Leafly Holdings, Inc. (NASDAQ:LFLY) Q3 2023 Earnings Call Transcript November 11, 2023
Operator: Good afternoon. Thank you for attending the Leafly Third Quarter 2023 Earnings Call. My name is Victoria, and I will be your moderator today. [Operator Instructions] I would now like to pass the conference over to your host, Josh deBerge. Thank you. You may proceed, Josh.
Josh deBerge : Good afternoon, and welcome to Leafly’s Q3 2023 Earnings Call. Joining me on the call today are CEO, Yoko Miyashita; and CFO, Suresh Krishnaswamy. Today’s prepared remarks have been recorded. After which, Yoko and Suresh will host a live Q&A. A copy of our press release, along with an accompanying earnings presentation can be found on our website at investor.leafly.com. Today’s call will contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the services offered by Leafly, the markets in which Leafly operates; business strategies; performance metrics; industry environment; potential growth opportunities; and Leafly’s projected future results and financial outlook and can be identified by words such as expect, anticipate, intend, plan, believe, seek or will.
A lab technician meticulously measuring and mixing ingredients to create a cannabis-infused edible.
These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations, and we caution you not to place undue reliance on such statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release, our annual report on Form 10-K filed with the SEC on March 29, 2023, and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures which are not prepared in accordance with Generally Accepted Accounting Principles.
A reconciliation of the GAAP and non-GAAP results is included in our earnings press release which has been filed with the SEC and is also available on our website at investor.leafly.com. With that, let me turn the call over to Yoko.
Yoko Miyashita : Thank you, Josh. Good afternoon. Our third quarter results reflect our progress towards building a sustainable business in this evolving industry. With the strategic focus on profitability, we are driving revenue from a healthier, more resilient base of customers, which we believe will provide us with a stronger financial foundation in the long term. We’re also carefully managing our expenses. Adjusted EBITDA for Q3 was negative $200,000 ahead of our guidance. We had minimal cash burn and essentially ended the quarter flat with around $14.5 million. This operational rigor has enabled us to remain focused on our key objectives, strengthen our relationships with high-value clients, reduce retailer friction and continue to improve the consumer experience, solidifying Leafly as a leading destination for cannabis discovery and e-commerce.
Despite our progress in these areas, which I’ll talk about in a minute, broader headwinds continue to pressure the industry. Cannabis markets are experiencing pain points of various types. First, retailers must solve for overall inflation and increased cost to operate a local business in today’s environment as well as price compression in flower in many markets. These external factors are compounded by lack of access traditional banking and much-needed liquidity. In addition, regulatory logjams in many markets are driving constraints in their businesses. All of these factors negatively affect their ability to spend on the Leafly platform and are also driving a continuation in out of business across our customer base. We also see market consolidation with operators and retailers unable to continue operating stand-alone in these constrained environments.
These outside factors masked the growth taking place across the broad cannabis industry. What gives us confidence in the long-term opportunity is that consumer demand for cannabis is unwavering and continues to grow. Estimates by Forbes show that legal cannabis sales in the U.S. are on track to reach $33 billion this year and are expected to grow to $50 billion by 2028. This is why we remain intently focused on strengthening the Leafly brand and nurturing our customer base as budget-constrained retailers continue to struggle. Our team has spent the past many weeks reviewing accounts and their ability to pay and that work continues. We’ve made efforts to work collaboratively with our retailers, but in cases where they are unable to make payments or solidify a payment plan, we have had to make the difficult decision to remove them from our platform.
The most significant regional impacts from these efforts have been in California and Oklahoma, and to a lesser degree in Oregon. While some of this work has immediate consequences for metrics such as ending retail accounts and revenue, we believe this is important and necessary work considering the current environment to ensure that we build our platform and reinforce our financial footing with healthy operators. As a result, we ended Q3 with ending retail accounts of 4466, which is a decline from Q2. The majority of accounts that are no longer on the platform came from our long tail lower-paying retailers. Thus ARPA rose 15.5% quarter-over-quarter. We expect the rate of decline in ending retail accounts to moderate, but continue in the near term.
We’re spending our time and attention focused on attracting and retaining stronger companies and are incentivizing retailers to shift subscriptions from evergreen to annual contracts. In addition, we’ve realigned our support costs. For the tier of our lower spend clients, we have implemented a more cost-optimized one-to-many service approach. This gives us the ability to take a more consultative approach with top-performing clients as we look to increase our share of wallet. We also continue to find ways to bolster the value of the Leafly platform. This includes better monetization of our brand advertising products that we know deliver value. Also, by cross-training our sales force, we’re now selling these ad products to a broader base of retailers as well as traditional brand customers.
And we continue to make improvements to our suite of tools making several significant enhancements to our product to reduce retailer friction and drive orders, the single most important metric for retailers. In September, we launched a new open API for order integration, allowing any cannabis point-of-sale system to seamlessly work with Leafly. This allows us to drive rapid scaling of order integration availability without reliance on additional Leafly resources. This breaks down barriers to integration, improved accessibility for both our customers and business partners and bolsters operational performance and efficiency for retailers. There are currently 50 POS systems that are using our order API, which means more than 2,800 retailers can seamlessly activate order integration functionality.
Deals continue to be a key component of the shopping experience. In Q3, we launched cart-based deals, allowing retailers and brands to apply discounts to an entire order and service that deal more easily to shoppers. We also made improvements to our ad functionality, introducing a tool that increases customization of ads across Leafly. On the consumer experience side, we saw an increase in both the number of shoppers on the platform and in the number of orders placed year-over-year. That’s the result of a more intentional focus on mid- to lower funnel efficiency and greater shopper conversion. We also enhanced our consumer life cycle management, which automates reorder notifications via e-mail and in-app push making it easier for consumers to order again based on their past purchase history.
We’ve made the shopping by effect experience better, and it is now easier for consumers to shop the strains most recently added to our comprehensive strain database. And of course, many of the improvements we have made to reduce retailer friction translate to improvements to the consumer experience as well. The market continues to show signs of evolving. We’re celebrating the Ohio vote on Tuesday to legalize adult use, the 24th state to do so. Maryland legalized adult-use and had their first day of rec sales on July 1. We’ve seen great growth quarter-over-quarter in the market with a 33% increase in order volume and a 21% increase in revenue as we partnered with retailers to make the transition from medical to rec. New York’s long-awaited adult-use regulations went into effect in September, but the regulations greatly limited retailers’ ability to market and promote their products and reduce consumers’ ability to research and shop online.
We challenged these limitations and under a temporary stay agreed to by the New York Attorney General’s office, Leafly is able to offer paid advertising services, display retailer product pricing, and transmit orders to licensed legal retailers in New York. This win reinforces our commitment to give consumers information and resources to be informed shoppers and provide retailer’s access critical channels to reach consumers. It also helps establish Leafly as a leader in the New York market. And finally, in Q3, we have 2 very significant moments in the long journey of cannabis legalization at the federal level. That should relieve some of the operational challenges retailers in the U.S. have been facing. In August, the U.S. Department of Health and Human Services formally recommended the rescheduling of cannabis to Schedule III under the Controlled Substances Act.
And the Senate Banking Committee passed the SAFE Banking bill, team to build up for a full Senate vote. The challenges and opportunities that this evolving industry presents continue to keep us nimble and resilient. We remain focused on the growth and opportunity that lies ahead and have rightsized the business and are operating with rigor and focus as that opportunity develops. We continue to bring value to retailers, brands and consumers, providing the technology they need to drive sales and e-commerce shopping experiences, ensuring that we remain an important and unique player in the local cannabis markets across North America. Now I’ll turn it over to Suresh.
Suresh Krishnaswamy : Thank you, Yoko, and welcome, everyone. To reiterate what Yoko discussed, the cannabis industry continues to be rise with challenges. We continue to see retailers struggle with their own margins, and this has led to pressure on our business. Earlier this year, we shifted our priorities to invest in the areas of our business where we could realize the greatest return. This meant partnering more closely with our largest customers and improving our platform usability for consumers. We believe this is the right decision in this current market environment, and we will continue to focus on these priorities while being mindful of costs across the business. Now to our results. In the third quarter, our revenue was $10.6 million, down 10.2% year-over-year.
Retail revenue was $9.3 million and brand revenue was $1.3 million. Revenue for the quarter was lighter than expected due to the decline in retail ending accounts. These account declines were primarily related to customer budget constraints and Leafly’s removal of nonpaying customers. In addition, we experienced a further softening in brand revenue. We have been diligently working on building a healthier customer base that includes improving our credit and collections processes over the last 2 quarters. We’re supporting customers and helping them understand and optimize the value of our products to help their businesses succeed. In some cases, we’re assisting them in rightsizing services to match their tighter budgets. Ending retail accounts in Q3 were 4,466 compared to 5,637 at the end of Q3 ’22.
Most of the accounts coming off the platform are the longer tail, smaller retailers with lower ARPA. As a result of these smaller accounts coming off our site, coupled with the price increases in August, our retail ARPA in Q3 was up 16% year-over-year to $644. Touching briefly on brands. We have not seen a pickup in the brands business but revenue in this area seems to be leveling out. Near term, we remain conservative on our estimates for this part of the business. We’ll monitor brand spend performance in the upcoming holiday period as a possible indicator for the health of 2024 brand spend. Continuing down the financial statement, our total gross margin in the third quarter improved to 89% compared to 87.1% a year earlier, primarily due to headcount reductions implemented in March.
For operating expenses, Q3 totaled $10.9 million, down 33% year-over-year. We started 2023 with an increased focus on cost savings. Through both headcount reductions and cost-cutting efforts this year, we’ve achieved meaningful results as seen in our operating expenses. Adjusted EBITDA for Q3 was negative $0.2 million, above the guidance we provided of negative $0.5 million. Turning to the balance sheet. We ended the quarter with $14.5 million in cash, excluding restricted cash, the same level as last quarter, and we’re targeting to end the year around similar levels in cash. Now to our guidance. For Q4 ’23, we expect revenue of around $9.5 million and an adjusted EBITDA of approximately negative $1.3 million. The fourth quarter revenue estimate primarily reflects a full quarter’s impact of the lower ending retail account base.
We expect the decline in ending retail accounts to continue in the near term, but at a more moderate pace. In light of the difficult environment for cannabis and its impact on our top line, we are managing expenses very carefully and investing in relationships with our largest customers. We’re focusing on what we can control and remain committed to staying on the path of profitability. We will now open up the call for questions. Operator?
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