Kits Eyecare Third Quarter 2026 Conference Call - DEFI TECHNOLOGIES INC

Financial Performance:

• Revenue reached a record $63.7 million in Q3 2026, representing a 21.6% year-over-year increase; contact lens revenue grew 15.7% to $52.4 million, while glasses revenue surged 59.3% to $11.3 million.
• Gross profit grew 31.1% to $23.8 million, outpacing revenue growth by 10 points, driven by a gross margin expansion of 280 basis points to 37.4% (up from 34.6% YoY).
• Adjusted EBITDA was $2.9 million (4.6% of revenue), marking the 16th consecutive quarter of profitability despite heavy reinvestment; net income was $672,000 ($0.02/share), down from $1.9 million ($0.06/share) YoY due to increased non-cash share-based compensation ($0.9 million).
• Operating cash flow generated was $4.8 million (7.5% of revenue), bringing YTD operating cash flow to $7.6 million; the company ended the quarter with $30.6 million in cash and zero debt, maintaining an undrawn $15 million credit facility.
• Fulfillment costs decreased to 10.4% of revenue (down 50 bps sequentially) due to fixed cost leverage, despite a 20 bps increase due to carrier fuel surcharges not passed to customers.
• G&A expenses were 7.1% of revenue; excluding share-based compensation, G&A improved to 5.4% of revenue (down from 5.8% YoY).

Guidance and Future Outlook:

• Q4 2026 revenue is guided to $64 million–$66 million (19%–22% YoY growth), with adjusted EBITDA margins expected between 4% and 6%.
• Full-year 2026 revenue is projected at $244 million–$246 million, achieving 20%–21% growth with continued margin expansion.
• Management anticipates long-term marketing efficiency returning to the mid-teens (15%–16% of revenue) as new customer cohorts mature and business leverage increases.
• Strategic focus remains on self-funding growth through generated cash flow, prioritizing high-value customer acquisition and expanding glasses capacity before considering capital returns to shareholders.
• The company expects to continue scaling profitably, with overhead leverage and mix shifts driving earnings growth that outpaces revenue growth over time.

Business Segments and Product Lines:

• Glasses: A primary growth driver with revenue up 59.3%; average order value (AOV) rose 32.5% to $151; progressive lens revenue grew 56% to $3.1 million; premium lens upgrades constituted 44.8% of glasses revenue.
• Contact Lenses: Re-accelerated to 15.7% growth; repeat revenue reached $41.8 million (65.6% of total revenue, up from 62.4% YoY); the two-year active customer base grew 14.1% to 1.175 million.
• Kits Daily: Own-brand daily contact lens revenue grew 44%, now representing over 10% of Canadian contact lens orders; nearly half of buyers are existing customers, indicating high conversion and margin efficiency.
• Auto-Ship: The recurring subscription program generated $29.6 million in annualized revenue, representing 14.1% of contact lens orders (up from 12.1% YoY).
• Physical Retail: The Toronto flagship store opened in Q3, outpacing online growth in the region by approximately 28 percentage points; a store in Calgary is targeted for early Q1 2027 opening, with Vancouver also performing strongly.
• New Product Launches: Introduction of tinted lenses (blue, pink, tan) for fashion segments; expanded AI glasses selection with full lab integration for prescription lenses.

Market and Competitive Landscape:

• KITS is growing significantly faster than the broader market, estimated to grow ~4x the contact lens category (4% growth) and >5x the glasses category in specific high-growth segments.
• The company maintains a competitive moat through a vertically integrated lab and fulfillment platform, allowing for rapid turnaround and lower costs on premium lenses (e.g., digital progressives) compared to competitors.
• Management views the glasses segment as a "greenfield" opportunity within an existing contact lens customer base, with the expectation that nearly all contact lens wearers will eventually require glasses.
• AI glasses remain an early-stage growth vector with double-digit growth, though the category has seen a slight macro slowdown compared to the previous two years.

Risks and Challenges:

• Customer Acquisition Costs: Marketing intensity is currently elevated at 17.1% of revenue due to strategic investment in high-value glasses customers; this may cause temporary volatility in near-term profitability metrics until cohorts mature.
• Timing Differences: A lag exists between acquiring a glasses customer (higher acquisition cost, later repeat timing) and realizing the full lifetime value, which can impact quarterly revenue recognition compared to the immediate repeat of contact lenses.
• Macro Trends: A slowdown in the AI glasses market and potential broader retail category stagnation are noted, though KITS aims to decouple performance from general industry trends.
• Execution Risk: Management acknowledged that while the foundation is set, the "final step" of converting gross profit pools into earnings and cash flow per share is the next critical test of operational leverage.

Management Commentary and Tone:

• CEO Roger Hardy and CFO Ibrahim Kumar expressed high confidence, characterizing the quarter as "category-leading" with accelerating growth and expanding margins.
• The tone emphasized a "decade-long" investment horizon, prioritizing customer lifetime value (LTV) over short-term quarterly earnings, with the business described as a "self-funding, compounding machine."
• Management highlighted the importance of "pricing power and mix" working in tandem to drive gross profit growth significantly faster than revenue.
• Capital allocation discipline was reiterated, with a focus on reinvesting in high-ROI customer acquisition and capacity expansion before returning capital to shareholders.

Analyst Questions and Answers:

• Customer Cohorts: Analysts asked about the split between contact and glasses customers; management confirmed they do not break this out but expect 100% of contact lens customers to eventually require glasses, creating a high-margin conversion opportunity.
• Repeat Cadence: Q&A clarified that contact lens customers return sooner than glasses customers, creating a timing difference in revenue recognition but validating the long-term LTV of the glasses segment.
• Store Impact: Discussion on the Toronto store confirmed it is driving online sales in the region by ~28% compared to the national average, validating the "showrooming" or brand lift model.
• Marketing Efficiency: Management projected marketing spend will normalize to mid-teens (15-16%) as new customer acquisition efficiency improves and the glasses business scales.
• AI Glasses: Clarified that while macro growth in AI glasses has slowed slightly, it remains a double-digit growth category where KITS leverages its lab integration to capture share by offering prescription lenses in AI frames.
• Black Friday: Early data suggests strong performance with Black Friday promotions driving volume without compromising gross profit margins, driven by high-intent customers and insurance claims utilization.

Other Key Points:

• Leadership Changes: Co-founder Joe Thompson moved to an advisory role in October; Ty Stillman remains President and leads operations.
• Share Buybacks: The company repurchased and canceled 89,000 shares ($1M) in Q2 and an additional 49,400 shares ($0.8M) post-quarter end, funding these purchases entirely from operating cash flow.
• Capacity Expansion: New surfacing lines were installed in Q3, adding 60% more capacity for specialty and progressive lenses to support high-margin growth.
• Customer Loyalty: Customers acquired in 2022 have spent an additional 187% of their first order over four years; new glasses cohorts are spending 63% more on first orders compared to the prior year.