PARTS iD, Inc.'s (ID) CEO Antonino Ciappina on Q3 2021 Results - Earnings Call Transcript

Nov. 13, 2021 2:29 AM ETPARTS iD, Inc. (ID)1 Comment
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PARTS iD, Inc. (NYSE:ID) Q3 2021 Earnings Conference Call November 9, 2021 4:30 PM ET

Company Participants

Antonino Ciappina - Chief Executive Officer

Kailas Agrawal - Chief Financial Officer

Ajay Roy - Chief Operating Officer

Conference Call Participants

Jeff Walker - D.A. Davidson

Adam Wilk - Greystone Capital Management

Operator

Thank you for joining us today to discuss PARTS iD's Third 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 the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our third 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.

In addition, the company plans to refer to certain adjusted non-GAAP metrics on this call. Explanation of those metrics and reconciliations of GAAP metrics to those non-GAAP metrics can be found in the earnings release issued earlier today, which is also posted on the press releases page of our website at www.partsidinc.com.

With that, I'll turn the call over to Nino Ciappina, Chief Executive Officer of PARTS iD. Nino?

Antonino Ciappina

Thank you, operator and good afternoon everyone. Following a strong first half of 2021 year-over-year sales trends moderated as we progressed through the third quarter. Despite the challenges in Q3, which is traditionally one of our weaker quarters, revenue grew in excess of 11% year-over-year for the nine-month period, in line with our strategic plans and we remain focused on driving long-term profitable growth.

Like many digital businesses we have seen a pullback in site traffic from the record levels achieved during the third quarter last year. On top of this difficult year-over-year comparison our sales and margins are also being impacted by the global supply chain disruption which has led to inventory shortages, increased order cancellations, higher product and shipping costs, and longer delivery times.

While our third quarter performance fell short of expectations, we believe the current economic environment is temporary and we remain optimistic in our long-term vision and strategic plan. As the environment normalizes we believe PARTS iD will be well positioned to grow revenue for several reasons.

First, our distinctive technology provides accurate fitment data which enables a successful experience for the auto parts consumer. This has been demonstrated in our continued high average order value levels that have been maintained over the last several quarters.

Second, our product catalogue of more than 17.5 million SKUs and over 5000 active brands is unrivaled. Third, our proprietary and capital efficient fulfillment model allows us to expand without the need for additional capital. This has enabled us to expand and deepen our supply chain network on certain product departments like Repair, Original Equipment, Motorcycle and Powersports, Boating and Marine and RV and Campers.

Fourth, our superior customer experience is a result of rich content, wide product range with ease of selection, proprietary fitment data and highly trained customer service, providing a data-driven engagement platform for discovery and inspiration. This has resulted in us increasing our net promoter score to 70 even in this various headwinds.

And fifth, we are making progress to advance the Motorcycle and Powersports, Boating and Marine, and the RV and Camper verticals by improving fitment data, onboarding new vendors, and expanding the product portfolio to create a superior digital customer experience. I’m happy to say that we now have leaders in place for these specific verticals too.

We have invested heavily over 10 years building our platform and as you already know, we believe our data platform is the best in the business as it’s not easy to replicate. In fact our investment in technology and data is arguably the deepest competitive moat around our business and it has allowed us to expand into new verticals leveraging a capital efficient and strong ROI inventory model to offer the consumer an extensive selection and experience.

Unlike conventional stock and ship businesses, our capital efficient just-in-time inventory model substantially shields us from costs associated with mass inventory transportation and better positions us to deliver long-term profitable growth. This model also allows us to continue to generate cash flow with a high ROI and enables us to grow without any additional capital infusion.

We have several initiatives underway to drive growth and margin expansion, which I’ll detail shortly, but now I’ll turn the call over to Kailas to review our third quarter results.

Kailas Agrawal

Thanks Nino. For the third quarter revenue decreased by 16.7% year-over-year due to 28.9% lower traffic and 10% increase in order cancellations. We took steps such as applying price index and making site experience improvements, which led to increases in the conversion rate by 9% and average order value by 11%. The operating adjustments resulted in more [indiscernible] in the business when compared to third quarter of 2019 revenue was up 45.4%.

Another positive from the quarter was 31% increase in repeat customers over the third quarter of 2020. The number of repeat customers defined as customers who made a prior purchase between 2011 to 2020 represented 24% of total customers in the third quarter of 2021. As the third quarter progressed the global supply chain disruptions were seen resulting in product shortages, increased cancellations, and higher shipping costs.

Our real time multisource inventory model helped us source finished products from secondary and tertiary sources. This allowed us substantially meet customer demand though it also typically carried less favorable product pricing. In this typical supplier chain environment our proprietary fulfillment algorithm has been able to identify the closest source to the customer and help mitigate a portion of the higher shipping cost.

Gross margins were 19.8% in third quarter compared to 22.3% in third quarter of last year and 20% in the second quarter of 2021. The decrease from quarter 3 2020 reflects the higher shipping surcharges we have discussed throughout this year combined with retail pressure from the backup inventory at some of our large vendor partners. We currently have several margin for growth initiatives on the way including evaluating sales prices, vendor negotiations and in some cases exploring new product sources.

Total operating expenses increased approximately $3 million or 14% from third quarter of 2020 with the increase primarily as we were able to costs associated with being a public company and share based compensation expenses. Despite the third quarter operating environment more challenging than expected, we managed the business to almost breakeven on an adjusted EBITDA basis.

Turning to our balance sheet, as of September 30, 2021 we grew our cash positions to $23.5 million compared to $22.2 million as of December 31, 2020. With our capital efficient business model our cash balance puts us in a strong position to continue investing in our growth initiatives designed to achieve our long term profit objectives.

I will now I will now turn the call back over to Nino for review of strategic initiative and closing remarks. Nino?

Antonino Ciappina

Thank you, Kailas. As we’ve shared on previous calls, we are working on several strategic initiatives to drive topline growth and margin expansion. Today, I’m going to focus on the initiatives designed to positively impact our performance in the near and long-term. Starting first with category expansions and developing the new verticals, within the core -- within our core automotive product lines we are working on developing additional vendor relationships, especially for our Repair and Original Equipment parts business, which has seen strong growth this year.

Year-over-year the value of orders from our Repair categories increased 13%. We are excited at the growth opportunity in the $400 billion plus auto parts aftermarket and continue to work on improving the customer experience by expanding and enriching the product catalogue, making it easier and faster for customers to find what they are looking for, offering them competitive prices and superior customer service.

We are also pursuing similar strategies in the Motorcycle and Powersports, Boating and Marine, and RV and Camper verticals which together represent nearly $20 billion of market opportunity annually.

Second, in marketing we are advancing our use of artificial intelligence, personalization and automation to improve customer acquisition and retention. Also data-driven targeting strategies are driving increasingly qualified traffic to our site, which can lead to more efficient long-term customer acquisition at lower cost. In addition, we procured new marketing automation software with customer data platform capabilities. This new software is being implemented now to further leverage our rich customer data through personalized activations across our customer relationship management channels, our website and other digital media.

We believe these initiatives will strengthen our customer relationships and lead to higher customer retention in the long-term. In fact, in the third quarter revenue from repeat customers increased nearly 5% to 34.4% of total revenue compared to the third quarter of 2020. These improvements are an integral part of our ongoing initiatives to increase our brand presence through investing in new upper funnel digital advertising.

Third, we are also further utilizing data in on-site experience enhancements to improve cross-sell, upsell, product discovery and conversion. As discussed earlier, in the third quarter we improved the conversion rate by 9% and the average order value by 11% year-over-year and we believe there is significant opportunity here.

Fourth, offering an end-to-end experience by developing uniformity services through channel partners. Our tire installation initiative is the first step towards this goal.

Moving to gross margin, there are two primary factors adding pressure to gross margin. Cost inflation due to a shortage of materials as well as a shortage of available products with many of our primary vendors which has led to alternate sourcing at higher cost, and an increase in shipping costs which we chose not to pass the entire incremental cost to the customer.

To address this gross margin pressure we are one, based on the increased sales volume we are renegotiating product pricing, discounts, promotions and rebates with our vendors. Two, we recently completed the integration of a new LTL shipping partner across the U.S. As we onboard specific suppliers to this partner we will be able to reduce shipping costs on large items such as bumpers and grills. As part of this pilot we are already onboarded three large vendors in the Repair and Accessories categories.

Three, we applied changes to our proprietary geo-sourcing procurement algorithm to further optimize shipping points and routes and thereby reduce shipping cost for us and our customers. Four, we applied changes in resale prices to increase market, yet with the intent to remain competitive. We remain confident in our strategic plan to create the premier one-stop-shop for parts and accessories and continuing to do that profitably.

Before I open our call to questions, I’d like to thank the entire PARTS iD team, both domestically and internationally for their dedication, hard work and commitment to serving our customers. Joining us for Q&A is our Chief Operating Officer Ajay Roy.

Operator, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Maria Ripps with Canaccord Genuity. Please go ahead.

Unidentified Analyst

Hi, this is Matt on for Maria. Thanks for taking the question and thanks Nino and Kailas for all the color, it was really helpful. I just wanted to ask about, one of your competitors noted an increase in under car part categories this quarter as compared to appearance [ph] and accessory categories. I was wondering if you’ve experienced a similar mix shift or if you’ve been noticing an uptick in more performance oriented parts consumption as people gradually return to work and miles driven has increased? Yes, and then I have one followup.

Antonino Ciappina

Hey, Matt, Nino here. Thank you, for the question. Yes, we saw an uptick in more performance-oriented parts consumption as travel restrictions eased and more people returned to work and are traveling. We experienced strong demand in our Repair categories, which includes original equipment parts. During the quarter, the value of orders in Repair categories, again including original equipment, increased 13% year-over-year. In terms of category mix, the contribution from Repair categories increased to approximately 19%. Accessories contributed approximately 70% in the third quarter, and the new verticals combined contributed approximately 10%.

We're very excited about the progress we made in Repair. For example, we recently finished onboarding 39 of the major original equipment brands, including Dodge, Jeep, Hyundai and Lexus. We now have over 2 million original equipment parts on the platform and we already secured exclusive fitment data direct from manufacturers. By having the data, we're going to be able to better meet the customer needs. And we've also obtained competitive pricing through our direct relationships with the original equipment manufacturers. We believe there's a substantial opportunity to further grow these categories.

Unidentified Analyst

Thanks, that's very helpful, and kind of segues nicely into my follow up, which was sort of within the original equipment parts and then, maybe in the expansion verticals again, could you talk about, like I guess, specifically within original equipment, what inning you’re in terms of product cultivation, do you feel you're sort of closer to the finish line there? And then could you maybe just sort of talk about a little bit more broadly, what the two executive hires that are going to be in charge of the Boating and Marine and RV and Camper verticals? What are some of the strategic initiatives they plan to implement first to sort of get the ball rolling there? Thanks.

Antonino Ciappina

Great question Matt. Let me address the first part of that, and then I'll hand it over to Ajay to cover some additional context on what our two new key hires are working on in that area. We're in the early innings of revenue contribution from original equipment and repair overall, a very small contribution in terms of percentage today. We experienced strong demand in our Repair categories, as I mentioned earlier, and we feel very confident in our strategic plan to continue growing these significant categories and have them become larger parts of the business. Ajay, do you want to cover some of the strategic initiatives?

Ajay Roy

Yes, so on the new verticals, I think we remain bullish on long-term prospects of these new verticals. As Nino pointed out, the total addressable market for the new verticals is nearly $20 billion. The two executives that we hired, Michael and Teddy, bring a significant background expertise and also relationships in the industry. Michael, he comes from an extensive supply management and purchasing experience and spent eight years at Brunswick and prior to that, 15 years at Panasonic. And Teddy, on the other hand worked with Sears, Advance Auto Parts and then Camping World, where he was focusing on improving the product assortment and growing the vendor base.

So, I think overall from a strategic perspective, there are specific initiatives that we have focused on; on the new verticals. The first feat is around improving the fitment data and improving our overall gross margin profile on the new verticals. One of the things that we want to also; we want to bring the new verticals at the same level as we are at on CARiD. So we want to have a really comprehensive catalogue. In the current state of the overall product offering, I would say, we are at 65% in terms of products that are available in the marketplace versus the ones that are offered in our platform, and in the next one to two years, we’ll be would be focused on taking it all the way up to 95%.

The other piece that also enriches our overall product catalogue piece is going to be focusing on strategic relationships with direct manufacturers. And recently, we actually built some relationships on trolling motors and propellers, so we are very excited about that, but we want to continue to actually build the direct manufacturer relationship, which will, of course, help us overall from product availability, but also overall from our margin profile perspective.

Management strategy is definitely to develop these three verticals into large standalone businesses. We will be leveraging all the synergies that we have from CARiD. So, we want to actually use the fungible technology platform that we have built on CARiD, and we will extend that to the secondary verticals and we really see these as great growth opportunities for us in the coming years.

Unidentified Analyst

Thank you guys, very helpful.

Operator

[Operator instructions] Next question is from Michael Baker with D.A. Davidson. Please go ahead.

Jeff Walker

Good afternoon. This is Jeff Walker on for Michael Baker. I was just hoping to get a little more information around the price optimization tests and if there’s been kind of any update we could get since last quarter? And then also how should we think about the price optimization test impact on gross margins over the coming quarters? Thank you.

Ajay Roy

Sure, so yes, great question. I think so, we have made good progress, on the overall price optimization initiative and few of the areas where we were really focused on was looking at our overall price policies across various categories. We made a lot of progress on major repair brands. From a positive impact perspective, one thing I would like to share is, we’ve been able to improve our overall margins by 400 basis points on the OE business. So we would definitely have made a lot of progress on just improving our overall margin profile in this whole year from to -- our pricing optimization initiative.

I think other emerging categories we are finding further opportunities to improve our pricing strategies. So we remain positive and very excited about having the whole pricing optimization initiative having a very positive impact on our overall gross margin profile. One of the things that I also want to point out is, this is also something -- it's not something that we really just started working on. Working on dynamic pricing is something that we do day-in and day-out. And from a pricing perspective we look at two key buckets, the product pricing and the shipping cost that we pass on to the customer. And we are constantly looking for opportunities to optimize those costs, and yet remain competitive and offer the right product at the lowest cost to our customer.

Jeff Walker

Perfect. Thank you very much.

Operator

And our last question comes from Adam Wilk from Greystone Capital Management. Please go ahead.

Adam Wilk

Hey guys, how's it going? Thanks for taking my questions. I'm wondering if you can repeat quickly that statistic in the prepared remarks regarding repeat customers or repeat customer rate? I apologize, I'm not sure I caught that, and I may have a question centred around that.

Antonino Ciappina

Hey Adam, Nino here. Yes, repeat customers increased 31% over the third quarter of 2020.

Adam Wilk

Okay, great thanks. So, yes, so I guess, first are you able to quantify the impact that cancellations is having or had on revenues for the quarter?

Antonino Ciappina

I didn’t get the first part of that Adam, can you repeat?

Adam Wilk

Sure, yes I was just, did you get that Kailas?

Kailas Agrawal

Yes, I got that Adam. The cancellation increased and that’s for the quarter three, is $1.6 million, and for the entire nine months, it’s around $11 million.

Adam Wilk

Okay, got you, thank you. And second, you addressed a lot of this actually which was really helpful. I appreciate. So, you've got this weird, but somewhat positive, I guess mix of declining site sessions, but continued rises in conversion and average order value, which is also kind of a trend continuing from Q2. And as we talk about, I think, it clearly speaks to your ability to sort of match customers up with the exact part or accessory they need. Meaning, once you get some to your site, it seems like you have a pretty good chance of converting them, but there's obviously this other piece missing with just traffic overall. So I'm just trying to figure out, can you maybe talk a little bit more or do you have anything else to add, I guess about your plans to sort of increase brand awareness moving forward, so we can sort of get that site session metric back on track and continue with this growth algorithm?

Antonino Ciappina

Adam, Nino here. Great question. Let me address the traffic first. So, during the third quarter, as we said, we saw a decline in traffic. This was primarily due to an increase in the average cost per click and our search advertising programs. As Kailas, just mentioned, we also experienced an increase in order cancellations due to supply chain disruptions. We offset partially -- we partially offset these increases in conversion rate and average order value. So that's kind of where our focus had been. We've been focusing on finding site experience improvements, which we’ve been working on implementing and the marketing, the increasing conversion rates reflects that.

Everything we invest in marketing we always want to deliver a quantifiable impact and improve our overall LTV to CAC. In the current year among other marketing initiatives, we launched a series of social media campaigns for all the new verticals. We invested in new marketing automation software. Most recently, we migrated email subscribers from our legacy system. We created new email templates and we are now warming up the IP address of the new software tools, so we can begin sending in the new year.

So we've got a lot of initiatives to kind of continue getting out of, improving conversion rate, expanding average order value and driving qualified traffic to the site and that's the part I really want to underscore. A lot of the traffic we shed was poor converting traffic due to the migration we made to automated bidding last year and into the first part of this year. So, we remain focused on driving qualified traffic to the site and getting that traffic converted as possible.

Q – Adam Wilk

Okay, great. Yes, and my last question just had to deal with digital advertising and inflation and cost per click inflation, so you covered that, so that's it from me. Thanks again. I appreciate it and take care. Thanks.

Kailas Agrawal

Thank you.

Operator

And I'll now turn it back to the presenters for closing remarks.

Antonino Ciappina

Thank you for everyone for dialling in today. We look forward to updating everyone on our progress in the new year. Thank you so much.

Operator

That does conclude our call for today and we thank everyone for participating and you may now disconnect.

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