PARTS iD, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Thank you for joining us today to discuss PARTS iD's First Quarter 2021 Financial Results. On today's call are Nino Ciappina, Chief Executive Officer, and Kailas Agrawal, Chief Financial Officer. I would like to point out that certain statements made during this presentation are forward-looking statements. These forward-looking statements reflect management's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting PARTS iD's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with forward-looking statements to be made in this conference call and webcast, we refer you to our first quarter 2021 earnings release, which was furnished to the SEC today, on form 8-K, as well as the company's most recent annual report on form 10-K and its other filings with the SEC. The company does not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

[Nino Ciappina:]

Thank you. And thanks everyone for joining us for our first quarter earnings call. 2021 is off to a great start. We entered the year with a lot of momentum in our business, and sound strategies in place to continue driving strong revenue and adjusted EBITDA growth. Our first quarter results demonstrate that our strategies are working as we grew net revenue 54% year-over-year, and increased adjusted EBITDA by 83% year-over-year, even as we faced some cost and expense headwinds. Given PARTS iD is a relatively new company, I'd like to spend some time discussing our business, the technology platform and operating model before getting into the key drivers of our recent performance. Kailas will then take you through the financials. After that, we'll open the call for your questions. PARTS iD is a technology driven digital commerce company focused on creating custom infrastructure and unique user experiences within niche markets. Our technology is a data and information platform that enables and facilitates a differentiated digital commerce experience for complex products categories, as opposed to a pure e-commerce retailer. The platform integrates software engineering with catalogue management, data intelligence, mining and analytics, along with user interface development, which utilizes distinctive rules-based parts fitment software capabilities. To handle the ever-growing need for accurate products and parts data we utilize cutting edge computational and software engineering techniques, including Bayesian classification, to enhance and improve data records and product information and ultimately to contribute to the overall development of an engaging user experience. The technology platform is fungible, which we've demonstrated by launching seven new verticals in August 2018 including MOTORCYCLEiD.com, BOATiD.com and CAMPERiD.com, which all leverage the same proprietary technology platform and data architecture with a unified shopping cart, enabling customers to shop across verticals and seamlessly checkout using one cart. Through the journey of building an end-to-end digital commerce technology platform for complex product parts and accessories, we develop the product portfolio with over 17 billion SKUs, a just in time fulfillment network comprising over 1000 vendor partners, over 5500 active product brands, over 14 billion data points related to vehicle parts and proprietary machine learning algorithms for complex fitment industries such as vehicle parts and accessories. There are several key points that highlight the attractiveness of our platform, our operating model and underscore how PARTS iD is distinguished from competition.

[Kailas Agrawal:]

Thanks Nino. With Nino covering the drivers of our top line and our earnings release and containing a review of our full first quarter financials, I'm going to limit my comments to gross margins, expenses and our balance sheet. Starting with gross margins, gross margin was 20.9% in the three months ended March 31, 2021, which was slightly lower than the gross margin of 21.4% in three months ended March 31, 2020. We like many businesses are experiencing higher shipping costs due to continuation of surcharges by shipping carriers.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today is from Maria Ripps of Canaccord. Please proceed with your question.

[Maria Ripps:]

Great. Thank you for taking my questions. And congrats on a very strong revenue in the quarter. Can you maybe talk about key drivers behind this sort of revenue growth accelerating in Q1? And did you see any benefit from the latest round of stimulus checks in the quarter? And sort of related to that are you able to share any color on whether this strength is continuing into Q2?

[Nino Ciappina:]

Hi, Maria. Nice to - thank you for joining the call. Let me take your - can you unpack your questions just one at a time. The first one just being about revenue growth in the quarter, the drivers.

[Maria Ripps:]

Yeah. I just wanted to ask about the key drivers behind sort of revenue acceleration in Q1 relative to what you reported in Q4 and just wanted to see if you saw any benefit from the stimulus checks in the quarter. And the last part of the question is whether you're able to comment on what you're seeing in Q2.

[Nino Ciappina:]

Okay, so we had very strong underlying trends in our core business, exceptional growth in our newer verticals, as I mentioned, many of the new verticals grew in excess of 80%. Conversion rate was very strong, as was average order volume, so really firing across many all cylinders. And this is in addition to the momentum coming into the year. In terms of the pandemic or rather the government stimulus check, the first quarter was aided by some degree of benefit from the government's renewals for absolutely, especially in January to March when those checks released. But I just want to isolate some of the impacts from the stimulus released from all of these strategic initiatives. The great example is your net revenue increased 54% versus last year total. But as I just articulated earlier, the new verticals, many of them exceeded 80% growth. So difficult to isolate, but we definitely believe there was some at least mild impact from the government stimulus. In terms of Q2, we don't comment on the current model - on the current month, excuse me, but otherwise, I would just say we're pleased with what we saw so far. But we certainly know we have a tough quarter in front of us given the year-over-year stimulus that was released in the second quarter of last year.

[Maria Ripps:]

Got it. That's very helpful, Nino. And just a quick follow up around sort of newer verticals. And you mentioned that you see an exceptional sort of growth there. Sort of as you expand your catalogue of products with the addition original equipment parts in again, newer verticals. Does that change the type of customer that you attract to the platform and sort of do you need to adjust your market messaging to educate consumers about sort of expanding breadths of your catalogue?

[Nino Ciappina:]

Yes. So when you're referring to, I believe this kind of the difference between the DIY to do it for me consumer and either the professional consumer quality mechanic or body shops. So what we expect is as we continue to expand into new categories, such as original equipment and repair parts, we believe organically that will bring the professional consumer to our business who's looking for parts. Today, we don't have a volume-based business for the professional consumer, that's certainly something we're discussing internally, potentially, for the future to help kind of accelerate the adoption of CARiD.com by these professionals. But we believe we're going to make a lot of - we're going to penetrate that consumer segment strongly just given the expansion into those key product categories they typically shop for.

[Maria Ripps:]

Got it. That's very helpful. And maybe one last question if I could, it seems like you had a pretty healthy level of advertising spend in Q1. Can you maybe talk about your sort of marketing efforts, both in Q1 and for the balance of the year? And how are you thinking about sort of the timing and depth of TV campaigns this year compared to last year? And can you maybe talk about whether you've seen any CPM inflation on social media and if that's impacting your marketing strategy at all?

[Nino Ciappina:]

Yes, your observations are correct. For advertising, right, we de - advertising rate, we deleveraged by about 100 basis points. There's a couple of key reasons for that is whenever there's strong demand in the marketplace as we experienced in the first quarter, we're going to be aggressive to capture that demand, especially knowing that the new customer acquisition we can pull in helps kind of facilitate repeat business in the future, given our superior experience, but we're going to balance it. So we're not going to invest in advertising for the sake of growth. It is not profitable. So we're going to balance the top line opportunities of capturing that demand with continuing to monitor the bottom line in terms of profitability. We do have a number of experiments on the marketing side going on. As I mentioned in my opening remarks, we're going to continue leaning into television and other video testing this year, we have a couple tests lined up coming up soon. We're going to be increasing our investment in social media, which we kicked off last year. And I think this segues into the other part of your question just regarding are we experiencing any kind of increase? I think you said in CPM or cost per page session on the Facebook side or just in general? In general, yes, we're seeing a rising cost per page session. That's really primarily due to how competitive some of the search engine advertising auctions had been during this quarter. And then on the social media side the CPMs are increasing. I think there's really two reasons for that. The first reason is we've significantly increased our investment in social media advertising year-over-year. And then the second part of that is most likely due although we can't exactly determine that with 100% perfection is that Apple's implementation of iOS 14, which is blocking cookies on devices or enabling consumers to opt out that we believe is probably impacting some degree of CPM rates, but it's unclear how much so far.

[Maria Ripps:]

Got it. That's very helpful, Nino. Thank you very much.

[Nino Ciappina:]

Thank you.

[Operator:]

The next question is from Mike Baker of D.A. Davidson. Please proceed with your question.

[Mike Baker:]

Hey, thanks, guys. Just on the top line, is there anything can tell us about maybe different markets that have opened up earlier than others during the first quarter? Or now that all - many local economies are opening up, what kind of trends you're seeing? I guess what I'm getting at as people sort of go back to work and maybe have less time for hobbies at home, how does that impact your business?

[Nino Ciappina:]

Hi, Mike. Nice to hear for you. And thank you for the question. This is a tough question. I mean, miles driven are still down versus prior years. I was looking earlier looks like they're up slightly to April last year, but still significantly down. It doesn't necessarily impact our business too much given that we're primarily in the accessories business, which is not really dependent on miles driven. But I think at the core of your question you're getting at are the lockdown restrictions - have we observed any difference across the country based on the lockdown restrictions? Again, a difficult question, especially given that a big part of the country specifically the Midwest and South are already open and have softened mask mandates. But really looking at the data in the first quarter, we didn't observe any material differences by state due to lockdown measures. However, what I would say is in February, given the extreme temperatures and snow storms across a large part of the country and even with regard to some of the southern states like Texas, we certainly observed some changes for a very brief period in the middle of February, but related to the lockdown, difficult to say, but I would say we haven't really observed anything there.

[Mike Baker:]

Okay, thanks. And then maybe, I don't know if this can help illuminate the situation. But you talked about repeat customers, I think you said anyone who purchased between 2011 and last year and then bought again, as a repeat customer. Is there any way to know maybe new customers who joined you guys, last year during the pandemic, as people did take on more hobbies, are you seeing those customers be any more sticky or come back and repeat? And if so, can you quantify that? Thanks.

[Nino Ciappina:]

It's a leading indicator. So we did a brief analysis to understand kind of the customers who purchased in the prior year, how much of them contribute to kind of the repeat customer rate in any given quarter? I won't disclose the exact figures, but we know it's a leading indicator and certainly a predictive attribute we can use going forward.

[Mike Baker:]

Well, so great. It's very - it's great that it's a winning indicator and predictive, is it moving in the right direction, I guess is the key question.

[Nino Ciappina:]

Yes.

[Mike Baker:]

Okay. Thanks. Thanks for that. And one more if I could, just on the gross margin Kailas. So shipping impacted you as you said, I think it's impacting a lot of companies. Any quantification or maybe can you please tell us would gross margins have been up if not for the shipping costs?

[Kailas Agrawal:]

Hey, Mike. Kailas here. Absolutely disappoint, 5% total impact is because of the shipping. And this is due to the continuation of the holiday surcharge by the big shipping carriers. And they did not take - took away the surcharges, which they generally levy at the time of holidays. So we are negotiating with them. Hopefully, with the volumes we'll have maybe - may have better results, but too early to comment on that.

[Mike Baker:]

And so a couple follow ups here, so 5% surcharge, not a 500 basis point impact I presume, but and then -

[Kailas Agrawal:]

Its 0.5% impact, sorry.

[Mike Baker:]

0.5 okay, I got you and then is that something that typically you're able to pass on to customers? Or do you see pushback, or maybe cart abandonment or something like that if you try to raise your shipping prices?

[Kailas Agrawal:]

Absolutely, we do pass on majority. But here we decided not to pass on this extra surcharge. And we ate those surcharge just to keep our volumes up. So that's a decision we make from time to time. But as you know, majority of the cases, we do pass on the shipping cost to the customers. We have API's from our common carrier. We know that shipping is with us upfront. And we charge back to the customers, but in appropriate cases we do offer concessional or free shipping.

[Mike Baker:]

Okay, so one more follow-up and then I'll turn it over. Should we expect that kind of gross margin pressure to continue because shipping costs are still high, I guess what I'm asking is, is there any plan to pass it through in this - in the coming quarters or should we continue to expect pressure? Thanks.

[Kailas Agrawal:]

I would say in the immediate quarter is, but we are still negotiating with the carriers. And if our negotiations are successful, then that pressure will be off.

[Mike Baker:]

Okay, thank you.

[Operator:]

There are no additional questions at this time. I would like to turn a call back to Nino Ciappina for closing remarks.

[Nino Ciappina:]

Yeah, thank you operator. I'd like to say thank you to the entire PARTS iD team here domestically and across the globe for helping kind of drive this great first quarter performance by the company. Thank you to the analysts and investors for joining the call today. And we look forward to updating everyone on Q2 results in August. Thank you.

[Kailas Agrawal:]

Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.