Good morning, and welcome to the KITS Eyecare Second Quarter 2023 Financial Results Conference Call. This call is being recorded and available later today for replay. Your hosts today are Roger Hardy, Chief Executive Officer, Sabrina Liak, the Chief Financial Officer, and Joseph Thompson, Chief Operating Officer. Before we begin, I'm required to provide the following statement respecting forward-looking information, which is made on behalf of KITS and all of 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 words such as intend, believe, could, expect, estimate, forecast, may, would, will, and other words of similar meaning.
This forward-looking information is based on management's opinions, estimates, and assumptions in light of their experience and perception of the historical trends, current conditions, and expected future developments, as well as factors that they currently believe are appropriate and reasonable in the circumstances. Actual results could differ materially from a conclusion, forecast, expectation, belief, or projection in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making the forecast or projection, as reflected in the forward-looking information. Management cautions investors not to rely on the forward-looking information.
Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in KITS' filings with Canadian provincial securities regulators. During today's call, all figures are in Canadian dollars unless otherwise stated. With that, I'd like to turn the call over to Mr. Roger Hardy. Please go ahead.
Thank you, operator. Good morning, everyone, thank you for joining us. I'm pleased to report another impressive quarter of results here at KITS, as we once again had record performance across our business, reaching an annualized revenue run rate of CAD 120 million, just two quarters after surpassing the CAD 100 million run rate mark. For the fifth straight quarter, we delivered top-line growth with a record CAD 30 million in revenue, a 38% growth rate over the prior year, and nearly CAD 10 million in gross profit, another record achievement by our team. Our two-year active customers also reached an all-time high to over 810,000 customers, and we also served over 79,000 new customers in the second quarter.
Similar to last quarter, we were able to accomplish this spectacular growth while being very intentional about pursuing higher margin business without having to utilize as much promotional activity. This helped our continued margin profile expansion in the quarter with an increase of 80 basis points year-over-year. Over time, we believe there are many significant opportunities to continue to expand margins as we continue to systematically grow and take share. Marketing expense as a percent of revenue was once again declined in the quarter as we continued to generate strong word of mouth and revenue momentum while generating improved efficiencies in our direct outbound marketing efforts.
As a result of keeping our organization lean and maintaining an efficient cost structure, we are better able to flow through this top-line growth to the bottom line as we marched closer to positive net income, reported positive adjusted EBITDA, and generated positive free cash flow from operations to maintain our strong cash balance. Today, our team is firing on all cylinders. As I've discussed at length on previous calls, we believe that our customers' experiences are the most crucial component to continuing our success and ensuring we remain a leading platform in our industry. Accordingly, we deployed CapEx in the early innings of this business to ensure we had the manufacturing capacity to sustain our growth and the digital infrastructure to continuously capture data and to understand how to best serve the customers of today.
We're doing what no other optical platform has been able to accomplish: deliver best-in-class products in a fraction of the time, at a fraction of the cost of competitors. While the optical industry continues to grow steadily in the mid-single digits, our growth continues to surpass that of our peers. We're capturing significant market share gains as our 38% year-over-year growth outpaces the industry by nearly 10x. As with all industries, there are winners and there are losers. We attribute our gains to our focus on the customer. Our asset-light, direct-to-consumer model is proving itself to be the superior model in the large and growing optical category. We are pleased to combine this double-digit growth with a substantial improvement in adjusted EBITDA margins this quarter.
Q2 adjusted EBITDA of CAD 0.5 million is CAD 1.1 million higher compared to last year as we continued to benefit from operating leverage and scale efficiencies. I'm incredibly proud of the entire effort of our organization and that it has put into making sure we deliver on expectations. I also want to congratulate our team on our 2023 Great Place to Work designation. In a tight labor market, it's a testament to our culture to be a great employer with strong benefits, compensation, and advancement opportunities. This is still only just the beginning of what we believe we can accomplish, and we appreciate each and every one of you on the journey with us. With that, I'd like to pass the call over to Joe to dive into more detail on our operational performance for the second quarter. Joe?
Thanks, Roger. As we grow, we believe our scale will continue to make our business more profitable while also improving value, selection, and speed of delivery for customers. This productive cycle certainly played out in our Q2 results. With growth in Q2 2023 came leverage, with combined operational expenses across marketing, fulfillment, and G&A declining 494 basis points versus Q2 2022.
With the investments we've made in infrastructure and technology, this business is built to scale, and it's our view that there is still more leverage to come. Additionally, thanks to the previous capital invested, we will only require modest investments to support a doubling of our current manufacturing capacity and revenue. As a result, we are prepared to serve millions more customers profitably in the years to come. As the North American customer base continues to move online for their optical needs, we are continuously innovating to meet the high standards they expect. One example is our custom-built fulfillment network, which continues to expand next-day delivery to key metro markets. In Q2, we again reduced overall shipment time to customers, both quarter-on-quarter and year-on-year.
Combined, our onshore optical lab and direct-to-consumer fulfillment network are the perfect pair, helping us to achieve glasses made in a day and shipping faster than ever. The optical customers told us that they want their glasses and contact lenses in 1-2 days, not the industry standard of 1-2 weeks. It's up to us to raise the bar for customers even further in this area. Importantly, we delivered these improvements in Q2, while also reducing the cost to serve at the order level. Looking ahead, we will also continue to innovate on the product side. In Q2, we launched over 130 new models of eyeglasses, while welcoming new brands to the KITS store, including Nike, Spy, Smith, Michael Kors, and more. Customers can expect to see even more new-to-the-world product launches from us in the quarters ahead.
In Q3, we will introduce a revolutionary new rimless product line, as well as a breakthrough new line of progressives and readers. Also in Q3, we are introducing Spectra, a new premium lens technology available exclusively at KITS. In Q2, we grew our glasses revenue by 22% to $3.5 million. We fulfilled a record 39,000 glasses to repeat glasses customers, for a total of approximately 72,000 in the quarter. We're also seeing success with our premium lens offering, as the number of orders increased 56% year-over-year in Q2. In our view, continued progress here will deliver higher gross margins on our business and help to support the growth of gross margins towards our target of over 40%.
Overall, we believe our eyeglasses segment will be a significant future growth driver of our business, and we are still in the early innings of our work and our potential here. Anchoring our business again this quarter were our repeat customers. In Q2, we reported another quarter of record repeat revenue of CAD 18.6 million. This figure included over 120,000 repeat orders. While we added 79,000 new customers in the quarter, revenue from repeat customers was again over 60% of our total revenue. We believe we have amongst the highest retention levels in the category. For us, the truest metric of customer satisfaction net promoter score comes down to how many customers return. We don't take this responsibility lightly.
Our customers have asked us for help to make eye care easy, easy to understand what they're paying for and why, easy to place an order, and just as importantly, easy to receive it on their doorstep one to two days later. We look forward to updating you as we continue to grow profitably and innovate on behalf of optical customers in the quarter, the quarters to come. I'll now turn the call over to Sabrina for an overview of our full second quarter financials.
Thanks, Joe. As Roger mentioned, revenue increased 38% year-over-year to $30 million. We are encouraged by the strength in our reported revenue, which reinforces our belief that our offering is resonating with customers. We continue to see growing demand for our eyeglasses, both through returning customers and first-time customers, as we roll out continued enhancements to our offering. During the quarter, we outperformed our peers as customers are continually seeking the value and convenience KITS provides. Our customers are our central focus, and over the last several quarters, we have continued to make meaningful improvements in gross margin, while simultaneously delivering more to customers. Specifically, we continue to benefit from scale efficiencies in purchasing and manufacturing. We are pleased to pass these savings along to customers through enhancements in delivery speed, selection, vision tools, and product. This is a virtuous cycle we plan to continue to cultivate.
Gross profit in the second quarter increased 41% to CAD 9.9 million, while gross margin increased 80 basis points to 33% compared to the year ago period. Moving a bit further down the income statement, our fulfillment expense as a percentage of revenue improved to 12.6%, compared to 14.7% the previous year. While our G&A as a percentage of revenue improved year-over-year by 120 basis points to 6.6%, as we continued to leverage efficiencies of scale. Our marketing expenses as a percentage of revenue improved from 15.3% to 13.7%, as we continue to capitalize on organic word-of-mouth brand awareness.
In the second quarter, net loss was CAD 1.2 million, and we generated positive adjusted EBITDA of CAD 0.5 million, an improvement of CAD 1.1 million year-over-year. Our financial focus remains on growing profitably, and we are well positioned to execute on this objective with our growing customer base and continually improving customer experience. We ended the quarter with a strong cash balance of CAD 19.8 million, compared to CAD 18.8 million at December 31, 2022, and CAD 18.9 million at June 30, 2022. Overall, we expect to sustain the momentum in our growth in the coming quarters, and look forward to delivering upon shareholder expectations. Thank you. Now we will take your questions. Operator, please open the line for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any key. Our first question comes from the line of Luke Hannan of Canaccord. Please go ahead.
Thanks. Good morning, everyone. I just wanted to start with a quick question on what you're seeing as far as consumer behavior goes. I know that, that optical care, eyeglasses, et cetera, it's a very stable category overall. I'm just curious to know if you're seeing any changes as far as, you know, that within either demographics of your, your average customer, maybe certain things that are being added to the basket, not being added to the basket, et cetera. Anything to call out there?
Good morning, Luke. Thanks for the question. This is Joe. You know, we're continued, we continue to be encouraged by the trends we're seeing from our customers. I think overall, maybe a couple of comments to your question. That the category, the optical category continues to move online, both on glasses and contact lenses. So we're, we're very encouraged by the business model that we've built, which will allow us to capitalize on that. I think the second thing that I'd mention is the millennial customer continues to be a focus for us. The millennial customer, is the biggest customer segment, in terms of people and dollars in the, in North America.
As of this year, is an age range of about 26 to 42 years old, which is really prime age to enter the optical category at the single vision level for glasses and contact lenses, and is also starting to come into the digital progressive and reader segment. We're continuing to see strong consumer behavior overall, and in particular, in the last couple of quarters, lots of growth in the contact lens segment as customers continue to get back to work and, and continue to go out post-pandemic. Just a continued tailwind from the millennial customer in coming into the optical category in single vision and contact lenses, and then encouragingly starting to come in more in progressives and, and readers.
Understood. Then, my second question here is on fulfillment costs. I know, I know you guys benefited, with those costs being lower as a % of revenue, just because of the scaling, in terms of revenue that you guys have been able to realize. When it comes to negotiating lower rates, going forward, I guess I'm curious to know how, how much visibility do you have into those transportation costs going forward? Like, is it fair to say that you're, you're fairly confident for the, the balance of the year, that you'll be able to maintain the, the low costs that you've been seeing of late?
Yeah, Luke, this is Joe again. On, on fulfillment and in specific to carrier costs, you know, we are confident with the momentum that we built and with the partnerships that we have across both Canada and the US. You know, we can continue to see faster delivery to customers, and either flat or declining costs. Part of that is scale, as you mentioned, and part of it is our use of data in being able to predict where customers are ordering from, where the order needs to get to, and just lining up the partners to deliver that.
You know, while there continues to be a lot of volatility in the greater carrier market, in particular in the US, we've been very happy with stable to declining costs and, you know, and we're gonna keep, we're gonna hold the line on those on behalf of customers.
Okay. My, my last question here, and then I'll, I'll pass the line. Just on your, your mix of marketing dollars, where, where exactly are they being allocated now, in terms of... Is it, is it mostly focusing on top-of-funnel stuff? Are you, are you focused more now on re-engaging active customers? I would imagine it's probably a little bit more so the latter than the former, but, curious to know how exactly you're, you're targeting that right now?
Yeah, Luke, so you know, while, while we don't break out some of the specifics of marketing, I think it's fair to say, you know, we've been really encouraged by our continued repeat profile customers. So repeat, we believe we have the highest repeat rates in the category in contact lenses and in glasses, in particular, this quarter. So that gives us confidence to go and invest in, in acquiring new customers. So, you know, the majority of the spend continues to go to new customers. On the contact lenses side, you know, maybe a bit more traditional channels. On the glasses side, really investing in the experience and promoting word-of-mouth of customers.
You know, what customers have told us is when they, you know, when they order a pair of glasses online, those glasses arrive in 1 to 2 business days, and they look great, the value is incredible, and then, you know, the prescription's perfect, you know, they're gonna tell everyone that they know about the experience that, that, that they've had. So that's really, the investment is really on the overall experience of selection, value, and convenience, getting that product to them in a day or two. And then, and then, you know, the word-of-mouth that comes from that. So, and of course, the repeat business off the back of that. That, that's really where we've been focused over the last 1 to 2 quarters.
Great. That's it for me. Thank you.
Thanks, Luke.
Your next question comes from the line of Matt Koranda of ROTH. Please go ahead.
Hey, guys. Good morning. Just wondering if you could maybe level set us on revenue growth in the second half of the year. Obviously, you guys are nicely outgrowing the industry overall and outperforming the category by a pretty healthy margin. You do have some tougher comparisons going forward in the back half of the year. Can we still assume, you know, sort of a high teens to low twenties growth rate in the back half of the year? Maybe if you could just unpack it by how to think about growth between the contacts category and then glasses, that'd be super helpful.
Thanks, Matt. Yeah, this is Joe. You know, we've been, as you heard this morning, we've been, you know, very happy with the growth, 38%, 2 quarters in a row, roughly 10 times the rate of the industry. So, you know, moving forward, we see strong tailwinds on our repeat customers. We see continued progress of customers moving online. You know, which is, you know, the rate of online penetration in this category has roughly doubled, you know, pre-pandemic to post-pandemic. You know, some. When we think with the millennial customer base, that's likely to continue. You know, some of the numbers you described, we, you know, we haven't put out any formal guidance for the second half.
You know, but certainly, you know, we're hoping to keep this growth, this growth, trend going. You know, the rates that you mentioned, you know, are definitely comfortable for us. On the mix of glasses and contact lenses, which I believe is your second question. You know, we've, we've been very excited about the growth of contact lenses. It's, it's definitely overperformed this year on our business. On glasses, in a category that's growing low single digits, you know, we believe about 3%-4%, we grew 22% while meaningfully reducing the marketing spend level. We, we think that there is great pull in this category, which continues to move online on glasses.
you know, we're particularly happy with our repeat, rate on both glasses and contact lenses. you know, that's gonna be our focus, is profitable growth, and, and, you know, while we haven't set a, a number for that growth, you know, we're, we're seeing, great momentum into, into Q3.
Okay, very helpful, Joe. And then maybe just more specifically on glasses, I may have missed it in the MD&A, but any commentary on, on unit growth there? Just curious to kind of get the dynamic on, on the drivers of the 22% between units and, and AOV.
Sure. So, you know, we, we, In the MD&A, we've, we noted that, you know, we did grow the glasses business 22%, on, on top of meaningfully reducing marketing spend. We, the, the, the notable point on, on our glasses growth was the repeat profile. Part one, we had about 72,000 units overall, totaling about CAD 3.5 million in sales. A record, 39,000 of those glasses went to repeat glasses customers, which, you'll see in the detail. So some of the things that, you know, we're, we were very happy about in the category was, the repeat profile. We've seen this repeat profile on our contact lens business, and, you know, we're encouraged to see it also continue on the glasses side.
Some of the previous investments we've made in acquiring glasses customers. Then we're also seeing success and growth of our premium lens offering, as the number of orders increased over 50% year-over-year in Q2. You know, on top of that, we still see lots of potential in this market. We, you know, we think we're in the early innings. We've got a lot of product, new lines coming to market. I mentioned our new rimless line, which launches in Q3, new line of progressives and readers coming also in Q3, and a new, a new lens offering called Spectra, available exclusively at KITS. Lots more to come and, you know, happy with the progress that we made in Q2.
Very great to hear. Just last one from me. On the gross margin line, you guys have done a nice job reaching the low 30% sort of range for the last several quarters. I just wondered if you could maybe just speak to the drivers to get into the mid-to-high 30s. I know you have in the past, but any changes there? Is it just, you know, sort of a better mix of glasses, higher AOV from progressives? You know, maybe speak to some of the key levers you have at your disposal to get to that higher level. Sort of how do we think about timing of when we get there?
You bet, Matt. You know, we are committed to our target in the 3-5-year range of 40+% gross margin. You know, we made some progress in Q2. I think, 80 basis points improvement on gross margin, while also demonstrating 38% growth. You know, what's next for gross margin growth? Well, as you mentioned, glass is gonna be a big contributor, both on the progressives and readers side. You know, we've, we've been very happy with the progress and much more to come on that, and that's gross margin accretive, as you can imagine. You know, we've also been impressed at the profile of our single vision customers with some of the premium lens offerings that, that we've introduced.
We think lots of gross margin expansion, opportunity and glasses, where that's really the next frontier and the next focus for us. We demonstrated growth, I think 5 straight quarters, and a number of quarters of adjusted EBITDA profitability. We'll continue to see leverage on the model, and that'll help on the operating expense. You can expect continued progress on gross margins in the quarters ahead.
Okay, I'll leave it there, guys. Thank you.
Thanks, Matt.
Our next question comes from the line of Doug Cooper of Beacon Securities. Please go ahead.
Hey, good morning, guys, and thanks for getting up so early, and congratulations on the quarter. Matt sort of was touched on what I wanted to go down, so maybe I'll just sort of continue the route, so that he was going down. Just on the mix, contacts were up 40% year-over-year in revenue, and glasses were up 22%. Is there a point where you see, I think, a kind of a breakout quarter for glasses as a percentage of overall revenue? Because given the growth in contacts, glasses, revenue contribution is actually down about 100 basis points year-over-year. As you mentioned, that's the sort of key driver of gross margin, I guess, greater utilization of the optical lab and so forth.
you know, when do you see that sort of real breakout quarter in the glasses side?
Hey, thanks. Thanks, Doug. This is Joe. I appreciate the question. We love to talk about glasses. It's definitely a focus area for our whole team here. Maybe a couple things on that. You know, we did, we've been looking very closely at a couple of trends. One, to make sure that the rate of growth of online penetration on glasses continues. It has, in our view, a check mark there. Two, just making sure that we enjoy, you know, tremendous retention rates on our contact lens business, and making sure that that repeat trend continues in, on, on the glasses side, given the investments we've made in previous quarters.
This quarter, in particular, we're really delighted with the repeat, with 39,000 glasses to repeat customers, over half of total glasses delivered in the quarter. You know, with the category moving online, demonstrating strong repeat as we see and as we know how to do in contact lenses. Really, the last piece was just building out our lens offering and our product offering. And the lens offering is close to, you know, close to there, and the product offering is really gonna take a step forward in the next 1-2 quarters, in particular. What...
You know, while we haven't, you know, all of this, while keeping a very close eye on marketing spend and, you know, and continuing to get leverage out of that marketing spend, helped by these repeat customers coming back. You know, we, we haven't, we haven't put a specific quarter on when we expect this real breakout to occur, but, but we're really encouraged that the progress is making and in particular on product for glasses and lenses in the next one to two quarters.
Good. That's, that's great color. Can you, can you give us an idea of what the capacity utilization of the, of the plant is now? Just so we can get an idea, maybe, of the operating leverage you guys are talking about. Obviously, targeting 40% odd gross margin, but, you know, from an industry perspective, obviously, the gross margins are actually much higher, so there seems to be a lot of headroom, potentially.
We, we agree with you, Doug. There's, there's a lot of expansion potential if we continue to execute on glasses. Gross margin, we see, is a, is a big driver. We have a lot of room to grow there, into, into the category, while still offering great value for customers. In terms of capacity, on the glasses line, you know, we're still roughly about one third, just over one third. Using about one third of the capacity. Overall revenue for the company, we think, can double with only, you know, minimal capital investment. You know, so very encouraged that, you know, that this growth in the that we're anticipating in, in future years, both on glasses and contact lenses, you know, will continue to be, will continue to be profitable growth.
Okay, terrific work. We'll leave it there. Thanks, gentlemen.
Thanks, Doug.
Just to remind everyone, if you wish to ask a question, please press the star followed by the 1. There are no further questions at this time. Please proceed.
Thank you, Jerry, and, thank you, everyone, for joining us today. We're, we're on a mission to make eye care easy for everyone, and I believe that we are well on our way to accomplishing that. It has been incredible to see this platform really take hold and resonate with the digital consumers of today. Our team is filled with exceptional people who all strongly believe in our long-term vision and have put in an incredible amount of work to make this vision come to life. We believe that this is only the beginning, and we appreciate the support of all stakeholders as we continue to move forward in our journey. We'll speak with you all in a few months when we report our Q3 results. Until then, we're getting back to work. Thanks so much for joining today, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.