Good morning, and welcome to ODDITY's Second Quarter 2025 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; and Lindsay Drucker Mann, ODDITY's Global CFO. Niv Price, ODDITY's CTO, will also be available for the question-and-answer session. As a reminder, management's remarks on this call that do not concern past events or 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 most recent annual report on Form 20-F filed with the Securities and Exchange Commission on February 25, 2025. 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. ODDITY's momentum in 2025 continues with another strong result this quarter and great progress on our long-term growth initiatives. Our financial performance year-to-date is another proof point of our success. For the first half of 2025, we grew revenue 26% to $509 million, generated adjusted EBITDA of $122 million and free cash flow of $99 million. This is more EBITDA and more free cash flow in the first half of the year than we delivered for the entire full year of 2023, the year of our IPO. In Q2, we once again beat our financial targets on revenue, profit and earnings per share as we have every quarter for the ninth quarter since our IPO. We have ambitions at ODDITY to become one of the biggest beauty companies in the world and to lead this huge profitable and underserved market. And we are moving at high speed towards this goal. In just 7 years since launching our first beauty brand in the U.S., ODDITY has transformed into a platform of soon-to-be 3 brands, spanning 4 categories and 6-plus markets. We have gone from pure makeup to then skin and hair and now offering medical-grade prescription and OTC products with our upcoming launch of Brand 3. And just as we unlock beauty online, we are now turning our sights to health care, another huge market where the consumer is unhappy and the opportunity is massive. I will share more on our plans for Brand 3 in a moment. Every year, we push our teams to innovate to expand our capabilities and grow the reach of our business. And you can see based on the results that we are doing a good job so far. It starts with the fact that we operate in a healthy,…

Thanks, Oran. Let's turn to our second quarter results, which I'll refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. Q2 was another strong quarter for us, capping off a great first half of the year, which is our most critical moment for user acquisition. These results set us up for another record-breaking year in 2025. We grew net revenue by 25% in the second quarter to $241 million. This exceeded our guidance for revenue growth of between 22% and 24%. The strength was driven by double-digit online growth at both IL MAKIAGE and SpoiledChild. Net revenue growth was driven by an increase in orders, while average order value was down around 1%. Average order value was impacted by mix, including faster growth in international markets and an increase in the mix of repeat sales, both of which carry lower AOV. A bit more color on international. As Oran mentioned, our sales outside the United States represented around 15% of ODDITY's 2024 net revenue. This is driven by IL MAKIAGE, where we have operations in the U.K., Germany, Canada, Australia and Israel. We also conduct tests in prospective new countries and the revenue from these test markets flows through our P&L. On our Q4 '24 call, we discussed our plans to increase focus on IL MAKIAGE International. This has meant greater prioritization from our teams as well as increased acquisition spend. The strategic rationale for our increased focus is straightforward. International is a meaningful revenue opportunity for us with great unit economics and a key driver in building IL MAKIAGE into a $1 billion revenue brand. The demand drivers for beauty online are similar overseas to what we see in the U.S. market today. Our technology platform works well in these…

[Operator Instructions] Our first question comes from Youssef Squali of Truist Securities.

Congrats on a solid quarter. So maybe just at a high level, maybe on the gross margin for Q3, Lindsay, the guide, it came in slightly below consensus expectations. Can you maybe unpack that a little bit? What's driving the sequential compression there? Is it volume, mix, investment associated with Brand 3, et cetera? And just to clarify, in your prepared remarks, I think you just said something to the effect that the 20% -- you believe you can grow 20% next year even without any contribution from Brand 3. Can you just confirm that?

Yes. Thanks for the question, Youssef. So on gross margin, as you know, this is not a metric that our teams manage to. They manage to DC margin, which is contribution margin, it's gross margin after media spend. And we have a pretty decent range of gross margin profiles across products that the teams are selling, which they're not managing to. They're only managing to contribution. And as a result, when we issue guidance, we do it in such a way that we give the teams a lot of flexibility to go after whatever it is that makes the right sense from an LTV perspective. We've also, as you know, since you've been covering us since our IPO, we've overdelivered on that metric consistently every quarter as a result of wanting to embed enough conservatism to give the teams flexibility and not be in a position to disappoint the Street. That being said, we do have a little bit of seasonality in our gross margin in the back half of the year. We're much more of a repeat business, as you know, that tends to have a bit more -- a bit lower gross margin profile. And also because the revenue dollars themselves are smaller in Q3 and Q4, we don't get as much leverage on the fixed part of our COGS. So sequentially, you do see a little bit of that in the back half. There's nothing else to make of it. From a business perspective, in Q2, gross margin behavior was flattish year-over-year. We had some puts and takes. We had some higher supply chain expenses that were offset by lower supply chain expenses to end up with a pretty flattish outcome that we were happy with as it exceeded our guidance for the quarter. The next question was on Brand 3 contribution. That's correct. We don't need Brand 3 for our 2025 outlook, and we don't need it for our 2026 outlook. We're obviously doing everything in our control to make sure Brand 3 is an unbelievable success, and we believe that it will be. But we have plenty of growth remaining in both IL MAKIAGE and SpoiledChild. IL MAKIAGE is still on track to achieve $1 billion of revenue in 2028, as Oran mentioned in his remarks. SpoiledChild is having an unbelievable year as well. That will cross $200 million of revenue this year. So we don't need our new brands because we have a lot of growth left in our existing brands. Anything that we deliver is incremental. That being said, our commitment is 20% revenue growth and 20% adjusted EBITDA margin. So if we got more from Brand 3, we wouldn't be changing our guidance.

The next question comes from Lauren Lieberman of Barclays.

Two questions. One was just a follow up, Lindsay, on the end of your answer to that last question that you wouldn't up your guidance or commitments if Brand 3 comes through strongly and will be incremental. Should we take that as to mean that you'll kind of pull back and constrain the growth on IL MAKIAGE and SpoiledChild to try to manage the business in '26 and beyond to something as close to that 20% as possible? Because I know that, to some extent, the way Oran has talked about the business is we want long-term predictable, very strong growth. And some of that is about managing the pace of growth. So I just want to understand how to think about that for '26 and beyond as Brand 3 comes in as incremental. And then the other thing, which is a shorter term, I think previously, you talked about a soft launch for Brand 3 in the third quarter, and now it's just full committed launch in Q4. Is there any soft launch activity in Q3? And if that's a shift in the launch plan, how come?

Yes, I'll take it, Lindsay, and then if you have something, please do. First of all, regarding Brand 3 and the reason that we said it's not baked in, it's already baked in 2026 is that even if Brand 3 is as successful as SpoiledChild, by the way, it was the biggest -- the best launch of all time based on our knowledge to D2C, see $25 million, and it's not material. And therefore, we didn't take it into account when building our next year algorithm. But it doesn't mean that we are not bullish. We are very bullish on Brand 3. We are working it for the past almost 4 years. As for soft launch, soft launch for us, it's a lot of trial runs at smaller scale, smaller acquisition spend to drive some traffic for testing. It's a way for us to identify issues that need to be solved and do a lot of [indiscernible]. Therefore, we will start doing some tests in Q3. And official launch is where we begin spending real dollars both on brand and user acquisition. We are planning to make a big push in Q4 and in Q1 next year. So it means more investments, and this is part of the reason that Lindsay was referring to in H1 next year around margins.

Lauren, just to follow up on the final part of your -- one of your questions was which was about will you constrain? And the answer is that, yes, we constrain all the time. We have the ability to grow faster than the actual numbers that we deliver. And our approach is to make sure that every single year, we can compound at 20% revenue growth with 20% adjusted EBITDA margins for many, many years to come as opposed to pulling any of that growth forward when we don't need it. So the right way to think about your models as you build in the out year is that we will have many, many levers of growth. We'll consistently deliver on that algorithm and that you can feel confident in our ability to sustain that growth and compound in the future.

Our next question comes from Anna Lizzul of Bank of America.

I was wondering if you could just elaborate a bit more on your investment in the business here with the launch of Brand 3 later this year and then Brand 4 next year? And then when do you expect we'll start seeing some returns here on just the investments with those launches?

Sure. Lindsay, I'll start. We continue to invest a lot of our margin dollars in the future. And going back to the previous question, there is no reason, in my view, to deliver higher margin than 20%, especially when we believe those investments could be massive unlocks for the business performance and for the growth in the future. And when we think about investments, there are mainly 3 pillars. Number one is new brands, Brand 3, Brand 4, each has its own team many years already spending a lot of money and a lot of time on building those brands. Number two is ODDITY Labs, which we continue to build. We have around 70 scientists there in Boston. We continue to invest a lot in infrastructure and building this machine. And lastly, technology, it continues to be the largest team in the company. We acquired a small company this year. We expand the team, and we believe this is the right thing to do. As for like what is the -- what about the future? Like in my point of view, we invested $25 million or $20 million in SpoiledChild, and today, 3 years later, it's $200 million of revenue and very, very healthy margins. So I hope that we'll continue to invest in this space, and we will see the margins and the growth coming.

Our next question comes from Andrew Boone of Citizens.

I wanted to ask about International and just the drivers of growth going forward there. Can you guys just talk about whether that includes new markets, deeper penetration or anything else we should be thinking about as we think through the international opportunity? And then, Lindsay, I want to go back to just a reoccurring theme of just repeat rates. Is there anything you guys can share either on cohorts, repeat rates to help us better understand how kind of the existing customers are progressing on the platform?

Sure. I'll take the International piece. International is an area we're super excited about. This is a part of the business we've been, as you guys know, laying the foundation for, for years now, really preparing the markets and getting them ready. And now as of -- we talked to you guys on the Q4 call that we were taking a step forward to move this like even further down the field in terms of executing on those markets. Very happy with our first half performance. This is a business that could easily be as large as our U.S. business. As you know, for our competitors, it's something like 70% of their business comes from international markets. And everything that we see is that the markets behave very similarly outside the U.S. to what we have already accomplished in the U.S. Just to give you -- put a little bit of numbers around it, in the first half, sales outside the U.S. grew over 40%, that's around $85 million. Of that $85 million, $75 million were markets that were already established in. So for example, U.K., Australia. But we have around $10 million from these new kind of testing markets where we see a lot of potential. I say all this just to illustrate how much runway there is. So for emerging markets for us or I should say, prospective markets for us like France, Italy, Spain, where the metrics are really positive. It's nice. The teams have been in preparation mode to finally actually be executing on it. There's still -- we're still very early stages. There's still a lot of runway, but it's been fun to see that take shape this year. And as we look into 2026, we have even more going on. In terms of what that's involved, of course, it's been more spend, more actual user acquisition activity in those markets, ad sets, creative, all that kind of stuff, but it's also been a lot of focus on the teams, physical products...

Because we don't have users theirs and we still don't have repeat, therefore, it's more costly for us at the beginning.

Yes. But also focus from the teams, availability of products, technology products funnels, all those things. So putting those in place, generating a really nice return on them and executing on that market. In terms of -- your next question was on repeat, repeat remains very strong for us. Repeat continues to increase as a percentage of the business year-over-year. And as we look at our 12-month repeat cohorts, those remain very strong, over 100% and performing well for both brands.

Our next question comes from Mark Mahaney of Evercore.

Okay I just wanted to ask about the Brand 3 go-to-market strategy. I think given the type of offering, it's probably going to require a different go-to-market strategy than what you've had with the first 2 brands. Could you just talk about your ability to execute well against that? How different the planning is? How do you mitigate some of the operational risk involved?

Sure. I'll start. Look, in terms of -- it's still same, still using our user base, still using our technology. But in addition to that, we have our vision technology that we built for the past, I want to say, 2.5 years. And there is nothing that different except the infrastructure itself for the pharmacy and the third party we work with. One thing that I would say about Brand 3 and our distinctive approach there mostly is around personalization. Our team spent almost 2 years developing the critical personalized treatments and developed almost 25 customer cohorts with unique treatment combination based on our testing. It shows material, material improvement in satisfaction. Some numbers are above 50% comparing to what exists in the market. And I think that the combination here is something that most other companies cannot do. It's both like building the product, but also building the tech products. So the combination, that's what brings us to those numbers. So we are very bullish. And in terms of go-to- market, it's pretty much the same.

Our next question comes from Dara Mohsenian of Morgan Stanley.

Just on Brand 3, can you just take a step back and give us an update on exactly what the brand sort of entails longer term from a consumer standpoint? Obviously, there's the product itself. You also mentioned monitoring. How does the professional recommendation fit in also potentially? And just basically, how we think about revenue from Brand 3? Is it essentially mostly the product itself? Or are you thinking there's substantial opportunity around charging for monitoring or other revenue streams just given commercialization potential in the derm area goes well beyond the product potentially unlike traditional beauty products. So just what's your approach there? And how do you think about the long-term revenue streams?

Sure. So as I mentioned on the call before, Brand 3 is a telehealth platform with medical-grade products. We are starting with dermatology, but we have already plans for the next categories because we already have the infrastructure of shipping OTC and Rx products for the first time. This is a huge opportunity for ODDITY. And in my view, we are addressing it differently than anyone else. We developed, as I mentioned before, ODDITY most customized and comprehensive line that we did so far. And in addition to that, it's the first time that we are doing something that deep in a new area of OTC and Rx, all to be sold online under our own brand and most products are formulated with existing ingredients. But for the first time, we are going to launch products coming from ODDITY Labs, new molecules. So this is another area where we are very excited about. What else we did here that is different, we were building a mobile app to ensure that compliance is high. Based on our study and our research, one of the main problems in this category is compliance. So we need someone there to coach and to make sure that she is on track for cure. If it means that we need to change her regimen, we will do it automatically, everything with vision technology and doctor setup. And number three is leveraging our 60 million users. As Lindsay mentioned on her part, huge part of our user base is already suffering from those problems. And therefore, we are planning to leverage it and to offer them the product. Don't forget, we use them as design partners to build this line. So we are pretty confident that this is something that is going to be excited also for them.

Great. That's helpful. And you mentioned some of the metrics which have you excited in your testing for Brand 3. Just take us back versus where you were 3 months ago? And what have you learned in the last 3 months in that testing? Has that changed how you're thinking about the commercial process going forward or excited.

Yes, 3 months is a short cycle. It takes us like 3 months to get a read, okay? But I can tell you that comparing to 2 years ago, comparing to a year ago, we are in a better position substantially. And I think that the key here was to unlock both, first of all, the diagnosis and in addition to that, to make sure that we are shipping the right customized product. So even if we had the right product or the right molecule a year ago or 2 years ago, if we ship -- if we send it to the wrong tester, therefore, the satisfaction was low. And I think that we made a big progress in matching the right patient with the right treatment.

Our next question comes from Scott Schoenhaus of KeyBanc Capital Markets.

Oran, as a health care technology analyst, I think this Brand 3 launch is a really exciting expansion opportunity. Everyone knows in health care dermatology providers are supply constrained and waiting for an appointment can take months to a year. I guess it seems like the launch is centered around -- initially around acne and offering topical treatments and prescriptions that are showing better efficacy than tretinoin currently. But I guess maybe talk about the opportunities with more acute conditions. I think you mentioned eczema. This could be an entirely different platform, bringing in a whole new customer set and people coming to your platform with really severe skin conditions. So kind of just walk me through the trajectory of how you view Brand 3 and the opportunities there as you emerge as a health care technology company.

Sure. Thank you for that. And I'm happy that you agree with us, and that's the reason why we launched it, to be honest, because it's such a headache and with very low satisfaction. We start -- the main focus for the beginning of the launch will be around acne and hyperpigmentation. Those are 2 areas that we believe that we have a very strong breakthrough around both the technology and the offering itself. We are ready also with eczema. I think that we're going to have great products out there, but it's a smaller -- like smaller prevalence, and therefore, the main push will be around acne and pigmentation at the beginning. We are going to launch also other body products in Q1 next year. And in addition to that, we are working on additional categories. As for your question, yes, new users -- it's something that we are happy about because it's going to diverse our user base. But you may be surprised, but many of our user base today is suffering from those problems. And this is why we started with like solving it. We saw at least 20%, 25% in each problem that we are about to launch, and we said that -- and we start to ask questions what is wrong there. And they answered us. And in this way, we built this line. And I think that, that's a very good start for launching the brand.

Thank you so much. There are no further questions at this time. I would now like to turn the call back over to Oran Holtzman for his closing remarks. Oran? Thank you.

Thank you very much. See you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.