Good afternoon, welcome to KITS Eyecare first quarter 2022 financial results conference call. At this time, all lines are placed on listen-only mode. Following the presentation, we will conduct a question- and- answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded and available later for replay. Your hosts today are Roger Hardy, Chief Executive Officer, Sabrina Liak, Chief Financial Officer, and Joseph Thompson, Chief Operating Officer. Before we begin, I am required to provide the following statement respecting forward-looking information, which is made on behalf of KITS and all its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by the use of such words as intend, believe, could, expect, estimate, forecast, may, would, will, and other words of similar meaning.
This forward-looking information is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions, and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances. Actual results can differ materially from a conclusion forecast, expectation, belief, or projection in forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making forecast or projection as reflected in forward-looking information. We caution investors not to rely on forward-looking information. Additional information about material factors that could cause actual results to differ materially from conclusion, forecast, or projection in forward-looking information and material factors or assumptions that were applied in the drawing of a conclusion or making a forecast or projection as reflected in the forward-looking information are available on KITS' filings with Canadian provincial securities regulators.
During this call, all figures are in Canadian dollars unless otherwise stated. With that, I'd like to turn the call over to Mr. Roger Hardy, CEO.
Thank you, operator. Good afternoon, welcome to the KITS first quarter 2022 financial conference call. Thank you for joining us today. I'm Roger Hardy, the company CEO, and joining me today are my two co-founders, Sabrina Liak, and our CFO, Joseph Thompson, our COO. Today, I'm pleased to share our first quarter 2022 results and discuss our vision for the company and its future. After my comments, we'll review our operational results, followed by a financial summary. This quarter, we continued to build on our vision of becoming the eyecare brand for consumers of today. Our positioning now against a volatile economic backdrop is perhaps more relevant than ever, as consumers are feeling the impact of higher gas prices and greater uncertainty impacting daily. We're encouraged this quarter by the performance of our Vision Care business, as Vision Care remains a non-discretionary purchase for our consumers.
As such, it's important to remember that Vision Care is largely a recession-proof business. Consumers are increasingly looking for value and savings as expenses rise in other parts of their lives. In the first quarter, we saw significant macro uncertainty, especially early in the quarter. Accordingly, we focused this quarter on what we could control. Specifically, we pulled back on marketing investments early and ended by 40% down year-on-year as we drove improved gross profit, which was up 25% year-on-year. As we spent less on acquiring new customers, we saw our subscription business and repeat customer activity provide a stable recurring base of business. Growing a stable base of advocates and focusing on creating lifetime loyal customers remains a top priority. We continue to operate at the key intersection of healthcare and technology, allowing customers everywhere to access affordable eye care more easily and cost-effectively than ever by technology.
This innovation ranges from online try-on tools to our state-of-the-art digital lens surfacing facility, where we can produce complex lenses at a fraction of optical store cost and pass the savings on to customers. Technological innovation remains a pillar of our business plan. Vertical integration is critically relevant today, with worldwide supply chain disruptions impacting all commerce. We know our customers need certainty in their eyecare provider. We continue to believe that controlling the rails of production is integral to our business model, allowing us to provide reliable, fast, and high quality to our customers while at the same time providing a key cost advantage. Our onshore optical laboratory right here in Vancouver enables us to deliver premium products faster and more affordably than our competition. NPS continues to be a key focus as the highest NPS in any category also ultimately has the highest value.
We continue to engage with our community to learn and improve our service. As a direct result of those early decisions, we can now celebrate having served more than 710,000 customers over the past 24 months and the creation of a meaningful eyecare platform ready to serve eyes everywhere. During the first quarter of 2022, we delivered CAD 20.1 million of revenue and grew our glasses revenue 63% year-on-year. We expanded our gross margins by 650 basis points to 30.5% of revenues as we maintain our focus on improving margins while growing our glasses business.
Some highlights of the first quarter of 2022. Our overall revenue from repeat customers for Q1 2022 is at 70%. We reduced our marketing spend by 40%. We served a record 710,000 customers. We delivered 148,000 orders in Q1. Of those, 46,000 were pairs of eyeglasses to customers. Given our unique strategy of offering glasses to our existing vision care customers, we had a category-leading customer acquisition cost for the quarter of CAD 21, a 26% improvement quarter-over-quarter. Overall, it was a great quarter. Here's Joe with an update on operations.
In Q1 2022, our KITS community of active customers grew 29% to 710,000 customers, up from 549,000 customers in Q1 2021. This 2022 growth of our installed base of vision-corrected customers and revenue built on record growth in 2021 and 2020. Our eyeglasses business continues to lead the way. In Q1 2022, KITS customers bought more glasses and leveraged more of our expanded range of lenses and frames available. Our eyeglasses delivered in Q1 2022 increased 12% year-on-year in units and increased 63% year-on-year in revenue. Our eyeglasses selection continues to expand, now with over 800 unique styles available and thousands of colorways to choose from. Over 90% of frames purchased were KITS branded, enhancing our brand presence throughout North America.
Additionally, we continue to add to our branded portfolio available in the KITS optical lab, recently introducing the latest Dior, Kate Spade, and Hugo Boss collections, with many more on the way. Encouragingly, we also achieved a milestone in repeat glasses purchases as eyeglasses delivered to returning customers increased over 180% year-on-year in Q1. That represents 70% of glasses orders this quarter, demonstrating the strength of the vision corrected community and the annuity we've begun to build. The significant growth in our sales to repeat customers reflects our success in delivering quality eyeglasses at prices that inspire existing customers to return. Our domestic automated optical laboratory, with a capacity to produce over 4,000 eyeglasses per day, is now hitting its stride. With our digital surfacing facility, we can produce high-quality custom digital progressives and specialty glasses in-house.
Our investment in an onshore vertically integrated eyeglasses manufacturing infrastructure enabled us to cut out the middleman, deliver predictably, and quickly become one of the leading players in the market in 2021. With all of our production local and onshore, we can ship patient orders quickly and cost effectively. Our D2C fulfillment model allows us to produce and ship in-house in under two days, with the vast majority shipping out same day. We strive to continue to improve on this metric, as speed of delivery is important to our customers. There's tremendous value in having built out this complete vertically integrated eye care solution, allowing us to ensure the highest quality of product reaches our patients in the least amount of time. We are still in the first inning of our expansion into the eyeglasses market.
With the investments we have made, we are competitively advantaged to capture the higher average order value and margin segments within eyeglasses. I'll now turn the call over to Sabrina for the financial review.
Thanks, Joe. Q1 2022 revenue was consistent at CAD 20.1 million as we focused on expanding gross margins in light of broader market uncertainty. Gross profit was up 24.7% year-on-year as we continued to invest in our highest LTV customers and in building retention within our glasses business. Resulting revenue in the near term was flat as we continued our strategic shift to glasses and expanding margins. Engagement remains on an upward trajectory as repeat revenue grew to a healthy 70% in the first quarter, allowing us to pull back significantly on marketing spend in the face of macroeconomic volatility. We continued our solid progress on expanding gross margin this quarter as we adjusted our promotional offers to higher order values and successfully attracted higher value customers.
The KITS brand is building momentum and loyalty. We are becoming less reliant on promotional activity as seen in our gross margin, which expanded 650 basis points from 24% to 30.5% compared to the first quarter of 2021. Our goal continues to be to generate long-term margins above 35%-40% as our glasses business and returning subscription customers become a larger portion of total revenue. Adjusted EBITDA margin improved to - CAD 0.9 million from - CAD 2.7 million in the first quarter of 2021. We generated an adjusted EBITDA margin of -4.6% this quarter, which is an 870 basis point improvement year-over-year. We finished the quarter with a strong balance sheet reflecting CAD 18.3 million in cash and don't expect any material investments over the next 12-18 months as we have built a significant runway for growth.
I'll now pass it over to Joe to discuss some of our cohort data.
At the core of our KITS focus is building happy, loyal, vision-corrected customers for a lifetime. We measure our success by whether customers come back, and how often they return is reflected in retention. We earn the retention of our customers by continually raising the bar on selection, quality, value, and convenience with every customer and every order. As we look back at the performance of our retention rates by customer cohort, it's clear we're building something special for customers and for shareholders. We evaluate the strength of our retention by measuring the purchase behavior of our customers over time. For example, within a period of 24 months, we have 100% retention rate on our 2019 cohort, meaning that customers from that cohort have matched their initial purchase within 24 months.
As we review this across 12-month, 24-month, 36- and 48-month periods, we're encouraged to see that we are doing a better and better job of retaining customers, particularly when compared to other publicly traded eye care companies. We believe this favorable trend gives us a sustainable and valuable annuity and positions us well for growth and to weather uncertainty.
Adding on Joe's remarks, with our production facility primed and our nimble asset light revenue model, we are well prepared to deliver through the turbulent times ahead. We're grateful to our customers and teammates who have put their trust in us. There have certainly been both tailwinds and headwinds to overcome, and an expensive environment will continue to be volatile. Having spent the past two years building the infrastructure to support the anticipated growth of our glasses business, we are well-positioned to leverage this infrastructure going forward, and our efforts are focused on growing top line as indicated in our previous guidance. At this point, we are approximately 45 days behind plan.
Now turn it over to the operator for questions. Operator?
Thank you. Ladies and gentlemen, we will now begin question- and- answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star, followed by the number two. One moment for your first question. Your first question is going to be coming from George Duman with Scotiabank. Please go ahead.
Yeah. Hi, guys. I haven't seen anywhere in the press release, I think you might have alluded to it, Sabrina, in your remarks, but just maybe making sure that we're sticking with the CAD 115-CAD 125 revenue guidance for this year and returning positive EBITDA midway through the year.
Yes, George, at this point, we're not changing our guidance. We see ourselves as slightly behind this year to plan, but hoping to make it up in the back half.
Okay.
Just to add to that, George, I mean, I think the year started with a lot of volatility in the macro environment, but we did see as the quarter went on in Q1, an acceleration, and so our view is that acceleration, we're looking to make up as we progress through the year.
Okay. It seems like you guys have been doing CAD 20 million revenues for seven of the last eight quarters. It looks like you need to do closer to CAD 33 million per quarter, over the next three quarters, I guess, to get to the midpoint. Just wondering if we're, I think you alluded to it earlier, Roger, we're halfway through Q2, presumably there's some visibility there. Would you expect revenues to be up materially on sequential basis for Q2?
You know, George, I think what we tried to emphasize today is that the contact lens business is really a recession-proof business, and that vision is quite non-discretionary. We're seeing strong tailwinds accelerating as consumers are looking for additional savings and value as other non-discretionary items rise. We are seeing quite a bit of momentum into Q2. It's of course early, but I would say it's a significant change over Q1, and I think that's about as far as we can go at this point.
That's helpful. Okay, great. That's really helpful, appreciate that. Maybe just a little bit of commentary around the fulfillment strategy. It seems like you had some pretty good announcements there later last year. Can you talk a little bit about how that's progressing to date and maybe how we should think of new activations in that channel?
Sure, George. This is Joe. Yeah, we continue to be very excited about fulfillment by KITS. As we've talked previously, we feel that we've built a better infrastructure for the industry. We've had a number of inbound requests from everyone ranging from insurance partners to others in the optical industry that are anxious to share in the scale and savings and fast delivery that we built. In particular, having an onshore facility has been a real advantage. We expect to update the progress on fulfillment by KITS a few times each year and have a few additional partnerships that we'll announce in the months ahead.
All right, guys, appreciate your answers. Thank you.
Thanks, George.
Your next question will be coming from Diane Daly with Canaccord Genuity. Please go ahead.
Yeah. Hi, everybody. I appreciate the commentary there just in terms of the guidance. Just a question on some of the inflationary pressures that pretty much every retailer has been facing these days. Are you able, in your view, to manage the cost inflation and some of the supply chain challenges that we've again heard referenced numerous times to still achieve that 35-ish% to 40% gross margin target by the end of the year?
Joseph? Yeah, go ahead.
Hi, Diane, it's Joseph. Yeah, thanks for that question. We've been fortunate to date. I'll talk what we've seen to date and then maybe discuss the balance of the year. We've been fortunate to date to see very marginal increases, only in COGS, in the low single digit range over Q1, even when compared to Q1 from a year ago. On eyeglasses in particular, we're seeing the cost benefits of our scale outpace any increase in COGS. You're seeing this play out in the continued growth in gross margin up again this quarter to 30.5%. To your question, we've seen two quarters in a row of progress towards 35%-40%, and that continues to be our focus by the end of the year.
I think, Diane, one last thing I'd probably add in there that when we think about sustainable competitive advantage for us inside our business, that the largest sustainable competitive advantage is our customers telling other customers about the offering. Getting that word-of-mouth flywheel going. If we think back to Q1 a year ago, it's really about investing to get that flywheel started. I think what Q1 2022 shows us really clearly is there's lots of leverage in the model. There's lots of resilience in the model. The contact lenses business is extremely resilient. I can remember the 2001-2004 recessions. I can remember the 2007-2009 recessions, running a contact lens business, and it's just a resilient business. We see that resilience.
We see the investments we made a year ago coming back, and then we've been steadily introducing those customers to the glasses offering, seeing very positive traction there. I think, the other key part of the model is that marketing as a percent of sales, we're seeing more leverage in that number as word of mouth starts to expand. I think that's something to think about as we go forward.
Just following up on that, I mean, you showed strong improvements in terms of your marketing expense runway. Is that a level we can kind of expect going forward, and can you grow your revenue off that base of marketing expense?
Yeah, Diane, I think we're seeing quite a bit of leverage in that marketing line as the years progress. Again, our expectation is that the best sustainable competitive advantage is customers telling others that they had a great experience. I'd say we've seen a bit of an inflection in that. The power of social media sharing and so on has really become powerful when you get the offering right. That's why we spent really a year focusing on NPS, making sure that we're shipping great glasses very quickly, and we're really seeing customers sharing that experience with friends and family. That's what we hope to continue to see, and we think that we've built the scale intentionally. One of the problems we've had in the past is volume upticks, and we have to pause while we build out the infrastructure.
We've taken the opportunity to build that infrastructure in advance. We've seen our satisfaction levels steadily rising on the highest in the category. You know, again, very important, I think the slide Joe spoke to from a retention standpoint. These are impressive retention LTV numbers. All those things give us kind of good confidence in how the back half of this year is going to go.
Okay, just in terms of one of the newer initiatives, the launch of progressives, looks like it was up really nicely during the quarter. Are you seeing your average order volumes moving up as you increase your exposure to progressives, and should we expect that to continue?
Hi, Diane. Yeah, this is Joe. On the glasses business, you did see that correctly in Q1 with our revenue growth in glasses of 63% year-on-year, outpacing unit growth. That's really attributable to customers looking at a broader range of our lens offering, including some of the premium digital progressives. That's a trend we expect to continue in glasses.
Okay. Just last one for me, I guess kind of moving back just to that in my original question on supply chain. Are you guys comfortable with your inventory position? What is the lead time on ordering raw materials needed to make the glasses and lenses?
Yeah, Diane, I think you saw our inventory go up at the end of last year in some anticipation of some uncertainty and some headwinds. I think we've got the right amount of inventory on hand, and we'll probably continue to manage that thoughtfully as the year progresses.
Okay, great. Thank you very much.
Your next question comes from Matt Koranda with ROTH Capital. Please go ahead.
Hello, [ROTH]?
Hey, sorry guys, I think I was on mute there. Apologies. Just wanted to see if we could dig into the marketing discussion that you guys had in the prepared remarks in terms of the pullback on expense dollars there. What exactly did you see in the quarter that caused that? Was that essentially sort of macro-related, or was there just some sort of scale that you got to in terms of repeat customers that you decided to dial that back?
You know Matt, I think we're being thoughtful about deploying marketing investments and continuing to rely more and more on existing customers to tell the story for us. So I think that's what you saw is that's kind of the initial, as I talked about, the flywheel starts last year. We start to see those customers coming back a year later. As the service has gotten better and better, the offering's got more broad, more and more sharing. I think, it's just that balance of ultimately trending the model to a marketing number that's below 10%. We think we probably run it between 6% and 8% with significant growth. I think it's good to see the glasses number growing the way it grew with that pullback in marketing.
As we go forward, I suspect that we'll see more sharing, more customers telling customers, and we'll look to moderate that marketing expense. I think all e-commerce businesses have seen kind of an efficiency decline maybe in Facebook and Google and some of the other sources of customers and traffic. Our view is that we're acquiring customers more and more cost-effectively, and that's kind of how we think that the rest of the year progresses.
Okay. Very helpful. Just to follow up on that, it sounds like 10% may be the goal over time, or maybe I think even to six to eight over the long run. Can we get to that number this year? Should we be thinking about, sort of, I don't know, the mid-teens or so, as a good rule of thumb for the year in terms of % of sales spent on marketing?
Yeah, I think we should call it 10. Double digit by year-end would be kind of an effective number. It's always a balancing act, but as I said, we're seeing that flywheel of customers telling customers really kicking in. We'll look to accelerate that where we can and try to moderate the sort of direct marketing hard costs to the extent we can.
Right. Wondered if you guys could maybe touch on consumer purchasing behavior within the quarter, obviously with the understanding that this is a recession-resilient or recession-resistant category. Anything within the category in terms of behavior changes that you saw from the consumer, in terms of their reaction to inflationary pressure or other pressures. I'm thinking just in terms of maybe trading down from a branded pair of glasses to a private label or contacts as well. Anything that you saw within the quarter cadence-wise?
I think Joe touched on a little bit that the expansion in our offering led to people choosing specialty lenses a little more frequently. We are seeing an increased number of first-time customers as the quarter progressed. Those customers typically come in for, I would say, a fairly standard offering, a single vision standard offering on that first order. It's again, a bit of a mix. Joe, any add-ons there? Any comments?
Yeah. Exactly. As these customers come back, we see them explore a broader range of our selection in lenses and in frames. Those initial customers, providing them with best-in-industry value is our focus.
Yeah, I think, to the extent we can, we really want to see that first-time customer come in, check out with a great pair of glasses, and then look to see them return for multiple pairs and upsell into specialty products. That's kind of how we have seen the model play out over the past year and how we think about it going forward now. If a year ago was a focus on acquisition and starting the flywheel, I feel like this Q really shows us that that flywheel pays quite well. It's an effective dividend to look at that cohort performance and see customers returning in a very impressive fashion. As we go forward, we'll be, again, looking to amp up that first-time customer number and then watch it return.
Like I said, I really do see that this model is very resilient. I would think in this, if the market gets challenging, more and more people are looking for savings as costs in other items rise. We will be very well positioned to accelerate through any recession. Yeah, that's kind of how we see it.
Very helpful, guys. Maybe last one. Really solid repeat purchase behavior at 70% of revenue. Also within context, I guess, Autoship is still only at sort of the 25% level in terms of total penetration. Just wondering, are we reaching a ceiling there? Is there more to go in terms of getting more folks converted to the Autoship side? Just wondered if you could kind of reconcile those two items for us.
Yeah. Thanks, Matt. It's our view that there is still more to go in subscription and the convenience that we can provide to our recurring customers, and as you mentioned, 70% of that revenue coming from repeat customers. We'll continue to bring more innovation to the market in the subscription area.
Okay. I'll leave it there, guys. Thank you.
There are no further questions at this time. You may now go ahead.
Hey, thanks everyone for joining us today. We'll look forward to updating everyone on the next quarter. Thanks, operator.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.