ODDITY Third Quarter 2026 Earnings Call - ODDITY TECH LTD

Financial Performance:

• Q3 2026 net revenue was $145 million, a 2% year-over-year decline, beating the lower end of guidance (approx. 5% decline) and marking a significant sequential improvement from the Q2 25% decline.
• Adjusted EBITDA was $22 million, exceeding the upper end of the $18–$20 million guidance range; the year-over-year decline was attributed to the Il Makiage advertising dislocation.
• Adjusted diluted EPS was $0.37, compared to $0.40 in the prior year, driven by a 23% reduction in diluted share count due to share repurchases.
• Gross margin compressed to 67.4% from 71.6% in the prior year, primarily driven by a mid-single-digit decline in Average Order Value (AOV) and a shift in sales mix toward lower AOV repeat orders.
• First-order revenue declined in the high teens year-over-year, while repeat orders stabilized; Il Makiage first-order revenue declined sharply due to ad dislocation, partially offset by growth at Spoiled Child and Methodic.
• Free cash flow was $10 million in Q3, bringing nine-month free cash flow to approximately $3 million.
• Cash, cash equivalents, and investments totaled $561 million at quarter-end; $350 million in credit facilities remains undrawn.
• Inventory stood at $158 million, with Il Makiage carrying excess inventory from prior commitments; the company expects better inventory balance in 2027.
• Capital return included $163 million in share repurchases (11.7 million shares) in the first nine months, with $86 million remaining on a $200 million authorization.

Guidance and Future Outlook:

• Full-year 2026 net revenue guidance raised to a decline of approximately 18.5% (previously expected ~20%+).
• Full-year 2026 adjusted EBITDA guidance raised to $32–$34 million (previously $30–$32 million implied).
• Management raised the outlook due to improved Q3 performance and strong momentum from Spoiled Child and Methodic, though Q4 is projected to remain in line with prior expectations to allow for volatility in the Il Makiage ad recovery.
• Strategic goal for 2027 is a return to growth across all brands, including Il Makiage, driven by new product launches and the resolution of ad account issues.
• Specific 2027 guidance was not provided, but the company emphasized a "most exciting" slate of product launches across all brands.
• Long-term ambition remains to build a top-tier global beauty and wellness company, expanding the scope from beauty to skincare, healthcare, dermatology, and longevity.

Business Segments and Product Lines:

• Spoiled Child: Strong double-digit Q3 growth; on track for >35% annual growth approaching $350 million in revenue. Success attributed to the company's platform, user data, and brand scaling capabilities. New products planned for 2027.
• Methodic: Launched successfully in its first year; outperforming the first-year revenue trajectory of Spoiled Child. High customer satisfaction and retention noted. Plans to expand into medical-grade categories in 2027, including prescription injectable therapies (NAD+, semaglutide) and six additional peptide therapies following recent HHS enforcement discretion.
• Il Makiage: Revenue declined due to an algorithmic dislocation with its largest advertising partner; management remains focused on fixing this issue to return to growth.
• Audity Labs: Frontier Biotech Lab developing proprietary molecules for anti-aging (collagen, L-Stain, NAD+) and other conditions; early testing results are promising.
• Brand 4: A fourth brand is planned for launch in 2027, with details to follow as timing approaches.
• Distribution: Company remains 100% D2C; no new distribution channels (e.g., Amazon) are currently planned, though opportunities are monitored.

Market and Competitive Landscape:

• Beauty and wellness markets are described as large, profitable, and sexually growing, with a secular shift toward online purchasing and high-efficacy products.
• The peptide and longevity market is identified as a highly attractive, emerging opportunity with significant demand; Methodic is positioning itself to be a key winner.
• Management views the beauty category as saturated for organic growth but believes their platform enables successful brand scaling that competitors have failed to replicate.
• Competition in the peptide space is expected to intensify in 2027, but the company believes its existing infrastructure (pharmacy, clinical intake, provider networks) provides a competitive advantage.

Risks and Challenges:

• Ad Algorithm Dislocation: Il Makiage faces ongoing volatility due to a technical issue with its primary advertising partner, causing fluctuations in CPA and ad spend efficiency.
• Inventory Management: Il Makiage holds excess inventory that impacts working capital and gross margins; resolution expected in 2027.
• Market Volatility: The nature of fixing the ad algorithm creates near-term volatility in return on ad spend (ROAS) and revenue.
• Execution Risk: Scaling into new categories (peptides, longevity) and managing multiple brands simultaneously carries operational execution risks.
• Forward-Looking Statement Risks: Risks include regulatory developments, the success of new product launches, and the ability to attract and retain customers in new categories.

Management Commentary and Tone:

• Tone is confident and optimistic regarding long-term prospects, emphasizing the "repeatable playbook" for brand building.
• CEO Aron Heltzman is personally dedicating significant time (60-70% of his day) to resolving the Il Makiage ad partner issue, signaling high urgency.
• Management expressed strong conviction that the Adity platform (data, tech, user base) is the key differentiator for success in new categories like longevity and peptides.
• CFO Lindsay Druckerman emphasized disciplined expense management while continuing to invest in growth drivers like Audity Labs and new brands.
• Management stressed that they only spend on products/categories with proven 12-month profitability and attractive unit economics.

Analyst Questions and Answers:

• Product Launch Prioritization: Management highlighted a slate of 8 new products for Spoiled Child, 5-6 for Il Makiage, and a robust roadmap for Methodic, including the introduction of peptides.
• Il Makiage Recovery: CPA is volatile during the algorithm fix; September was the best month since 2025, but October saw declines. The company is making daily changes in full collaboration with the ad partner.
• Q4 Outlook: Q4 is tracking as planned; the focus remains on fixing the algorithm rather than capitalizing on holiday seasonality for Il Makiage.
• Amazon/Distribution: Confirmed 100% D2C strategy; no immediate plans for third-party retail expansion.
• Methodic Customer Acquisition: Deliberately acquiring net-new customers for Methodic rather than relying solely on cross-selling, though cross-selling to existing Il Makiage/Spoiled Child users is an upside.
• International Strategy: Near-term focus is on fixing the US market for Il Makiage; international expansion for Spoiled Child exists but is secondary to US growth.
• Innovation & Investment: New products are tested rigorously ("fail fast") before scaling; 2027 innovation will be phased, with a mix of 1H and 2H weighted launches.

Other Key Points:

• The company has transformed from a single-brand entity into a multi-brand platform with a 70-million-user base.
• The "Audity Playbook" (leveraging data and technology) is cited as the primary reason for the successful organic growth of Spoiled Child and the launch of Methodic.
• The recent HHS enforcement discretion policy for peptides is viewed as a catalyst that simplifies the path for Methodic's expansion into prescription therapies.
• Share count reduction of 20% YTD indicates a strong commitment to capital return alongside growth investment.
• The company has built a complete infrastructure for telehealth, pharmacy fulfillment, and clinical intake to support the transition into Rx and longevity markets.