News of the Week (February 28 - March 4)

Progyny; Duolingo; GoodRx; Green Thumb; CrowdStrike; PayPal; The Trade Desk; SoFi Technologies; Ozon; Tattooed Chef; My Activity

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1. Progyny (PGNY) — Earnings Review

“When we issued our guidance to you in November, we were experiencing increased utilization as September, October and November all had strong utilization growth month-over-month. When Omicron emerged in December, overall member activity slowed sharply enough to have an impact on our results that was beyond our predictions.” — CEO Peter Anevski

a. Demand

Progyny guided to $137.4 million in revenue for the quarter and analysts were expecting $134.9 million. Progyny reported $127.6 million in revenue, missing its expectations by 7.2% and analyst estimates by 4.4%.

PBM = Pharmacy Benefits Manager; ART = Assisted Reproductive Treatment

Progyny always anticipates a slight utilization dip from November to December as offices close for holidays and people go on vacation. The decline this year was twice the impact they’ve come to expect which resulted in a revenue hit of $9 million for the quarter. Without this event, Progyny was gearing up to slightly beat analyst revenue expectations.

In Q2 of 2020, Society for Assisted Reproductive Technology (SART) suspended all new fertility treatment cycles. These resumed in Q3 2020 which is why there’s such an abrupt reduction and subsequent recovery in revenue and utilization in Q2 2020 (red) vs. Q3 2020 (green). It was heartening to me to see utilization recover so quickly.

b. Profitability

Progyny guided to earnings per share (EPS) of $0.02. Progyny earned $0.15 per share, beating expectations by $0.13. This beat was related to tax allowance benefits that Progyny will continue to enjoy in 2022. With 2021 earnings of $0.66 per share, Progyny’s trailing earnings multiple is 65X.

Progyny guided to adjusted EBITDA of $17.55 million. It generated $15.1 million, missing expectations by 14.0%. Like the revenue miss, this was attributed to Omicron.

Gross margin compression is entirely stock-based compensation related. Without stock-based comp charges in Q4 2021 and Q4 2020, gross margin would have expanded to 23.4% from 21.7% YoY. Without this benefit, gross margin would have expanded to 24.2 from 21.2% YoY for 2021 vs. 2020 as a whole.

Other Important notes on margins:

  • Q4 2020 net income margin removes a larger, one-time tax benefit Progyny enjoyed to make the comparison apples to apples.

  • Operating cash flow margin fell this year as expected and as a result of contract revisions with pharmacy partners. This changed the timing of its payments.

    • This tweak allowed them to “leverage the strength of the balance sheet to lengthen rebates receivable to capture more margin and profitability.”

  • Progyny discloses adjusted EBITDA margin on new, incremental business. This incremental margin was 22.4% for 2021 vs. 16.7% in 2020.

  • Progyny expects to continue to consistently and meaningfully expand gross and EBITDA margins in the years to come.

    • Progyny’s growth provides natural leverage in contract negotiations and operations of scale that are naturally boosting its margins.

The company has $159.7 million in cash on hand and is debt free.

The 4th quarter is Progyny’s seasonally weakest period for margins. This is due to it adding the people and assets needed to support new clients before these clients go live the following year.

Note that as this is a healthcare services company and so sequential growth is not super relevant. It’s all about selling season success and the growth step-up Progyny enjoys between Q4 and the first half of the next year. For this reason, it makes most sense to focus on Q4 growth rates from 2021, 2020 and 2019 rather than all of its most recent quarters.

c. Guidance

2022:

  • Progyny guided to $752.5 million in 2022 revenue at the midpoint. This missed analyst expectations of $757 million by 0.6%.

  • Progyny guided to $116 million in adjusted EBITDA. This beat analyst expectations of $111.3 million by 4.2%. It expects adjusted EBITDA on incremental revenue of “more than 19.0%.”

  • Progyny guided to $0.03 in EPS. Analysts were expecting closer to $0.60.

    • This projection doesn’t include discreet income tax benefits or benefits related to stock based compensation. Progyny will likely continue to benefit from those items in 2022 which will continue to boost its EPS performance. This is why EBITDA outperformed while EPS “underperformed.”

Q1 2022:

  • Progyny guided to $167.5 million in Q1 2022 revenue. This beat analyst expectations of $164.1 million by 2.1%. This would represent roughly 37% growth. This range includes the impact of Omicron in January and assumes a more normal level of Utilization through March.

  • Progyny guided to $24.0 million in adjusted EBITDA. This beat analyst expectations of $22.3 million by 7.6%.

  • Progyny guided to a loss per share of $0.015. This missed analyst expectations of $0.14 by $0.155. This again is tax benefit related.

Progyny is assuming a normal level of utilization and mix in its 2022 guide and is NOT “writing in a little bit of the extra strength in February and March into the rest of the year.”

Why the larger revenue range?

“The larger overall revenue range is to factor in some level of less favorable mix or utilization or other unfavorable changes. It also factors in the larger portion of customers going live in Q2 and Q3 than they normally do. To the extent they decide to delay anything any further, that’s a risk assumed in the range we put out there.” — CFO Mark Livingston

d. Notes from CEO Pete Anevski

“Coming off of our most successful sales season ever, we are excited for the year ahead after successfully launching with the largest number of new clients and covered lives in our history. All of the macro trends that have been fueling our rapid growth remain intact” — CEO Peter Anevski

On 2022:

“We are cautiously optimistic that the pandemic may be coming to an end and the world hopefully will return to a more normal state. At this point, every indicator we monitor supports that we will have another successful selling season, driven by our superior solution, high levels of service and industry-leading clinical outcomes.” — CEO Peter Anevski

Utilization rates were strong in October and November, however the Omicron variant led to an activity hit in December and January. Importantly, the company has seen its member utilization and activity levels “rapidly” normalize in February which is why the company was able to maintain its ambitious full year guide.

“Based on the visibility we have into February and March as well as the limited visibility we have into April, member activity has rapidly recovered to normal levels. The Omicron impact on member utilization appears to be behind us.”

“One of the most important themes of the last 2 years is that most fertility patients have continued to be highly resilient in the pursuit of care even against the backdrop of the pandemic. Covid-19 disruptions for us have been short-lasting and have only impacted activity for a small portion of our members.”

Anevski reiterated Progyny’s plans to be at 265+ clients by July 2022 and 4 million+ covered lives thanks to the historically successful selling season being in the books. This still just represents 3% of Progyny’s target market despite its massive market share lead in the growing space. This doesn’t even include school systems, unions and other public employers.

“Our sales momentum from 2021 has continued into 2022. We are seeing meaningful increases across all metrics we use to monitor sales progress vs. early selling season progress one year ago at this time. This includes the active pipeline, new pipeline development year-to-date and year-to-date sales wins so far.”

On 2021:

Client retention remained “near 100%” for the 6th consecutive year.

Progyny’s NPS of +81 set a new record high while most of its competition remains around +0. Progyny was at +71 at the time of its IPO.

On product and geographic updates:

Progyny is making it a 2022 focus to provide increasing levels of fertility support to its male members. It will launch many new services and capabilities here specifically in the coming months to enhance up-selling.

“Male factor infertility is diagnosed equally as often as female factor infertility. While a Reproductive Endocrinologist is often able to effectively treat the couple regardless of what the underlying factor cause is, in some cases, a Reproductive Urologist may be beneficial for proper diagnosis and treatment of male issues.”

“Less than 20% of Urologists in the U.S. focus on reproductive health issues, and carriers may not have the subset of providers or coverage of these services in their network. This creates a gap which Progyny will attempt to address with this enhanced offering.”

Progyny will launch its fertility benefits solution in the Canadian market during 2022. It has been working tirelessly to build a network of Canadian Providers that it will manage in the same hands-on, data-driven way it does in the U.S.

“Although the Canadian Government provides universal healthcare to its citizens, comprehensive fertility coverage is not included in that program… Canadian employer supplemental coverage of fertility is even further behind where the U.S. was when we launched our benefit in 2016. As a result, most Canadians have no effective coverage today.”

e. Notes from CFO Mark Livingston

On margins:

“Gross margin increased meaningfully even as we invested to expand the functions and resources that we needed to support the on-boarding of our largest-ever cohort of new members in 2022.”

“In early November we issued a broad based grant of new equity to our workforce which increased the level on non-cash stock-based compensation and our operating expenses.”

On Progyny Rx:

Note 2021 and 2020 represent 12-month averages for the year

On treatment mix:

Utilization via consultation and diagnostic testing early on in treatment is worth less in revenue vs. advanced procedures later on in the treatment journey. Interruptions in this treatment journey (fostered by variants) negatively impacted its mix in Q4. This is why utilization rates are rather stable but revenue underwhelmed. Treatment mix in Q4 skewed to earlier on in the cycle than in previous comparable periods.

f. My Take

This was a fine but unspectacular quarter for Progyny. The variant seemed to weigh on its business but the 2022 guide hints at the pandemic’s impact being in the rear view. If management is wrong (which several analysts thought it may be based on the Q&A tone), that should mean falling short of the guidance the team has offered. Even if it does fall slightly short, I think there remains a lot to like with a 2022 EBITDA multiple of 28X and 40%+ growth expected going forward — in my view, there’s upside here if it can continue to execute. 2022 is a big year for this young fertility disruptor. I plan to continue accumulating more shares into any significant multiple compression.

Click here to read my Progyny Deep Dive.

2. Duolingo (DUOL) — Earnings Review

a. Demand

Duolingo guided to $68 million in revenue and analysts were looking for $68.85 million. Duolingo posted $73.0 million, beating its expectations by 7.4% and analyst expectations by 6.0%.

Duolingo guided to $80.5 million in quarterly bookings. It posted $90.8 million, beating its expectations by 12.8%. Strong bookings growth is an excellent hint at favorable forward looking demand — this is the result of more subscribers choosing annual plans in action.

MAU = Monthly Active User; DAU = Daily Active User.

The company did not see a material boost from the Omicron variant like it did with previous outbreaks. This outperformance was not pandemic-driven. Duolingo thinks it has returned to its long term growth trajectory — including 10-15% MAU growth going forward.

Notes:

  • The pandemic accelerated its business in 2020 but the company appears to be through the toughest comps from that factor.

  • This is the first time Duolingo has seen a sequential rise in Q4 MAUs in 3 years. It had guided to an MAU reduction for the quarter. Duolingo’s successful year-end campaign was given a lot of the credit for this encouraging reversion.

  • Duolingo’s paid annual subscriber retention in 2021 rose “several percentage points” YoY.

  • 85% of Duolingo’s subscribers are now on annual plans vs. 71% YoY and 80% last quarter. This greatly boosts lifetime value (LTV) and visibility.

  • From an external marketing perspective, Duolingo’s once-a-year New Year’s discount yielded results “above expectations and drove a meaningful increase in new subscribers.”

Subscribers as a % of MAUs is Duolingo’s most important key performance indicator for revenue growth. Duolingo had been raising this metric by roughly 1% annually but was able to raise it by 1.5% in 2021. Von Ahn attributed this positive momentum to continued split (A/B) testing which its leading scale offers the data to accurately guide. This equips the company with a wildly efficient and informative trial and error mechanism to make the paid experience more appealing. Duolingo thinks its subscribers as a % of MAUs can eclipse the roughly 12% that dating apps enjoy on average — there’s a long way to go.

Additionally, evolving from a fixed price in each country to dynamic pricing by country is raising subscriber conversion.

“We have a long roadmap of tests that we believe will continue increasing the subscriber ratio in the years ahead.” — Co-Founder/CEO Luis Von Ahn

Its newly introduced family plan — allowing 6 members to access subscription features through one plan — should boost subscriber conversion further and the company is “encouraged by the early results.” So far, a low single digit % of subscribers are on this plan which has already been should to juice LTV. With elementary school products like Duolingo ABC and Duolingo Math on the horizon, family engagement in the core product will be a key driver of cross-selling.

b. Profitability

Duolingo guided to a loss of $5 million in adjusted EBITDA and analysts expected a loss of roughly $0.35 million. Duolingo earned $0.3 million, beating expectations.

Analysts expected Duolingo to lose $0.68 per share. It lost $0.46 per share, beating expectations by $0.22.

*Adjusted for temporary, IPO-related expenses*

Duolingo generated $12.7 million in free cash flow in 2021. Note that this metric adjusts for IPO expenses and stock-based compensation associated with Duolingo’s public debut. The gap between net income margin and cash flow from operations margin is related to this and should close over time. We were told in recent calls that Duolingo planned to pursue growth over profitability in the near to mid-term future. The positive EBITDA surprise was in spite of this priority.

c. Guidance

2022:

  • Analysts were looking for $321.3 million in 2022 sales. Duolingo guided to $337 million, beating expectations by 4.9%.

  • Analysts were looking for a loss of $4.5 million in 2022 EBITDA. Duolingo guided to a loss of $3 million, beating expectations by 33.3%.

Q1 2022:

  • Analysts were looking for $73.3 million in Q1 2022 sales. Duolingo guided to $77.0 million, beating expectations by 5.0%.

  • Analysts were looking for a loss of $3.6 million in Q1 2022 EBITDA. Duolingo guided to a loss of $4.0 million, missing expectations by 11.1%.

d. Notes from Founder/CEO Luis Von Ahn

On growing users and subscribers:

90% of Duolingo’s user growth was via word of mouth in 2021. Duolingo generally enters individual markets with a few million in external marketing spend to get “the organic flywheel going.” It did this in places like India and Japan.

“Rather than spending our resources on short-term gains like performance marketing, we take the long view and continually improve our products and brand.”

Duolingo’s new TikTok account for its owl mascot (Duo) has 3 million followers and has racked up 500 million views with “basically zero marketing spend.” Its “Duolingo in Review” campaign, offering annual summaries of a learner’s year, drove “record” engagement and trended on Twitter.

Duolingo’s social and competitive feature additions continue to drive user growth and engagement. The % of daily users giving or receiving a “congratulatory message” grew from 1% to nearly 10% during the year and 25% of DAUs now follow 3+ other learners — which also directly boosts engagement.

On product enhancements to drive better learning:

  • Duolingo upgraded roughly 3,000 lesson plans “to align more closely with language teaching standards.”

  • Duolingo added 30,000 “immersion exercises” and audio lessons to bolster user conversational skills.

  • Duolingo added smart-tips feedback (again using its scaled data engine) to give timely explanations when a student is struggling.

  • Duolingo expanded into several non-Roman writing systems with brand new lessons.

    • As languages like Japanese and Korean are “among the world’s fastest growing” — this was imperative.

  • Duolingo launched unique, geography-specific voices for all of its popular characters.

  • Duolingo will launch a new home screen in hopes to juice engagement further.

  • Duolingo will add new in-class and mobile experiences for Duolingo for Schools. This is a dashboard aggregating all activity from students using the Duolingo app.

Duolingo’s internal research depicting that 5 Duolingo units is equivalent to taking 4 university semesters in half the time was peer-reviewed and published in the journal: Foreign Language Annals. Ahn reiterated that getting through 7 units is equivalent to 5 semesters and that most learners that get through 5 units are developing “level appropriate” speaking skills as well.

On the Duolingo English Test (DET):

Continued university adoption and student preference powered 63% YoY Duolingo English Test Growth. This implies revenue of roughly $24.5 million or 9.8% of total sales for a product that began monetizing in 2019.

The Irish Government announced acceptance for DET for new student visas. The company aims to expand DET beyond higher education and sees this as its first step in doing so.

“We are already the most downloaded language learning app globally and believe we can achieve similar success in testing and assessment… We’re just getting started… Duolingo aims to connect the DET proficiency scores to its app to “become the standard way people talk about fluency. Instead of a learner saying they’re intermediate, we want them to say they are a Duolingo 65.”

On new subject expansion:

The Duolingo ABC literacy product will launch on Android this year — the company is working on an overarching upgrade to this product at the moment. Its math product is still in the works and will launch by 2023. Duolingo will rollout premium versions of all of these products to drive further monetization in the coming years. As a reminder, Duolingo doesn’t monetize its products until they’ve reached effective scale and maturity. So, this was not the source of the guidance raise — it was the health of the core business.

“I’m biased, but the math app looks beautiful.

On strong culture:

67% of its new hires in 2021 were engineers or product managers — this led to GAAP research and development (R&D) as a % of revenue rising from 32% to 41% YoY. This is my favorite kind of company spend — especially for growth stories. Duolingo will continue to accelerate R&D spend and we have been told NOT to expect operating leverage in this cost line in 2022.

Duolingo’s employee attrition rate in 2021 was 6% — lower than industry averages.

e. My Take

This was a strong quarter in every sense of the imagination. While many seemed to think Duolingo was a pandemic flash in the pan, that does not appear to be the case. I continue to think this has promising potential to profitably and briskly compound over the coming years and this quarter was merely another data point supporting that opinion.

Click here to read my Duolingo Deep Dive.

3. GoodRx (GDRX) — Earnings Review

The company announced a $250 million share re-purchase program or roughly 6% of its shares. This is for the purposes of “limiting the dilution associated with employee equity compensation” and will be funded via cash or “funds available through various borrowing arrangements.” Unfortunately, that was the highlight of this poor quarterly performance:

a. Demand

GoodRx guided to $217 million in Q4 2021 revenue and analysts were expecting $217.5 million in revenue for the quarter. GoodRx posted $213.3 million, missing its expectations by 1.7% and analyst estimates by 1.9%.

MAC = Monthly Active Consumer; other revenue includes its pharma manufacturers and telehealth segments

GoodRx continues to push out its timeframe for when it sees prescription transaction volume recovering to its pre-pandemic growth trajectory. Management initially believed that an elective care backlog unwind would accelerate its prescription growth long before now. What it didn’t contemplate is that most of its script starts are long term in nature.

This means the void via losing 2 years of normal script starts will take a long time to fill. The company will need to somehow get these lost consumers back or we’ll need to wait several more quarters before returning to its fully normalized growth trajectory. I understand that Covid-19 was wildly difficult to model for businesses. Considering this, GoodRx management should have been pessimistic in their assumptions to leave a margin for error. They instead skewed optimistic, and it’s greatly costing them (and me) at this moment.

“We believe the growth of our prescription transactions offering continues to be impacted by COVID-19 headwinds, as healthcare utilization challenges continue and the cumulative impact of reduced prescription starts impacted new and returning users.”

Its pharmaceutical manufacturer solutions offering quadrupled in revenue YoY vs. tripling last quarter. This was another rare bright spot within the report.

b. Profitability

GoodRx guided to $65.1 million in EBITDA for the quarter and analysts were expecting it to earn $66.1 million in EBITDA. GoodRx posted $62.3 million, missing its expectations by 4.3% and analyst expectations by 5.7%

Analysts expected GoodRx to earn $0.10 per share. It earned $0.09 per share, missing expectations by 10% or $0.01.

Note that GoodRx tax provisions related to the IPO and stock based comp lead to significant, temporary volatility in GAAP net income. For this reason, GoodRx discloses adjusted net income to account for this change and to offer a better sense of the company’s actual profitability.

In Q2 2021, we were told by CFO Karsten Voermann that the 30.9% EBITDA margin would be a bottom that GoodRx recovered from. He was unfortunately wrong:

Note that proliferation in GoodRx’s telehealth product is the reason for margin compression over the last 2 years. The company sells this product at cost to feed cross-selling for the rest of its business. This meant that the pandemic-fostered telehealth boom worked to erode its margins as the segment grew as a piece of its operational pie. Aggressive spend on building out its product suite and employee base is also contributing.

c. Guidance

2022:

  • Analysts were looking for $1.02 billion in sales. GoodRx’s growth guide implies revenue of $916.8 million, missing expectations by 10.2%.

  • Analysts were looking for $329.9 million in EBITDA. GoodRx’s guide implies EBITDA of $293.4 million, missing expectations by 11.1%.

Q1 2022:

  • Analysts were looking for $227.4 million in sales. GoodRx guided to $200 million, missing expectations by 12.0%.

  • Analysts were looking for $69.6 million in EBITDA. GoodRx guided to $58.0 million, missing expectations by 16.7%

d. Notes from Co-Founder/Co-CEO Trevor Bezdek

On the poor results and worse guidance:

“The Omicron variant adversely impacted the latter portion of the quarter.”

GoodRx previously expected the impact of the pandemic to fade away by the second half of last year. The pandemic, however, is now expected to impact GoodRx through the end of this year:

“We underestimated the length of time that the pandemic would impact our business. Having 24 months of smaller new therapy starts in a business that’s highly recurring — due to the frequency and the long-term nature of prescriptions — created this compounding impact.”

On weak margins:

“We didn’t reduce our pace of investment or innovation during the slower-than-anticipated growth period, even though this resulted in lower than historical margins… this has resulted in record unaided brand awareness.”

“We are taking the long-term view… we continue to build innovative products and execute strategic M&A to offer more value to the increasingly recurring base of users who know and love GoodRx… Most of the teams where we have been focused on investments are now largely in place. We anticipate our operating leverage will scale in the 2nd half of 2022 with margins expanding throughout the year. We are committed to returning to an adjusted EBITDA margin of 40%+ in the coming years and are confident we can do so… We are confident in our ability to inflect margins significantly.”

On GoodRx for providers:

As a scaled platform for both patients and HCPs… we believe there is an enormous opportunity for us to meet provider needs with innovative solutions while helping them achieve better patient outcomes… Early adoption for the provider platform has been strong, with over 90% of those eligible opting into this new mode — representing 80,000 healthcare providers (out of the 700,000 in its overall network). Within weeks of launch, we closed the first two of what we expect to be many deals [for use of this platform] with pharmaceutical manufacturers who want to engage with our massive provider network.” — Shareholder Letter

This product re-organizes the prescription transaction value chain with the provider at centerstage for easier, timelier solutions to their patient needs. These changes have already boosted engagement — physicians who use this new product offer GoodRx pricing codes at a rate of nearly 2X. This mode also makes things like sharing GoodRx Health content far easier (in response to spiking provider interest in this content service). GoodRx continues to focus heavily on building out more provider tools as it knows these professionals power its industry. Early this year, GoodRx purchased flipMD to bolster the provider solutions that it can offer. This is a marketplace connecting doctors to enterprises seeking consulting and advice. It’s pre-revenue.

As providers foster branded medication prescribing, this platform should be a fantastic, free marketing tool for branded manufacturers to leverage alongside GoodRx’s core consumer app.

“500,000 healthcare providers (HCPs) have visited GoodRx over the last 90 days — that’s very challenging for anybody else in the space.”

On New relationships — GoodRx announced partnerships with:

  • Wheel (virtual platform for primary and behavioral health) to make its pricing codes available to its millions of patients.

  • Instacart to provide shoppers access to GoodRx Gold.

On the changing competitive landscape:

“We continue to anticipate we’re going to raise market share and take rates within the prescription transaction volume segment… Our relationships with PBMs remain great and we continue to add more. Our relationships with retailers are very good. We haven’t seen any significant changes or developments in terms of the competitive landscape.”

e. CFO Karsten Voermann

On the weak results:

GoodRx’s November guide came when flu season was outpacing 2019 levels. It subsequently slowed enough to fall below company expectations. Q4 2019 prescription volumes fell by a “single-digit percentage” via Omicron which hit GoodRx’s results.

“Even if the market fully recovered, at this point most of the pandemic effect is related to the cumulative 2 year impact of less new therapy start cohorts. This is lasting much longer than we expected and has been detrimental to our recurring revenue base.”

It’s startling how wrong leadership was about Covid-19’s impact. The pandemic cost them tens of millions of dollars in the second half of the year while the company thought its easing would boost revenues immediately. Voermann has stopped talking about the pandemic-induced diagnosis gap going away leading to accelerating demand for GoodRx. Now he’s saying the impact of the pandemic on its revenue may decrease over time as this gap fills. Hopefully this is a corporate decision to under promise and overdeliver because in reality, no one can predict when standard medical treatments will be fully normalized.

On segment Guidance — Voermann offered the following specific guidance:

  • 70-90% YoY other revenue growth. Pharma manufacturers will decline sequentially as Q4 is the segment’s strongest period.

  • 45-55% subscription growth.

  • 16-18% prescription transactions growth.

Multi-year outlook:

“We are confident in our ability to grow revenue at rates in the mid-20% range over the next few years without any inflections in the current macroeconomic or pandemic environment.”

On repositioning its GoodRx Gold Subscription:

GoodRx is raising individual plans to $9.99 per month and family plans to $19.99 per month. It had been $5.99 per month per person and $9.99 per family. This is a massive price hike. Prices were only hiked for new members with plans to extend the raise to existing subscribers by the end of Q2. GoodRx expects this to result in flat subscriber growth for the year due to an anticipated churn impact in Q2. GoodRx has 774,000 Gold subscribers today who contribute $13.8 million in quarterly revenue.

“Initial tests on the price hike are encouraging.”

GoodRx Gold is pivoting to focus on a more specific audience that can gain the most from using this subscription — so people with “chronic conditions, multiple recurring prescriptions and other long term needs.” In relation, it raised prices to “reflect all the value we’ve added to the program in 2021 and to create a clear differentiation between our offerings.”

“Two years after integrating Gold into the GoodRx platform, it was time to evaluate our subscriber behavior and pricing strategy. We found that some subscribers are high users and savings thousands per year for a $100 subscription. Others were not using it enough and were better off using the free offering… We believe this targeted approach will allow us to continue to invest in Gold & deliver more value resulting in better retention and LTV.”

On the branded manufacturers segment:

“We built a robust pipeline for 2022, setting a foundation for strong sustainable growth of this offering.”

Net revenue retention (NRR) for the pharma manufacturers business remained over 150% — stable sequentially.

f. My Take

This quarter was a large swing and a miss from management. The team’s inability to come close to accurately assessing the pandemic’s impact on its operations casts doubt on the reliability of its future projections. This quarter must prove to be the kitchen sink — or the worst that things get — for me to stick around as an investor. Demand must accelerate and margins must improve going forward. To be candid, I’m quite annoyed with this report but am not ready to sell or pause accumulation of shares. GoodRx continues to take market share and expand its value proposition for multiple stakeholders. To me, this failure to correctly guide investors was solely the fault of the team.

Click here to read my GoodRx Deep Dive.

4. Green Thumb Industries (GTBIF) — Earnings Review

“Cannabis is a complex business, but you can rely on us to continue our enter, open, scale strategy to drive shareholder value… we think it’s still day 1 for cannabis and it’s definitely day 1 for Green Thumb. The best is yet to come.” — Founder/CEO Ben Kovler

a. Demand

Analysts were looking for $238.4 million in sales for the quarter. Green Thumb posted $243.6 million, beating expectations by 2.2%.

It now has 76 stores open as of the call. Comparable same store sales growth rose 6% YoY on a base of 48 stores. Average basket size fell sequentially via pricing pressure discussed below.

b. Margins

Analysts were looking for $0.08 in EPS. Green Thumb earned $0.10, beating expectations by 25%.

Full year gross margin of 55.1% expanded from 54.7% in 2020. This is Green Thumb’s 6th straight quarter of positive GAAP net income — despite dauntingly difficult taxation and cost of capital headwinds associated with growing cannabis in the United States.

SG&A fell from 35.6% of sales in 2020 to 31.0% of sales in 2021, indicating increasing operating leverage while the company continues to scale.

For 2021 as a whole, Green Thumb generated:

  • $893.6 million in sales — up 60.5% YoY.

  • $75.4 million in GAAP net income — up roughly 5X YoY.

    • 8.4% 2021 GAAP NI margin vs. 2.7% YoY.

  • $307.8 million in adjusted EBITDA — up 71.4% YoY.

    • 34.4% 2021 adjusted EBITDA margin vs. 32.3% YoY.

  • $132 million in cash flow from operations — up 38.9% YoY.

    • 14.8% cash flow from operations margin vs. 17.1% YoY.

c. Balance sheet

Green Thumb has $230 million in cash and equivalents and $240 million in outstanding debt. It has another $130 million in current assets such as inventory.

d. Founder/CEO Ben Kovler Call Notes

On the future of cannabis:

“We committed over $200 million in CapEx to invest ahead of the demand curve in the U.S. in 5 states that we can underwrite… Our end game is to stay ahead of this demand curve while producing the highest quality, safest cannabis experiences… all projects are on time and on budget… there are some issues in the supply chain, but the team does an amazing job sourcing these things.”

Green Thumb spent $75 million in CapEx during Q4 specifically — marking an acceleration vs. the rest of 2021. This is mainly going to building out its cultivation footprint across several states. It’s nice to be profitable and have access to relatively low cost of capital vs. industry competitors. They can press down on the gas pedal harder than most can afford to — and with a forward industry CAGR of 20% through 2030, this should absolutely be the plan. I’m glad it seems that it is.

“It can be difficult to avoid the noise of cannabis. There are plenty of dead ends of noisy chatter. I believe we have done an okay job filtering out that noise and focusing on where the puck is going. The growth trajectory may not be linear, but over the long term, we are confident it will be up and to the right. The timing of adult-use rollouts in states is difficult to predict, but when it happens, we are confident that the demand is real.”

On Illinois:

Sales grew 67% to $1.8 billion in the state BUT:

“The market is being artificially capped by the lack of progress in Springfield social equity licenses… it’s ok to make mistakes, but it’s not okay to not learn from them. We are seeing other equity provisions states study Illinois as a cautionary tale.”

While this is frustrating today, it leaves more upside going forward. These issues will be resolved at some point.

Green Thumb opened Rise Mundelein in Chicago in October. This is the first Illinois shop with “roll-through car service” for medical patients and curb-side pick-up. It also features an on-site lounge for consuming cannabis and a “private smokeasy.”

On regulation:

“We are in an optimal position to take advantage of the changes that seem inevitable. But I would repeat what I’ve said before, we operate our business without the need for federal change…. We’ve executed a plan that puts Green Thumb in a position to win based on what we know now, not what may or may not happen in the future.”

On Minnesota:

“Due to some of the details on the medical program, Minnesota is really an underserved state. We believe we can expand our capabilities to provide patients with greater access to well-being through cannabis. This week, the first legal sales of flower are beginning and our Minnesota stores are proud to offer several strains.”

States like New York saw sharp demand spikes when flower sales first went live.

As a reminder, Green Thumb bought LeafLine and its 1 of 2 licenses in Minnesota in December. This purchase comes with a cultivation center, the ability to sell finished goods to patients and 5 open stores (with the ability to open 3 more).

On the “flippening” (medical states turning on recreational sales):

Of the states Green Thumb has licensing in currently: Virginia, New York, New Jersey and Connecticut all have passed recreational legalization but have not yet gone live. Recreational sales turning on will be a large boon to growth.

“Regardless of what happens in New York and New Jersey, there’s $5 billion in demand there. We’re putting in dollars where we can create amazing returns at ridiculously low multiples of EBITDA out 24 months.”

e. Notes from CFO Anthony Georgiadis:

On falling gross margin:

“Falling gross margin was primarily attributable to moderate pricing pressure experienced on both the consumer-packaged goods (CPG) and retail sides of our business. At no point have we as a management team assumed that our historical gross margin performance was repeatable into perpetuity… Into Q1, we. are not seeing the rate of [downward] pricing change we saw in Q4… we are starting to see some kind of real settlement.”

“We remain confident that our scale, diversified market base and focus on premium products will help support our efforts in keeping this critical gross margin metric at or above 50%... and adjusted operating EBITDA margins over 30%.”

The steepest price compression is occurring in the lower quality flower segment.

These are CPG companies at heart and CPG companies don’t typically fetch 55% gross margins. For context, Boston Beer sits at around 38% with Mondelez at 39%. Green Thumb being able to stay above 50% would be remarkably positive in my view. These can be very successful business with typical CPG margins. Also keep in mind that while gross margin should level or compress in the future, net income and cash flow margins could still greatly expand with the passage of 280E and cannabis banking reform.

Ohio, Maryland and New Jersey all have new grow rooms that are planted but haven’t yet translated into revenue. The grow period is 6 months — so this will take a few quarters to show up in results but is on the way. Green Thumb has already incurred the fixed cost for these projects and, because it hasn’t yet translated to sales, this also weighed on gross margin temporarily.

On the vape recall for Curaleaf and others in Pennsylvania:

“The team is doing a great job to adjust and increase throughput given some of the short term supply challenges we’re seeing given products pulled of the market. I think it’s premature to say we’re going to be able to grab share because of this.”

Kovler told us that Green Thumb is “in it together” with the industry and is not an opportunity to step ahead of somebody or “pound on our friends.” He said the ultimate goal is to serve patients and that the industry is partnering together to deal with this situation. In my view, Green Thumb should be trying to step ahead and pound on friends for more market share. This was not its blunder and this is business, not friendship. It should be taking full advantage of the situation and I’d imagine the team is doing so and just trying to play nice in its dialogue.

5. CrowdStrike (CRWD) — Product Launch

CrowdStrike released Falcon Identity Threat Protection Complete during the week. This marks the cybersecurity industry’s first “fully-managed identity threat protection solution” according to CrowdStrike. Roughly 80% of 2021 breaches used identity based attacks as this is a relatively easier breach method. The strategy allows hackers to freely, horizontally move through a software ecosystem after one simply identity breach — the hacker merely needs to gain access to the most vulnerable section of a digital ecosystem. This module frees enterprises to “run an effective identity security program without the burden and costs associated with internally building.”

“Falcon Identity Threat Protection Complete enables organizations to get full visibility into identity-based threats and respond to them in real time to prevent attack progression.” — CrowdStrike SVP Thomas Etheridge

This product is a marrying of CrowdStrike’s Identity Protection module and its managed detection arm — Falcon Complete — to merge the strengths of its threat-hunting team and identity protection software. CrowdStrike aims to collect data once and use it several times across dozens of modules to bolster client security. This is why its margins are so good: most of its costs are fixed so do not grow with rising revenue per client as module adoption accelerates.

Importantly, this is not CrowdStrike encroaching on Okta’s identity-based niche. This is instead CrowdStrike bolstering its endpoint and cloud workload protection capabilities by incorporating identity-based controls into the process of stopping breaches. Okta and CrowdStrike remain close partners.

6. PayPal Holdings (PYPL) — CFO John Rainey Interviews with Evercore

On PayPal lowering 2022 outlook:

“As we looked at the outlook for 2022, we did see the expected impact from both macro and the supply chain which led to the softer outlook. As we go through the year, we expect to accelerate and this will hopefully give investors more comfort on the health of our core business.”

As a reminder, eBay will represent a $600 million drag to revenue in 2022. Importantly, once we get to the third quarter of the year, the eBay impact will vanish as YoY comps normalize due to eBay having “effectively completed” its payments migration by Q3 2021.

Rainey called out the guidance volatility that the end of the PayPal-eBay operating agreement fostered — it was difficult to model the pace of their evolution which turned out to be faster than management originally anticipated. It’s temporary with eBay now representing 3% of PayPal’s total payment volume vs. 10% YoY.

Rainey again called out supply chain issues as slowing advertising spend for merchants and then also payment volume for PayPal — especially within cross-border where PayPal’s fees are highest.

PayPal’s guide assumes 10% e-commerce growth for the industry overall. PayPal sees that “playing out about as expended” thus far.

Rainey reminded us that the margin pressure expected in 2022 is via lapping a 2021 release of credit reserves which temporarily boosted margins last year.

“The secular tailwinds for our business have not changed and we expect them to increase in the years ahead.”

On the changing account growth philosophy:

“There’s been a fair amount of confusion around the net new actives strategy. I want to emphasize that we still see an opportunity to add users. It’s simply that when we consider the best return on our investment, we think we should focus more on quality of users vs. quantity. In 2022 — because of that — we’re going to see a more elevated level of churn. Going forward, we would expect to see that at something that’s more normalized.”

On bold double-digit average revenue per account (ARPA) growth guided to for 2022:

Rainey pointed to how PayPal’s traditional market niche is as checkout facilitator. That’s no longer the case. PayPal’s digital wallet, which 50% of PayPal users have now downloaded, has been shown to double the lifetime value (LTV) of a PayPal customer vs. one solely using its checkout feature. PayPal’s business continues to morph into one that doesn’t just power checkout, but all things digital banking and discovery (thank you Honey acquisition). This is what’s giving it the confidence to offer such an optimistic ARPA guide.

Rainey further eluded to PayPal’s vast digital wallet market share lead in terms of merchant checkout acceptance with 76% of North America’s largest retailers accepting it vs. 27% for 2nd place Apple Pay. Connecting its digital wallet to vast checkout adoption simply bolsters the appeal of the product more.

On needing BNPL and upstream presentment:

“If you’ve got a BNPL option that has upstream presentment, and the PayPal option is buried a page back with other options, we see declining share. This is why it’s so important for us to grow our upstream and BNPL. I think our value proposition in BNPL is second to none… This was the best product launch we’ve had in the history of our company.”

I greatly prefer BNPL being deployed as a tool in a broad toolkit — like with PayPal — vs. it being the core value creator for a company like Affirm.

On continuing to enhance its legacy checkout business & innovation overall:

“Checkout is our legacy but also our future… we need to continue to innovate and provide better experiences to optimize presentment with merchants. The better the presentment, the better the share of checkout via removed consumer friction… When we look at our customers, roughly half of the time a customer has the opportunity to checkout with PayPal, they actually do… we can double the size of our business without adding another customer and our team is focused on completing that vision by helping change the experiences so that our value proposition shines.”

This is also why up-stream presentment (offering PayPal pre-checkout and more shopper discovery tools) is so important. It boosts PayPal’s core business.

“I’ll give you a stat here… roughly half of the customers at PayPal that churn annually had a login failure in the last 6 months. If we can do better things around authenticating then you remove that possibility for them to churn.”

“We’re doing a better job today than we ever have at organic development. You can see that in things like our BNPL and crypto launches etc.”

“We think that we can move our 50% online checkout share appreciable higher from there. With some merchants we are going for 100% share as the sole source provider. With larger enterprises there are other options… but we like our position in that game.”

On the company’s long term plans to allocate 30-40% of free cash to buybacks and capital allocation:

“At this moment in time, with what we believe is the dislocation in our stock, it’s fair to assume that we’ve been a little more aggressive on the share buyback front.”

Rainey told us that in the near term, any M&A would “probably be for lower dollar amounts.”

On higher interest rates and competition vs. Square:

“We certainly stand to benefit from higher rates as we’re in a net cash position.”

“We think we’re maintaining market share here. We continue to maintain share very favorably with the competition.

7. The Trade Desk (TTD) — New Europe Partnership

The Trade Desk and LiveRamp will partner with advertising bellwethers to create a version of The Trade Desk’s UID 2.0 in Europe (called European Unified ID). This will function as “a new privacy-conscious identity solution for the European advertising market.” As part of the new relationship, the companies will debut ad-impression auction bidding with LiveRamp’s “people-based identifier” technology (called RampID) and within The Trade Desk’s platform. The firms will totally integrate with one another to deepen the utility of the combined offering — the two are already partnered in a similar capacity in the United States. The Trade Desk is spearheading the product’s creation but LiveRamp will be providing critical functionality within the authentication and appraisal of traffic via its “Authenticated Traffic Solution.” (ATS)

  • ATS Definition per LiveRamp: Provides a privacy-first solution to improve programmatic addressability across the open web by providing an encrypted, persistent, people-based identifier throughout the programmatic supply chain, starting at the inventory source.

Wonderful, free content can only exist with relevant advertising. In a world where walled gardens are making the “relevant” part of that equation more difficult with targeting restrictions, new solutions like these can both ensure privacy while continuing effective monetization. Industries like Journalism even depend on this unspoken deal for survival — according to Trade Desk CEO Jeff Green.

With strict and tightening data protection laws in Europe, the value of The Trade Desk’s ability to guarantee privacy while continuing to deliver effective targeting across the pond may be even greater than in the U.S.

Click here to read my deep dive into The Trade Desk’s business.

8. SoFi Technologies — Cash Burn, Stock Based Comp, M&A & Student Loans

After SoFi’s quarterly earnings report, many identified its $1.4 billion in 2021 operating cash burn as a red flag for the company. Those people needed to read into the cash flow statement to see where these numbers came from.

The burn was via adding roughly $1.4 billion in net loans to the company’s balance sheet. In cash flow statement accounting, this counts as “cash burn” similarly to a retailer adding inventory. The cash burn is the result of purchasing liquid assets that will yield net interest income for the company if held — not poor unit economics. It’s a change in capital structure which is why it isn’t included in losses on the income statement. Sometimes (most of the time), reading the headline numbers does not give you the full story.

I reached out to CFO Chris Lapointe to comment and this was his response:

“Given the nature of our business, a significant portion of which is lending, it is difficult to look at cash flow from operations as the true view of FCF for our business as it excludes important financing activities core to our day to day operations.”

He also commented on warrant redemption leading to P&L volatility:

“In Q4 2021, we redeemed our remaining warrants to eliminate the volatility on the P&L in the least dilutive manner. The nature of needing to mark to market these instruments each quarter resulted in material non-cash fluctuations on the P&L. By calling the warrants when we did, we were able to remove any volatility on the P&L post Q4 2021.”

The other concern many folks had was stock-based compensation that is set to grow 41% YoY to $340 million in 2021 (2.7% dilution). Stock-based compensation growth for companies rapidly hiring new talent and creating new products like SoFi is doing is wildly common. Still I’d like to see this growth slow going forward.

I was able to get a comment from Chris Lapointe here as well:

“We expect longer term that our SBC as a percentage of revenue should come down and be in line with other peers.”

In other news, rumors are circulating that the Biden Administration will again extend the federal student loan moratorium. Based on the $33 million dollar hit SoFi’s Q1 2022 guidance took from this extension, this extension could cost SoFi $77 million in its most profitable 2022 revenue.  While this is quite frustrating, it’s the kind of headwind I accumulate into. Why? It has nothing to do with the quality, market share and differentiation of the loan product SoFi is offering. It’s solely related to temporary, exogenous, regulatory pain.

Finally, SoFi’s acquisition of Technisys has closed and CEO Anthony Noto made an open market purchase for $150,000 in SoFi stock.

9. Ozon (OZON) — Press Release

Ozon published a press release assuring investors that the company is not subject to any current sanctions. It believes there will be “no direct material adverse effect of the U.S., EU and other sanctions recently imposed on Russia.” While this is nice, hyperinflation is still cutting the value of Ozon’s revenues significantly and the company remains a victim of its government’s maliciously aggressive activity.

While the company’s shares remain halted on U.S. exchanges at this time, I have no plans to sell once trading resumes. I will also not add to my currently 0.6% stake in the company.

10. Tattooed Chef (TTCF) — Delayed 10K

Tattooed Chef notified investors that it would be filing its annual 10-K by March 15th — after its set deadline. The company told us that “revenue will be significantly higher and operating expenses will be significantly higher.”

With the company already on my hot seat, all I can say is the next quarter and guide better be great, or I will likely be out.

11. My Activity

I added funds into my account during the week. After adding to several names, most of that infusion has been used up, and my cash position remains right around 8.5% of holdings.

I added to the following names during the week:

  • Duolingo (twice)

  • Olo

  • GoodRx

  • Match Group

  • PayPal Holdings

  • Revolve Group