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Greetings, and welcome to the Wag! Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, [ Greg Robles ] with Investor Relations. Thank you, sir. You may begin.
Good afternoon, everyone, and thank you for joining Wag!'s conference call to discuss our third quarter 2023 financial results. On the call today are Garrett Smallwood, Chief Executive Officer and Chairman; Adam Storm, President and Chief Product Officer; and Alec Davidian, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of these risks and uncertainties are included in our filings within the SEC.
We also remind you that we undertake no obligation to update the information contained on this call. These statements should be considered estimates only and are not a guarantee of future performance. Also, during the call, we present both GAAP and non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release, which we issued today. The earnings release is available on the Investor Relations page of our website and is included in Exhibit and Form 8-K furnished to the SEC. These non-GAAP measures are not intended to be a substitute for our GAAP results.
Lastly, you can find our earnings presentation posted on our IR website and with the SEC. And with that, I will now turn the call over to Garrett Smallwood.
Good afternoon, and thank you for joining us today to discuss our financial performance for the third quarter of 2023. We are excited to announce another successful quarter for the Wag! team, exceeding our own expectations for both revenue and adjusted EBITDA. This quarter further demonstrates that we are transforming the pet industry by becoming an all-inclusive trusted partner for the premium pet parent and capitalizing on the secular growth of pet ownership.
We continue to build lasting high-frequency relationships with households across the U.S. by becoming their go-to destination for premium services, health and wellness. While we remain laser-focused on profitability for the remainder of 2023, we continue to invest in our platform and technology, building proprietary solutions to the most important needs.
In 2024 and beyond, we will continue to use our proprietary technology, scalable platform and deep and trusted relationships with premium households to strike the right balance of growth and profitability.
With that, I will provide a brief overview of our financial results for the third quarter. Following that, Adam, our President and Chief Product Officer, will share updates on our strategic plans and key initiatives for the remainder of 2023 and beyond. Then Alec, our Chief Financial Officer, will provide a more detailed analysis of our third quarter results, discuss our capital allocation priorities, and reiterate our 2023 guidance.
During the quarter, revenue grew by 42% year-over-year to $21.8 million. This growth was driven by the success of our Wellness business, fueled by demand for pet insurance and wellness products. In addition to the success of Paw Protect, the only pet insurance product in the U.S. with Instant Pay. We're seeing early signs of success with Cat Food Advisor, which validates our longer-term growth initiatives by expanding our reach in the Pet Food & Treats category. Our adjusted EBITDA was $1 million, an increase from a loss of $0.5 million in the same period last year. As we navigate the dynamic macroeconomic landscape, our primary objective remains centered around achieving a sustainable equilibrium between growth, profit and margin.
In the third quarter, platform participants increased to 632,000, an increase of 34% year-over-year, and Wag! Premium maintained strong penetration at 52%. Our third quarter organic acquisition rate was more than 70%, which is a result of our focus on dynamic partnerships, a best-in-class experience and our referral partners. We continue to be thoughtful and deliberate around capital allocation and brand building. And as a result, our LTV-to-CAC ratio was a deliberate 9:1.
On the supply side of the business, we maintained a supply and demand equilibrium through a variable platform fee, which averaged $50.26 in Q3 2023. In summary, the team at Wag! continues to execute against our goals and deliver strong and sustainable results. Our third quarter results demonstrate our ability to scale the platform faster and more profitably than anticipated and show the effectiveness of our strategy and business model to become the #1 platform for premium pet parents.
Simply, we have out-executed on the strategy we set forth almost 2 years ago for the seventh consecutive quarter. And with that, I will turn the call over to Adam Storm to review our strategy for the remainder of 2023.
Thanks, Garrett. I'll once again walk through the 5 top-level elements of our strategy to drive long-term shareholder value and profitable growth. One, accelerate growth in existing markets. As Garrett mentioned, the third quarter was another record revenue quarter, driven by the demand for pet insurance and wellness products across the U.S. as well as a post-summer return to normal daytime service habits. We will continue to leverage our technology and best-in-class user experience to innovate on comparison tools and matchmaking services for highly fragmented experiences with the largest total addressable markets such as pet food and treats and pet insurance.
Two, expanding premium subscription offerings. Our premium penetration rate remained at a robust 52%, ahead of our long-term goal of 50%. We are continuing to test the value of the Wag! Premium bundle by introducing new benefits and experimenting with current offers. We're actively experimenting around a 10% price discount for new subscribers with an emphasis on the upcoming holidays, which [ seek ] toward overnight sitting and boarding, which is a higher average order value service set. Three, platform expansion. Last quarter, we rolled out the Wag! Store in partnership with maxbone, which we acquired in Q2 of '23, bringing modern pet essentials to our engaged community of pet parents and pet care givers. maxbone has incredible assortment of premium products. For example, the Christian Cowan collab jumper, which Kim Kardashian organically posted about on her Instagram page with her Pomeranian, Sushi. I urge you to check it out. Other bestsellers include the Eco Sling Carrier and the Easy Fit Harness, which come in fun colors such as peach, yellow, ivory and dusk blue. We will continue to roll out seasonal products, collaborations and must-haves to expand the Wag! brand while capturing additional share of wallet.
Fourth, opportunistic M&A. Wag! continues to be strategically positioned to leverage pet-specific M&A opportunities due to our ability to strictly integrate new assets into our platform, supported by our deep understanding of the consumer and our technology-first DNA. We are most excited about assets that have high rates of organic acquisition, a product or a service that is beloved by customers and/or categories of household spend that we do not currently capture.
Fifth, operating scale. This quarter, we saw operating margin improvements across all areas due to the positive impact of our unit economics and fixed cost operating leverage. Adjusted EBITDA margin improved substantially year-over-year from minus 3% to positive 5%, an 8 percentage point improvement. This significant year-over-year improvement is inherent to our high-margin software marketplace model, where incremental revenue significantly enhances the adjusted EBITDA profile for the entire platform.
2023 continues to be our year of efficiency and focused on full year adjusted EBITDA profitability, which we have achieved as of Q3 '23. We will continue to invest in efficient marketing payback cycles, operational excellence, platform integration then cross-sell, and best-in-class customer experience. I will now turn the call over to Alec to discuss our third quarter financial results in more detail.
Thanks, Adam. Q3, building on our Q1 and Q2 momentum, closed with record platform participants of 632,000, revenue of $21.8 million and adjusted EBITDA of $1 million, resulting in back-to-back adjusted EBITDA profitable quarters. This also takes us to full year '23 adjusted EBITDA profitable year-to-date, a huge milestone in the company's history.
Third quarter revenue of $21.8 million exceeded our expectations, up 42% from last year, driven by strength across all 3 revenue categories. This resulted in an adjusted EBITDA profit of $1 million for Q3 versus an adjusted EBITDA loss of $0.5 million last year.
Breaking down our 3 revenue categories. Services revenue was $6.6 million, growing 12% from Q3 last year, making it the largest service revenue quarter to date. We continue to see [ post similar ] return to normal service habits, combined with a continued slow and steady return-to-office trend. Services also includes normal amounts of e-commerce revenue from maxbone and Wag! Store. Wellness revenue was $13.5 million, increasing 42% from Q3 last year, driven by demand for our pet insurance and Wellness products through our proprietary comparison engine technology. Our technology's ability to add value to customers are clear. And in Q3, we experienced record traffic as consumer return-to-normal activities resumed.
Pet Food & Treats revenue, a new revenue category for this year, was $1.7 million. Cat Food Advisor, our newly launched cat food adviser, continue to provide pet parents with high-quality information to allow them to make the right food decisions for their pets.
Turning to expenses. Cost of revenue, excluding depreciation and amortization, of $1.4 million was consistent year-over-year at 7% on revenue. Capital costs were down year-over-year as a result of very thoughtful operational excellence and the scalability of our tech stack, offset by product costs from the sale of products through maxbone and Wag! Store.
Platform operations and support expense of $3 million equates to 14% of revenue, down from 37% a year ago. While non-revenue-generating platform operations and support functions remain a key factor into the business, our operations have become highly efficient over the past year through redesign and use of AI tools to get answers faster.
Sales and marketing expense of $12.8 million equates to 59% of revenue, down from 73% a year ago. We saw numerous opportunities to put dollars to work in sales and marketing across our various revenue stream, and we'll continue to take advantage of efficiencies as we identify them.
G&A expense of $4.7 million equates to 21% of revenue, down from [ 165% ] a year ago, which included transaction costs. 21% represents the lowest ratio since we have become public and illustrate the scalability of our platform and operational excellence of our leadership team.
From a balance sheet perspective, we ended the third quarter with approximately $31 million in cash, cash equivalents and accounts receivable. Our adjusted EBITDA positive results put us in a strong position to continue to deploy cash through sales and marketing, product innovation and value-add acquisitions.
Moving to our guidance for '23. Taking into consideration results year-to-date, we reiterate our full year '23 forecast of total revenue in the range of $80 million to $84 million and adjusted EBITDA guidance to a range of 0 to $2 million. $82 million and $1 million are at the midpoint of the respective ranges.
For the fourth quarter, we expect total revenue of $20 million at the midpoint of the full year '23 range, which would be an 18% increase in revenue over Q4 '22, and adjusted EBITDA of $0.3 million at the midpoint of the full year '23 range, which would be a 168% improvement over Q4 '22 adjusted EBITDA.
With our strong future results, which took year-to-date adjusted EBITDA to $0.7 million, we are in a strong position to complete '23 fiscal year as an adjusted EBITDA profitable company. We continue to be thoughtful and considerate of the macroeconomic environment and potential slowdown in consumer spending.
Our financial guidance includes the following considerations. The forecast incorporates our internal target of the rule of 50, meaning a total of greater than 50% from revenue growth plus adjusted EBITDA margin for the full year. We expect holidays to drive incremental overnight versus daytime service demand, but also expect that severe weather will impact service demand.
Pet adoption during the holidays also positively impact penetration and demand for wellness plans. We anticipate that continued growth in the pet industry, driven by factors such as higher rates of pet ownership, pet insurance penetration and increasing demand for premium pet products and services will have a positive impact on our full year '23 results, including on our entrance to Pet Food & Treats. General trends related to the state of the economy, interest rates, consumer confidence. We have factored in potential risks and opportunities related to these macroeconomic factors in order to accurately forecast our financial performance. And finally, we recognize that there may be potential risks to our financial performance in '23 such as disruptions to global supply chains, changes in consumer behavior due to unexpected events such as a delayed or unbalanced return to office, digital and performance marketing trends, the potential impact of AI, and our ability to expand through partnerships.
In summary, our strong quarter results illustrate our team's strong ability to execute across our diversified revenue streams, taking advantage of opportunities that arise to build a profitable business and shareholder value. And with that, we now welcome Q&A. Operator, can you kindly open it up for Q&A.
[Operator Instructions] The first question comes from Jason Helfstein with Oppenheimer.
So Garrett, you're coming off of over 40% revenue growth this quarter. I want to push you to kind of comment on how you're thinking about growth potentially next year. And then how are you thinking about marketing relative to that kind of growth? You talked about the rule of 50. Is that something that you want folks to focus on next year? Just whatever you can talk about kind of like growth versus marketing as we're thinking about next year. And then secondly, any kind of color on mix of service versus wellness as we move into next year? Do we just kind of look at the current trends and just kind of assume the same mix shift as we move into next year?
Great question. I think taking a step back, we're certainly very excited about the progress in 2023. Some good news. We haven't really seen any sort of consumer slowdown or change in behavior, I think, that maybe some we're anticipating as a function of the macro this year. We feel like we have a really resilient premium consumer base.
In terms of next year, obviously, we'll have more to share next quarter in terms of forecast. But I definitely think the minimum expectation just broadly is we're a rule of 30, if not 40, marketplace. I think we're going to see how this kind of quarter pans out, frankly, meaning Q4. But I think we're very excited about next year's potential. There's a lot of great products and services on the road map in addition to the ones we launched this year. But to answer your question specifically, we're really just laying the groundwork to accelerate growth in 2024, and that growth should be very profitable is our expectation.
Our next question comes from Jeremy Hamblin with Craig-Hallum.
Congrats on the strong results here across your segments. So I wanted to dive into your Wellness segment here. And just to understand, in terms of driving that growth also over 40% growth in that segment, is that being driven by more participation, more participants? I mean you had a record number here in Q3 at 632,000, or being more driven by higher spend or the combination of both?
Jeremy, great to hear from you. Again, Garrett here. Wellness is certainly a very exciting category. I think you're seeing a number of insurers and wellness players and health players leaning into our marketplace as a great place to find and meet customers. We're certainly enjoying it in terms of our opportunity to match customers with great experiences and services and products they care about.
In terms of participant growth, wellness is functionally going to grow as a function of net new customers. Really, that's -- we're seeing basically like a 1:1. More revenue from wellness implies more net new participants in the platform. And then you can imagine that those customers then cross-sell to the other ecosystems of products, right? So you come for purchasing the right pet insurance product somewhere or finding the right pet insurance product somewhere, and then you stay for a daytime service or an overnight service or purchasing a maxbone product.
Got it. Okay. And then let me shift gears here and talk about sales and marketing. As we look ahead here, we're going to get into an election year. Sometimes, costs are a little bit higher for advertising. You guys are still running a really strong CAC ratio of 9:1, I think, in the quarter. Any color that you might be able to share in terms of the strategy you're utilizing to reach new customers as well as to keep existing customers engaged on the platform or to reactivate lapsed customers?
Yes. So I certainly think if you look at the LTV-to-CAC, we're running incredibly efficiently. It's probably the best way to put it. We certainly think there's room to run. We made it pretty clear, I think, in the last 2 earnings that we're very focused on profitability for this year. And we're thrilled that we're adjusted EBITDA profitable for the fiscal year as of this quarter. And we don't expect that to change, obviously, for the remainder of the year.
So now we know we have kind of adjusted EBITDA profitability as a minimum expectation. Now I think we're feeling more comfortable about our ability to deploy more in sales and marketing. So in terms of next year's thinking, I'd be surprised if we weren't leaning further into sales and marketing, whether that's with the big partners you'd expect, whether that's with partners that are offline that we already have in place, or just existing customers that we want to retarget or reach with custom offers. But generally, I think next year, we expect to lean even further into sales and marketing.
Got it. And then just a couple of other questions here. In terms of your pet caregiver pipeline, have you seen any change? I mean we still have -- unemployment is still quite low, but you are seeing an uptick in first-time unemployment. Are you guys seeing that pipeline still strong? Is it getting better? And then are you still experimenting in terms of the fee that you're charging to join the platform for the PCGs?
Jeremy, this is Adam. Good set of questions. Long story short, no, there's no change in our supply characteristics. We really think it's the best gig in America, walking dogs in sunny days and nice neighborhoods. It's kind of what everybody wants to do. In terms of kind of how the broader macro affects it, in theory, unemployment would be good for us because it would make the gig more kind of competitive or whatever you want to call it.
But I really don't think that there's a macro tie-in. I think this is an awesome gig that people want to do rain or shine, no pun intended. I don't think -- regardless of what happens to the macro, I don't think that's going to be a -- have a large impact. In terms of the onboarding fee you mentioned, it's really about finding price equilibrium or supply-demand equilibrium in the markets. We're not like looking to really drive that as a primary revenue source. So any fluctuation you see in that onboarding fees is really just a supply-and-demand mechanism.
Got it. Last one for me, a high-level question. You noted this year's focus on profitability, which you look well on track to achieve. In terms of looking a little bit ahead here, what is the -- in an environment like this where you get kind of shaky set of investors, a little more uncertainty in the macro, what's a reasonable time line that you guys are thinking about to get your EBITDA margins into, let's say, the high single-digit range or maybe even up to 10%?
So I think last quarter -- yes. No, I think last quarter, Alec hinted that we plan on reaching free cash flow by the second half of 2024, which I think is a really important milestone, Jeremy, to your point. This kind of defaults our ability to kind of manage the business independently from any macro factors. And I think that would also then imply a strong EBITDA margin of high single digits. So I think that's sooner than anticipated, and we certainly expect to hit our free cash flow target in the second half of 2024.
The next question comes from Tom White with D.A. Davidson.
Walking dogs in a nice weather in a nice neighborhood sounds like a gig I need right about now. Two, if I could. Just, I guess, first on the fourth quarter revenue outlook. It looks like you beat the high end of the third quarter guide, but you're holding the full year kind of unchanged and, I guess, at the midpoint kind of implies the fourth quarter could be down a little bit sequentially. Is that just kind of seasonality or some of the weather kind of implications that you touched on, Alec? Or is there something else about the fourth quarter that maybe you're thinking a little bit differently about than you were a few months ago? And then I have a quick follow-up.
Tom, great to hear from you. We love to have you. And so to answer your question on Q4, I don't know if you're following, but we expect a lot of incremental weather this quarter. I think California is already expecting like catastrophic storming next week, which obviously is a headwind in terms of some of the Services business. Second thing is we certainly saw a really strong Q3 in our Wellness business as a function of pet insurance products, wellness plans and other premium health care products. And we're unclear if that trend will stay, although we've certainly been excited about their initial Q4 results that we've seen. But to be really clear, we're really just thinking about 2024 and 2025 at this point. Most of our focus is on next year and making sure we're growing profitably with strong margins.
Okay. That makes sense. And I guess just to follow up on the wellness piece and specifically, the pet insurers. I'm just curious whether you're seeing any kind of change in behavior on the part of those advertiser partners that maybe could be related to the macro, like in terms of bid levels for leads or any volatility in the bidding. I'm just -- I guess, I'm just trying to see whether the macro might be having any kind of influence there. It doesn't seem from the numbers. But I guess maybe just kind of looking ahead, are you seeing any?
Yes, I think we're seeing strong demand. I think you saw in Q3, actually, people were leaning in further, asking if there was more they could be doing in partnership with us. I watched something, I think on CNBC this morning, on a progressive CEO saying they're going to be leaning back in aggressively in 2024. I think it's a good sign broadly for insurers. So we're seeing strong demand. We expect to see continued strong demand. I think the macro is cooling a bit. I don't know if that was true 2 quarters ago. Maybe we felt a little more volatility, but I think that's certainly calmed. And people certainly seem to be in a better place.
The next question comes from Matt Koranda with ROTH Capital.
So 2 questions. I guess, first one is just more near term in nature. In the Services platform specifically, have you observed any change in behavior with your customer set in response to any of the macro crosscurrents that have happened in the last couple of months? Just curious what you've seen quarter-to-date in terms of behavior, maybe just mix of services, if you could unpack sort of how to think about that, if there's any discernible change.
Matt, this is Adam. Yes, I think that our daytime services, as we've said, is a function of occupancy, which is challenged relative to, let's say, 2019, but no real change there quarter-over-quarter. That's something that we've kind of been pretty open and honest about. Whereas the sitting and boarding segment, the overnight segment is more so a function of travel. And travel is doing great. Travel is actually above 2019 levels per the TSA data. So the Services mix is probably going to be a little bit more overnight as we think about Q4, which is seasonal, and in 2024 generally. But we're really just letting the consumer lead us to what they want and then kind of investing behind them.
Okay. That's fair. And then the other question was on platform participants. Nice growth this quarter, whether you look at it sequentially or year-over-year. Curious if maybe you could unpack for us sort of where -- like maybe the split of platform participants by the segment. And I guess the other question that I had for you, which may be harder to answer, is how many of the platform participants that you cite are attaching to more than one of your segments? Just curious to get a sense for cross-sell between the segments that you have.
Matt, it's Garrett here. I wish you wanted to walk dogs a ton, so I'll just say no. We don't really talk about the platform participants by their revenue group because there's so much happening dynamically in a given quarter, whether that's less caregivers doing daytime or doing overnight. So that leads to that to be a different number or more people cross-selling in a given quarter because of seasonality to things like, let's say, buying wellness plans or insurance products or talking to a vet.
But I generally think that you should look at 2 things. One would be revenue divided by platform participants to get a good sense of ARPU, kind of how that trend is going. Obviously, we want to see that continue to stay going up, frankly, like that means we're doing a good job of cross-selling and monetizing the consumer base. The second thing which is the kind of revenue split by platform participants, probably a good way to think about it. I mean, all these products are premium products. They're all somewhat expensive. Like I don't know if you looked at maxbone recently, but rompers are $90.
So generally, I think 2 things. One is there's certainly a strong cross-sell happening. That's something we expect to even lean into further as we broaden our bench of products and services. The second thing would just be to think about revenue divided by platform participants to get a healthy understanding of how we think about monetizing those customers.
Thank you. At this time, I would like to turn the call back over to management for closing comments.
Thank you all. Two things I want to add that we didn't talk about in the management presentation. One is just kind of -- we've gotten a lot of questions around the impact of AI and how we think about its efficacy in the Wag! organization. Actually, we're excited about AI and its potential. We think it's been a great tool for employees to accelerate their efficiency, their tasks and ability to just create more, frankly, like do more with less. As a result, we're really thinking about headcount and SG&A efficiency in 2024. As a function of AI and automation, we don't expect much headcount changes. We think we're going to continue to have operating leverage in the business.
The second thing is we're very excited about the future for Wag! and 2024 specifically. I think you'll continue to see us leaning into long-term profitable growth. We think it's -- we're still very early on this journey. So if you have any 2 takeaways today other than the fact that we just did record revenue and record EBITDA for the seventh consecutive quarter, it's that we're very excited about 2024 and the opportunity for new technology to improve our customers' lives and shareholder value.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.