News of the Week (November 15-19)

Nanox; Ozon; Tattooed Chef; Upstart; SoFi Technologies; Teladoc Health; Olo; Butterfly; GoodRx; The Trade Desk; The Boeing Company; Cannabis; My Activity

1. Nanox (NNOX) — Earnings Review

A. Business updates

This company is pre-revenue and pre-commercialization. At the company’s current quarterly burn rate, it has roughly 3.5 years of cash on hand.

On the SEC:

Nanox received a subpoena from the SEC to turn over documents relating to its Nanox.ARC machine and its costs. The company is in full cooperation and I do not expect this to be an issue going forward but this has led to an incremental $600,000 in costs for the company. Investigations into young companies with no revenue, bold claims and a stock 80% off all-time highs are somewhat common. It’s not good, but it’s a yellow flag to me and not red.

On the Korea factory:

Production in its Korea chip factory is still “highly likely” on pace for broad production in the 2nd quarter of next year. We shall see.

On multi-source resubmission:

“We’re still in the process of responding to the FDA after receiving their comments [the deficiency letter] on the first multi-source submission. We are planning a second submission in the near term that will cover the next version of the multi-source Nanox.Arc. We believe that the feedback we received from our first submission will inform any subsequent submission.” — Outgoing CEO Ran Poliakine

As a reminder, the company has been telling us to expect a re-submission of the multi-source (multiple x-ray tubes) machine by the end of this year. It expects to submit it within the 180 day window and has 7 weeks left to do so. It still plans to produce 1,000 units in 2022 and the company continues to gain “more and more traction” for new Arc deployment contracts.

After/if its multi-source application gets clearance, Nanox plans to submit more 510Ks to the FDA to clear additional Nanox.Arc use cases.

B. My take

Nanox remains my smallest and most speculative investment. If it can move from development stage to commercial distribution, the upside here will be immense. The value proposition of a $150 X-ray tube writes itself and then some. Still, there is absolutely no guarantee that it will be able to execute and operational blunders in the past do cast doubt. I paused adding two quarters ago in light of the production delay and that pause will continue — but I have 0 interest in selling any shares. This will be a binary outcome: either a historic winner or a giant loser. Time will tell.

Click here for my broad overview of Nanox’s business.

2. Ozon Holdings (OZON) — Earnings Review

A. Demand

I used an exchange are of 1 Russian Ruble = $0.014 dollars for all Revenue and GMV numbers.

Ozon was expected to generate $579.1 million in revenue. Results were roughly in line but — based on what exchange rate we use — could be reported as a beat or miss.

Ozon benefitted from renewed pandemic outbreaks in Russia during the quarter. Partially as a result of this (and due to strong execution as well), every single key demand growth metric for Ozon meaningfully accelerated vs. Q2 2021 and Q3 2020. Its NPS scores “improved” during the quarter despite spiking volumes. Advertising revenue growth of 150% YoY (more than half of Ozon’s sellers now use its advertising tools) and 165% marketplace commission growth were the two primary contributors to the success.

This was the highest active user growth rate that the company has posted over the last 7 quarters (comparing to other periods of severe pandemic pain) and the 7th consecutive quarter of total order growth over 100%.

Ozon now has 60,000 active sellers vs. just 20,000 at the beginning of 2021. Demand for Ozon’s analytics tools, advertising products and now financial tools is all supercharging this growth.

B. Profitability

Ozon lost $158 million in EBITDA during the quarter. It was expected to lose $141.5 million meaning it missed expectations by 11.6%. This is again greatly impacted by the exchange rate I selected and could have been reported as a beat.

Note that Ozon reports margin lines as a % of GMV and not revenue. I calculate its margin lines as a % of revenue which makes gross profit margin look better and the rest look worse.

Excluding a one-time charge related to the change in inventory valuation estimates, gross profit margin for the quarter was 38.1%. Gross margin is expected to further improve in 2022. Gross margin improvements this quarter were attributed to “optimizing investments to achieve greater efficiency” plus a 16.1% lower operating cost per order per CFO Igor Gerasimov and was “despite a temporary surge in cost pressure from the 150% warehouse capacity growth and last mile infrastructure added during the quarter.” The company continues to get more out of the fixed cost portion of its asset base as volumes accelerate.

Worsening margins (aside from GPM) are due to fulfillment and delivery expenses rising to 18.6% of GMV vs. 4.2% year over year as Ozon scales its courier business. Sales and marketing expenses also rose from 1.9% of GMV to 6.5% YoY with technology expenses rising from 0.8% of GMV to 3.7% YoY. Furthermore, adjusted EBITDA was negatively impacted by a one-off expenditure on an R&D project and an adjustment to its inventory valuation allowance estimate. Without these charges, adjusted EBITDA margin would have been (25.1%).

The company has roughly $1.72 billion in cash on hand.

C. Outlook

Ozon has now raised its GMV growth rate by 10% in each quarter this year — from 90% growth at the start of the year to 120% today. Its capital expenditure (CapEx) guide has not budged during that time. The company continues to find operating leverage in the business model.

D. Business updates

On a dive into the creator economy:

Ozon launched a self-employed entrepreneurs product starting in October to sell unique, handmade goods. Sounds like Etsy in Russia.

On growth & success:

1. Russian e-commerce remains just 10% of commerce in Russia compared to 21% in the United States and 27% in China.

   • Russia has internet penetration rates similar to these countries and so its own e-commerce penetration rate is expected to reach 21% by 2025.

2. Customers placing at least 1 order per week rose from 500,000 to 2 million year over year.

3. The company now offers 46 million stock keeping units (SKUs) vs. 9 million year over year and 27 million sequentially.

4. 3,000 cross-border sellers from 26 countries across Asia and Europe are using Ozon’s platform.

5. Ozon doubled its pick up locations and quadrupled its sorting capacity YoY.

6. Ozon maintained its 98% on time delivery rate in the quarter — this is stable sequentially and up vs. 95% at the time of its IPO last year.

7. The company continues to open more dark stores throughout Russia with its dark store count doubling QoQ.

8. Ozon’s growth continues to outpace all competitors in the region.

9. Ozon’s newest customers continue to have the highest order frequencies.

10. Ozon grew its top of mind brand awareness leads over competition during the quarter. That trend is shown below:

    

On newer verticals:

Ozon re-branded Oney Bank to Ozon Bank during the quarter. This segment will mostly focus on “providing infrastructure and payment solutions deeply integrated with the core e-commerce platform.”

Ozon card issuances rose to 1.6 million which is up 60% sequentially. These holders continue to order 60% more frequently than non-holders. Ozon also integrated its loyalty points offering to deepen the utility of the card — results so far have been “promising.” Ozon’s financial products now make up nearly 15% of total GMV.

5 thousand sellers now use Ozon’s “Flexible Payment Plan” — up 109% sequentially. This is a payment scheduling product to boost liquidity and lower net working capital needs for sellers.

Ozon Credit is now issuing loans to Ozon sellers. According to the company, this product relies on 40 variables and its machine learning algorithm to foster more accurate quantification of risk. It also debuted a buy now pay later feature this year.

Ozon Express — its one-hour delivery service for over 20,000 SKUs — expanded outside of Moscow and St. Petersburg following successful debuts. Ozon express has even created a private label brand for goods like coffee and food. Daily orders for Express have doubled sequentially.

Ozon debuted an ad-tech business during the quarter to better monetize all of the impressions on its platform. It also launched a streaming service to grow its social commerce business.

On international expansion:

Sales in Belarus (9.4 million population) have 10Xed since the beginning of the year. Ozon launched a sorting center and branded pick-up points there during the quarter.

The company opened sorting centers in Kazakhstan (19 million population) during the quarter. Kazakhstan is expected to enjoy 41% e-commerce growth through 2025.

E. My take

This was another remarkably positive quarter for Ozon. Gross margin continues to expand and the GMV growth outlook continues to be raised quarter after quarter. This company remains in aggressive spending mode to capture all of the low hanging fruit in Russian e-commerce. So far, so very good. A lot of companies say they’re the “Amazon” of another geography — Ozon’s success, rapid product expansion and aggressive spending actually provides some evidence of this being the case.

Click here for my broad overview of Ozon’s business.

3. Tattooed Chef (TTCF) — Earnings Review

A. Demand

Tattooed Chef was expected to post $64 million in sales for the quarter. It posted $58.8 million missing expectations by 8.1%.

The miss in revenue was attributed to timing the rollouts of distribution contracts.

The sequential decline in branded sales as a percentage of total sales was entirely due to the foods of New Mexico Purchase which is currently producing solely private label products. It will begin producing Tattooed Chef-branded products next year. The company still sees branded sales as a % of total sales reaching 80%+ in the coming quarters — branded sales are higher margin.

B. Margins

Tattooed Chef was expected to lose $5 million in adjusted EBITDA for the quarter. Its results were in line. It was also expected to lose $0.05 per share but lost $0.10 per share missing expectations by $0.05.

Q2 2021 net income margin was impacted by a one-time $6 million charge relating to a change in valuation allowance for a deferred tax asset. I adjusted for this to make the sequential comparison more applicable. Q2 2021 net income margin was actually (105.1%).

The decline in gross margin both sequentially and annually was attributed to the same supply chain and raw material/freight/container input cost inflation hitting most in the space at this point in time. I have a close contact in food manufacturing (with very overlapping supply chains) who I reached out to. I was able to confirm that this was truly the case for Tattooed Chef as well as most food processors. My contact expects the issues to continue into spring of 2022 before they’re resolved.

The decline in EBITDA and net income margins were due to the company’s well-telegraphed plans to greatly accelerate marketing and operational spend to capture more growth and awareness for the Tattooed Chef brand. This was entirely expected.

C. Guidance Updates

“We are lowering our revenue guidance for the year. As a high-growth business, it is difficult to forecast new distribution wins and the timing of rollouts. I own that.” — Sam Galletti

This was the company’s second consecutive decline in gross margin outlook. Over the last 2 quarters that has now gone from 22.5% to 13% for the reasons stated above. This must revert going forward for my thesis to be maintained.

D. Notes from Founder/CEO Sam Galletti

On the branded store footprint & sales velocity:

Tattooed Chef products can now be found in 13,000 stores vs. 4,300 stores 3 quarters ago. The company expected to be in 10,000 stores by the end of this year as of 9 months ago and has already handsomely eclipsed that target. It’s confusing to see its revenue underperformance coincide with this statistic.

The company now has 6.5 stock keeping units (SKUs) per store vs. 5.8 sequentially. The goal is to get to 30.

On snack food:

“The Karsten facility is set to open at the end of the first quarter next year, and we expect to start selling ambient products then.”

On M&A:

Galletti reiterated that he thinks the added capacity from the Foods of New Mexico acquisition (Mexican/snack food expansion) and the Belmont Confections purchase (nutritional bars and snack food expansion) will contribute $300 million in incremental revenue by 2024.

SPINS data highlights on the Tattooed Chef brand:

1. Distribution points grew by 315% year over year.

2. Measured consumption grew by 239% year over year.

3. Consumption sales rose 49% sequentially.

4. Tattooed Chef is now the 4th largest brand across all of the categories in which it competes by multi-outlet sales.

   • Tattooed Chef is now a top 10 brand across club, grocery and mass in every single category it competes in.

5. Tattooed Chef has 50% of the top 10 highest velocity SKUs in the frozen vegetable entrée category over the last 52 weeks.

   • Tattooed Chef now has the top selling new pizza SKU by velocity.

6. Tattooed Chef club sales grew by 64% YoY this quarter.

E. Notes from the Tattooed Chef, Sarah Galletti

On plans for Belmont Confections:

“While the transaction has not closed yet, we have already begun testing for the new line of bars which will be on shelves at some point next years.”

On marketing:

“Paid social marketing is outperforming industry benchmarks by 2x in terms of consumer engagement.”

F. Notes from COO/CFO Stephanie Dieckmann

None of the revisions that Tattooed Chef will make to results in prior quarters will have any material impact on the numbers.

“We expect gross margin to expand in the fourth quarter and throughout 2022 as we increase branded volume and production capacity.”

G. My Take

This was a bad quarter but not quite as bad as I was expecting after the company delayed its release by a week. The supply chain and inflation issues Tattooed Chef cited are very real and very temporary — this too shall pass.

Tattooed Chef remains on very thin ice for me. I will not be adding to my stake but I am not ready to sell any shares. It is time for the company to prove it can handle the success that its brand is delivering. Gross margin needs to inflect positively and permanently and management needs to execute with far less drama.  A veteran, rock star CFO would be a positive addition to allow Dieckmann to focus on her COO role.

4. Upstart (UPST) — Another Win & Two Interesting Blogs

a. A new partner

Upstart landed another top-60 credit union in BCU (Baxter Credit Union) during the week. BCU boasts roughly $5 billion in assets under management and over 300,000 members. The 2 companies had been working together since June, but now Upstart is officially ready to add it to its referral network and its rapidly growing list of partners (32 strong). Now any member fitting to customized credit parameters of BCU will be eligible to be plugged into a Baxter-funded loan.

“We are delighted to partner with Upstart to provide a digital, AI-powered lending experience to reach and lend to more eligible non-members across the nation.” — SVP of Lending at BCU Dave Brydun

A few months back, the National Association of Federally Insured Credit Unions (NAFCU) named Upstart as its preferred AI-lending partner. Since then, Upstart has seamlessly added large new credit unions to its partner roster. This should continue with CEO Dave Girouard expecting Upstart to have “hundreds” of partners down the road.

b. 2 Interesting blogs

American Banker reported that Upstart’s planned micro-loan, emergency cash product launch will feature APRs below 36%. It’s common for these types of loans to carry triple digit interest rates. This will be Upstart’s combative response to the predatory, payday loan industry.

Upstart released a new blog post claiming its platform can save users $912 on average when they refinance a car loan with the company.

Click here for my broad overview of Upstart’s business.

5. SoFi Technologies (SOFI) — Leadership Interviews with Citi + a Secondary

a. CEO Anthony Noto Interviews with Citi

On long term margin thinking:

“Long term contribution margins of our business will be between 30%-40% and we are already showing that with our incremental margin. Incremental margin will become our long term margin over time.”

On competition:

“There will be a trillion dollar direct to consumer financial technology company. We want that to be SoFi. I’ve seen digitization happen in so many other industries and we have the formula to make it happen here.”

“Today there is nobody that is a direct competitor. Nobody offers our breadth on a digital platform. There has been a lot of talk and no substance. I believe we compete primarily with legacy banks and their 500 million accounts. Our goal is to acquire all of those accounts.”

“We are not all the way there yet in terms of best in class products — but we are getting there and are pretty damn close.”

Noto eluded to the process of banks focusing on their highest return on equity (ROE) segments leaving a void for a more overarching solution. SoFi is tackling these lower ROE products to build loyalty and familiarity by making all products work “better together” and then using that momentum to up-sell and drive industry-leading consumer lifetime value (LTV).

On the bank charter:

“There is no defined timeline but we continue to make good progress. Our liquidity is well, well above requirements. From a standpoint of what SoFi can do, we’ve done everything and the ball is really in the regulator’s court. Leadership changes could impact timing but we remain encouraged with the progress.”

“The bank charter will allow us to provide a rate on saving and checking accounts making people think about why they’re doing banking anywhere else. It will also enable us to charge lower rates on loans and to use these loans to drive more direct deposits.”

On the product roadmap:

“We don’t do anything with tax or insurance today… should we do both of those things? Yes.”

“We’re not in margins or options today… we wanted to make sure our customers wanted it and they do. We are working on both.”

On Galileo:

“We think by owning both SoFi and Galileo, we have a customer that informs the service provider on what they need. SoFi and Galileo have now built products that Galileo clients didn’t even know they needed yet. We are running to stay ahead of the competition and to expand our lead.”

b. Secondary offering

SoFi announced a secondary offering of 50 million shares. This offering is from existing institutional holders (Silver Lake, Qatar Investment Authority, Red Crow) and will not result in any shareholder dilution for equity holders or proceeds for Sofi.

These holders owned 279.75 million shares before the offering, meaning this sale represents 17.8% of that cohort’s stake. The institutions now own 28.5% of SoFi.

Click here for my broad overview of SoFi’s business.

6. Teladoc Health (TDOC) — Investor Day Highlights

A. Notes from CEO Jason Gorevic

On growth:

Teladoc offered growth forecasts through the year 2024. These forecasts were as follows:

1. A 10-20% primary care CAGR (currently 35% of revenue).

   • This will accelerate in 2023-2024 via Primary360

2. A 30-40% mental health CAGR (currently 40% of revenue).

3. A 25-35% chronic care CAGR (currently 25% of revenue).

   • As a reminder, Teladoc leadership told us several times on the last earnings call that this chronic care CAGR forecast was very conservative.

4. A 25%-30% total revenue CAGR.

Note that these CAGRs are NOT apples to apples with previous disclosures or estimates. Teladoc moved certain faster-growing lines of business away from primary care and to mental and chronic care. This weighed on its projected primary care CAGR.

“We’ve talked at length about Primary360 and myStrength Complete. What is assumed in the growth ranges we gave you is that these products are very nascent. We expect to win here but we are being responsible in our growth trajectory and projections. You’re absolutely right, we could be at the high end of the range and absolutely beat it. ” — CFO Mala Murthy

“There is a very attractive and sizable opportunity for international growth. Deals with international health systems are very lumpy. We did not want to put out growth ranges and then miss because the timing of these contracts.”

Gorevic also spoke on estimates for chronic care service utilization being very pessimistic. This could also provide “meaningful upside” in the revenue forecasts.

Analysts were expecting a roughly 26% CAGR through 2023 meaning this 25-30% forecast through 2024 is actually quite positive to me (regardless of what some others might think). This would likely leave Teladoc with roughly $2.7 billion in 2024 gross profit — based on a current enterprise value of $19.5 billion I find this extremely compelling.

On industry and company traction:

The company’s projected $2 billion in revenue this year gives it roughly 36% market share according to McKinsey. This $5.5 billion in total category spend is vs. a $121 billion market opportunity that becomes $261 billion with Primary360 activations. This assumes that virtual health reaches 7% of total healthcare spend.

Teladoc’s business to business product features a +60 NPS and is — as previously announced — the #1 JD Power-rated company in its category. 97% of Teladoc users are confident in the company’s ability to resolve its issues.

While the pandemic pulled forward a significant amount of virtual care growth — 38X visit volume vs. pre pandemic — more than 80% of consumers think it’s equal to or better than in-person care & 60% of consumers are interested in a virtual plan.

“We have true industry leadership. There’s no question that we are operating with unmatched breadth and scale. We have the industry’s only complete whole-person virtual care suite. There are low barriers to entry and high barriers to scale.”

On Livongo progress:

“We are on track to realize the cross-sell synergies forecasted from the Livongo merger.”

At the beginning of the investor day presentation, there was a powerful member story on how Teladoc and Livongo can together positively impact lives and allow for many more remote use cases. The video starts at minute 5 of the presentation. Click here for the link.

B. Notes from President of U.S. Group Health Kelly Bliss

On case studies:

Highlights from a new, large employer survey:

1. 80% of employers think virtual care will significantly impact how care is delivered going forward.

2. 99% of employers intend to keep or grow virtual care investments.

3. 80% of Teladoc clients view it as a partner, not a vendor.

4. 20% of Teladoc clients now believe they have a “well-defined virtual care strategy.”

Highlights from a Teladoc case study within a leading national retailer:

1. +71 NPS.

2. 19% reduction in health costs.

3. 1.9X diabetes ROI.

Highlights from a Teladoc case study with a company (10,000+ employees) moving from a single condition account to multi-product:

1. Teladoc gets $95 per member per month (PMPM) vs. $70.

2. Teladoc gets $527,000 in average annual revenue vs. $130,000.

On Primary360’s opportunity:

4 core markets for Primary360:

1. Carriers like Aetna.

2. Insured ACA exchanges like Centene.

3. Benefits managers/consultants like Aon.

4. Direct to Employer.

C. Notes from SVP of Corporate Strategy Dan Trencher

General notes:

1. Teladoc’s chronic condition solutions are generating better clinical outcomes and employer cost savings ($195 in claims-based savings for diabetes and $87 for hypertension). Win-win.

2. Teladoc is looking into virtually covering new conditions like chronic kidney disease (CKD), musculoskeletal (MSK), respiratory and cancers as well as aggressively pursuing hospital systems to integrate its chronic care solutions across the globe.

On Primary360 highlights:

1. Over 50% of members use 2+ services.

2. 25% of diabetes and hypertension diagnoses are brand new.

3. Over 95% member satisfaction.

“We’re just scratching the surface on how we can use our assets to tackle new use cases. While we have leading products around primary, chronic and mental care — it’s those 3 products together that will drive our success.”

D. Notes from Chief Product Officer Donna Boyer

On the consumer experience:

Boyer took us through the Teladoc experience in the eyes of a consumer. She depicted a curated, customizable set of variables to arrive at the perfect physician with a seamless ability to plug into needed mental or chronic solutions — all under one roof. Less than 10% of primary care mental health referrals are followed up on.  Teladoc’s whole person care approach has already more than doubled that to 20%. This is the power of the hands-on, “stepped-care” approach.

Using all of the training data that Teladoc has from touching more points of the consumer’s healthcare journey allows it to give more relevant, data-driven recommendations and to understand members on a far deeper level. Teladoc curates an action plan using all of this data which again powers better adherence, outcomes and cost savings. Based specifically on 70% of mental health issues being missed in preliminary primary care appointments and 33% of people with a chronic condition also having an undiagnosed mental health condition — this is important.

E. Notes from BetterHelp Founder, Alon Matas:

On rapid momentum and success:

1. BetterHelp will generate $700 million in revenue this year for 35% of total company sales. It will conduct more visits in 2021 than in its previous 8 years combined. Teladoc bought this company for $4.5 million 6 years ago.

2. BetterHelp added more members from March-September 2021 than March-September 2020 — when the pandemic was peaking. This is not a fad.

3. Despite the rapid growth, the segment’s LTV/CAC ratio remains between 2.5X-3.0X. It is attracting 20 million visits in 2021 ORGANICALLY, without any advertising dollars.

4. 86% of members continue after session 1 — FAR higher than the average.

5. 79% of revenue is from members there for 3+ months.

6. New members contribute 90% more revenue than new members in 2017.

7. BetterHelp is THE top of mind brand for online therapy according to a Qualtrics survey. BetterHealth was mentioned “more than any other online therapy service combined.”

   • Top service by brand searches, web traffic and users per Google

8. International sessions 5Xed over the last 24 months and BetterHelp has a $100 million international revenue run-rate.

BetterHelp’s Success Visualized

On BetterHelp margins:

“BetterHelp has a consistently strong and improving margin profile that is accretive to Teladoc’s overall margin.”

This was a pleasant surprise to me.

On why a direct to consumer (DTC) branch is imperative:

1. 32% of patients with private insurance seek out-of-network solutions.

2. 48% of BetterHelp members are brand new to therapy.

F. Notes from Chief Marketing & Engagement Officer Stephany Verstraete

On marketing synergies with Livongo:

The power of Teladoc’s data science-driven recommendations and nudges vs. pre-Livongo merger:

1. 24% increase in engagement from at-risk populations.

2. 50% increase in visit requests among telehealth members.

3. 23% lower advertising costs in direct mail.

4. 44% higher activated install base YoY.

5. 78% more Livongo app sessions YoY.

6. 86% more provider referrals.

G. Notes from CFO Mala Murthy

On the long term forecasts:

Teladoc now expects 1%-1.5% EBITDA margin expansion through 2024 despite the heavy planned spending.

Teladoc expects a 25% growth contribution from PMPM growth over the period — every 100K new members raises PMPM by $0.32 between Primary360, myStrength Complete, Chronic Care and BetterHelp. It further expects 1-5% member growth contribution to revenue growth during that same timeframe to arrive at its 25-30% forecast.

Low penetration for many of the company’s new products within its 92 million covered lives gives it confidence in forecasting so far out as depicted below:

Teladoc’s up-selling trends visualized:

7. Olo (OLO) — Leadership Interviews with RBC

A. Founder/CEO Noah Glass on industry trends

Off-premise volumes continue to handsomely exceed company expectations pointing to the pandemic-induced shift being somewhat sticky.

QR Code ordering as a % of transactions is rapidly rising (still just 1.5% of transactions) which should work to support Olo’s growing on-premise focus.

The company is just over 1% penetrated on its total transaction volume opportunity yet 20% penetrated on its total enterprise location opportunity. Olo sees this gap closing over time with both penetration rates rising.

B. Glass and Benevides on launching new products

The company takes an obsessively detailed approach to arriving at new product modules to debut. It constantly consults with its brand customers while employing a product advisory council made up of industry experts to help Olo fill incremental gaps in value proposition. This is not a guess and hope approach, but an approach instead driven by key insights and trends.

“We have always felt that restaurants are the right starting point for on-demand commerce but by no means the only place we can play. Any brick and mortar retailer wanting this experience can benefit from our platform.” — Glass

C. Glass on competition

“Olo mostly competes with inaction or the idea that restaurant brands don’t need to do anything in on-demand or digital commerce and also restaurant brands attempting to build a solution in-house. A core belief at Olo is that SaaS beats home grown solutions and we have a lot of examples of brands like Chili’s, Potbelly’s and Outback trying to build solutions on their own, putting a lot of money into it and then moving to Olo.”

Operating expenses to continue maintaining and upgrading in-house solutions are the main cause behind brands migrating to Olo’s suite of modules.

“What we’ve heard time and time again from restaurants that could build their own solutions is that their digital ambitions are far greater than their budgets allow and if Olo is seen as a force multiplier of these ambitions then the restaurants are all in… it is rare in 2021 for a brand to decide they need to build digital ordering internally.”

“The platform level innovation we are able to bring to our restaurants thanks to being a provider for over 76,000 locations means we can build capabilities like Rails, and Dispatch and now Olo Pay that a restaurant cannot build on their own. Platform innovation is what gets me most excited about the opportunity ahead.”

Note: The company does not compete with Chow Now’s or Toast’s SMB niche.

D. Glass on why Wisely

“We have a massive amount of data and partners we work with to harness that data. We saw a team that was incredibly aligned with Olo’s values and best of breed in its space. We think we can take that great set of capabilities to our over 500 restaurant brands.”

“Wisely is able to see Olo orders and also non-digital, offline orders and every touchpoint a consumer has with a brand. Wisely then ‘zippers’ all of this data together for a 360 degree customer profile to identify and uncover things like who are the top 20% of a brand’s customers driving 60% of their ordering.”

E. CFO Peter Benevides on DoorDash

“DoorDash continues to be an excellent partner for Olo.”

Click here for my Olo deep dive.

8. Butterfly (BFLY) — Adios

I exited my position on Monday and I’d like to explain what I originally saw in Butterfly as well as what changed.

Butterfly’s handheld ultrasound probe is not a game-changer, but it is a significant improvement over the other portable probes on the market. It’s cheaper and also features a 3 in 1 probe with linear, curvilinear and phased array modules allowing for more diverse imaging depths and applications. Other substitutes either require 2 or 3 different probes (costing a few thousand dollars each) while Butterfly’s IQ+ only requires a press of a button on an app to switch modalities. Furthermore, Butterfly’s probe does not utilize piezoelectric crystals — the material used to power imaging in legacy alternatives — which makes Butterfly’ probe more durable and cheaper. It instead uses a semiconductor to power its imaging which means it could be more easily used in field settings where crystal-powered probes are essentially broken after being dropped once.

This incremental utility is what appealed so deeply to me — especially considering this can boost imaging availability in a world where most of us have no ultrasound access. Butterfly also planned (in its initial  SPAC presentation) to miniaturize its semiconductor to create wearable ultrasound technology which I saw as another lucrative avenue for optionality and long term growth.

So what the heck changed? Three months ago — when Covid-19 variants were still popping up across the globe — Butterfly’s CEO Todd Fruchterman confidently proclaimed that the company was maintaining its ambitious 2021 revenue guide of $78 million at the midpoint plus a 45% gross margin at the midpoint. The company seemed to be clicking and — especially considering this information was offered a month into this calendar quarter — I found that encouraging.

This quarter represented a shareholder rug pull — in my view the results were entirely unacceptable.  The company lowered its 2021 revenue outlook from $78 million to $61 million (a roughly 22% reduction). It also lowered its gross margin guidance to 29% vs. 45% due to a “loss incurred on purchase commitments” — that does not inspire confidence. This follows news that Butterfly would be raising the price of its IQ+ probe which also directly fights against a core piece of my thesis.

The company’s leadership blamed a few things on the massive disappointments:

First, Fruchterman called out the company’s past CEO as being too promotional and too optimistic with forecasting — but Fruchterman also reiterated those same forecasts just 3 months ago. Utilization trends in healthcare were also blamed for the miss — but when looking around at my other healthcare names, the impact on Butterfly was far greater.

Progyny and GoodRx both roughly maintained their revenue guides and further offered that utilization trends were quickly recovering and selling momentum felt “normal”. In contrast, Butterfly forecasted that poor utilization trends would hurt the company going into the 4th quarter and next year. According to Progyny, utilization of care already bottomed out at 88% of normal levels — yet Butterfly lowered its forward looking guide by 22% with the other 2 being able to endure. These utilization patterns are not apples to apples — but the divergence still gravely concerned me.

Lastly, Butterfly claimed that a pivot away from direct to consumer and towards focusing on enterprise contracts was hurting demand. This made no sense to me at all as the company has been telegraphing a more aggressive pursuit of this segment since it went public last year. Shareholders had been incurring net losses all year while Butterfly rapidly built its sales team to pursue larger contracts — now that rapidly built sales team will translate into a demand headwind? Very confusing and off-putting.

None of this is to say Butterfly cannot succeed going forward. The company continues to find demand for new distribution deals and does think growth will accelerate into 2022. This was just shockingly bad to me across the board — and as a result — I no longer believe Butterfly delivering for shareholders over the long term is the most likely result.

I hope Butterfly thrives for those sticking around, but I am officially out of it and will focus on investing in companies that are actually performing. I now see this as a broken organization, so the broken stock does not at all appeal to me.

9. GoodRx (GDRX) — Telehealth Survey

GoodRx released a survey of over 1,600 patients and healthcare providers in collaboration with the American Telemedicine Association. Here were the key findings:

1. 40% of consumers reported getting more face time with providers due to telehealth.

2. 70% of providers said that continuity of care was better or much better with telehealth.

3. 60% of respondents said telehealth improved medication adherence and fostered better cost and outcome communication between providers and patients.

4. 60% of consumers plan to use both virtual and in-person care vs. just 17% of patients reporting even having used telehealth at all pre-pandemic.

5. 45% of providers reported that missed appointment rates were higher for virtual visits vs. in-person. This was the one negative in the report.

Click here for my broad overview of GoodRx’s business.

10. Lemonade (LMND) — New Hire

Lemonade named USAA’s Chief Claims Officer — Sean Burgess — (CCO) as its own new CCO. Burgess has been the CCO of USAA since 2015 and was with the company climbing its ladder since 1994. This is a great, legitimacy-building hire for Lemonade.

Click here for my broad overview of Lemonade’s business.

11. JFrog (FROG) — New Partner

JFrog deepened its relationship with Salesforce and Slack with new JFrog Artifactory and X-ray integrations. JFrog built a new app for Slack’s vast user base to expedite communication of key software-related topics (with customizable notification settings) within a company’s operations. This is expected to quicken software releases further while accelerating time to resolving any uncovered breaches.

Three key benefits beyond better communication will include:

1. Quality Assurance (QA): QA teams will be able to build controls and policies with JFrog to continuously monitor relevant repositories.

2. Shift Left Security: Essentially this means breaches are resolved earlier on in a software package’s development cycle.

3. Contextualized alerts: Developers will be able to augment alerts with more context and recommended courses of action.

Click here for my broad overview of JFrog’s business.

12. The Trade Desk (TTD) — NBC News

The Trade Desk announced a deepening partnership with Comcast and NBCUniversal to add Peacock to the company’s connected TV (CTV) platform. Peacock’s extensive sports-content rights should help accelerate the shift to streaming further.

The company announced this news in its earnings call 2 weeks ago so I was a little confused as to why the press release was issued now. Still, it is worth noting.

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

13. The Boeing Company (BA) — 787 Issues

Boeing further delayed the ramp-up of 787 Dreamliner production due to issues with the door. According to leadership, this is “Boeing being tough on Boeing.”

14. Cannabis news

A. position-specific news

1. Cresco Labs opened its Wrigleyville dispensary in Chicago (just a few hundred feet from the ballpark) during the week.

2. Ayr Wellness opened a new Pennsylvania dispensary in Montgomeryville.

B. Industry news

Republicans issued a new bill — called the States Reform Act — to federally legalize and regulate cannabis. The bill features a 3% federal tax and would grandfather in current state operators to ensure a smoother transition to federal regulation. This is seen as an olive branch to left-winged lawmakers as it incorporates some criminal justice reform which would release 2,600 non-violent incarcerated individuals and earmark tax dollars for social good.

Some other features include regulating cannabis similarly to alcohol with different regulatory bodies assigned to growers (the USDA) and selling products. This would immediately remove cannabis from its current schedule 1 classification and therefore would allow multi-state operators (MSOs) to enjoy lowered tax rates due to 280E exemption and lower cost of capital due to lower perceived regulatory risk. I don’t think this will pass, but we are undeniably moving in the right direction.

Click here for my broad overview of American cannabis regulation.

15. My Activity

As previously stated, I exited Butterfly during the week. This was a very small position for me so only brought my cash position from 15.7% to 16.6%. I took advantage of the added liquidity and the market’s turbulence during the week to add to some of my healthy companies — this brought the cash position back down to just under 15.9% (15.87%).

I added to the following names during the week:

1. Upstart

2. CuriosityStream (click here for my broad overview of CuriosityStream’s business)

3. Duolingo (click here for my Duolingo deep dive)

4. Ozon

5. Lemonade

6. JFrog

7. GoodRx

8. Olo

9. Teladoc Health