Good morning, and welcome to ODDITY's First Quarter 2024 Earnings Conference Call. Today's call is being recorded, and we have allocated time for prepared remarks and Q&A. 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's Co-Founder and CEO; Lindsay Drucker Mann, ODDITY's Global CFO; and Dr. Evan Zhao, ODDITY's Chief Science Officer. 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 6, 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 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.

Thanks, everyone, for joining us today. The first quarter was once again another record-breaking quarter for us. We achieved massive scale online, growing revenue 28% to $212 million, and we did it very profitably with 23% adjusted EBITDA margin, generating $79 million of free cash flow, a massive record cash generation quarter. We continue to deliver above our plan, beating our guidance for the first quarter on every metric. This is what we have done every single quarter since we went public and every single quarter even before that as a private company. During our IPO last summer, many investors told us that they had concerns that we would not be able to lock our enormous revenue performance in Q1 2023, where we grew more than 80%. And we tried to explain why we had full confidence in our ability to continue to grow on top of it. Now we are here today after growing 28% against that quarter, and we achieved it with record profit margin. It is another proof that the demand online for beauty is very high and that our platform allow us to capture this demand and enable profitable growth. I will provide a few data points that shows the demand and the strength of our platform. Q1 2024 revenue is more than double our revenue for the first quarter 2 years ago. In Q1 2024, with $212 million of revenue, we delivered almost the same amount of revenue that we delivered for the full year of 2021. And Q1 2024 is more than double our revenue from Q4 2023, just a quarter before it. We have shown once again that we can follow our business up and down on a $0.10, a huge advantage for us and something almost no other business can do. We…

Thanks, Oran. Let's turn to our Q1 '24 results, which I will refer to on an adjusted basis. You can find a full reconciliation to GAAP in our press release. ODDITY delivered a record-breaking first quarter across the board. We grew net revenue by 28% to $212 million. This strength was driven by both IL MAKIAGE and SpoiledChild across a wide range of product categories. Last year, we talked at length about the huge preparations our teams were making to ensure we have many ways to grow in 2024, many different levers to pull, everything tested and ready to go, and we immediately saw the benefit from this preparation as we entered the year. We quickly began to deliver results ahead of our plan. This very strong start to the quarter allowed us to once again slow the business down with full control in order to pace our growth. As is always the case for us, there were no single drivers of our strength, but a combination of so many improvements across our entire business. Just a few examples from the first quarter include getting even better in our acquisition and retention using data and our tech to segment customers, deliver personalized marketing campaigns and curated experiences to drive a number of our KPIs. Our expanded product portfolio, which Oran mentioned, it allowed us to do an even better job meeting user demand at very attractive contribution margins and continued integration of computer vision into product matching and recommendation models. These are just to name a few examples. Moving down the P&L, gross margin of 73.8% expanded 284 basis points in the quarter. The gross margin beat versus our guidance was driven by specific supply chain and logistics efficiency initiatives at both brands. We delivered adjusted EBITDA of $48 million…

[Operator Instructions]. Our first question is from Dara Mohsenian with Morgan Stanley.

Can you give us an update on the LAB side and molecule development and what you're expecting in terms of commercialization in the rest of this year? And then looking out to next year? And then also, just a couple of months later after the last earnings call, can you give us an update on any plans for Brands 3 and 4? And any more insight you can give us there? Has anything changed on that front? And then I'll come back with one more question, if that's okay.

For those who don't remember, ODDITY LABS used the same technology being deployed in pharma to develop higher efficacy molecules. I view the opportunity is endless. And this is why we spent so much time around it. We are building a system. We got the teams. We invest a lot in the infrastructure. It takes more time than I initially projected. It is really hard, but also building the tech in Israel 6 years ago was really tough for us, but we made it. It will continue to be an investment in the next 3 years, and we will never launch a single product from lab without being 100% sure about its efficacy and safety. In terms of product range of categories are growing in skin, especially for Brand 3, color and hair and many other things that we are working on now. We are working with the team to ensure we have the capacity to support our pipeline and to ensure we are delivering the highest efficacy product. It means we need to transition from a research lab to a factory output model, and this is what we do as we speak. To achieve this goal, we are focusing on 2 things. Number one is massive recruitment. And number 2 is building a full operating system with process and control. In terms of recruitment, bioengineering and chemistry team are where we spend most of our recruitment focus. Those are the teams that are doing the research and running the actual live work as the development in bit-molecule screening to develop the molecules. We plan to grow the team to 75 to 100 people, mostly PHG in the next 12 months. Second area where we focus a lot is building methodology and solidization a complete system to ensure we remain…

And then, Lindsay, can you just give us a little more insight on the revenue upside in the quarter? Where did you come in better than expected at the brand level in terms of IL MAKIAGE versus SpoiledChild or skin versus color? How do you break it out? And was the upside more existing customer upside or new customers, just basically looking for a bit more insight under the hood there and then implications in terms of the way you think about the business and balance of the year after that Q1 upside from a revenue perspective.

So as Oran talked about in his prepared remarks and I mentioned as well, we're running the business well below its actual potential based on the demand we see and the strong returns we're able to get on our spending. And as a result, we're delivering very strong revenue growth, but we could be growing more than that. And we actually saw that very visibly when we started the year. So we basically went from no investment in new user acquisition to in January, the team came out swinging really strong. We very quickly started to see our revenue pace increase relative to the 4Q run rate. And then we also very quickly started tracking ahead of our plan. And after that, we started to slow the business down again; you guys are used to us doing that by now. But we always want to make sure we're delivering guidance objectives that we know are things that we feel with very high conviction that we'll be able to achieve on and that feel bulletproof to us. And so we felt strong confidence we'd be able to hit the targets of the 23% to 25%. We came in a touch above. We talked about last quarter that our plan was to really land the plane on what we were delivering versus our guidance. You would not see big beats, huge beats outside the beats the way we delivered last year. We want to really, really land the plane. And so we're thrilled with the outcome in the first quarter. And based on how 2Q has already started, and we're through a lot of it already, 2Q is going to be another great outcome for us. In terms of where the strength was, both brands are great, IL MAKIAGE had an awesome quarter color and skin were very strong. SpoiledChild also had a really strong quarter. It was across a number of product categories. New acquisition was great. Repeat, again, very strong, our repeated on track to be even higher as a percentage of our sales this year versus last year again. So just all around very strong outcomes.

Our next question is from Andrew Boone with JMP Securities.

One for Lindsay and one for Oran, please. When the guidance suggests an expansion in 2Q EBITDA margins and then investment in the back half of '24, can you talk about where you're spending those dollars in the back half of the year and how we should think about that? And then, Oran, you talked earlier about a greater penetration of repeat rates for 2024. Can you help us understand the drivers of that comment? And then what you're seeing maybe at a cohort level in terms of repeat rates?

I'll start with the first one. So yes, we have some really nice EBITDA margin expansion we had in the first quarter, we'll have it again in the second quarter. And as we talked about before, Andrew, the underlying profitability of the business is much higher than what we are printing because we want to reinvest a lot of that profitability upside into all the future growth opportunities that Oran talked about. In terms of the second quarter, in particular, in the first quarter, we have so much increase in repeat, which is a very profitable business for us. So that's really the primary driver of the EBITDA margin expansion. We're also getting great gross margin behavior on top of that as well. In terms of where we're investing, there's 3 big buckets for us. First of all, there's new brand development. So we're doing a lot to invest behind both Brands 3 and Brand 4. We already have teams in place, product development trials with consumers to make sure we have the product absolutely right, prefunding as much as the launch as we possibly can in a way that's really thoughtful where we know we'll get a strong return. The second on talked a bit about ODDITY LABS. That's a huge focus of investment for us. The teams, the infrastructure. It's a huge focus for Oran and Zhao. And right now, all that you're seeing is truly the expense portion of it impacting our P&L, but we believe the profit upside will be huge for us. And this is, again, another massive competitive moat that we're building today alongside what we did with technology. So we think that's a great use of our capital. And then the last is technology. It continues to be the largest team in the company. We have to make sure we preserve our competitive advantage and develop new products that will increase all of our KPIs or conversion our satisfaction and allow more categories to work online. So those are really the 3 primary areas of investment.

As for repeat, as I mentioned before, like most D2C companies, we generate most of our revenue from repeat, and this is although we grew 28% in Q1 2024, comparing to 80% growth last year in Q1. This is why the beat is so profitable, and we continue to see the repeat percentage of revenue grow consistently. There is nothing more impactful and meaningful to the business strength than this. And by the way, this is why you will see Q2 guidance for EBITDA margin so strong because we enjoy a lot of repeat coming from new users for Q1. Currently, 12 months net revenue repeat rate is around 100%. This compares to less than 30% 2 years ago and still getting better every cohort. What are driving it is like 3 main things: number one, more repeat for the same product, number 2, expanding wallet share with new products; and number 3, now that we are getting cross-selling from IL MAKIAGE to SpoiledChild in the future new brands. And where it will go, again, 100% today is already the best that I've seen in any DC and this is why we are profitable, but I didn't see any feeling for that. We continue to improve the cohorts. More products and more brands that people love means higher repeat as we use the same user base and the same customer base. And basically, we are taking more share from others under the same user base. That's it. Lastly, I would say about repeat again, very hard to grow against that quarter last year with having still more than 30% coming from repeat, and this is what we saw. And that's why we could grow again this quarter with such strong profitability.

Our next question comes from Youssef Squali with Truist Securities.

Two questions here, please. Lindsay, can you please talk about return rates in the quarter? And how do you see those progressing in Q2? And then Oran, maybe going back to the ODDITY LAB topic. So just trying to get a sense of when do we start seeing new products coming out of that? Should we be thinking that brand #3 will be the official launch of the new pipeline coming out of ODDITY LABS or have you already started infusing existing products within the 2 brands with some of the ODDITY LABS innovation so far? And if so, is it with the skin and color and hair thing.

I'll start the repeat rate. So we don't disclose repeat rates specifically by quarter. We were really with the return rate that we saw in Q1. As you know, last year in fiscal '23, return rates were lower on a year-over-year basis, and we'd actually expect them to be a touch lower again this year. However, in our model, we don't project return rates to continue to decline as a percentage of gross revenue, mostly because we think that's a really important investment that we have, the acquisition investment we have or way to push new products and expand into new categories where you'll just naturally have some threshold level of return rate. But for us, we're managing towards a contribution margin, which is most important. I will say and I talked about in the prepared remarks how we are incorporating vision more into our matching engines, and we actually are seeing on a like-for-like basis with vision improvement in return rates for the same products. And we're still very early days here. But for example, for the first time, we can use multimodal data sets for our machine models that includes vision, reviews, data around purchase rates, et cetera, and putting all those things together, we can lead to an improved training set, which is now driving better models. We can also use vision during the matching process itself for the first time. Again, it's still very early days, but these things are allowing us to improve on our return rates.

I will touch one thing regarding the return rate. Look, I never view it as improvement because don't forget how we work. When I want to launch a new product or a new category, I start to train the machine learning, in order to train the machine learning, I need to see like I need to be wrong. I need to send the wrong product to the wrong person and that's the way that we train the machine. So if I decide to invest now in building more machine learning for new products, it means that I will have higher return rate. But we are prepared for it, and this is not an outcome. That's like it was our decision. So that's why like paying attention to the return, it doesn't represent anything about the business. As for ODDITY LABS, for sure, you will see it in Brand 3; we will start to do things even before that when we need. Just to be clear, if we wanted or needed products out there in the market, they would have been ready B1 and in some projects and even B2 already, but we are already pacing the growth without it. So I didn't need to do it. For new products, I don't need 50 or 100 paid days in Boston, and I don't need to spend my time or [indiscernible] time there. We build LABS to build something that never exist before. We would love to take the business 5 or 10x. And therefore, another year, another quarter, if I don't need it, like I'm not putting pressure, I do put a lot of pressure around way higher efficacy in terms of products and very high protocols. So if we need before, probably we will start launching products to see the reaction, but a meaningful wave should come with Brand 3.

Our next question is from Lauren Lieberman with Barclays. Our next question is from Lorraine Hutchinson with Bank of America.

This is Melanie on for Lorraine. I wanted to talk about the marketing strategy that you guys implemented in 1Q. Just how that looked versus prior years and that it drove such a strong start to the quarter that you ended up pulling back a bit? Just any context on that strategy?

Same strategy. We've put a lot of the attention in Q1 for News acquisition. That's how we did historically. Acquisition environment was very favorable for us and you can see that in the strong margins that we just printed, again, we grew with new users and without damaging -- improving the EBITDA margin went from 17% to 23% from Q1 to Q1. We have a very different approach from other companies, which make us more efficient. We use a lot of data, acquiring users. We are not acquiring customers. And therefore, when we hear a lot of like problems around acquisition with other companies, we still continue to acquire at very high scale new users at very strong metrics.

Our next question comes from Javier Escalante with Evercore.

I'm new, so would like to explore your business model a little bit better is proving its quite idiosyncratic, it's proven advantage. In our neck of the world, $200 million per quarter is quite a scale, and you did it very rapidly. So 2 part from me. I guess, Lindsay, if you could give us some more color on the repeat if you have it. Was it particularly in IL MAKIAGE, where it was led by new product launches or repurchase of so-called hero products or your best sellers? And then I have a follow-up to Oran.

Repeat rates continue to be very strong. We talked about last year; it was more than 50% of our revenue. And in 2024, it will be even higher. In terms of 12-month net revenue repeat rate, we've talked about this 100%. So in other words, for a year ago, all of our first customers spent $100 over the next 12 months; they spent an additional $100. And as far as we know, this is by far the highest repeat rate, 12-month net revenue repeat rate of any D2Cs certainly that we've seen. We have no specific plans to increase that higher because it's a huge rate, but we haven't yet found a ceiling. And of course, as we continue to add new brands and new products to the mix, and we're gaining more share of wallet from the same user base that will grow. Oran had a really important data point that we disclosed for the first time on this call, which is what happens when we add skin to Lindsay IL MAKIAGE. So as you know, we had no skin business a couple of years ago, and now it's 20% of our revenue as of 2023, and it's on track to be 25% for 2024. And Javier, I know based on the industry you cover that you understand how hard it is for a beauty brand to actually expand into skin. And when we started, everyone told us it wasn't possible. And yet here we are with a huge color business and now skin on track to be 25%. What Oran talked about was for our customers who came into us through color, they were previously color purchasers, but then they try skin, over the next 12 months, they're shopping with twice as much frequency and they're spending twice as much as our other customers. And it just goes to show you the power of the ability to know who our user is, use that data to create products that she wants, have the machine models based on that data to put them in front of her to drive transactions, drive frequency. Obviously, with the repeat, we get a lot of profitability at very high incremental margins. So we certainly saw great trends again for IL MAKIAGE. And for SpoiledChild, that portfolio is set up to be a great repeat business. And so on a stand-alone basis, we're seeing very strong repeat behavior at SpoiledChild again. And then at the audit level, it all compounds together to lead to overall better repeat.

Because it's the same user, same customer. We started with offering them color, few products in California, and we added more color products. Then we had a skin where it's full charge building this brand for her. So that's why it's component. That's why it continues to grow. By the way, grow both and alt-level, but also for IL MAKIAGE and SpoiledChild standalone basis.

Now yes, this is all very impressive, and I like the fact that you like link it back to the business model that is so unique. But Oran, more strategically and in the context of your business model and your solid repeat and new users at a time when traditional companies spoke of a market deceleration. So going forward, there's going to be changes in digital marketing. So do you expect your business model to prove as advantage or even more advantage relative to your beauty peers if and when programmatic advertising or cookies go away as people -- there is this rumor?

Look, I cannot answer it. The only thing that I can say that when iOS 14 took place, most of my competitors had really like bad quarters trying to navigate, and we didn't see any problem. I think the main reason is because we use data as the main reason and the second main reason is because we are not acquiring customers. Actually, I'm not acquiring revenue, okay? I'm acquiring users, then I'm reaching the data that I'm building product, and I'm converting them based on what I believe is the best thing for them. And the biggest question is people continue to use like social media and search, and I believe it's going to grow every year, we have more people on those platforms. So as long as they are there, I don't see any problem.

So conceptually, you are basically personalizing beauty products to your existing user base that's like the secret sauce, if you will.

Learning a lot about them, trying to understand what is missing, interoping building machine learning models that actually can work to spend the right product for them and then matching it with the right physical product to stand them because at the end of the day, you can have all the technology in the world, but if you don't have very strong beauty products that matches them and they are happy with and then they will return and the repeat will not be high. So continue to increase our machine learning capabilities, but at the same time, continue to add more and more products for those users who did not convert 3 or 4 years ago. That's why the bids continues to be so strong because we have such a strong and large user base that we built in the past 5, 6 years. One last thing that I would say, building a business like this today would be way harder because every day, market is getting more expensive and to acquire $50 million today with cost fortune. And again, this is an advantage that we had as a first mover.

Our next question is from Lauren Lieberman with Barclays.

Notwithstanding what you said earlier about return rates and service as part of the process. I was just curious if you're seeing any pickup in return activity as we're in a tougher consumer environment, an environment where consumers are reallocating their spending and making different decisions. So any uptick in that type of, if you will, return rate? And then also any change in the mix in terms of demographics of your consumers. That was my first section of questions.

Look, I almost think that people want me to say that we see softness. But the answer is no. It look like we were trying to get as much data as we can internally, learning the core, running them and the return of behavior, learning the repeat, and we didn't see softness, we see the same metric and in terms of acquisition, we didn't see any problem acquiring new users at a high scale this year, again, although the consumer is a bit more challenging based on what we heard from others. So no, the answer is no. So far, so good.

I'll just add on to that, Lauren. So I think it's really important to remember that, first of all, we are tiny in a huge market. And number 2, our demo is expansive, okay? So if you look at on a safe basis across the United States, we are almost evenly perfectly aligned with that distribution. We have a big portion of our customers that are under 30. A big portion of that are over 50, a big portion that are right in the middle. We service upper, middle and lower income. We see people trading in from luxury brands into our categories. We see them trading from [indiscernible] enabling. And it's important to remember, like we are dominating what we believe is the most important and will be the largest channel in beauty, and we're really alone in acquiring customers at scale in this channel. So you really wouldn't see it here, I guess, is the punchline.

One that Q1 '24 comparing to Q1 '23, return rates was better this year. So again, to your question, we don't see it.

And then second thing was just on the decision and timing on new launch activity and around very consistent what you said this quarter is what you said last, about time line for launching products from LABS. But one of my questions was if some of these products have such demonstrable efficacy and improved quality versus anything in the market, let alone versus what you've already got in the market, why wouldn't you be looking to launch, to raise the profile, like Lindsay said, you're tiny, but like raise the profile, raise the word of mouth that exists around some of your products. So if you've got things that work better than anything else, why wouldn't you want those in the market sooner rather than…?

Because I want to be sure 100% and it's way better than others. That's my honest answer. I want to make sure that we have a system that this is very strong. We built protocols. We make sure that, again, we are doing it for the first time. I don't want to go to market when I don't need it with something that is better, but slightly better. I want to go with products that are way better and it takes time.

Our next question is the follow-up from Dara Mohsenian with Morgan Stanley.

So Lindsay, we're more focused on the top line side, but gross margins are really notable in Q1 at record levels. It looks like you're expecting a solid Q2, but that implies the back half will decelerate sequentially and on a year-over-year basis. So just trying to understand that implied guidance for the back half, perhaps it's just conservatism, but help us understand the pacing of gross margins as we go through the year. And I'm just wondering if that has implications for the out years, the back half or how we should think about that?

So just as a reminder in terms of how we build our brands and our product launches, we really focus on gross margin last. We're going to make sure, number one, we have the absolute best performing product we're going to make sure that we're building an experience that's going to drive the right kind of customer satisfaction, the right kind of return rates that we're going to sort of optimize for all our KPIs. We're then going to see if it scales, if we can scale it. And it's only after we achieve those that we go back to solve for gross margins. We know that there's a threshold gross margin level we'll achieve. But in the beginning, we're not at all focused on delivering it. So for example, the SpoiledChild early on, we were airfreighting everything. And now obviously, we're much, much better inventory planning and we're much more scale. So we're able to extract cost efficiencies. And the same thing goes for IL MAKIAGE. The team has done an awesome job going back across the supply chain and picking low-hanging fruit candidly, that we had in order to -- and it's delivered more gross margin improvement than we expected. The truth is, though, that as an organization, gross margin is not a KPI that we are focused on. We are focused on contribution margin. And so if we're making a trade-off where gross margins are lower, but frequency and repeat or higher, we're very happy to make that trade-off as long as we're meeting our contribution margin and EBITDA margin targets. We're already several quarters into the cost optimization that you saw that drove us for the last few quarters in terms of gross margin. We start to lap that benefit. And again, we always want to make sure we're delivering targets that we're not ever going to miss, but we feel very confident in the gross margin targets that we've laid out. Remember, certain products for ours have lower gross margin profile than others. And if we opt to mix more into those, you're going to see the complexion of gross margin change. And so we've laid out a target that we believe are achievable. We feel very confident in them. And we're towards the end of that big tailwind from cost optimization you saw earlier.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Oran Holtzman for closing remarks.

Thank you very much, guys see you next quarter. Have a good day.

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