Quarter 1
Q1 2026 Earnings Call — June 2, 2026
Analyst: Brian Tanklett (Jefferies): Hey, good morning. Lindsay, maybe just on the earnings trajectory, you said positive EBITDA for the year and 8 to 10 million positive EBITDA in Q2. If you don't mind just talking about the cadence of unit margins that you expect throughout the year, and do you still plan to have most of the acquired customer reps to come in the first half, or is there a shift happening to the back half?
Executive: Management: So, unfortunately, based on the technical issue we had, first orders were down, as I mentioned in my script, around 50%. And it will be very, very difficult for us to make this up in the back half just based on seasonality. That being said, the leading indicator we look for is the improvement in CPA, which should allow us to drive some improvement, at least in the sequential trend of declines across the year. And once we get first orders going, that's when we can start to drive the repeat, and that's where the profitability flows through. We didn't give EBITDA guidance by quarter for the back half by design. We just don't have enough visibility right now. But we do have confidence that we will be profitable for the full year based on everything that we see today, the exact specifics of it, we just don't have enough visibility to yet.
Analyst: Brian Tanklett (Jefferies): Totally understand. And in follow-up, can you go back just to the comments about maintaining a reduced level of acquisition spend? So we're thinking, how much have you reduced your run rate by compared to last year? And then was this evenly spread across Q1, or was there something you did in May which helped bring CPAs down?
Executive: Management: Yeah, so we are still spending. And so media spend for the quarter was down a little bit relative to the prior year. It's just that our efficiency on that media is a lot worse. We talked about, you know, you can see in the table that we provided the 80-plus percent increase year over year in the first half. And that, you know, rate of increase did get worse Jan, Feb, March to April. And May was our first month of sequential improvements. So we are still spending. And the reason that we're still spending is to fix the problem. Without spending, we will not be able to identify the problem, and we will not be able to test all the things that we have done in the past quarter. And without that, we will not see any recovery. So we need to continue to spend, but we obviously cannot increase spend because of the efficiency of that spend. But we are hopeful after what we saw in May.
Analyst: Lyne Yusef Squally (TruSecurity): Excellent. Thanks so much, guys. Maybe a quick question for Oran and one for Lindsay. So Oran, can you delve a little deeper into the drivers of decline in the CPA for LMA-PI? I think you talked about the 28% sequential between April and May. And just like practically what has been working and how much of that is like sustainable and can actually compound on itself over time. And Lindsay, just as I look at, you know, that improvement in CPA and I look at the guide you're providing for Q2, there seems to be a bit of a disconnect because look at the overall revenue growth. You're still talking about negative 25 to 30. You put up 26%. negative in Q1. Maybe just talk to us about the assumptions that are baked into that revenue decline, maybe from a CPA trend and anything else you want to share on that guy. Thank you.
Executive: Management: So needless to say that we do many, many tests in order to fix it. On the other side, it's an algorithm and those things most of the time very hard to move the needle and exit those type of spirals. By the way, we navigated, as I mentioned, many algorithm changes in the past, and we always were able to solve it. The fixes that we are doing are primarily structural and technical, auditing signals, adjusting our infrastructure, shifting audience strategies, and of course campaign setup, but that's only on our end, of course. In parallel, our ad partner is doing analysis on their end, and we work with them closely for the past few months. We have also made some budget allocation, reducing the overall spend for ill maquillage, giving the elevated spend, but continue to spend just to make sure that we can continue to have tests running. And again, for many months, we saw only negative trend. Almost every month was worse than the previous months, other than May. May, we had lower spend, but still, we had also very low spend in other months, and the trend was opposite. That's for that question. Lindsay?
Executive: Management: Sure. Hey, Yusuf, so our guidance for the second quarter is for revenue to be down between 25% and 30%. The challenge for us, in part, is that, A, acquisition is still very difficult. We talked about the sequential improvement in May versus April, but remember that Feb was worse than Jan, March was worse than Feb, and April was worse than March. So on balance, the overall CPA in May versus Q1 is not materially different yet, but the encouraging thing for us is the positive inflection that we saw in May overall. We did lose a lot of first orders in the first quarter that would have translated into repeat orders in the second quarter. And so that's a continued overhang for us. So again, like where we hope to see more sequential improvement is in the second half of the year. And like I said, and what we said in our outlook, we do expect for full year adjusted EBITDA to be profitable.
Analyst: Andrew Boone (Citizens): Thanks so much for taking the question. You guys have historically run your marketing in-house. Can you guys talk about the changes that have either taken place within that organization or maybe the thought about using third parties? Basically, what's changed in terms of the marketing strategy given this speed bump?
Executive: Management: Historically, we've done everything in-house very successfully for many, many years. For the first time, we shared with the market how stable our results are, despite the fact that we were growing massively. But that's just for acquisition. Of course, a repeat and other metrics and compounding repeat continue to grow. That's why, despite the small change every year, we were able to continue to present such strong results. What we have now is something that we never saw before. We are evaluating it with the ad partner and we also brought in another team recently to take a look. But again, we don't believe that the problem sits on our end, but we continue to do everything in our power to exit this spiral as soon as possible.
Executive: Management: I would just add on to that, Andrew, that it's been very encouraging as we've worked very closely with this advertising partner to hear their view that all other things equal, and as we said in our prepared remarks, not related to other things like market dynamics, just in their systems alone, they estimate that we can recover 40% to 60% of CPA. And if we get to those levels, we'll be back in a position to resume healthy, profitable growth.
Analyst: Ryan McDonald (Needham & Company): Thanks for taking my question. Maybe one for Oren and one for Lindsay. Oren, I'm curious to think about, as you're thinking about product development and understand, obviously, I think that probably the algo change is taking most of your time, but as you think about product development throughout the remainder of this year, We're obviously getting some updates or should get some updates in July from the FDA around peptides and potentially some moving from certain peptides from Category 2 to Category 1 with applications in skincare like, you know, GHK, CU, copper peptides, BPC-157. Just curious what sort of opportunity and maybe what research or investments you're doing in this area and what sort of opportunity this could open up for your brands over time. And Lindsey, for you, just on the guidance, if we think about the adjusted EBITDA guidance of eight to 10 million, are you assuming, is that based on assumptions that the improvements in CPA you saw may continue, or do they revert back to April levels, first quarter levels? Thanks.
Executive: Management: Yeah, on your first question, you used to say that the majority, the vast majority of our time is handling the problem that we currently have with media. For both me and Shiran, that's what we do 24-7. I will say that despite what we have in media, we continue to heavily invest in product across Ilmakia, Spoiled Child, Methodic, but more importantly, OIT Labs. We continue to see massive opportunity there. And once we have what to inform regarding the peptides and the new changes, we'll update the market. Thanks.
Executive: Management: And as it relates to our assumptions, we, our assumptions assume that CPA remains similarly difficult.
Analyst: Dara (Morgan Stanley): Hey, good morning. So, first, just a clarification. You highlighted CPA moved back down sequentially versus recently. You remain hopeful you're on track for normalization in the second half of the year. Is that normalization more around CPA itself or is there some hope perhaps you could get back to revenue growth at some point by the end of the calendar year? And just any thoughts on how much of this 2026 revenue pressure might extend longer term as you look out to 2027? I understand 2026 is still a moving target this year. But just looking for your conceptual thoughts on what this means to the business longer term, the issues around CPA here in 2026. Thanks.
Executive: Management: I'll start just once we fix this problem. Of course, the most important part of our end is to fix it, but then to go back to growth. So my plan, as soon as we fix it, is to go full power and back to growth. As for the implication of 26, obviously we lost a big chunk of new users that we were not able to acquire in 26, which will impact 27. But again, all depends when we fix it. If we are able to fix it, as soon as we are able to fix it, we'll go back to growth to compensate some of these new users' loss.
Executive: Management: Yeah, the leading indicator for us is the CPA. We have this overhang on revenue that will continue across the year, but the sequencing is better CPA allows us to drive first orders. We do see that our repeat rates remain very strong, and so when you pull those pieces together, once the CPA is at an improved level, we can drive first orders, which will drive repeat and healthy profitability, and that's kind of the sequencing of how you'll see the business improve.
Analyst: Scott Schoenhaus (KeyBank Capital Markets): Thanks for taking my question. I wanted to focus on Methodique. You said it was performing in line and expectations. Do you see any ability to drive that revenue growth algorithm faster or by investing more in the business? Are you pulling resources away from the other two brands, especially Il Makiage, in order to divert more attention to Methodique? And then on the hiring front, you know, the biotech environment has strengthened here over the last 12 months. Are you seeing any issues with retention or hiring in that department? Thanks.
Executive: Management: Thanks. First of all, we don't see an issue with hiring in Boston Energy Labs. Second question, as we believe the problem within maquillage is technical and we believe we'll be able to solve it. We continue to invest in maquillage and we are not shifting or allocating resources from that brand to other brands. Lastly, for Methodic, very excited and bullish about what it can be. Seeing strong initial demand and still early days, but we believe that it will be a great brand. We spent many years on building it. As for your question to accelerate it, it's a new brand. Many things that you want to test, you don't want to accelerate it before you optimize the exact funnels and products. And therefore, it's already extremely substantial for a new brand. And we think that's the right pace.
Analyst: Lauren Lieberman (Barclays): Great. Thanks. Good morning. Two questions. First was just around, you know, you've emphasized a couple times, you know, this is an issue with one particular advertising partner. I was just curious about, you know, efforts or thoughts around diversifying your partners, right? There's more than one platform out there. So, wanted to just get some understanding of how you're thinking about the range of opportunities on other platforms and other ad partners. And then secondly was just to clarify whether or not Spoiled Child is sort of undisturbed. We've been very focused on El Maquillage, and it may just be my memory, but I wasn't sure if Spoiled was seeing the same issues or not. And if it's not, why not? And is there anything you can do or are doing to future-proof it to avoid the same kind of signal breakage that's happened with El Maquillage? Thanks.
Executive: Management: Sure. As to other platforms, of course, we advertise also on other platforms, but based on the data that we have just in 2025, our largest ad partner was by far the largest ad partner in beauty in the U.S., way more than 50% of the market. So there is a limit of how much we can revenue or acquisition we can drive in the other platform. This platform is by far the biggest one and more the majority of the spend in beauty in the US for new user acquisition.
Executive: Management: Second question about spoiled child. Spoiled child we see also increasing CPA less severe than ill maquillage. The main difference is spoiled child continue to grow and despite the fact it continue to grow the CPA is way less severe than what we see in ill maquillage so it's a good indication. But we are still like once we identify the right solution for ill maquillage we'll implement the same in spoiled child we believe that we'll have a tailwind for that brand also.
Analyst: Mark Mahaney (Evercore ISI): Okay, thank you. I'm going to get back to the question somebody asked earlier about Methodic. It looks like this product is ramping reasonably well in line with what Spoiled Child did earlier on. That sounds promising. Talk about the customers that you've gotten for the product so far. Are these customers that are brand new to Oddity as a whole? Are they customers that have come from other areas? Can you give us some sense about the sustainability of growth of those customers and how much they expand your market or is it largely just a resale to existing customers? Anything on that and the type of customers coming in for Methodic would be helpful. Thank you.
Executive: Management: Yeah, I'll start and maybe continue. With any new brand that we launch, we try to see the strength and the potential by itself, meaning it starts by its own with less marketing to our existing user base. Otherwise, we would never see or understand the potential of that brand. So to do your question, it's an addition to our customer base in Il Makiage. Of course, when those brands operate by themselves, some of the customer base is going after the same audiences just because Il Makiage and Spoiled customer base is huge. But it's a completely separate brand with its own efforts to acquire new users just to understand the scale and the potential and to optimize the funnels in the hard way and not with quick wins just due to our major customer base. Thank you.
Analyst: Corey Carpenter (JP Morgan): Oh, good morning. I had two questions. Building on an earlier question, could you talk about the CPA trends that you are seeing at your other advertisers? That's the first question. The second question, last time we talked, I think you were hopeful that you could maintain the Try Before You Buy program. I think on this call, you said about 40% have shifted away from that. Maybe just could you give us your latest thoughts on the role that you think Try Before You Buy can play based on your learnings with the technical changes thus far? Thank you.
Executive: Management: Yeah, Try Before You Buy remains part of our model. We have no plan to eliminate it as we strongly believe it's great for consumer and it's the closest way of bringing physical store experience to the online world. Toward the end of Q1, we successfully shifted 40% of our acquisition revenue from Try Before You Buy to standard buy. This process was expensive in terms of margin as it required many, many tests until we successfully landed on a solution with no impact on unit economics, which is very encouraging, at least in my view. There is no – by today, based on the last numbers that I saw, we came to be a tiny number, a tiny percentage out of our total revenue or total orders, but we intend to continue to use this program as we really believe it's great for consumers, but more balanced with standard buy. The question was on CPA and other platforms. Listen, other platforms, obviously the CPA of other platforms is taking their overall CPA of ill maquillage materially down, but since this is our largest platform, we work really hard to solve it so we can go back to growth and go back to full power spend also with the largest platform in the U.S. Thank you.
Analyst: Anna Lizu (Bank of America): Hi, good morning. Thank you so much for the question. I wanted to follow up on Lauren's question here. Now that we've heard from several beauty companies and watch the trends over the past few months. I guess we haven't really heard of the algorithm adjustment as much impacting other beauty companies. They are less exposed to the channels, but, you know, they say maybe see 20% of sales on e-commerce channels. So I was wondering if, you know, this will make you reconsider in a broader way your marketing and user acquisition, just given the impact to what seems to be to your brand specifically. And then how do you ensure this doesn't happen with any other platforms in the future? Thank you.
Executive: Management: I can't refer to other brands, but I don't know anyone that is on our scale, and most of them are omnichannel and are less sensitive to algorithm changes. By the way, as I mentioned, we had many of them in the past year, the most notable one is iOS 14, and I think that also then it was harder for us than others just due to the fact that we are 100% D2C. If we think about diversifying our channels, yes, we think about it, and when we have what to tell the market, we will. Thank you.
Executive: Management: Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Holtzman for final comments.
Executive: Management: Thank you very much, guys, for joining. We'll see you next quarter. Thank you. This concludes today's conference call. You may disconnect your lines
at this time.
Thank you for your participation.
Quarter 2
Q4 2025 Earnings Call — February 25, 2026
Management: Category, where we are well-positioned to outrun our competition. We finished the year with strong balance sheet position with $776 million in cash and cash equivalents. Even as we worked tirelessly to address what we believe is a near-term dislocation in our user acquisition cost, there is no change to our long-term vision strategy or our commitment to growth. First, the consumer immigration online where our brands maintain leading positions. One of the best indicators of our business health is our very strong repeat sales. In 2025, approximately 70% of Audity's revenue came from repeat sales. Customer cohort's repeat behavior remained very strong and continues to increase. 12 months net revenue repeat rates for our 2024 cohort of first purchases increased from the 2023 cohort and remained over 100%. We believe these are outstanding repeat metrics compared with other direct-to-consumer companies and reflect the health of our brands, the quality of our products, and the high satisfaction from our customers. Moving to our brands, Il Makyash grew revenue low double digits in 2025 to approximately $560 million.
Il Makyash Skin was a highlight as planned and finished the year at approximately 40% of Il Makyash brand revenue, expanding from around 30% of brand revenue in 2024. The rapid success of Il Makyash Skin since its launch in 2022 demonstrates the power of our platform and our ability to leverage our user base and technology to quickly scale new products and categories. International markets were also a key driver for Ilmakiyaj. Auditing international revenue, the majority of which is from Ilmakiyaj, grew 42% for the year. International markets represent 17.5% of overall auditing net revenue for 2025, compared with many of our competitors that generate more than 65% of net sales from international markets. Spoiled Child also had a strong year, increasing revenue double digits to approximately $250 million. This is an incredible accomplishment for an online-only brand that just launched four years ago and once again shows the power of our platform and ability to scale. We remain excited about SpoilChart's long-term potential, including new product expansion in beauty and wellness. The launch of Methodic, our third brand, was a highlight accomplishment in 2025.
Methodic is a medical telehealth platform that aims to deliver high-efficacy treatments at scale, starting in dermatology, addressing concerns like acne, hypopigmentation, and eczema. It is off to a great start, and we are very pleased to see its initial success. Our early focus on acne hyperpigmentation and color products is showing good traction, and we believe this will be big categories for us. We are seeing good metrics and continuous improvement in our KPIs, even as our customer codes increase in size. What we see in Methodix app engagement reinforces our view that Methodix can uniquely deliver high standards of care for a broad audience, and do it with great convenience. When we look at the app download rates, onboard completion, weekly check-in rates, and care team engagement, we can see the demand, and we are bullish about how our app technology will drive user compliance, satisfaction, and success. Moving on to the second focus area of our long-term growth strategy, the consumer adoption of high-performance products that better address their pain points.
Our product development pipeline for all three brands are focused on bringing the market top performance that we believe beat the competition on efficacy. Quality Labs continue to push the frontier of ingredient innovation in beauty and wellness. Over the past 18 months, we have made major strides in our capabilities and infrastructure to improve our work with the goal of shrinking our timelines and improving the probability of success in identifying game-changing molecules. Our efforts in process and infrastructure have given significant improvements in our productivity, increasing the number of targets we can tackle, and allowing us to push projects along faster with greater accuracy. One highlight area is our work in transitional biology, which expands on our strong in silico and in vitro foundations. This work helps us to get stronger reads on the most relevant biomarkers for our products, increases our predictive power of success, and does it in a way that is scalable, representative, and with rigorous science. Another highlight is our ability to identify biological targets that can influence a desired effect.
We are focused on pain points with large commercial opportunities, including acne, pigmentation, and aging. And our target list includes pathways like reducing melanin production and boosting collagen and LSD. We are leveraging AI agents to map targets and structures and also applying our work in traditional biology to identify novel targets. We recently expanded our capabilities into peptides to add to our small molecule foundations and are working on peptide solutions in areas like acne and aging. This expansion into peptides give us flexibility to identify the right modality to address an individual biological target. At the same time, we are working in parallel to improve topical delivery of different activities to ensure they reach the relevant areas in skin and maximize the biological effect. We expect to have eight products in market in 2026 made with OET Labs molecules. The innovation for Methodic is especially exciting, including molecules that cover key categories, including acne, eczema, and hyperpigmentation. And more to come in the future that we are bullish about. Turning to our acquisition costs.
We experienced an unprecedented dislocation in our account with our largest advertising partner, which we believe is due to recent changes in their algorithms that likely diverted us to less desirable auctions and traffic at abnormally high costs. These changes resulted in significant abnormal increases in our new user acquisition costs for ODT that are not correlated with the market or our historical experience. We have never seen anything close to those acquisition costs, not in ODT and also not in other beauty advertisers. This elevated acquisition cost is severely hurting our ability to acquire new users efficiently at high scale, as we normally do in the first half of each year and have done consistently for the past eight years very successfully. Both in-makeup and spoiled child appear to be impacted by these algorithm changes, although the impact on in-makeup was more severe, probably due to its higher scale.
After identifying the root cause in late January, we quickly moved to implement strong remediation actions primarily around the model infrastructure that we hope will get us back to the right auctions and ultimately drive improvement in our new user acquisition with significant progress in Q2 and normalization in Q3 or Q4. These types of algorithm updates are not new and have been ongoing through the years, and we've historically adapted to them. In this case, it was harder than before to identify how these updates were impacting our business, and therefore it was harder to identify the root cause. We believe we got hit by the algorithm change due to our user acquisition strategy that includes a try-before-you-buy offering, which is a raring beauty and therefore may be an edge case within the new algorithm changes. We believe the algorithm updates impact on how this platform interprets and weights the signals associated with try-before-you-buy model, primarily due to its inherent higher return rates, and they averted us to lower quality auctions at abnormally high costs, disconnected from the market.
For more context about the model, Try Before You Buy is designed for the benefit of the consumer by reducing the risk of trying our products online. It is a pro-consumer model that allows us to replicate online the experience of physical stores like Sephora, where consumers can try products in real life and materially reduce the risk of purchase. This model is very new due to its complex execution. We believe it's an edge case and a non-obvious interaction within the platform's new auction dynamics. After assessing the driver, what we believe is hitting us, we quickly move to fix it. Our remediation actions are designed to reduce try-before-you-buy down weighting while preserving the ability for new customers to purchase products on trial basis with minimal risk. Important to note, try-before-you-buy isn't a dependency for us. We offer it as a better alternative for consumer, but our agile model allows us to rebalance towards the standard by offering if we see it is needed. Unfortunately, because we only recently identified the root cause, and despite working tirelessly to fix it, we have not had much time to take action, and it takes time to recover.
Therefore, we expect negative impact on our 2026 financial results with the most significant impact expected in H1. But I want to be very clear, despite the dislocation in our news acquisition we are currently facing, we are not changing our model, our strategy, or our long-term focus on growth. The main objective of the company right now is correcting this issue and being in a position to immediately pivot back to growth. I want to close with some perspective on this moment in time. Over the past eight years, we grew from $25 million of revenue to $800 million of revenue, despite multiple changes on ad tech side. A prominent one was iOS 14. We have navigated algorithm adjustments by our ad partners in the past, and we believe we will be able to also address the current dislocations. Most importantly, we believe we understand the problem, and in a world of complex online auctions, understanding the problem is always the hardest part. We don't see this as a structural issue or a secular disruption, as you are seeing in other sectors, or a negative macro trend for our category.
It is a technical issue, and from here, we believe it is a matter of time and execution to deliver the strong outcomes we have constantly delivered over the past eight years. And as I said, we believe we have a strong plan in place, and I hope to see normalization in H2. With that, I will turn it over to Lindsay.
Lindsay (Title): Thanks, Arun. Let's turn to our Q4 results, which I'll refer to on an adjusted basis. You can find the full reconciliation to GAP in our press release. Audity delivered an outstanding quarter to cap off a record-breaking year. We grew net revenue by 24% in the quarter to $153 million. Growth was driven primarily by an increase in orders, while average order value declined slightly year over year. The 24% revenue growth we delivered this quarter exceeded our guidance for growth of 21% to 23%. Gross margin of 70.5% compressed 220 basis points year over year and exceeded our guidance for gross margins of 69%. The delta versus our outlook was driven in part by product mix. We delivered adjusted EBITDA of $13 million in the quarter and adjusted EBITDA margin of 8.2%, above our guidance for adjusted EBITDA of $10 to $12 million. Adjusted EBITDA margin compressed by 410 basis points year over year due to planned investments for future growth, including the methodic brand launch, Audity Labs, and Brand 4, as well as higher media costs. We delivered adjusted diluted earnings per share of $0.20 compared to our guidance for between $0.11 and $0.13.
Our adjusted EBITDA and earnings per share excludes approximately $8 million of share-based compensation. Turning to some highlights for the full year of 2025, we grew net revenue by 25% to $810 million, with double-digit growth from both Il Makiage and Spoiled Child. This 25% growth is ahead of our long-term algorithm target for 20% sustained top-line growth. Net revenue growth was primarily driven by an increase in orders, while average order value increased slightly year over year. Gross margin of 72.7% expanded 30 basis points year-over-year, driven by cost efficiencies. We delivered adjusted EBITDA of $163 million. Adjusted EBITDA margin of 20.2% is consistent with our 20% long-term earnings algorithm target. And that's despite our planned investments in future growth initiatives, including Methodic Brand Launch and Audity Labs, and despite increased advertising costs. Advertising costs increased approximately 50% year over year, reflecting growth investments in international markets and methodic, as well as higher acquisition costs for ill maquillage and spoiled child. We delivered adjusted diluted earnings per share of $2.21.
We exited the year in a strong liquidity position, including $776 million of cash, cash equivalents, and investments on our balance sheet. The buildup in reserves in 2025 was driven by our successful exchangeable note offering, and free cash generation of $84 million for the year. Free cash flow in the fourth quarter was negatively impacted by approximately $19 million of increased inventory due in part to new inventory investments in Methodic on top of our seasonal inventory build ahead of the Q1 selling period. We amended our credit facilities in January of 2026 to expand our borrowing capacity to $350 million. These facilities remain undrawn. As for potential uses of cash, we believe repurchasing our stock is attractive at recent share prices and intend to opportunistically return cash to shareholders through buybacks. There's $103 million remaining on our previously announced repurchase authorization. As Aron discussed, we experienced a significant increase in our new user acquisition spend, Q1 to date. The timing of normalization is uncertain, although we're working hard to have this behind us.
Our remediation actions have started but are still in early stages, so we're not going to make any predictions on their success. Due to the uncertain timing of recovery, we're not issuing full year 26 guidance
at this time, but we'll provide updates to our progress and outlook as we get more visibility.
A few things to keep in mind for your models. We expect Q1 sales will decline approximately 30% due to reduced acquisition revenue. We're still spending acquisition dollars today despite much higher CPA, and this is so that we can continue feeding the algorithms the signals needed to reset and normalize. At current CPAs, we are not profitable at first order, and that has material negative impact on our near-term EBITDA. We are, however, still profitable on a 12-month direct contribution margin basis because of the strong repeat we generate from acquisition sales. Based on the expected timing of CPA normalization, Q2 sales are also likely to decline, but it's too soon to determine the magnitude. Q1 and Q2 are historically our largest periods of user acquisition, and from that acquisition, we typically generate significant repeat revenue over the balance of the year. The reduced user acquisition activity today will therefore result in lower repeat sales later in the year, even if acquisition costs normalize. We're managing costs through this period to offset EBITDA pressure, but continue to carve out investments in growth initiatives like Audity Labs, new brands, product development, and our tech infrastructure, and we believe this is the right strategy to set us up for sustained growth if CPA normalizes. With that, I'll hand it back to the operator for questions.
Operator: Thank you. We will now be conducting a question and answer session.
Yusuf Squali (Truist Securities): Great. Thank you guys for taking the question. Maybe dig a little deeper into the algo change. I'm assuming this is related to Google's Andromeda. When did the issue actually start? When did you start seeing it? Has it, is it continuing to, is the trend continuing to worsen or has it kind of stabilized? And lastly, Oran, when you talk about the issue being related to try before you buy, does that mean that you guys are going to de-emphasize that or is there work around it such that you can continue to differentiate yourself through that offering and still maybe rank higher. Thanks.
Management: Thanks, Yusuf. We didn't specifically name the advertising partner, but the issue is we first observed that something was different in the second half of 2025, and we did call it out on our November earnings call. But it did get much worse as we entered 2026 and really began to scale our business. And I think, you know, at the time when we'd spoken to you, we had started to see some improvement. But it's always difficult for us to get a read on CPA, you know, as you go in the holiday quarter because it's just not a typical market. There's a lot of noise. And so as we moved into Q1 and we started to scale, that's when we saw the dislocation. As for moving from try before you buy, look, we believe that we can still solve it. We try, as I mentioned, we believe it's pro-consumer, we believe it's the right thing to do. But I also mentioned that we know how to move to buy like the rest of the industry. I want to say that more than 95% are selling via buy, so it's not something new and we know how to do. As for what we do, there are a range of things that we need to identify the issue and working on fixing it.
We try before you buy, including deep signals audit, funnel UI and UX adjustments, a lot of work on the infrastructure side, building new prediction models, offering adjustments, and different audience strategies. We wouldn't sit here today if we didn't think that we can solve it. We would say that we are moving to buy, but the fact that we believe that it's solvable with the current business model.
Anna Lizzell (Bank of America): Great. Thank you both.
The next question is from Anna Lizzell from Bank of America. I just wanted to ask on the change or the lack of guide here, I guess, and what you can recover for the remainder of the year, it does seem like an uphill battle. Is it possible to shift this user acquisition really from Q1 or H1 into Q2 or H2? Or will there be more of a delay? And does this change your thinking at all on distribution, just given you are vastly sold on direct-to-consumer? Would this make you think at all about going into retail? Thank you.
Management: As mentioned, no change in our strategy. Thank God this is our strategy. Online is our strategy. Online continues to grow. And there is no change in our plans or no plans to move into retail at this point. We are confident we can go back to growth. We believe it's something that's a temporary change that happened that we need to adjust to. So no change in distribution strategy.
Lindsay (Title): Yeah, thanks, Ana. We're navigating a situation today where CPA is significantly higher than last year, in some cases, two plus X higher in some cases. And as a result, we've dialed back on our acquisition to manage it. Remember that, as I mentioned in my prepared remarks, at current CPAs, we are not profitable at first order. And so that has a material negative impact on our near-term EBITDA. We are still profitable on a 12-month contribution margin basis, but in the near-term, as we spend, you have pressure. And since Q1 and Q2 are our largest periods of acquisition, we'll have, as I mentioned in my remarks, we'll have that carryover effect into the back half of the year as we lose the repeat. And so in the short-term, we view this as a pothole that we'll have to recover from, but as the business and CPA normalizes, as we hope it will in the back half of the year, we'll be on a track to normalize our financial model as well. But by the way, I would just add that Lindsay mentioned even more than 2X. If we saw something gradually increasing in terms of CPA, we wouldn't think that something is completely off.
We know that the current numbers that we see in user acquisition are completely off market, and therefore we believe it's something technical, and we work really hard to go back to that. By the way, we never build a business on marketing margin, on making profit from better acquisition strategy or execution. We build a business on repeat that can protect us from regular increase in media spend. By the way, we see it every year. But this is something completely off, very unusual business. We never saw anything like it. And based on my understanding, like, it doesn't exist elsewhere.
Brian Tenkulich (Jefferies): Thank you so much.
The next question is from Brian Tenkulich from Jefferies. Hey, good morning. Maybe, Lindsay, just as I think about the model, right? I mean, one of the things that we've always loved about your business is how you can flex the advertising space. Obviously, as you said, CPAs up more than 2x in some cases. So when you think about how you would strategize around this, I mean, once things normalize, I mean, should we expect kind of like, you know, a steep pullback in advertising expense? Or just curious how you're thinking about strategizing around this once we get that normalization point. And then if you just give us any color on retention rates or reorder rates that you're seeing in the market. Thanks.
Management: I'll start and maybe you take it. Even when media is abnormal as now, you don't want to stop the train. You still need to feed the algorithm and continue to spend so that you are giving it signals it needs to go back on track. We have balance between not overspending at this crazy CPA that doesn't make sense while keeping the signals going. And that's our plan to keep balance that way until we fix it. As far as what normalization looks like for us, it would be something in line with what the rest of the industry CPA is. That's typically how our business is operated. It's a very, very big auction. It's a lot of competitors in there, and we typically are around where we would see our competition in terms of CPA. Right now, we're completely dislocated and off-market based on this dislocation and this malfunction of sorts. And as we address it, as Aran said, we should be getting back to track.
Management: Repeat rates remain very strong. This is one of the reasons why we know we don't have a brand issue. We don't have a saturation issue. We continue to see very good performance out of our repeat. Repeat revenue is, for 2025, around 70% of our sales. And as we look at our 12-month net revenue repeat rates, those increased again. So the 2024 cohort that repeated in 2025, that number increased relative to the prior year. So that's nicely over 100%. And even as we look at our more recent cohorts within who started in 2025, those net revenue repeat rates on a six-month or so basis are better than they were in the prior year. That trend remains very strong.
Andrew Boone (Citizens Bank): Thanks so much for taking the question. Can you guys help us understand just what exactly is changing within your guys' funnel? Is this higher CPMs? Is this lower click-through rates? Is this worse on-site conversion, meaning it's a lower quality user that you're targeting? Help us understand that dynamic. And then one of the things that we've also always appreciated about the business is just your ability to be able to pull different levers to be able to sustain that 20% growth. And so can you just help us understand the size of this channel and your inability to be able to allocate spend elsewhere and help us understand just why this is an overly large impact versus what we would have thought was a more diversified ad platform? Thank you.
Management: Yeah. When we refer to our ability to grow in multiple areas, one thing that is important to note, because this change for auditing is global and across brands, it makes it harder and that's why we came to the market with 30% decrease targeting in Q1. It's very hard to continue to grow without overspending, and obviously this is something that we don't want to do in those CPAs levels.
Lindsay (Title): Yeah, as it relates to mix, what I can tell you is that for our largest ad partner, if you just look at pure platform orders, so that's any order that can be attributed directly to an ad from this specific partner. Those revenues make up just under a quarter of our revenue, and that's based on our internal attribution system. But keep in mind, this is just pure acquisition dollars. And on top of acquisition, you also get repeat. You have direct revenue, so there's additional impact. We have relationships with many different ad partners. I want to say almost, I don't want to say all of them, but many, many different ad partners that. But your ability to scale is only so much with each individual, and so this is impacting us.
Georgia Anderson (Evercore ISI): Hi. Thanks so much for the time and the question. You mentioned that you've made kind of significant actions to fix this. Can you maybe clarify if these are more structural, I guess, technical fixes to your internal, I guess, data feedback loops, maybe retraining your AI to find high intent users, things like that, or is the rebound expected to come from a strategic shift in budget allocation? Maybe just talk us through the fixes that you're making.
Management: Yeah, it's both. Infrastructure side, offering adjustments and signal adjustments. We do all. The good thing about us is those points of time, like when you need to make multiple changes, we do everything in-house. We are not dependent on third parties. Data scientists, developers, media buyers, so we can run dozens of variants at the same time. And that's what we did in the past few weeks. And therefore, we believe that we are more prepared than most companies to address it.
Scott Schoenhaus (KeyBank Capital Markets): I think thanks for taking my question. And Lindsay, is there areas that you're currently seeing strength that you could possibly offset this weakness strategically? I want to focus here on international opportunities and then the brand three rollout, which you've mentioned has seen nice success. Thanks.
Management: Yeah, I'll start with the good news. We launched brand free Methodic. It's growing more than what we saw in Il Makiage when we launched Il Makiage. It's facing spoiled child. So we are very pleased to see the demand and success of Methodic. By the way, as we thought, as for international and other areas, you still need user acquisition, and we still don't want to overspend just to meet the revenue goals. I never ran a business like that before, and that's why the business is profitable for many, many years and last year 20%. So we first need to fix it, and then we go back to growth.
Ryan McDonald (Needham & Company): Oh, thanks. Sorry, I was muted there. Thanks for taking my questions. As we think about balancing sort of the near-term priority of sort of fixing the problem here versus sort of balancing with longer-term investments to sort of continue the growth trajectory once these problems are solved, can you talk about sort of what that balance looks like internally right now and then what are some of the priorities, whether it's continuing down the path with product development with Auditory Labs, you know, growing Method IQ brand, you know, also, is there a risk here that we see a delay or a push out in sort of the brand for launch plans as well? Thanks.
Management: Since we identify, since we believe we identify the problem, we're not changing our investments in growth. We believe it's the right thing to do. We continue to invest in labs. We continue to build brand four. And we continue to work tirelessly on new products in NPD for in-machines, spiritual, and methodic.
Ryan McDonald (Needham & Company): Yeah, so it was just any concerns about a delay in brand four, and then as we kind of come out of this, whether you lean into investment of more aggressive for growth as we work back towards the balance of 2020 or sort of work more towards margin expansion. Thanks.
Management: The current focus of my leadership is fixing the problem. That's the first priority. Most of the teams are working on that. At the same time, we continue to invest in OECD Labs, we continue to grow it, and we continue to build Brentford.
Kate Grafstein (Barclays): Hi, thanks. I was just wondering, how does this dislocation impact the launch of Methodic? I know you had planned to step up spending in the first half of the year with this launch, and that was expected to have an impact on your EBITDA margins in the first half.
Management: Yeah, the fact that Methodic is relatively small, it means that we can continue to grow it without the negative effect that we see. It doesn't mean that the current problem doesn't affect Methodic, but since it's running at low scale compared to Immaculate and Spoiled Child, we can continue to grow it and meet our target for this brand for this year.
Management: This concludes the question and answer session. I would like to turn the floor back over to Iran Holtzman for closing comments.
Management: Thank you guys for joining. See you next quarter. This concludes today's teleconference. You may disconnect your lines
at this time.
Thank you for your participation.