All right. Good afternoon, everyone, and welcome to Needham's 19th annual Tech and Media and Consumer conference. My name is Anna Andreeva. I'm a senior analyst covering e-commerce and global brands here at the firm. Next up, we're very excited to feature KITS Eyecare. From the company, we have Joe Thompson, who is a co-founder. Welcome, Joe.
Thank you, Anna. Great to be here.
Okay, fantastic. For those listening in and have some questions, feel free to type those in the prompt, or conversely, you can email me at aandreeva@needhamco.com, and we'll go over those. So with that, Joe, please take it away.
Wonderful. Well, thanks, everyone. Nice to bring home the conference here with this presentation. Hope everyone has their glasses, contact lenses on. Optical is a fun category. It's a big one, about $80 billion. That's contact lenses, glasses, eye exams. And roughly eight out of 10 adults require one or the other just to get through the day. Despite this size and the number of folks that require the product, there's still way too much cost and way too much complexity in the category. And so, you know, each year, about 100 million Americans buy a pair of prescription glasses, and none of them really seem to know why it costs so much to buy a pair of prescription glasses or why it takes two weeks to get them.
So we launched KITS in 2018 to make eye care easy. Now, how would we make eye care easy? We knew it wouldn't be by adding more cost or more complexity to the category. It'd be by taking things away, removing all the waste, and passing high quality and cost savings on to customers. So five years in, five and a half years in, how are we doing? Well, we just reported our Q1 2024 results last week. We had revenue of about $38 million, up 26% year-on-year. Our run rate is about $ 140 million on revenue. We have been growing about six quarters in a row in around 25%-30%, about five times the rate of the industry. And we're funding that growth entirely ourselves from cash flow.
Free cash flow, positive, generating cash flow from operations, and alongside those six quarters of 20%+ revenue growth, we've also had six-plus quarters of positive adjusted EBITDA. So, over the last five years, one of the fastest optical companies to $1 00 million and soon to $ 150 million and remaining profitable as we do. But probably the most exciting thing about this category is the repeat profile and the stickiness of this customer, and each, each quarter, each year, we like to have 60%+ of our revenue come from repeat, recurring customers. Because once you need vision correction, you need it for decades, often a lifetime. And so if you can treat customers very well, give them a great experience, they tend to come back. This last quarter, this last year was no different.
Even growing 25%-30%, we're still able to maintain 60%+ of revenue coming from repeat customers. Our active customer base is now approaching 870,000. And so how to grow, maybe before we go too much into the details, we'll step back and say: You know, we started this business just over five years ago and asked, "You know, how can we grow KITS to quickly become a $100-$200 million revenue business and to remain profitable? And how do we do that?" And so for us, we've had some experience, our team has previously built and scaled an optical company. Coastal Contacts took it on the Nasdaq, and ultimately it exited for about $450 million in cash in 2014.
And so we know the optical category, and we know the e-commerce category, and so we said, "With that expertise, how can we be really thoughtful about building an optical business that will endure?" And as we launched, Roger and I said, "There's two secrets to this category that we think are really important. Number one, if you start and build an optical company, start with the smaller part of the category, which is contact lenses, not glasses." Contact lenses are about a quarter the size of the eyeglass market, and they have a lower gross margin profile, as a percentage, vs glasses, often 35%-40% gross margin, whereas glasses can be, you know, 80%, 100% gross margin, even higher. You know, not a design-driven category, it's not as exciting as glasses.
So why start with a smaller, lower gross margin percentage category? Well, contact lenses are highly recurring, that customers are coming back every three or six months. They tend to skew younger, tend to skew female. So you have a fashion-focused, customer base, so vision-corrected customers that are coming back regularly, and that becomes a profit core. So that's what we did. And once you do that, use that profit core to launch into glasses. And when you launch into glasses, secret number two is start with the manufacturing, because the optical lab. Because in eyeglasses, all of the profit comes from the lenses, the manufacturing of those lenses, the upgrades, the blue light coatings, the digital progressives, the thinner lenses, photochromic. And that, too, is counterintuitive.
Why invest million, millions into an optical lab before you've figured out how to sell any glasses? Well, it turns out, if you do it the other way and sell 10, 1,000, 100,000 pairs of glasses, you're giving the profit away to the lab, to someone else, and you have to charge customers more money. And in the process, you've built a marketing organization or a retail organization. So we started with the lab. Before we sold our first pair, we put a couple million of our own capital into the first version of our optical lab, we since built it out significantly since then. So that's it. Start with contact lenses, build the profit core, and use that profit to launch into glasses, starting with the optical lab. Once we did that, things started to take off.
And what helped our revenue even more than we had thought was that we've just happened to build the lightweight cost infrastructure for this category at the exact moment the category is moving online. And what's driving that movement online? It's the millennial consumer. And so the millennial consumer this year is 28-43 years old, prime optical age. And this year they overtook the baby boomers to be the biggest demographic in the U.S. and Canada with the most spending power. And this is a customer that has very high expectations, but also is very comfortable buying every category online. And so, while, you know, we anticipated that the category would move online gradually, we underestimated how fast it would go, and that's really been a big driver of our growth.
We happen to have built the low-cost infrastructure for this market, at the exact time the customer of today, who will become the revenue generator for the next decade or two, the millennial cohort, is coming into the category. And that's been driving our revenue growth, and we've seen steady progress on revenue. Importantly, as we've grown revenue, typically you see marketing costs come up with growth companies, but not so with our model. We've been able to hold and recently even decline marketing as a percentage of revenue. This past quarter, growing revenue 26%, while marketing as a percentage of revenue leveraged from 14.5% a year before to 13% today.
As we continue to grow, we see more leverage coming on the model, on, on fulfillment, on remaining G&A, and, and we see that flowing through to the bottom line. Our goal in the short term is to build a CAD 200 million revenue company, and we're, and we're well on our way to do that in, in our view, in the next two years or less. At that point, have gross margin in and around 40% or quickly approaching 40%, and EBITDA in the 10%-15% range, all while growing 20%+ a quarter or higher and funding that growth from our own cash flow. Now, what's at the heart of this?
The heart of it is, the lens, the lens lab, that I described a few moments ago, and the fulfillment center that's attached to it. We have built the, the entire infrastructure around, delivering customers the highest quality eyeglasses, and the freshest contact lenses to their home in a day or two, anywhere in North America, at the best value in the marketplace. And that, for us, started with what we've started to call our Giga Lab, our, our optical lab, on the West Coast. It's fully automated, one of the most automated, largest optical labs in North America. It's important that that lab is onshore here, close to customers, so that if you place an order today in New York, it's, you know, approaching 5:00 P.M.
Out on the West Coast, it's only 2:00 P.M. It takes about 20-30 minutes to make a pair of single vision prescription glasses in our lab. They quickly get that order into the carrier network. It's flying east tonight and at your door tomorrow or the day after, and for customers, that becomes a real wow. And that is part of the driving force of customers coming back again and again. Important to note, we've deployed the CapEx to grow this, to grow our revenue base at least to double from where we are today. Currently at about CAD 140 million run rate, we think this lab will sustain us without significant CapEx until CAD 250 million-CAD 300 million at least.
Maybe just to touch on the balance sheet before we go into questions. We try to keep things pretty simple. We have 31 million shares outstanding, all common. We have a large insider ownership. The first equity raise we did was the IPO. And so as a result, our incentives are very much in line with the market. Insider ownership is around 75% of the stock. We have cash on hand approaching $20 million, $18 million as of last quarter, a small debt balance of just over $6 million, and that's it. So we're excited about the tailwinds in this category. It's rapidly moving online. Pre-pandemic, the category in eyeglasses was around 6%-7% of the revenue was online.
Fast-forward a few short years later, it's now approaching 20%. The latest numbers we've seen in the U.S. market have glasses as a online share of revenue in and around 17%-18%. Contact lenses growing even faster online. Pre-pandemic, it was 16%-18% of the category was sold through online channels. This year, it's 42%, and so, you know, we think that that momentum continues, and we're fortunate to be here with the KITS brand to catch this momentum as this category continues to move online. Maybe with that, I'll pause, and I'll see if there's any questions.
Okay. No, that was great. Thank you. Definitely, very extensive and thorough. I guess a couple questions from me. So really a wow factor, you know, 25-30 minutes to make a pair of glasses and delivery within a day, in the U.S. How do you think about the kind of a propensity for stores vs online for this category? I mean, of course, you said the online penetration continues to grow, but I think there are always gonna be those consumers who are reluctant to convert, you know, for this almost very important purchase online. So how do you guys think about that debate? You know, stores vs e-com.
It's an important debate, and it's one that's even happening this week. There are some customers that will prefer to shop in-store. Now, fortunately, there's about 45,000 brick-and-mortar optical shops across North America, so there's a huge number. It's a very over-retailed category in North America. At the moment, the category is shifting from store to online, and we were reading and inspired by a BCG report the other day, which suggested that 41% of all commerce in the U.S. it will be online by 2027. We think that optical, specialty categories like optical, they tend to start a little bit slower 'cause you need a whole infrastructure to power the online model. It's not as easy as T-shirts, but once it gets going, it never moves backwards.
So the pattern that we're seeing is, on average, having no brick-and-mortar stores, we can pass on $150-$250 in savings to customers just by not having that huge footprint of brick-and-mortar stores. And as we plan around the millennial consumer, which will be the consumer for this category in the next 10, 20, 30 years, and we see their purchase experience, their purchase habits, what they're telling us very clearly is they have no interest in going into a traditional brick-and-mortar store, paying $350-$400 for a pair of prescription glasses, waiting two weeks for it.
They're much happier browsing online and from wherever they are, placing an order and recognizing that savings of hundreds of dollars and then having the convenience of having those glasses show up at their door in a day or two.
Yeah, no, the quick turnaround and the price point definitely huge, huge value adds here. I wanted to ask about influencers. That seems to be an interesting and new theme for the brand, at least since last time that we spoke. And we saw that post that generated all the buzz, right? The $28 pair of glasses is less than an Uber ride. Can you talk about how you guys think about that opportunity? Are you seeing more of a micro-influencers currently that makes sense for the brand or not necessarily, and what do you see with the costing of all of that?
Yeah, influencers have been just a really pleasant surprise for us, and.
And we were delighted to see that, you know, with our pricing model, every pair of KITS prescription glasses is priced at $28, including prescription lenses. And that lends itself really well to the influencer channel, where people wanna spread the word and tell everyone in their network about it. And we had a couple. So I think micro-influencers will continue to drive the balance of growth, and as we get more and more micro-influencers, I think we'll just continually graduate up into bigger and bigger influencers. You know, we had one, and I had a couple screenshots in the presentation a few slides ago. One influencer, she was in L.A., and we hadn't paid her.
Our team just reached out to say, "Hey, you know, we love what you're doing. Can we send you some glasses? We're from KITS." And she said, "Sure, here's my prescription." The team sent her some glasses, and unbeknownst to us, you know, she recorded a unboxing experience, posted it on a TikTok, and it was a record day and a record week for us on glasses. And so, it, that's, you know, we think just scratching the surface. It's very early days on influencers for this category and for us, and so we're super excited.
In Q1, it was our largest channel for acquiring new customers, and it had the lowest acquisition cost, so that's a pretty powerful combo, and we're gonna invest much more in that in the year ahead.
I can imagine, spending money, right, on, on Google and general performance marketing, as opposed to, providing, you know, somebody with a pair of glasses at that cost, gotta be extremely efficient, from the costing, cost-benefit analysis.
That's right. Yeah, no, we and typically what we'll see is a customer will come in, and as you said, one of these customers posted that $28, that's about the price of an Uber. And so that tends to be an intriguing proposition for customers, where it draws them in, and they're interested. And then they come to the site, they see we have over 2,000 different styles of glasses. They can get anything they need. Their first purchase may be m aybe they'll make some small upgrades, and the purchase will be, you know, $40 or $50 even.
But when they come back, on average, the return customers are buying two pairs because they have this, but most customers anyway have, you know, $300-$400 of vision care to spend over a two-year period. And if we can deliver on the customer experience, then, you know, then a customer six months in, their glasses are still perfect, the lenses are crisp, they don't smudge, the quality holds up, and they paid $28 for their frame. That's a customer that feels like they're just sitting on found money with insurance, and they come back and spend, and maybe buy a prescription sunglasses or that big red frame that they've always wanted.
So we think, you know, for us, we look at the combination of cost of acquisition and gross margin with the initial purchase. And what we're seeing with word-of-mouth, and referrals, and influencers, and affiliate channel, just gives us high confidence that the next thing for us to tackle will be, we already have the lowest cost of manufacturing, the lowest cost of shipping for a high-quality pair of prescription glasses. We think we've got the lowest cost to serve customers with a website instead of a brick-and-mortar store. We think the last frontier is the lowest cost of acquisition, which we'll get to, and we'll have to earn the right to get there with thousands, and soon millions of happy customers spreading the word.
No, that sounds great. I wanted to follow up. You mentioned a record repeat purchase behavior, right, as of late, especially in 1Q, I think, very annuity-like, you know, for the business. Can you talk about what are some of the specific drivers behind that that you're benefiting from?
Sure. We're happy to have a strong business in both Canada and the U.S., and in both contact lenses and glasses. I think on contact lenses, what customers really value is great value and super, super fast delivery.
Mm-hmm.
Customers even, you know, customers that are buying three, six months worth of supply, tend to reorder when they're down to their last two-four days. So waiting two weeks means, you know, you're putting a daily contact lens in your eye well beyond where it should be worn. So if we can meet that customer's need in getting them their refill within one-two days, that's a real game changer for them. To do it at an unbeatable price point with a few clicks on their mobile device, that's a customer we feel like we should be able to retain for decades. So that's on contact lenses. But on glasses, the repeat profile in eyeglasses, historically, has been 18-24 months.
Every two years, people buy a new pair of prescription glasses. That's not because magically, everyone's prescription just changes every two years. It's really driven by the insurance industry, where they fund $300-$400 that expires every two years. And in a remarkable coincidence, the legacy infrastructure has priced eyeglasses at $300-$400, so that you can buy one pair every two years, and don't break them, or don't take any risks on, you know, on a new shape, or a new style, or a new color because you only get one, and it has to last you two years. So the behavior we're seeing on eyeglasses is really the most fun, where customers are coming back within three or six months, and it becomes a treasure hunt for them.
Because they have their saved glasses, and they also now have $300 more to spend on, on another pair, or another three pairs, or four pairs. And so, so we think that, that really, bodes well for the future. But what you can expect to see from us is, a consistent focus on 60%+ of our revenue every quarter, every year, coming from that repeat cohort. And we think this, this is a, this is a great annuity category if, if you really can deliver for customers on.
That's great. So very, very sticky, obviously, for the many reasons that you discussed. As you take a look at your business, so you've had, I think, six quarters now of sales greater than 20%, and top line accelerated vs the holiday, while marketing as percentages of sales, actually declined sequentially as well as year-over-year, which is always, you know, great to see. Can you talk about, just as it relates to your last quarter, as you were going through, what surprised you the most to the upside? And conversely, you know, what were some of the negative surprises?
That's a good one. So, you know, positive surprises are just the power of word-of-mouth. And I think, you know, all of us, and I'll put myself in this camp, I think it's very tempting to go to some of these traditional channels that you mentioned, you know, Google, Facebook, Instagram. You just see more and more content on, "Well, that's where people are, so we have to pay the tide to be there." And we've done that in the past, for sure. On average, it costs, you know, $100-$200 to acquire an eyeglasses customer on Facebook or Instagram, and we've done it in the past and it's fine.
But when you do that, you give away all of the economics, and somebody has to pay for it, and often it's the customer. So, you know, for us, what's been most uplifting, and in a positive way is the word of mouth and how far your dollars can go with influencers. And also, when you have a lightweight infrastructure and you don't have, you know, thousands of brick-and-mortar locations, you can do really fun things like city-by-city takeovers.
And so, you know, we started in Q4 with our first, our first city here in Vancouver, where you can take your marketing dollars in, in a very concentrated way, you can focus them on only one city for only a few weeks, and really, light the spark of awareness in that city, and then just maintain it from there. And then you start to really see, once you have two, three, four people in any given workplace that have tried KITS, well, you, you. They're on a Zoom call similar to this one, and, and, you know, someone says, "Hey, what's new? You changed something. Is it your hair?" You say, "Oh, you got a pair of glasses. Let me tell you about KITS.
And before you know it, you know, you have 10, 20, 50 people from that workplace using KITS. And so city-by-city takeovers have been productive for us in.
In the early going, and we're now looking at 15-20 markets incrementally over the next few years to roll out to. And, we like the economics of them. We like that you can really, in a concentrated way, focus on that customer and then and then serve them really well, and then turn that customer into a repeat customer. On the. You know, what was surprising on the downside, I think, you know, we are very aware that the customer is compressed in terms of spending. And so.
You know, I think, you know, we need to do an even better job of communicating to customers that, you know, with vision insurance, even without vision insurance, you can ensure you have the optical products that you need, you know, for on kits.com for $28. And, you know, we ran a survey in the Canadian market. Our business is about 70% U.S., about 30% Canada, but Canada's growing really quickly. It grew just over 40% in this most recent quarter. And, you know, we ran a survey on the insurance industry, and we found that one out of two Canadians is postponing a needed optical purchase, based on cost, and based on the fact that their insurance couldn't cover the full need.
So when you think about customers who 10, 12 hours a day are wearing a pair of glasses to be able to see accurately, and they're having to squint while they save up to buy their next pair, I think, you know, it's disheartening for us that that's the case. It really emboldens us to say, "We need to take as much cost and complexity out of the system so that we pass that on to customers, so that we can offer them a designer quality pair of glasses for $28 with prescription lenses.
Okay. Okay, no, that, that makes a lot of sense. Just going back to your last quarter, you mentioned there were some new customer acquisition initiatives that were a headwind, specifically with a more premium type of a consumer. Can you elaborate on that a bit more? I guess, what was the rationale to target specifically those consumers, and what kind of return are you seeing from this? Maybe it's too early to talk about returns, but I figured I'd ask.
Sure, yeah. No, that was one of our biggest surprises in Q1, was we set a target to grow meaningfully in the premium tier of customers. And for us, we define that as daily modality contact lens users, so contact lenses that are getting replenished every single day. And on the glasses side, digital progressive, so two or more prescriptions within each lens, or lens upgrades, such as photochromic, that change from light to dark, or thinner, more premium lenses. And so our hypothesis was that if we offered an initial discount to those customers who'd never shopped on kits.com or Kits.ca, that that would be intriguing.
For us, that was a pleasant surprise, that our new acquisition grew faster than we thought, and our revenue grew faster than we thought, faster than the market thought as well. So what was the cost of doing that? Well, we were fortunate not to burden the marketing line.
Where we saw marketing's percentage of revenue come down. We did invest a little bit gross margin dollars on a one-time basis to acquire those premium customers. And as an example, you know, the digital progressive customer is a really interesting one, where the average cost for a pair of digital progressive glasses in the market in the U.S., in a brick-and-mortar retailer is $800-$1,000. And on kits.com, it's our price is $98. And so, and so, you know, we think that there's a lot more we can do for that customer cohort. And, and so we really wanted to start the investment cycle to get to scale, and you know, we're still underdeveloped in that segment.
There's still a lot of room to grow, but that was a big positive for us. It had, you know, a small impact on our gross margin percentage, but that was a conscious trade-off on not burdening the marketing line to acquire those customers.
Okay. Okay, makes sense. And are you expecting a similar headwind on a gross margin line as we go through the year? And just maybe remind us. Well, I guess it will depend if you do something like that again, but remind us on the puts and takes on a gross margin line.
Sure. Yeah, no, we put out our outlook for Q2, which we haven't done before. But in our earnings call last week, we've seen just continued growth as it comes into Q2. And so we thought, you know, we're not only gonna put out top line, we're also gonna put out bottom line guidance and outlook for Q2. So we've said that we expect revenue to come in again +20% and around 23%-25% growth, CAD 36-38 million in top line. And in adjusted EBITDA, we expect to make meaningful progress there quarter-on-quarter, year-on-year. We expect adjusted EBITDA to come in 3%-5% within that range.
For us, the puts and takes to your question are operating leverage on marketing and fulfillment vs gross margin expansion. You know, we think every quarter is just a little bit different. Some quarters, some numbers will go up, some quarters they'll come down. But over the lens of a full fiscal year or a year or two, you know, if you look backwards over the past six quarters, we've really made meaningful progress on both, and we expect that to continue. Right now, we're focused on Q2, 3%-5% EBITDA, and in the next two years, internal target, revenue greater than CAD 200 million revenue run rate, gross margin at or approaching 40%, EBITDA 10%-15%.
Okay. All right. Terrific. Just shifting gears quickly, what did you see with the industry growth in 1Q? Obviously, your brand is outpacing whatever is happening with the industry, but curious, are you starting to see that replenishment cycle in the category come back post the pandemic?
Overall, the industry has reported modest growth, you know, 3%-4%, last year, and appears to be the same this year. So it's a stable category that way. People have got to see, it's nondiscretionary in that sense. But underneath that number, we're seeing lots of movement. And so, traditional, maybe legacy infrastructure, specifically brick or brick-and-mortar, that growth is really coming with price premiums to consumers. So, it's the thing that we're looking at is our, what is the customer-new customer growth and overall active customer growth quarter-over-quarter, year-over-year? And we think a healthy business is growing that, growing both, and not burdening the customer to achieve revenue growth.
So unfortunately, in some of the legacy brick-and-mortar stores or in some of the public companies, we look at the comps and we realize, "Oh, gosh, it's just price, a price premium. The customer's paying for that growth." And.
Yeah.
And so we're happy to see both customers upgrading more, once they see the value on our site, but importantly, new customer growth coming through on our platform. But probably the biggest shift maybe in history, in this 500 year-old optical category, is the movement from brick-and-mortar to online. And you know, we could really... You know, there's only a few of us with a pure play online model now. To be honest, we could probably use more. You know, the more like-minded competitors we have, the faster this market shifts to online.
But there's a few of us, and, and that's really where we're seeing the market share shift go, is if you look at brick-and-mortar flat to, you know, minus, you know, somewhere between flat to plus or minus, you know, 3%-5%, donating share to the online channel, which in our case, we're growing about 5 times the rate of the industry.
Okay. Okay, perfect. Makes sense. One on AOV, you mentioned consumer upgrading, and you've seen growth in AOV for a number of quarters now. So can you talk about the composition there? I mean, obviously, you're seeing units. How much of a crossover do you see in glasses vs contacts? And just how do you think about that growth going forward?
Sure. Yeah, our, our AOV in the latest quarter on, contact lenses was up 10%, on glasses, it was up 22%. That was really driven by, yeah, your previous question on, acquiring new premium customers, customers coming in, buying digital progressive. And so we, we think that there's a lot of room to grow there. But expect to see from us just a nice, smooth balance between new customer growth.
That repeat profile continuing. Even last year, if we think back to 2023, our full fiscal, we grew at 32%, but still maintained over 60% of our revenue coming from repeat customers. Just continuing to grow the active customer base, continuing to grow into existing and premium categories, and ideally passing cost savings, not cost increases, on to customers.
Okay, terrific. I think we're now out of time. Thank you so much, Joe. Thank you to everyone who listened in. This was, this was great. Thank you for attending the conference, and we'll speak soon.
Thanks, Anna.