABS today, both people and the way that in protocol, in building the LAB to make sure that we have enough, that the pipeline will be efficient for both end users. And we will have products ready this year to be launched and more case impacts, so development-wise everything has to be built. And by the way, like any other growth engine that we build, it doesn’t mean that we launch them as we did before. We always keep engines ready to be launched based on where they are needed. So if we see that I need more power, I already have a few products out there ready to be launched within IL MAKIAGE and SpoiledChild both coming from the LAB, but it’s going to be our decision. And every product that we are working on takes time. It’s a long and deep process, and it takes around two years to develop a product in this LAB from idea to molecule discovery, all the way through incorporation into the high-efficiency product that exists in the market. We are using the best molecule discovery methods for bioengineering, synthetic biology, computational chemistry, and artificial intelligence, and it starts all the way from the idea, from where we see in the user base, we see a segment that is craving for something better. Then we go back to LAB, we ask them if something can be done to create something better in terms of efficacy and then we start developing it and do that and use the power of LABS. So, again, multiple projects, more than 20 projects that LABS are now working on and not all of them will be successful, but we don’t need all of them, because each and every one of them can be a category killer.

Scott Schoenhaus, Analyst

Thanks, Oren. And just a follow-up there. Can you remind us, on average, how long it takes from the initial idea and molecule discovery through any kind of regulatory process and then full commercialization on the molecule side? Thanks.

Oran Holtzman, CEO

Sure. It typically takes around two years, and I can provide some background that may help you understand our future work in LABS. We begin by creating advanced biological models to address specific challenges, simulating the underlying cause in a cell-based assay and assessing the cell's physiological response. Next, we conduct computational screenings to identify molecules that can elicit the desired cell response. We utilize deep learning models to predict which molecules are most likely to interact effectively with our target, followed by a series of in-vehicle cell enzyme-based assays to validate these computational predictions. Afterward, we focus on safety. All identified molecules undergo evaluation in human trials to confirm that our findings in LAB translate to successful outcomes in people, outperforming current market solutions. This process can take anywhere from 18 months to two and a half years, but on average, it's about two years from the moment we assign the task to when we’re ready for market launch.

Scott Schoenhaus, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Youssef Squali with Truist Securities. Please proceed with your question.

Youssef Squali, Analyst

Great. Thank you very much. Lindsay, can you help us think through your market expense cadence in 2024, overall and across both brands? And then Oren, SpoiledChild at $110 million in its first calendar year is really impressive and I believe it’s actually tracking ahead of where IL MAKIAGE was back in 2019. It was launched in 2018, I think. So do you think that kind of ramp for SpoiledChild in particular can continue at a kind of a faster rate than what you’ve seen with IL MAKIAGE, considering the much more developed platform now that you’re running? Thank you both.

Lindsay Drucker Mann, CFO

I’ll begin with the marketing question. We started the year with a significant increase in our user acquisition spending compared to the fourth quarter, which generated very effective returns. As Oran mentioned, our return on ad spend in the first quarter of 2024 improved compared to the same period in 2023. Overall, we expect marketing growth to align closely with sales for the year. In terms of pacing, we usually see more repeat activity in the latter half of the year than in the earlier part, which influences our marketing spending throughout the year. While I won't provide comments on individual brands, I have high expectations for both brands this year and anticipate strong performance, partly due to our excellent marketing execution.

Oran Holtzman, CEO

Sure. I will discuss the growth strategy and then we'll move on to SpoiledChild. In the first quarter of 2023, I made a mistake by growing too quickly. We saw an 83% growth, which resulted in an overall growth of 57% for the entire year, and we have chosen not to repeat that approach, although I truly believe we could. The long-term target remains, as previously stated, over 20% growth and a 20% EBITDA margin, and by controlling the pace of growth, I am ensuring that these goals will be met and sustained. For Q1, we designed the model and managed growth to achieve a year-over-year increase of 22% to 24%. I want to emphasize that the decision to pace growth is mine. Even while we aim for over 20% growth, we are far outpacing my traditional competitors, who are experiencing single-digit growth, and we are successfully securing business early in the year. The first quarter is incredibly significant for us, with 60% of our revenue generated in that period in 2023, and we anticipate a similar figure for 2024. However, we do not need to increase the percentage of total revenue for the first quarter or the first half of the year to achieve this. Regarding SpoiledChild, I accelerated its growth in 2023 to understand its brand potential. Since it's a new brand, we needed more data to assess its limits. The decision to drive growth was entirely mine, which resulted in remarkable 300% growth. There is no need to accelerate growth in 2024. If you inquire about how SpoiledChild compares to IL MAKIAGE, it has outpaced IL MAKIAGE because I permitted it to grow at a faster rate. In the early days of IL MAKIAGE, I restricted their growth; however, that led to consistent revenue growth from $25 million to around $400 million this year. The plan is to maintain a similar approach with SpoiledChild.

Youssef Squali, Analyst

Okay. Thank you both.

Operator, Operator

Our next question comes from the line of Andrew Boone with JMP Securities. Please proceed with your question.

Andrew Boone, Analyst

Good morning. Thanks so much for taking my questions. International grew 13% year-over-year in 2023. This is below IL MAKIAGE’s total growth of 33%. Is there anything to call out there or is that one example of you guys holding back on growth initiatives? And then, Lindsay, stepping back, you guys have beaten the guidance by about $10 million each quarter. Is there something unique in 2023 or is there a way that we should be thinking about the conservatism that you’re setting out in the guide and how we set expectations for 2024? Thanks so much.

Oran Holtzman, CEO

Sure, I will start with international and then Lindsay can discuss the guidance. We see a huge opportunity in international markets, as I mentioned earlier, for other competitors. It represents two-thirds of their business. However, we still have room to grow in North America as well. We are developing strong localized experiences for each market we enter, which enables us to achieve strong and profitable performance right from the start when we launch in new markets. This is a significant strategy for us that we aim to continue leveraging. Ultimately, it's my decision on how quickly we want to grow and prioritize our efforts. Because we are a fully direct-to-consumer company, I can choose at any moment where to allocate our resources, specifying the brand and category, product, or geography. Everything is measured daily, and we allocate accordingly. We have tested more than 10 countries where we have confirmed strong results, favorable unit economics, and significant scale, and we take the time to ensure we have ample runway ahead. When the time comes, we will enter those markets.

Lindsay Drucker Mann, CFO

Great. I’ll continue on the question about our guidance. You’re right, as a public company and every time we’ve spoken to you, we’ve over-performed on every metric, achieved or mostly exceeded on every single metric that we committed to delivering. This is one of the favorite things about when I first met Oran, I’ve never missed a budget and I never planned to, and obviously, as a CFO and for us and our team, that’s really important in terms of building confidence with our investors that we do what we say we’re going to do and that’s 100% how we think about the business. We set out very, very big goals internally and we ensure everything possible that we achieve them. And then we also make sure that we’re delivering to our investors a framework that we know we can make good on and that’s why we have so much conviction in our guidance for 2024 and our long-term guidance, because on an underlying basis, if we wanted to, we could be delivering faster topline growth. We can see it. I mean, it’s very obvious just based on how the first quarter has come together that we could do nicely ahead of the numbers that we’re laying out for you today. We could also be a lot more profitable, but that’s not the right way for us to approach if we want many, many years of steady, durable compounding. As it relates to 2023, we did over-deliver by a pretty wide margin. Some of that is because we ramped so much in the first quarter and the first half of last year. We had a big wave of first orders that came in and we got a big wave of repeat in the back half of the year, and we always try to take a conservative approach to modeling, but we were overly conservative in modeling repeat, and so ultimately that, and repeat is quite profitable, so we ended up delivering ahead of plan. Our objective for 2024 and our second year as a public company is to try to land the plane much more closely to our targets. And so, as you guys think about your models, number one, from a revenue perspective, we plan to land the plane much more in line with the guidance that we set out. In addition, every incremental dollar of revenue upside, we plan to reinvest in the business as I talked about in my prepared remarks. We think that’s the amazing use of our capital for future value creation.

Andrew Boone, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Dara Mohsenian, Analyst

Hey, guys. Good morning. So we spent a lot of time on ODDITY LABS, but obviously you guys are very excited about it. Can you just give us an update on how much of a revenue driver you expect that to be along with vision technology in 2024 and just what’s embedded in the revenue guidance? And then as you think about the commercial development of the business over time, looking out beyond 2024, how important each of those areas might be conceptually? I know you probably won’t want to give us exact numbers, but how do you think about it looking out over the next few years, each of those areas?

Oran Holtzman, CEO

I can begin, and maybe Evan or Lindsay will join me. We can achieve our results and guidance for this year without any products from ODDITY LABS. Our teams are prepared, the product is excellent, and the market is ready to support our objectives without LABS. That said, we will test LABS products, which likely means some revenue will come from LABS, but we will focus on managing our growth.

Dr. Evan Zhao, Chief Science Officer

Yeah. Hi. I just wanted to reemphasize one point, which is all of the projects that LABS is working on, we think are very high impact. We have an amazing commercial team that works with the LAB crew to decide what projects we want to work on, and we really only target the markets we think could be huge revenue drivers. So think about things that could replace entire sections of the business and so it gives you an idea of what we expect the impact we’re working on to be.

Dara Mohsenian, Analyst

Great. And then can you touch on vision technology a bit? Sorry, my phone cut out for a second, but just cover how important that might be as you look out over the next few years?

Lindsay Drucker Mann, CFO

Great. I’ll take this one because I think Oran’s having trouble with his line. So vision technology is the capability that we established with the acquisition of Voyage81 in 2021. There are so many applications for this technology. We really have the team prioritizing two objectives. The first is to make our existing matching capabilities stronger and the second is to build really new diagnostic tools. As it relates to making our existing matching capabilities stronger, right now, for example, in our PowerMatch engine, we’re making product recommendations based on data alone, what the user tells us about themselves. But of course, there’s information that we can glean above and beyond that, sometimes things that they don’t know about using vision. And so incorporating vision into PowerMatch was something that we really have been working on from the beginning. Last year, we had some more implementation. This year, we’re going to take it even further. We’re still in pretty early days as far as how much vision we can use for to do better matching, but we’re already seeing the benefits for sure. And even though we’ve got 90% accuracy already in shade matching, every incremental 50 basis points, 100 basis points effectively flows through for us to the bottom line. So that’s already in process. You’re already seeing it in our products today. You’re already seeing it in our results for existing brands, but we expect more of that in the future. The next really big and transformational innovation for vision is how we implement it in Brand 3. And as Oran talked about it, with Brand 3, we’re really creating a first-of-its-kind mobile platform that will number one, support full diagnostics. So what are your skin issues and concerns, using machine models, data, and AI, and computer vision to do it. Number two, what’s the right treatment protocol, so what do you use to fix the issue? And again, using our machine learning models for those product recommendations. And then finally, coaching and upkeep, which will support compliance. So oftentimes, for example, with an issue like acne, your problem might get worse before it gets better and so that coaching component is really important for churn, and vision is, of course, an integral part in helping people understand how they’re progressing and their improvement. So those are three applications for Brand 3 and vision that we think are truly groundbreaking, and you’ll hear us talk a lot more about that when we launch Brand 3 and have it on the ground running.

Oran Holtzman, CEO

Guys, can you hear me?

Lindsay Drucker Mann, CFO

Yes.

Oran Holtzman, CEO

Yes. Cool. I would just add to that that we have around 30 people on the computer vision side and around 20 out of the 30 are working on Brand 3 for diagnosis and for the mobile application that we are building there, and the rest of the people are working for Brand 1, Brand 2, which is in my case, in SpoiledChild, and we already see results, better matching and better unit economics just based on the addition that we had with the computer vision.

Dara Mohsenian, Analyst

Great. And then if I can slip one more in, you talked about managing the pace of revenue growth to a bit more manageable level this upcoming year versus 2023 when you’re obviously a very outsized growth. Can you just talk about sort of how you think about that conceptually in terms of what level of growth is healthy for the business from a top line standpoint and how that impacts the long-term revenue opportunity of the company and how you think about that relative to profitability?

Oran Holtzman, CEO

Yeah. So the way that we measure everything is based on contribution, meaning EBITDA level based on the brand, and we don’t spend media dollars against products that we don’t see. Very strong results in terms of 12 months and 24 months direct contribution margin. So every dollar that you spend is more or less equal, otherwise you will spend against something else. In terms of visibility and managing the growth, again, last year was something unique, was the first year of full scale or full scale that I allowed for SpoiledChild. And again, it’s something that we didn’t have because we didn’t know the repeat numbers that we were going to see from this brand and the results were very, very strong. That’s the main reason for the additional dollars that we had against our guidance, and we hope that we are modeling this now better. Again, it’s a good problem to have, but the repeat rates are the main driver for the business and it’s less about new acquisition because in Q4, even in Q3 last year, we almost, like, we cut and spent way less than what we are going to spend. So it’s purely about repeat.

Dara Mohsenian, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Lauren Lieberman, Analyst

Great. Thanks. Hey. Good morning. So I know in the prepared remarks and through the conversation since, you talked a lot about where you’re reinvesting and proactive reinvestment and then the incremental dollar goes back into reinvesting for future growth. But we have gotten asked by people prior to the call just about sort of cost of growth and thinking back, Lindsay, to your mention earlier of the high return model of a software business. So if we look out over, let’s call it, the next five years, maybe you guys tell me what the right time frame is. When should we think about that sort of high incremental returns business model being more apparent externally? Again, I understand the notion of investing for future growth, but just putting together the high return model and that being completely visible externally versus the continuing to invest for future growth.

Oran Holtzman, CEO

I want to say that, looking at this year, a few months ago I would have aimed for a 20% EBITDA margin. However, we realized that the business is significantly more profitable than we initially thought, which allows us to target around 22%. Even with our current investments, the business remains very profitable. I intend to stick with this margin and continue investing for the future, as there is a lot to accomplish. We see two major transformations in the industry: one is online technology, where we need to keep investing in our tech team to stay ahead of competitors; the other is ODDITY LAB, which has tremendous potential. Additionally, every new brand we launch, like Brand 3 and Brand 4, requires investment in its first couple of years. Therefore, as we invest in tech, ODDITY LAB, and new brands, we are focused on building the future of the company. If I didn't believe in this, I would sell the business. My plan is completely to continue investing, and I don't see any reason to aim for more than a 20% margin. The business is generating substantial cash, we have zero debt, and I don't find it necessary to target a 30% margin.

Lauren Lieberman, Analyst

Okay. Great.

Lindsay Drucker Mann, CFO

Let me just add, I’ll just add one thing, Lauren, to that.

Lauren Lieberman, Analyst

Yeah. Go ahead.

Lindsay Drucker Mann, CFO

As you consider the returns on our business, a key difference between us and larger consumer conglomerates is our capacity to develop brands organically. For example, we invested $20 million upfront to launch Spoiled, which has generated over $100 million in net revenue. If you were to use a beauty M&A multiple ranging from 5 to 10 times revenue, the acquisition cost for Spoiled would be between $500 million and $1 billion. This illustrates the return on capital we can achieve by building brands organically rather than relying on traditional conglomerate models. Our approach allows for significant returns as we capture a greater share of existing spending with high margins. We believe that once fully mature, our model will demonstrate a superior return profile compared to legacy structures. Nonetheless, we currently only have a small fraction of market share in a vast global market, and there are numerous opportunities for us to grow. We anticipate maintaining this growth trajectory for many years without hitting a saturation point. Therefore, it's challenging to predict when we will start delivering the higher margin returns, as we have abundant opportunities for growth investment.

Oran Holtzman, CEO

I just want to add one more thing regarding margins. When we launched SpoiledChild, although it was an amazing success, the first year, 2022, it had single-digit EBITDA margin and second year was already double-digit, but it was less than IL MAKIAGE. Now they’re running very strong EBITDA margin, but again, it takes time. So when we launch Brand 3, for example, like it will cost us in terms of margins, and therefore, every brand that we launch, it damages short-term our margins, but long-term it supports high growth and with very healthy margins, otherwise we will not spend against it.

Lauren Lieberman, Analyst

Okay. That’s really helpful. One more quick thing on Brand 3, on the acne. I think at one point you talked about having sort of a pharmacy element to this and now you’re saying medical grade. So I just wanted to check in on that. Is there still sort of an online or a pharmacy function that’s going to be part of this or is it medical grade, something different?

Oran Holtzman, CEO

Yeah. Yeah, it’s going to be both OTC and Rx, and we are not going to start with our own pharmacy, we’ll start with third-party, just because of the regulation, because we want to see what works and what doesn’t before we invest so much against it, but it’s going to be both.

Lauren Lieberman, Analyst

Okay. Sounds good. Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Oran Holtzman for closing comments.

Oran Holtzman, CEO

Thank you very much, guys, for joining. We’ll talk with you when we report the first quarter. Have a great day. Bye-bye.

Operator, Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.