ODDITY Tech Ltd. (ODD) Q3 2023 Earnings Call Transcript

ODDITY Tech Ltd. (NASDAQ:ODD) Q3 2023 Earnings Conference Call November 8, 2023 8:30 AM ET

Company Participants

Maria Lycouris – Investor Relations

Oran Holtzman – Co-Founder and Chief Executive Officer

Lindsay Drucker Mann – Global Chief Financial Officer

Conference Call Participants

Dara Mohsenian – Morgan Stanley

Scott Schoenhaus – KeyBanc

Youssef Squali – Truist

Andrew Boone – JMP Securities

Lorraine Hutchinson – Bank of America

Lauren Lieberman – Barclays

Jason English – Goldman Sachs

Operator

Good day, and welcome to the ODDITY Tech Earnings Call. [Operator Instructions].

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

Thank you, operator. I’m joined by Oran Holtzman, ODDITY Co-Founder and CEO; Lindsay Drucker Mann, ODDITY’s Global CFO. As a reminder, management’s remarks on this call that do not concern past events are forward looking statements. These may include predictions, expectations, or estimates including statements about ODDITY’S business strategy, market opportunity, future financial performance, and potential long term success.

Forward-looking statements involve risks and uncertainties, and actual results can differ materially due to a variety of factors. These factors are described under forward looking statements in our earnings press release issued yesterday and in our prospectus filed with the Securities and Exchange Commission, on July 18, 2023. We do not undertake any obligation to update forward-looking statements, which speak only as of today. Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business. Additional information about these non-GAAP financial measures, including their definitions, are included in our earnings press release, which we issued yesterday.

I’ll now hand the call over to Oran.

Oran Holtzman

Thank you, everyone, for joining us today. We are glad to report our third quarter results today, which beat our guidance issued back in August on every metric and also exceeded the preliminary result we recently communicated in October. Revenue is going faster. Gross margins are higher and adjusted EBITDA is better than we expected. This is despite our real effort to pace our growth and slow down, as we historically have done in H2.

With this record breaking quarter, we will deliver net revenue growth of 60% and adjusted EBITDA of $91 million for the first nine months of this year. We are scaling a dispute that beats legacy incumbents, but also the majority of internet consumer companies and with profit margins and cash flows that are rare in other growth companies. This outstanding financial performance reflect the strength of our platform, the health for brands, our strong discipline teams, and the massive runway we have in front of us.

Our large investment in technology and data capabilities over the past five years are enabling us to continue to grow fast without damaging our high margins and profitability. Our tech team is still the largest team in the company represents approximately 40% of total headcount. At the center of our success is our powerful financial model, which from the beginning, we designed to deliver a real combination of scale, growth and profitability.

On scale, we to break new records again in 2023, growing revenue more than 50% and with over 50% coming from repeat customers, which is very rare in our industry. We believe we are already the largest DTC platform in our industry and have a massive user base with over 40 million users while our design partners for future products, categories, and brand launches.

On growth, we expect to deliver more than 50% growth this year after having delivered around 50% last year and 100% the year before that. But although our high growth, we could have done way more. We believe we have massive runway ahead and have built so many engines to allow us continue to grow. We believe both IL MAKIAGE and SpoiledChild will be $1 billion plus brands, and we are building our future brands to have meaningful addition to our company.

On profitability, we continue to deliver margins and cash flows well ahead of other growth businesses. We expect to deliver over $1 million of adjusted EBITDA this year alone, which is a 21% margin.

Before diving into the quarter, I want to discuss our industry and why I’m so bullish about the opportunity ahead of us. First, we operate in what we believe is one of the most lucrative terms in the world. The global beauty and wellness market is over $600 billion in size and dominated by offline legacy incumbents. There are a huge number of beauty and wellness categories for us to go after which are larger sized and are waiting for proper online access.

Second, consumers are shifting online, and this is our strength. Today, online is around 25% of the industry’s sales, and we believe it will reach 50% in the next year, but in order to win online, you need to deliver experience that is even better than a store, and therefore, data and technology capabilities are critical. With all due respect to my competitors, we are simply playing different games and as it relates to technology to data, not to mention talent and operating structure, we believe we are simply years ahead but still running like a startup to ensure we preserve our lives.

Third, we’ve been amazing brands and amazing products, and we have proved that ODDITY is a brand scaling machine. Our track record speaks for itself. IL MAKIAGE is the largest online beauty brand in the U.S. and either number 1 or number 2 in almost every International market it has launched. SpoiledChild is expected to achieve $100 million of net revenue this year after only just launching in 2022. Multiple categories, hair and skin, and success across a very wide demographic, all of this with very high customer satisfaction, best in class repeat rates and consistently healthy growing cohorts.

Brand 3 and Brand 4 are already in the making with dozens of talented folks dedicated to develop it. Both brands will be launched in 2025 and are responsible for at least 40% of my time and focus I feel. The next stage of our evolution is with ODDITY Labs and unleashing biotech for our industry to create the next generation of high efficacy products. Consumers today are smarter than ever. They start to demand real high efficacy signs back products to solve their pain points.

High performing products are not new to us. They are already central to our model and a huge part of why we are so profitable. No quality means no repeat. No repeat means no profitability. And based on my knowledge, we have the best repeat rates in the industry. We operate a world class of in-house product development engine that I believe beats most of the brands in the industry. That’s because we launched products based on data. We are not like other brands that launch based on what head stylist says or based on what Sephora or supplier says. Data, prices no exceptions, no compromises. But as entrepreneurs, who luckily found themselves in building, we never stop and we are never satisfied.

ODDITY LABS take us to the next level in terms of physical products and innovation. It was always my dream to use technology to develop high efficacy product with stronger new ingredients. I was hunting for this opportunity for years and with Revela we found the perfect match. Since closing the acquisition in May, we have made so much progress in building ODDITY LABS, to beat the AI based ingredient development platform of our industry, attracting amazing talent and moving fast across the enrolment.

ODDITY LABS will be one of our main growth engines for all brands. We are truly building something that was never done before. You don’t see its contribution in our current and earnings today, it’s just expensive, but are more bullish than ever. It is the same feeling that I had when we started to build our R&D center in Tel Aviv.

Before I hand the call over to Lindsay, let me touch on Israel, where we have our R&D center but most importantly where my heart and thoughts are in those sad days.

First, the unwavering support I get daily from teammates, entrepreneurs, CEOs and friends is unbelievable and I deeply appreciate it. Since so many people stand with Israel and we did try to defend itself make it a bit more bearable in this insane situation. We at ODDITY are doing everything we can to support our people and the country at this time. This is our duty and we’ll continue to do so. As for the business, there have been no meaningful disruption, of course we are monitoring the situation very closely and we don’t expect any material impact on Q4 or on 2024 results. Our teams in Tel Aviv are operating remotely since the beginning of the war, and we have had a limited number of employees called for reserves.

And now I’ll hand over to Lindsay.

Lindsay Drucker Mann

Thanks, Oran. We’re pleased with our third quarter financial results and the momentum that continued into the fourth quarter. Our business is firing on all cylinders and we are in excellent shape for 2024. Our teams achieved a number of unlocks through hard work, planning, testing and iterating that are now in our arsenal for execution next year starting with a successful first quarter. We will issue 2024 guidance when we report Q4 results next year, and we’re confident in our ability to continue to deliver strong growth across brands and product categories at attractive margins and with healthy user cohorts that fortify our overall model.

Turning to the quarter. Net revenue grew 37% year-over-year to $94.5 million above the 18% to 23% guidance we communicated in August. Drivers of growth in the quarter are consistent with what we discussed on our October call. Both IL MAKIAGE and SpoiledChild brands exceeded our expectations. Repeat growth was stronger than we had originally modeled, which drove the upside versus our original guidance. Importantly, our revenue growth was of high quality and profitability and generated across a range of products and categories. The successful expansion of new products and categories, including in skin and hair, are seed that we planted less than two years ago and have grown today into powerful foundations off of which we’re building large and dominant franchises. These are incremental to our existing products. They expand our overall TAM and create deeper relationships with our users.

Moving down the P&L. We generated gross profit of $66.4 million, 41% increase versus the prior year. This represents a 70.3% gross margin in the quarter which is 280 basis points better than the 67.5% guidance we issued. Gross margin expanded 217 basis points year-over-year. The increase was driven by cost efficiencies at both brands which has benefited from specific cost optimization efforts relative to the prior year. While SpoiledChild has continued to make good progress in narrowing the gross margin gap to IL MAKIAGE, it still operates at a lower gross margin and will drive some negative gross margin mix shift as it becomes a larger portion of overall sales.

Adjusted EBITDA increased 227% to $20.8 million in the quarter. This represents a 22% adjusted EBITDA margin above the 20% to 21.5% initial guidance we delivered back in August. Adjusted EBITDA margin in the quarter expanded 1280 basis points versus the prior year driven by our gross margin expansion as well as improved Opex efficiency, including improved efficiency on our marketing spend as we throttled back new user acquisition costs and generated the majority of our revenues from repeat customers. We reinvested a portion of these EBITDA tailwinds into future growth, including investment in future brands and products as well as ODDITY LABS. It’s also worth noting that we delivered this robust EBITDA margin expansion despite higher revenue contribution from SpoiledChild which today carries lower EBITDA margins than IL MAKIAGE.

Adjusted pretax income increased 304% to $20.7 million driven by the adjusted EBITDA growth. Our adjusted tax rate was 37.1% in the quarter, a bit more favorable than the 43.5% rate we guided to. This elevated tax rate was driven by nondeductible expenses associated with our IPO. We delivered adjusted net income of $13 million and adjusted diluted EPS of $0.21. Diluted average shares were $61.4 million. Reported net income was $3.8 million and reported diluted earnings per share were $0.06 in the quarter. Adjustments to GAAP this quarter include $12.29 of stock based compensation expense. As we mentioned on our 2Q call, our 3Q stock based comp was elevated this quarter due to accelerated vesting related to our IPO. We continue to expect a step down in stock based comp expense in the fourth quarter to $8 million. We exited the quarter with $164 million of cash, short-term deposits and restricted cash on our balance sheet and zero debt. Our balance sheet strength is a function of our robust profitability and excellent returns on capital which yield attractive cash flows at high cash conversion. Year to date, we generated $78 million of free cash flow, driven by roughly $79.5 of cash from operations and $1.5 million of capex.

Before I turn to our outlook, I want to touch on three big picture drivers. First, as it relates to the consumer broadly, there is no change to what we discussed in early October. We have not seen signs of macro softening in our business. Again, we do believe our model is relatively insulated based on our idiosyncratic growth drivers and our models inherent agility. And also because of the beauty categories resilience and our broad demographic appeal, although we are, of course, watching closely. Second, as Oran mentioned, our business continues to be very strong, and we received significant near term and long term runway for growth and profitability. Third, we continue to find attractive high return reinvestment opportunities to support the expansion of new brands and product categories across our platform and our discipline and success in building the high margin cash generative business today puts us in a position of strength to make these investments. We will continue to reinvest for the future, while maintaining revenue growth of at least 20% and EBITDA margins of at least 20% over the long term.

Now turning to our outlook. For the full year 2023, we expect net revenue growth between 52% and 53% representing net revenue dollars between $493 million and $497 million. Our revenue growth outlook is an increase from our previous expectation of revenue growth between 46% and 48%. We expect growth margins of approximately 70% and increase from a prior expectation of 59.5%. We expect adjusted EBITDA will be between $104 million and $105 million and we expect adjusted EBITDA margin of 21%, which is at the high end of our prior expectation for adjusted EBITDA margin in a range of 20% to 21%. We expect adjusted diluted EPS between $21 and $23, and increase from our prior expectation of $11 to $17. This assumes a tax rate of approximately 25.5% and average fully diluted shares of approximately $60 million. We also issued a detailed outlook for the fourth quarter, and you can find that in our press release.

With that, I’ll hand the call back to Oran.

Oran Holtzman

Operator, we are now ready to take the questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions].

The first question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara Mohsenian

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

Oran Holtzman

Hi, Dara. Thank you for that. I’ll start with ODDITY LABS and then we’ll touch ____ (17:41).

As I mentioned before, it was my dream to use technology to develop better ingredients and our industry still look the same as when I started the company, same ingredients, same manufacturers, serving same companies. And with OODDITY LABS, you are doing something different and we are about to change it, Revela and ODDITY LABS and use the same technology being developed in pharma to develop a higher efficacy molecules. This opportunity is endless, and this is why I spent so much time – of my time as the CEO around this topic. As I mentioned in the call, we see a way smarter consumer today. We see how much time she spent on our product pages and how many questions she asked which leads us to believe that, and we are going to see a trend towards size back products regardless the brand itself and quality product club versus just brand love in beauty.

In terms of how we market it – that’s the magic because we are able to see a model we use our user base to build segmentations and profile then we build the product, then we are going back to the consumer and to the user and – and offering that molecule on your product and if you want, but also when it comes to ODDITY LABS there is no change and to the criteria of how we think about market opportunities, has to be huge term where we see will demand opportunity where the unit economics work for online and where we believe we can truly solve the consumer pain point and we’d love it to make our life easier just because if in the past I just had a user and I need to develop product based on the need, now I have a huge engine for product development and with science backed products.

Just like when meeting the teams and see the talent and the amount of PhD that we have now in Boston, it’s something that is – is unrelated to the industry. Because so far we saw those talents simply just in Pharma, it’s the first time that I see a team, [Indiscernible] is our team that is working around beauty and building something better. So, as for the future, next year we are launching 10 products coming for ODDITY LABS, but this is nothing that – like the – the runway and the pipeline that we have with ODDITY LABS is huge. Therefore, we continue to hire and therefore we continue to spend a huge portion of my time around ODDITY LABS.

Again, today you see two brands Brand 3 and Brand 4 in the making and Brand 3 is going to use, the services of ODDITY LABS because part of – a significant part of the – of the product range are going to come from there, but it’s also great for SpoiledChild and IL MAKIAGE for the first time both for the development teams that are working with ODDITY LAB for different products for things that we didn’t believe that can be done in the industry because like that’s what we were told by manufacturers, but now like a new world is open to us and again it’s very early and – and but like I believe this is the future of the company.

As for repeat rate, again, repeat like is going when people ask me about our bid to predict the business obviously it’s easier because we are not relying on any third party. The DTC model is very easy to understand the cohorts and for the business and it’s my decision where I want to turn on or off or cut back spend for New Year’s acquisition, but one thing I cannot see is with new products or new brands like the repeat rate and what we missed here on again it’s not missed we beat, it’s – it’s like the repeat rate coming from SpoiledChild that exceeded my expectations and that’s why the revenue came stronger this quarter. And I don’t see any feeling like every cohort is getting better and better and it’s both because we are doing – we are using our data better, but also because we are – because you just put the right product in the right hand. And so we expect the repeat rate continue to grow and to continue to see the vast majority of our revenue coming from repeat customers, which is very healthy and that’s why we are able to generate cash every month every quarter.

Lindsay Drucker Mann

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

Dara Mohsenian

Great, thanks.

Oran Holtzman

Thank you.

Operator

The next question comes from Scott Schoenhaus with KeyBanc. Please go ahead.

Scott Schoenhaus

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

Oran Holtzman

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

Scott Schoenhaus

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

Oran Holtzman

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

Scott Schoenhaus

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

Oran Holtzman

Yeah. Thank you.

Operator

Thank you. The next question comes from Youssef Squali with Truist. Please go ahead.

Youssef Squali

Excellent. Thank you, guys, and congrats on solid quarter. So a couple of questions, maybe starting with the 10 products, Oran that you talked about for next year. How meaningful are kind of these products? Obviously, they’re not brands, their extensions of the two existing brands. Can you just share some color there as to how potentially meaningful they are – they could be just for us to kind of get a sense of – of ultimately how impactful they could be to the revenue.

And then, Lindsay, with such a high repeat rate, your market inefficiency must be going through the roof. So can you maybe talk a little bit about that and whether that’s like a step up in your thinking about longer term margins? Because if that repeat rate stays high and obviously your margins are going to be higher and your market inefficiency is going to be that much higher. So just or is it just too early for us to get to that – to conclude that at this point? Thank you.

Oran Holtzman

Sure. I will start with the first question. How are you first of all Youssef? I will tell you the first one, the 10th – we can – we can beat like the way that you operate, we never count on one thing. We can beat that. We always run with multiple levers and to deliver our growth and that that we want to see next year. We don’t need those 10 products to like – to beat our plan. It’s an addition, but I want to see like in SpoiledChild I could have done this year just – the plan just with IL MAKIAGE, but I pushed more SpoiledChild because I want to see diversity and I want to see more like revenue coming from different sources. So I will do the same with – with the new products coming from ODDITY LABS, and just for the sake of building this engine, but I don’t need it to grow or I don’t need it for – to justify my plan for next year.

The second question, I will hand it to Lindsay. I would just say that regarding long term margins like, in my school, you don’t need more than 20% EBITDA margin. And I want to continue to invest in the business. We could have done, like, more than 25% this quarter. And I intentionally decided to hire more people in Brand 3 and Brand 4 to be – to make sure that we are better positioning ODDITY LABS, to make sure that again also on the tech side that we continue to hire the best people and to develop more products, and to like, invest in our future, but I will hand it over to Lindsay.

Lindsay Drucker Mann

Yes, thanks. So Youssef, as we think about our repeat rates, as Oran mentioned, it was a key driver of the upside relative to our expectations in the quarter. We’re thrilled to see the very strong repeat rates at both brands IL MAKIAGE and SpoiledChild for each of those brands, repeat revenue will be more than half of our revenue for this year which is remarkable when you consider how young each of those brands is, IL MAKIAGE only having launched five years ago in the U.S. and SpoiledChild which is less than two years old, and growing as much as it is as Oran mentioned around $100 million in net revenue this year, and profitable to be able to deliver that kind of repeat is something we believe is unprecedented across not just beauty but any vertical in DTC. We love the repeat for a number of reasons. First of all, it reflects the strong customer satisfaction, the fact that our customers love the product they come back and we’re truly filling a need for them that’s not being filled outside.

Number 2, of course, repeat is very profitable for us. Because we don’t have to, as you were, sort of pointed to before, we don’t need to deploy any material Opex or marketing spend in order to – to generate it relative to – to our first purchases. The fact that our repeat rates are so high, reflect those things, but they also reflect the fact that we have significantly underinvested in our potential for – for new customers this year as we purposely pace the business and try to slow it down. So the fact that you’ve got a brand that’s less than two years old with more than 50% repeat and nicely profitable in SpoiledChild means you could have grown a lot faster if you wanted to as Oran said. But based on the size of the opportunity ahead of us, we are operating in a massive $600 billion global TAM in beauty and wellness. It’s dominated by offline incumbents, who we believe have significantly underinvested in technology. We think the category moves to 50% online before you know it and we are – we believe way ahead of others and our ability to capture this.

Our focus is very much on reinvesting, that profitability in order to deliver against those goals. Our underlying business wants to be much more profitable than we’re letting it, but we’re disciplined about talking to that 20% EBITDA margin, which by the way, is still incredibly profitable relative to anything in our peer set. So we think that’s a strong return. It allows us to generate a lot of cash to invest in the future, but doesn’t change our overall thinking in terms of the algorithm, profitability or growth algorithm.

Youssef Squali

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

Lindsay Drucker Mann

Yeah. So as you allude to Youssef, our first and second quarters of the year are much larger than the second half of the year, and that is unusual for lots of consumer companies, beauty companies, DTC companies were typically holiday in the fourth quarter the biggest time of year. I think seasonality is a misnomer. It’s really more about cadence and how we choose to pulse our business. Obviously, if you look industry wide in those categories, holiday is naturally very – very large. There’s nothing that’s naturally very – very large in our industry about the first or second quarter.

So this is really about when we go full power and take advantage of our opportunity to really dominate the market and candidly too with very high visibility get the full year done. And I know that’s unusual relative to what you typically see for other businesses that are going kind of as hard as they can all year long to sort of match the pace of spending of the consumer for us, it’s been really important for us to pace our growth. So we’ll do more than 50% revenue growth this year. That’s on top of approaching 50% last year and 100% the year before. We’ve been growing at a very, very rapid pace, so we wanna make sure that the way that we’re growing allows us to deliver over the long term, compounding, durable, sustainable, and super high quality growth for many, many years to come. That’s been our decision to restrain growth in the back half when we were able to over deliver on our budget so early in the year. I think another thing that’s important to point out is we don’t participate in the holiday promotional fray. You won’t see us discounting. You won’t see us fighting in a low quality way like that. We are a full price businesses and full price brand, which is also why…

Oran Holtzman

While the majority of the – while the majority of the industry is 50% off. So that’s – that’s why it doesn’t make sense for me to – like to compete in Q4.

Lindsay Drucker Mann

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

Youssef Squali

Yes, exactly, awesome. Thank you, both.

Oran Holtzman

Thank you very much.

Operator

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

Andrew Boone

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

Oran Holtzman

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

Andrew Boone

That makes sense. Thank you. And then as we think about really as a follow on to Youssef’s question, we’re two months away now from January. Can you guys just talk about any features or new geographies that you guys may be launching as we think about 1Q ‘24 that gives you the confidence to be able to really pull that growth forward in the first half of next year? Thanks so much.

Oran Holtzman

Yes. I’ll start by saying that you are in a very strong position entering 2024, and the plan is to execute well every quarter and we are not providing now guidance for ‘24 and not for Q1, and you already know our algorithm, but I will try to touch it more generally. And thanks to the huge term of our industry of so many ways to grow and my job as a CEO is to make sure we are spending time and resources going after the right targets and balancing between opportunity size and chances we can get it done.

And it’s true to all we do, new products, new brands, new categories, new tech products, new innovative molecules and we are always working on all five, but with massive pipelines, and this strategy allow me to grow the business consistently for $110 million in 2020 to $120 million in 2021. $225 million in ‘22 and approaching $500 million this year with over $100 million of EBITDA but when – when – when we try to understand like how we break it down, first is our existing brands, IL MAKIAGE and SpoiledChild, which are still like small in the market share and not even close to hitting the limits with the categories we are already in. And this brand’s pipeline comprised from new products and new categories for both brands as well as new geographies, as you mentioned. The teams are already in market testing new product launches and based on those early reads alone we are – we have a very good clinical about 2024.

IL MAKIAGE, we have number of exciting products in skin to expand our strong foundation there. And in addition, IL MAKIAGE leadership is ready with new markets to launch in where our tests have come back very strong in terms of unit economics and customer satisfaction. And we have slowed play these market expansions to ensure our users are happy in our current market but we have those new markets ready to go and it’s multiple markets. And SpoiledChild, we have a pipeline of new products in both hair and skin to drive those two categories and to continue the hyper growth of the brand. And so I’m not concerned at all that meaningful growth will come from both brands.

Andrew Boone

Thank you.

Operator

Thank you. The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson

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

Lindsay Drucker Mann

Yeah. Thanks. New markets outside the U.S. are a huge opportunity for us today and over the long term. Around a quarter, IL MAKIAGE is outside the U.S., SpoiledChild has not endeavored outside the U.S yet. And as you know, from our competitors, call it, two thirds, maybe 70% of their business is outside the U.S. So we know this is a, a significant opportunity for us. As part of our – what I mentioned before in terms of pacing our growth, we have been really, slow played this opportunity in terms of actually unleashing it, that being said we’ve set out significant – set up significant infrastructure and capabilities in order to unleash it when we’re ready. And that includes conducting many, many tests in different markets, laying the groundwork, and getting the wheels in motion, getting a read from the customer. What we see is, basically, all the markets that we’re testing, you’re seeing very, very good customer satisfaction, cohort data, the foundation of things that give us confidence that the unit economics will work and that we can scale across a number of different markets that we’re not in already.

For SpoiledChild, International is really not on the table in the – in the near term. The teams have asked and want to expand more aggressively overseas, but we’ve made sure that we’re still focusing on the U.S., but we do see significant opportunity when we’re ready to start building that on overseas as well. And it’s easy for us based on the infrastructure we’ve already built for IL MAKIAGE to leverage that. It’s part of as we think about the bill to a $1 billion for IL MAKIAGE and for SpoiledChild International plays an important role.

Operator

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

Lauren Lieberman

Great, thanks. Good morning. Covered a lot of ground, but two things I wanted to follow-up on. First was on the repeat rates. I was just curious the degree of which you have visibility or – visibility into everything. But [Indiscernible], you can comment on these repeat rates being existing consumers replenishing products they’ve already bought in the past that are coming back at a higher rate than you had forecast? Or is it a basket size thing, right that they’re now buying more things from SpoiledChild or IL MAKIAGE, but were existing consumers of other products within the portfolio? So that’s kind of number 1. And then number 2 was on the 10 new product launches, with tech from ODDITY LABS, I didn’t know how that compares to a normal year of new product activity. Is 10 products a lot, a little, just some sort of benchmark for thinking about what 10 means in the context of a typical year? Thanks.

Oran Holtzman

Sure. I’ll start by talking about replenishment. It’s both – both AOV and both like new products and also both like replenishment, but the – like the less visibility that we have is it’s mainly around new products or new brand or new categories that we launched, and we don’t have enough history to predict the repeat rate. And that’s why we thought that we will be an excellent [Indiscernible] and coming back with way higher but you could see it across the board in IL MAKIAGE and SpoiledChild, both all cohorts are growing and the percentage of revenue coming from, although we grew massively in the past two years, the majority of the revenue is coming from repeat. So it just showed the strength.

As to the second question, 10 products, I don’t know comparing to who, comparing to us, it’s not a lot because we launch way more and we are not always successful. So we have way more than 10 products. We test them and then if we see that everything works both, satisfaction and unit economic, then we continue to push. So we have more than 10 products, but we are very bullish about those products because they can come from labs.

Lindsay Drucker Mann

Hey, Lauren. I’ll just add to on your first question. As you know, our net revenue repeat rates have continuously improved since the first time we spoke to you was, I think, December of 2021, we talked about net revenue repeat rates in kind of low to mid 40s. Those net revenue repeat rates as of – you’ll see in our F1 for our IPO where I wanna say around 80% on a 12 month basis today are closer to a 100%, we don’t see a ceiling. That has been an ongoing story for us, the continuous improvement in repeat rate and it is so many factors that I have to call out our technology and how, for example, our machine models that support us in retargeting, and how we market and making sure we’re maximizing things like bundles and up-sells and adding basket size, in getting people to engage again with the products. We just continue to get better and better and better as we get more data and optimize for our models. So that’s been a really important driver for us.

And, of course, now that we’ve layered SpoiledChild on top of the IL MAKIAGE and we’re building the platform, we’re able to extract more from the same wallet and that’s part of the really strong, financial profile of our business, which makes us more like what you would see in a software, land, and expand type of model where we know who the user is, we understand their profile, we understand so much about the products that we need and then we’re building those products specifically for them that allows us to extract more from the same wallet and drive repeat. That’s a lever for us that we only just started realizing really with SpoiledChild and to some degree with the launch of IL MAKIAGE skin, we’re extracting more from that same user. But that will just continue to compound over time as we add more products and more brands to the platform. And then I guess one clarification the 10 products are purely ODDITY LABS that’s not the full scope of products that we will introduce for IL MAKIAGE and SpoiledChild in total next year.

Lauren Lieberman

Okay great. Thanks so much.

Operator

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

Jason English

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

Lindsay Drucker Mann

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

Jason English

Okay.

Oran Holtzman

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

Jason English

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

Lindsay Drucker Mann

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

Jason English

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

Oran Holtzman

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

Jason English

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

Oran Holtzman

Thank you very much.

Operator

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

Oran Holtzman

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

Operator

Thank you. The conference has now concluded. [Operator Closing Remarks].