News of the Week (August 8-12)

1. Lemonade (LMND) -- Earnings Review

a) Demand

The company guided to $47 million in Q2 sales while analysts were looking for $47.6 million. Lemonade posted $50 million in sales, beating its forecast by 6.4% and analyst estimates by 5%.

Lemonade also guided to:

• In Force Premium (IFP) of $447.5 million. It posted $457.6 million, beating expectations by 2.3%.

• Gross Earned Premium (GEP) of $104 million. It posted $106.8 million, beating expectations by 2.7%.

More context on demand:

• This growth does not include any inorganic Metromile contribution. That closed after the quarter ended in July. This is all organic.

• Lemonade ceded 70% of its premiums to reinsurers this quarter vs. 75% in recent years. That fell further to 55% as of this week. This is an expected shift in light of its models and book maturing and is expected to continue. This move is a revenue tailwind as ceded premiums aren’t recognized as sales.

• Headcount grew 52% YoY but is flat vs. 6 months ago.

b) Profitability

Analysts were looking for an EBITDA loss of $65.2 million for the quarter while Lemonade guided to a loss of $67.5 million. It lost $50.3 million, sharply beating expectations. Lemonade also guided to $15 million in stock based compensation for the quarter while it paid of $13.9 million.

More context on margins:

• Inflation continues to weigh on GLR. Why? Claims float freely with inflation while premiums do not. Lemonade has filed the needed rate changes to combat this issue, but GLR is a lagging indicator and these changes have not yet shown up in improvement. It will next quarter and thereafter as GLR is expected to precipitously fall DESPITE Metromile adding ~400 basis points (4%) to the metric for the rest of the year.

• Lemonade is rapidly building out new products to bundle with its existing offering. These products debut at GLR maximums which mean they also debut at gross margin minimums. That is the reason for the YoY worsening in these two stats. Its legacy business continues to see margin expansion.

• That same ceded premium reduction from 75% to 55% hurts GPM as the denominator in the calculation becomes larger.

Lemonade has $1 billion in cash on hand and no debt.

c) Guidance

Lemonade now sees an EBITDA loss of $242.5 million for the year vs. previous expectations of $272.5 million. This includes $30 million in added EBITDA loss from roughly 4 months of Metromile contributions (so without Metromile the loss would be $212.5 million). It’s controlling costs, yet still sees $237.5 million in 2022 sales (well ahead of expectations) for 83% top line growth.

Along the lines of cost-control, the team committed to no more external capital raising until turning profitable. It isn’t saying it will never fundraise again. It’s saying it doesn’t want to have to do so from a point of weakness, which a dwindling cash position and no path to profitability would create. I was pleasantly surprised that this was such a prominent piece of the prepared remarks. In recent quarters, it has given the impression that it would spend on growth at all costs. It seems to have responsibly walked that back a bit with this new context. Considering where we are in the current macro cycle, this philosophical change shows management’s willingness to cater to public market appetite when need be. That’s important to me.

With moderating spend, it now sees IFP of $612.5 million (61.1% YoY growth including Metromile) vs. previous expectations of $540 million. This -- which now includes the Metromile acquisition -- which was about $30 million less than I was expecting. That's the flip side of controlling costs, it’s pursuing new share less aggressively. Furthermore, the company has halted all Metromile marketing investments while it is integrated into the Lemonade umbrella. It doesn’t want to market the new product until it’s called “Lemonade Car” rather than Metromile. The natural churn inherent in car insurance will therefore lead to a few quarters of car business shrinkage before Lemonade turns the growth engine on. That profit prioritization is the source of this miss -- and I find these two reasons to be sound.

As Metromile closed this quarter, there is a large inorganic boost to guidance. As a result, I only included current guidance (not % changes vs. the pre-Metromile guide) vs. Wall Street estimates:

For Q3 2022, Lemonade guided to:

• $597.5M in IFP

• $128M in GEP

• $64M in revenue vs. analyst estimates of $57 million.

• ($71.5) million in EBITDA vs. analyst estimates of ($77.4) million

• Stock comp of $16 million

d) Shareholder Letter Notes

On Metromile notes:

• Car premiums jumped from 1% of Lemonade’s business to 20% with the close of this M&A. Renters fell from 50% to 33%.

• It’s now actively working on transitioning Metromile's data and tech stack (and brand) to Lemonade’s infrastructure.

• Lemonade gained immediate car access to 7 markets with rapid state expansion expected now that it has 49 state licenses in hand.

Click here for a detailed article on what Lemonade saw in Metromile.

On Cross-Selling and Retention:

23% of Lemonade’s Q2 2022 sales (21% ex-car) was via cross-selling. This has been steadily rising and that trend should continue. Why? In Illinois where its car product is most mature, cross-selling is 36% of its business. This cross-selling in Illinois is also greatly juicing retention rates in the state to 93% vs. 83% for the rest of its book. These are encouraging signs.

The runway for continued cross-selling is simply massive. While nearly 25% of new product sales are via cross-selling, just 4% of Lemonade members have more than 1 product.

On Macro:

On Profitability:

Lemonade spoke at length on the leading indicators it sees that are offering it confidence to offer these words. These indicators will be shared in detail at its investor day in November. The biggest factor is that more and more of its business is coming from seasoned products, customers and geographies. Again, loss ratios naturally fall with this seasoning.

During the quarter, Lemonade launched the 6th generation of its lifetime value (LTV) and lifetime loss ratio ML model. This is expected to juice its LTV/CAC (currently near 3.0X) with the enhanced data granularity and precision. This model has already uncovered a large cohort of California home customers that its old model thought was profitable. They were actually cash burning users. Conversely, the model revealed how much more profitable its pet business is than the old system thought. It re-allocated resources accordingly.

Management cautioned using static GLR to determine its underwriting quality as the indicator is lagging and doesn’t capture rapid improvement. This makes sense to me, but I would also caution that of course management doesn’t want us looking at GLR if it’s still too elevated -- which it is. Instead, management pointed us to lifetime loss ratio predictions and the vast improvements it’s seeing there:

For context, it takes 2 years for a Lemonade customer to see its GLR fall below the lifetime loss estimate. Thereafter, the loss rate is typically below the lifetime estimate. Today, 75% of its business is from products less than 2 years old (product growth is rapid) -- offering a clear path to continued loss ratio improvement over time. Lifetime loss ratio is the leading indicator, and it looks very strong per management.

e) My Take

This was another pleasantly surprising quarter from Lemonade. Management is effectively controlling costs while still delivering the rapid growth we’ve come to expect. Its path to profitability, while still long, is as clear as it has ever been and my confidence in the team is rising. I’ve taken this off of my hot seat (do not accumulate list) and am ready to resume opportunistically adding into pricing volatility. This quarter put a large smile on my face just like the last one did.

2. Olo (OLO) -- Earnings Review

a) Demand

Olo guided to $45.8 million in revenue while analysts expected the same. It generated $45.6 million in sales, slightly missing expectations.

More context on demand:

• Olo added 3,000 gross QoQ locations but lost its Subway Rails contract which cost it 2,500 locations. This also cost Olo about 500bps on its DBNRR. More on this later.

• Sequential ARPU growth was actually boosted by Subway beginning its migration away from Olo -- Subway's ARPU was far lower than Olo’s client average.

b) Profitability

Olo guided to $800,000 in non-GAAP operating income while analysts expected $1.2 million. It earned $2 million, sharply beating expectations. This was the bright spot of the report.

More context on margins:

• The Wisely and Omnivore acquisitions continue to weigh on margins.

It has $464.7 million in cash equivalents and investments with no debt.

c) Guidance

Q3 2022:

• Olo guided to $46.8 million in sales. This missed analyst estimates of $51.2 million by 8.6%.

• Olo guided to $3.6 million in non-GAAP operating income. This beat analyst estimates of $3.3 million by 9.1%.

2022:

• Olo lowered its previously issued 2022 sales guidance by 7.4% from $196 million to $183.5 million. This came in about 7.2% below consensus estimates. Yuck.

• Olo lowered its previously issued 2022 non-GAAP operating income guide by 4.8% from $8.4 million to $8 million. This came in 25% below consensus estimates. Double yuck.

d) Notes from the Call

On Subway:

Olo expects Subway to migrate its remaining 12,500 locations to their home grown solution by Q1 2023. While this will weigh on active location growth (still expects to add 6,000 net new locations through the end of the year), it interestingly wasn’t the reasoning behind its guidance reduction. The company has been anticipating this move for several quarters and had already factored it into its guide by reducing Subway’s contribution from a few million to near $0 through Q1 and Q2. I would’ve liked to know about it as soon as Olo began factoring it into the guidance earlier in the year. An analyst on the call rightfully asked the team if there are any other brands like this to be aware of. Glass said no.

Glass also assured us that conversations with the top 20 enterprise restaurant brands continue to be productive and frequent. He’s confident they can land some of these whales. We shall see.

On Macro for Restaurants and the Guide:

Glass spoke on these issues manifesting in two key ways. First, the sales cycle has been elongated. New client wins are taking the company longer as these brands struggle with macro headwinds and falling sales industry-wide. Furthermore, deployments post-winning a brand are also taking much longer than in recent quarters. The company landed several new large deals late in the quarter which will now not go live until 2023 because of this. This part of the call made me feel much better about the 2022 guide down.

Olo is building small upgrades into its tech stack to make onboarding easier and is also now managing a larger part of the onboarding process for several clients.

On Wins and New Partners/Products Announced During the Quarter:

• Freddy’s Frozen Custard & Steakburgers with its hundreds of locations deployed Olo’s full stack of digital ordering -- including Olo Pay.

• Nando’s added Olo Pay after the dine-in ordering module Serve delighted them.

• Integrated with QSR Automations to allow Olo to help direct orders “based on real time kitchen activity.”

• Launched a new ability for large groups to cue orders to the kitchen as soon as an individual guest arrives.

• New Geofencing partnerships to time drive through orders.

On Olo Pay:

• Early success here has prompted the team to now assume a few million dollar contribution from the module vs. $0 QoQ.

• Olo’s Borderless Pay solution (rapid checkout with vaulted card info) is live for 3 clients. These clients are enjoying card data saving rates at 2.5X the typical average with a meaningful conversion rate boost as well.

• Olo Pay is delivering the expected 4X revenue per order halo effect.

e) My Take

This was a disappointing quarter for the company. Guidance was light and it lost its largest client (by total locations) in Subway. Hearing that the revenue shortfall was mainly related to timing eased most of my concern, but this quarter was still the company’s worst since going public. I have no interest in selling my stake and will instead continue adding to it -- albeit at a slower pace. Down, but not out.

Click here for my Olo Deep Dive.

3. Duolingo (DUOL) -- CFO Matt Skaruppa Interview with KeyBanc

On the Threat of Real-Time Translation Services:

On the Freemium Model (Deep Dive Review):

Duolingo’s success has been born out of accessibility: None of its content is behind a paywall. Unlike the competition, access is its guiding principal. This frictionless top of funnel philosophy has allowed management to build industry leading scale. It uses this scale to power constant split testing to see how a certain color or a phrase or a character juices bookings. Every piece of the app comes from this data driven process which becomes better and better with more users.

Duolingo’s focus on creating wonderful products for free vs. spending on external marketing for share comes with an added bonus. Most of its subscriber user growth is via free users who convert. This allows it to spend very little on external marketing while enjoying rapid growth and operating leverage.

The latest series of split tests will culminate in a new user interface going live this quarter. This will create a singular, linear lesson plan progression path -- but with each lesson granularly customized for each user. That uniform progression is expected to give Duolingo exponentially better data on its app efficacy… to guide more split testing.

HBO Max:

Duolingo’s partnership with HBO Max on its new Game of Thrones spinoff is going according to plan. Just like other similar partnerships in the past, most users coming into the app for this reason are eventually learning a different language on Duolingo.

Click here for my Duolingo Deep Dive.

4. CrowdStrike (CRWD) -- Humio Data

CrowdStrike’s log management platform -- Humio -- released some encouraging data this week. First, in a case study involving Remitly, Humio delivered a 15X data compression rate to vastly cut the resources needed vs. Remitly’s homegrown solution. This saved the firm significant money and sped time to resolutions.

In other news, Forrester released a Total Economic Impact study on Humio. Per that research organization -- which surveyed several Humio clients -- the company delivers a 210% return on investment. Just like CrowdStrike fosters agent consolidation and automation to allow companies to protect more with less, Humio serves as a similar force multiplier within log management. No wonder why CrowdStrike paid 50X sales for it.

5. SoFi Technologies (SOFI) -- Softbank, APY & Technisys

a) Softbank

SoftBank has begun to aggressively sell off their stake in SoFi. It liquidated 13% of its position this week and that trend is expected to continue. It still owns nearly 9% of the company. The troubled financial institution has been liquidating positions left and right to preserve liquidity amid the recent downturn. While this could create some near term stock price noise, it’s irrelevant to my overarching thoughts on the company.

b) APY

SoFi raised its annual percent yield (APY) for direct deposit customers to 2% from 1.8% -- or to 65X the national average vs. 58X previously.

The positive customer LTV windfall that comes from added direct deposits (in some cases more than 2X) makes this added expense well worth it. And furthermore, SoFi’s tech stack integration, charter and lack of a national physical branch presence keeps this company lean and efficient. This affords it room to raise the APY with still favorable unit economics.

I would note that SoFi is not alone in this hiking cycle. Many other Fintechs -- including PayPal which just raised its own to 1.65% -- are briskly raising their yields as well to drive their own direct deposit growth. Competition is fierce, but SoFi is holding its own with rapid deposit growth into late July. I expect this APY to keep pushing higher in response to any incremental benchmark rate rises from here.

c) Technisys

Technisys launched the 4th generation of its Cyberbank Core (end to end digital banking infrastructure) with the following benefits expected:

• Reduce processing and production costs with on-demand processing power vs. purchasing in large blocks.

• Broader ability to create relevant products within Early Pay and BNPL.

• Infuse automated risk and fraud controls to reduce manual controls and resources.

6. Lululemon Athletica (LULU) -- Unions

Lululemon workers from a store in Washington D.C. will vote on unionization this month. If this passes and momentum builds throughout the rest of Lulu’s footprint, it could materially raise cost of labor for the company. We’ll see what happens -- still very early days here.

Click here for my Lulu overview.

7. Meta Platforms (META) -- Pew Research, Bond Offering, DoorDash & China

a) Pew Research

A survey of 1,300 American teams revealed some unsurprising news. Facebook is only used by 32% of U.S. teens vs. 71% in 2014. YouTube is used by an impressive 95% of respondents with TikTok at 67%, Instagram at 62% and Snap at 59%. 46% of U.S. teens say they are constantly online vs. 24% in 2014.

b) Bond Offering

Meta’s Bond offering was 3X oversubscribed. Good news as it shows strong belief among creditors in Meta’s continued cash flow generation for the next few decades.

c) DoorDash

DoorDash and Meta announced a new Facebook Marketplace delivery partnership.

d) China

Aurora Mobile -- a Chinese tech company -- and WhatsApp announced a new partnership. Together, the two will embark on a joint go-to-market strategy on marketing and communication services provided by the app. Facebook is banned in the PRC, but WhatsApp isn’t.

Finally, Meta also issued a blog post correcting the misinformation being spread on its role in a polarizing Nebraska court case. Click here for the link.

8. Match Group (MTCH) -- Bumble

Bumble’s 2022 outlook this week selfishly made me feel a bit better about Match’s underwhelming quarterly report. FX is a massive pain in the neck for both of these globally oriented companies, and it’s showing up in forward expectations. The good news? Both continue to operate with envious market share in an industry poised for 10%+ growth for as far as the eye can see. This is not a matter of dating apps going out of vogue -- and far from it. It’s a matter of a strong dollar paired with the need for Match specifically to execute better -- which I think new CEO Brian Kim is fully capable of doing.

Click here for my Match overview.

9. GoodRx (GDRX) -- Earnings Review and Goodbye For Now

GoodRx announced a feud settlement between Kroger and PBMs this past week (so not reflected in this quarter). For context, this feud cost GoodRx 80% of the volume it was doing with Kroger. It now expects its discounts to be accepted at the point of sale there. Because this just was settled, the revenue lift will not come in Q3 but will take some time. It also seems as though the PBMs that Kroger was feuding with made some key pricing concessions which will lead to GoodRx pricing at Kroger rising. Take rate will coincidingly fall because of the price denominator rising.

It’s important to keep in mind that Kroger had been the source of GoodRx’s best discounts and was its largest prescription transaction revenue (PTR) contributor. When Kroger stopped accepting PBM discounts (and so GoodRx discounts), GoodRx had to pivot these new users to higher price options. Encouragingly, new user growth remained consistent throughout this entire period. Consumers were fine with the slightly higher pricing which was still better than any other option.

a) Demand

GoodRx guided to $190 million in sales while analysts expected $184.7 million. It posted $191.8 million, beating analyst estimates by 3.8% and its own guide slightly.

More context on demand:

• PTR suffered a $30 million hit from pricing disputes between Kroger and PBMs. That impact will continue for the next several quarters despite the dispute recently being resolved. Specifically, it will cost GoodRx about $37.5 million in Q3 2022 revenue alone. This dispute also was the source of MAC declines.

• Subscribers sequentially declined due to GoodRx’s first price hike ever taking place during the quarter.

b) Profitability

Analysts were looking for $34.8 million in EBITDA for the quarter. GoodRx posted $47.2 million, beating expectations by 36%. GoodRx also earned $0.06 per share vs. analyst expectations of $0.04.

More context on margins:

• The Kroger/PBM dispute also weighed heavily on margins as GoodRx lost most of the higher take rate, higher margin channel. That’s why gross margin fell sharply. I don’t see this getting back to 93%+ with the higher prices GoodRx now must charge customers at Kroger. This weighs on that margin and that headwind is permanent.

• The Kroger grocer issue similarly impacted EBITDA and net margins as well.

• Cash flow strength was really a matter of payment timing and a hefty stock based comp add back (about 40% of which was still via IPO founder awards).

• NIM was also greatly impacted YoY by $24 million (around 13% of revenue) income tax net headwind.

c) Q3 2022 Guidance

GoodRx guided to $185 million in Q3 2022 revenue which sharply missed analyst estimates of $201.4 million by 8.1%. This represents a YoY decline and would have been $220 million without the Kroger issue. Similarly, analysts were looking for $44 million in Q3 2022 EBITDA while GoodRx guided to $37 million -- sharply missing expectations by 16%.

d) Call Notes from Co-CEO Trevor Bezdek

On top of funnel:

GoodRx is refocusing its top of funnel customer acquisition strategy. It now plans to request more data from these users to bolster the value it can provide. That move is expected to slow new user growth in the short term due to the added onboarding friction. The company thinks this is a palatable concession for the deeper consumer relationships it wants to build.

On pharma relationships:

e) Call Notes from CFO Karsten Voermann

• Prescription starts are back to pre-pandemic levels.

• The response to the subscription price hike was in line with expectations. This actually disappointed me because we were told in Q1 that they had set pessimistic expectations.

• Most cost line items rose as a percentage of revenue YoY EXCEPT for promotional and advertising spend sharply falling.

• The Kroger issue will not have a long term material impact on its run rate growth or even the margin profile (small hit there but not massive).

f) My Take

It’s good to see the Kroger issue resolved and it’s good to see GoodRx engaging amicably with its pharmacy partners. It’s also good to see its ancillary businesses continuing to thrive. What isn’t good? The fact that this grocer issue proved to be capable of such massive destruction of GoodRx’s multi-quarter momentum and results. Maybe its competitive positioning within this complicated value chain isn’t as durable as I thought. I find myself at the end of the rope here and have exited my position entirely following the call. I’d love to see the company string together a few quarters of strong results and I’d entertain re-entering if that happened.

The team can say “we’re sorry and we’ll do better” all they want. I’d just like to start seeing some success based on the immense value GoodRx provides to the world of healthcare. Leadership has certainly paid themselves well enough with somewhat ridiculous stock awards. It’s time to execute, and my conviction in their ability to do so is not high enough to stay a shareholder today. Hopefully, this will eventually make its way back into my portfolio -- but that won't happen any time soon.

10. Macro:

a) Data from the Week

• Core Month over month CPI (strips out food & energy) came in a 0.3% vs. 0.7% last month and 0.5% expected.

  • CPI = Consumer Price Index

• Month over moth CPI came in at 0.0% vs. 1.3% last month and 0.2% expected.

• Month over month PPI came in at (0.5%) vs. 1% last month and 0.2% expected

  • PPI = Producer Price Index

• There was a 10 year Note auction with a 2.75% yield vs. 2.96% last month.

• Michigan Consumer Sentiment for August came in at 54.9 vs. 48.4 expected and 47.3 last month.

• Jobless claims came in at 262,000 -- in line with expectations.

• Atlanta Fed GDPNow estimates jumped back above 2% for the quarter.

5-year Breakeven inflation data continues to look a big fragile:

High yield corporate credit spreads continue to quickly look better and better:

The 2 year treasury yield was largely flat this week:

b) Level-setting the data

This was the most uniformly positive week of macro data we’ve gotten in over a year... by far. We seem to have hit peak inflation, especially considering the negative MoM PPI and that being a leading indicator for the CPI. This should theoretically allow the Fed to become more patient on its tightening schedule -- but importantly should not be taken as an all clear sign for a dovish pivot.

Why? Inflation levels are still running near generational highs and at levels far in excess of healthy. We needed a peak and it was great to see. We also need inflation to continue to precipitously fall not just to 5% or 6%, but lower. While commodity inflation easing and slow labor supply progress are both welcomed, sticky pieces of these reports like rent inflation will take at least 12 months to cycle through. To me, it makes sense for inflation to keep falling -- but maybe not rapidly and certainly not linearly: We’ll likely get fits and starts in response to new data being digested. I could be wrong, but that's my opinion. Still, it is undeniably wonderful news that both the CPI and PPI are now cooling off. That cannot be overstated. Step 1, complete.

I plan to become more aggressive in my dip buying process going forward. That could change if inflationary data again turns materially worse.

Market headlines:

• The Justice Department is gearing up to sue Google over their ad practices

• Microsoft laid off a few hundred workers and is asking managers to control costs.

• AppLovin wants to merge with Unity Software.

11. Cannabis

• New York is now accepting dispensary applications -- but only for those with previous cannabis offenses.

• Missouri got the needed signatures to vote on cannabis reform in November. This was a pleasant surprise.

• Michigan set a new monthly record for cannabis sales of $210 million in July.

• Arkansas’s Supreme Court is ordering its lawmakers to put cannabis reform on the November ballot.

• Maryland will be voting on legalization in November. Oklahoma’s AG is trying to make it happen for that state as well.

• New Jersey’s Senate passed a bill that would allow for interstate commerce.

12. My Activity

This week, I exited GoodRx for the reasons stated in the earnings review. I also sold about 5% of my stake in The Trade Desk following a near doubling of its forward earnings multiple in a matter of days. My cash position is 17.6% of holdings.

If you’d like to have my transactions sent to you via text in real time, that’s now possible! Through a product called Savvy Trader, I’ve created a direct line of FREE communication with anyone interested. You can see my portfolio and sign up for the alerts through the button below:

Also this week, I had a wonderful Twitter Spaces conversation about earnings highlights with four of my favorite writers: Richard Chu, From Growth to Value, TSOH and Mostly Borrowed Ideas. That event was recorded and can be found here.

Enjoy your weekend!