Rover Group, Inc. (ROVR) on Q2 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to the Second Quarter 2022 Rover Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like turn the conference to your host, Mr. Walter Reddy, Vice President of Investor Relations and Capital Markets. Please go ahead.
Walter Reddy : Good afternoon. Thank you for joining us to discuss Rover's second quarter 2022 earnings results. In this call, we will be discussing the results announced in our press release issued today after the market close, which is available on our Investor Relations website at investors.rover.com. As a reminder, this call is being webcast live from our Investor Relations website and is being recorded and will be available for replay from our Investor Relations website shortly after this call. With me on the call this afternoon is Aaron Easterly, Chief Executive Officer and Co-Founder; Brent Turner, President and Chief Operating Officer; Tracy Knox, Chief Financial Officer; and Charlie Wickers, VP of Finance at Rover. Before we begin, I'd like to remind everyone that management will make certain forward-looking statements within the safe harbor provisions of the Securities Litigation Reform Act of 1995. On this call identified by the words expect, believe, will, may, assume, continue, plan, ongoing and similar expressions. Forward-looking statements are based on the current expectations, estimates, forecasts and projections and beliefs and assumptions of management and relate to our future financial performance, such as our third quarter 2022 and full year 2022 financial guidance. Trends for GAAP and non-GAAP marketing expense as a percentage of revenue, marketing investments and initiatives, COVID and macroeconomic impacts, investment and expansion opportunities, market share, other future events and industry and market conditions and forward-looking statements about Rover, its platform and its domestic and international market opportunity. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results or performance to differ materially from those expressed or implied in the forward-looking statements. We strongly encourage you to review the information that Rover files with the SEC regarding specific risks and uncertainties, in particular, those that are described in the Risk Factors section of Rover's first quarter 2022 10-Q filed with the SEC on May 12, 2022, and those that will be disclosed in our second quarter 2022 Form 10-Q. These forward-looking statements speak only as of today. Rover undertakes no obligation to update these statements to reflect subsequent events or circumstances, except as required by law. You should not place undue reliance on our forward-looking statements as they are not guarantees of future performance. Finally, during the course of today's call, we will discuss audited and unaudited GAAP and unaudited non-GAAP financial measures. We provide a reconciliation of the non-GAAP measures to the most comparable GAAP measure in the non-GAAP reconciliation supplement, which is posted under News Events Presentations on the Investor Relations section of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to GAAP financial measures. Unless otherwise noted, we will compare all Q2 2022 metrics to Q2 2021 metrics in the call. And with that, let's get started. I'll turn the call over to Aaron Easterly, Co-Founder and CEO. Aaron?
Aaron Easterly: Thank you, Walter, and thank you, everyone, for joining us today. I will begin by discussing our high-level second quarter 2022 earnings results, give a few other quarter's highlights and then provide some commentary on what we are seeing in the market right now. At that point, I will turn it over to Brent to provide you with more details on our bookings and investments. Tracy will then conclude by walking through the financials and our detailed guidance before we take questions. Overall, Rover had another solid quarter, improving both revenue and adjusted EBITDA. Despite the impact from COVID variants and other potential macro headwinds, the business exceeds the high end of our guidance range. Second quarter revenue of $43.4 million was up 77% year-over-year. Gross booking value grew 59% to $212.8 million. Total bookings were up 35% to $1.4 million, and adjusted EBITDA was $4.2 million, which was a 68% increase year-over-year. Going beyond the recent financial results, we are excited about certain underlying fundamentals. First, the value of customers acquired this year is the highest to date. Despite the relatively lower mix of daytime services, revenue per customer less the cost of revenue and support are trending higher than the 2021 cohort, which were also well above our historical norms. In Q2, repeat book has reached $1.2 million, up 40% year-over-year. Our 10-year data collection, insights and technology investments are helping identify and reward great interaction on the platform, and this is showing through in our custody; second, the strength of our value proposition relative to competitors continues to shine. In addition to posting strong top and bottom line numbers, we believe that we are continuing to gain noticeable share in our largest markets. For example, according to third-party U.S. data, Rover had more than 13x sales of pet services versus the next largest similar player for the 12 months ending June 30, up from just over 10x for the prior 12-month period; third, our international businesses continued its aggressive growth trajectory with GBV increasing to over 3.5x Q2 2021 levels, and have driven the mix of GBV from non-U.S. markets from 3% in Q2 of last year, 8% this quarter. This growth is due to rapid expansion of customer acquisition with Canada and the U.K. being the largest contributors. One particular bright spot is our penetration into European cat households. Over the last year, we made a series of investments designed to bring more European cat parents onto our platform. We are seeing that payoff. Cat-only GPV in Europe was 9x the prior year period. More broadly, we see opportunities to invest incrementally in markets such as France and Spain. Our international business leverages the technical and data size investments we have made to support the U.S. business. And that said, we expect it to not only be a cost-effective driver of long-term enterprise value, but to also compete effectively versus smaller players that have been unable to invest comparably. Finally, we saw marked progress in laying the groundwork to expand beyond our current services. Rover has a unique position in the ecosystem, which we believe creates opportunities for us to solve a greater array of pain points for modern pet parents. While most of our focus over the last year was scaling our core business, our newly formed corporate strategy and development team have been looking at opportunities to build, buy or partner to expand our offerings. For example, we recently acquired a small early-stage dog training platform. Overall, we expect to invest low single-digit millions of dollars in the remainder of the calendar year to prototype and test extensions that are offered. We plan to share more on this front in the coming quarters. While we delivered a striking quarter and continued to gain market share, we're also seeing some signs for caution in the back half of the year. What we have observed as the quarter unfolded and continuing into July, positions us towards the lower end of our previously communicated full year revenue guidance. During the second quarter and continuing through July, cancellation rates have accelerated after initially dropping materially in February. In July, cancellation rates were roughly 50% higher than the historical norms and are approaching the levels we saw in July and August of last year during the Delta Wave in January of this year during their Omicron way. Additionally, we are seeing some evidence of a slowdown in new customer category demand. The Google query volume for some keywords is decreasing year-over-year compared to the outsized gains of 2021, though still significantly above the 2019 levels. Similarly, we've noted a slowdown in the year-over-year growth rates for U.S. air passengers. Most of these dynamics are consistent with trends in our marketplace. Out of our desire to balance growth and profitability, we significantly slowed our hiring starting Q2 and are adjusting our marketing outlays. In conclusion, we just reached the anniversary of entering the public markets, and it's worth reflecting on the last 12 months. In that time, we increased revenue approximately 130% over the prior 12 months, slipped from negative to positive adjusted EBITDA, gained market share, all while ramping our investments in product support and marketing to drive long-term enterprise value. It has been a good 12 months. We look forward to growing our position as the world's largest online marketplace for pet care and continuing in our mission to make it possible for everyone to experience the unconditional love of a pet. We will look for and execute on opportunities to expand our business judiciously and with the macroeconomic backdrop in mind. And now I would like to hand over the call to Brent to provide more details on our bookings, operational performance and marketing spend.
Brent Turner: Thanks, Aaron, and greetings to everyone on the call. I'll first start by adding a bit more color regarding the performance of the business in Q2. As Aaron mentioned, total bookings increased 35% year-over-year to $1.4 million, another all-time record quarter for Rover. With that being said, we observed increasing headwinds, especially toward the end of the quarter and during July as cancellation rates rose and new customer demand softened. In Q2, worldwide new customer acquisitions were 260,000, an increase of 14% from Q2 2021, when we saw an incredibly strong rebound in pent-up organic new customer demand. Our non-U.S. business also grew its acquisition of new customers nicely with the largest absolute numbers coming from Canada and the U.K. and with still impressive growth rates from the rest of Europe. In Q2 2022, non-GAAP marketing expense was 24% of revenue, up 600 basis points from Q2 2021 and roughly sequentially flat from Q1 2022. This percentage was towards the top end of our previously mentioned long-term and seasonally adjusted range of 18% to 25%. The higher Q2 percentage compared to 2021 was driven by an increased cancellation rate, higher search spend and ongoing testing of marketing channels. With respect to marketing testing, we upgraded our ROI measurement during the pandemic with a particular focus on the return on video, social and similar channels. As we have mentioned previously, we plan to increase marketing spending as we evaluated both the efficiency and scalability of these channels. We are pleased with the results of our testing from Q1 and Q2, and we like their implications for our ability to drive efficient new customer acquisitions over time. However, based on our observations in June and expectations through Q3, we believe that the macro environment, inclusive of COVID impacts and the second half may not be conducive to scaling these investments at this time. As a result, for the second half in the context of our current revenue expectations, we expect marketing as a percentage of revenue to trend lower. While we continue to make progress in our new customer marketing initiatives, we are also pleased with our repeat bookings, which were $1.2 million for Q2, a year-over-year increase of 40%. As discussed last quarter, we continue to leverage our channels as a cost efficient way to invite our existing customers back to the platform. Further, we continue to invest in products and customer experience. Our ongoing work includes improvements to usability of our apps and testing new ways to improve our platform's ability to create great matches between pet parents and care providers. We are particularly excited about a number of recent improvements in our trust and safety capabilities. For example, we have introduced notification for walkers and sitters to be mindful of breaches susceptible to heat-related issues when temperatures rise. We believe by continuously improving our product and service, pet parents and sitters will find increasing values in the Rover offering. We are pleased with the results of our investments to date and the strength of our results this quarter. Rover continues to execute well, attracting new customers and building scale. I'll now hand the call over to Tracy to walk through our financial performance.
Tracy Knox : Thanks, Brent. I'll begin today by providing an overview of our financial results for the second quarter of 2022, followed by guidance. Unless noted otherwise, I'll be comparing our second quarter results to the same period in 2021. As a reminder, our discussion of expenses will cover non-GAAP amounts, which excludes stock-based compensation expense. Revenue in the second quarter was $43.4 million, up 77%, while second quarter GBV was $212.8 million, up 59%. Our second quarter revenue exceeded our guidance, driven by continued increases in average booking value and strength in our European bookings. Brent already discussed bookings, but I want to give a little more color on ABV. Second quarter ABV was $147, up 18% driven by increases in average price per service set by pet care providers on the platform with a skew towards greater growth in the overnight services. We believe this is due to a continuation of the more significant provider initiated price increases that started in Q2 of 2021, and as a result of our extended state billing feature, which rolled out in Q4 last year. These price increases can be seen when viewing newer pet parent provider relationships versus those that began more than a year ago with the newer relationships being noticeably higher increases of price per unit. We believe new relationships are more fully reflecting the providers increase in pricing, while legacy relationships will lag as providers respects earlier agreed upon pricing with their longer-term customers. This growth ABVs, along with our solid retention rate has increased expected LTVs. Moving to expenses. Cost of revenue in the second quarter was $10.5 million or 24% of revenue compared to $6.3 million or 26% of revenue in the prior year period and 28% in the first quarter of 2022. Both the year-over-year and sequential improvement was largely driven by the scaling of revenue and leverage achieved a portion of costs that are more fixed in nature, namely amortization of internally developed software and certain technology platform costs. Non-GAAP marketing expenses were $10.7 million in the second quarter or 24% of revenue, up 600 basis points from Q2 2021 and roughly flat sequentially from Q1 2022. The higher Q2 percentage was driven by higher search spend, ongoing testing of marketing channels as well as the accelerating cancellation rate that we saw during the quarter. Of note, our advertising expense was the primary driver, up 207% as we implemented our strategy to increase our marketing investments, while our fixed marketing expenses were up 26%. As Brent described earlier, we plan to keep our marketing spend elevated on an absolute basis for the second half of the year versus 2021, but we do expect it to be a lower percentage of revenue relative to the first half of 2022. Second quarter non-GAAP operations and support expenses were $6.1 million or 14% of revenue, flat compared to 14% of revenue in Q2 2021. We continue to see leverage in non-GAAP product development expenses, which were $5.2 million or percent of revenue compared to $4.7 million or 19% of revenue in Q2 2021. Second quarter non-GAAP general and administrative expenses were $8 million or 20% of revenue compared to $5.1 million or 21% of revenue in Q2 2021. The increase year-over-year in expense is a result of the investment needed to support our transition into the public market, while the decline on a percentage basis is due to our scaling of revenues from Q2 2021. In addition, there was a sequential decline in expense from Q1 2022 of $400,000, primarily due to a decrease in professional fees. Adjusted EBITDA was $4.2 million or a margin of 10%, up from the adjusted EBITDA of $2.7 million in Q2 of last year. The improvement in adjusted EBITDA resulted from strong revenue paired with ongoing operational expense efficiencies during the quarter. From a liquidity perspective, we generated strong cash from operations, and our total cash, cash equivalents and investments of $288 million is up from $282 million from Q1. In summary, our business delivered strong top and bottom line results during the quarter. Now turning to guidance. Given the context Aaron and Brent articulated, we are updating our full year guidance for 2022 to tighten the revenue range to the lower end of our previously provided range and are reducing our adjusted EBITDA guidance. Both the low and high end of our revenue guidance continues to assume the full year impact related to Omicron and the recent macroeconomic headwinds, inclusive of the elevated cancellation rates and softer new customer demand, as Aaron described. The high end of our guidance differs from the low end by assuming more modest impacts of additional COVID waves and no further incremental deterioration in demand due to macroeconomic trends. For the third quarter of 2022, we expect revenue of $46 million to $48 million and adjusted EBITDA of $6 million to $8 million. For the full year 2022, we are updating our prior guidance and now expect revenue of $160 million to $166 million and adjusted EBITDA of $10 million to $14 million, which at the midpoint would be a 48% increase in revenue over 2021 and approximately flat in adjusted EBITDA. The change in the adjusted EBITDA guidance is primarily driven by the following: first, our revised revenue guidance, including ongoing elevated cancellation rates. Of note, going forward, a 1-point improvement in our cancellation rate drives approximately 1 point of additional adjusted EBITDA margin; second, a shift in the marketing mix to a higher proportion of paid and within that, a higher proportion of higher-cost marketing channels. And finally, the choice to invest single-digit millions in the initial steps to expand our service offerings through the coming quarters. While it does have an impact to adjusted EBITDA margin in the near term, we believe that we have optimized our marketing investments for positive payback and ROI and that not pulling back investment as aggressively as we did in 2021 during increased cancellation rate periods will benefit future enterprise value. In addition, we are excited for the longer-term opportunities that we intend to invest in. Without the impact of these items, adjusted EBITDA margin at the midpoint would be approximately flat year-over-year and in line with the midpoint margin of prior guidance. Furthermore, without the softening of demand, we are now projecting for the second half of this year, our adjusted EBITDA margins would be solidly on the path to our longer-term margin goals. Importantly, we are reiterating our commitment to delivering on our longer-term margin goal of over 30% for the core business. Before I open it up for Q&A, I want to take a final moment to thank you all again. Aaron and the leadership team, our amazing employees, and our stockholders for your continued support as I transition to an advisory role as part of my previously announced retirement. I'm truly grateful for my time at Rover, especially to have been part of the progress made in our last 12 months as a public company, including growing revenue 130% over the prior 12 months and generating positive adjusted EBITDA. I continue to be impressed by Charlie as we've executed our transition process, and I'm excited to watch him help Rover continue to prosper and grow. With that, we'll turn it to Q&A. Operator, can you open it up for Q&A?
Operator: Our first question comes from Ralph Schackart of William Blair.
Ralph Schackart: Good afternoon. Thanks for taking the questions. Two, if I can. First, just in terms of the cancellation rates. Just curious if you could give some sense of attribution to slowdown in air travel that you called out. I think a lot of that occurred towards the end of Q2 versus just a tougher macro environment and maybe some also some consideration on the increase of pricing being increased by pet providers. Just curious if you give some thoughts on what's perhaps having the most pronounced impact? And then I have a follow-up.
Charlie Wickers: Ralph, this is Charlie. Good to hear from you. With regards to the cancellation rate, it did increase during the quarter. So as the quarter progressed, we saw an uptick. And so we do think that it was partly driven by what we continue to see is ebbs and flows from the pandemic as well as partly attributed to what we're seeing on the travel cancellation front as well. It is hard to tease those 2 apart, but we definitely saw a correlation as the quarter went on with those 2 dynamics.
Aaron Easterly: Ralph, this is Aaron. Just to add on to that a little bit. We do track communications through the platform. And one of the things we track is reason for cancellations and the messaging that goes attached to it. We saw a marked increase in the number of people that said that they tested positive or restrict themselves during the period. So while the overall death are not rising dramatically in the U.S., we do still see a significant portion for that. With regards to the sitter pricing, we've looked at this in quite a bit of detail of the system. It's possible that pricing in the broader economy is affecting people's decisions to travel. So as energy prices go up, as food prices go up as people may feel some economic . That being said, when we look at in our marketplace, we don't see any impact from provider prices on the decision to continue to book a stay. There's a little correlation, if any, with regard to higher prices and people are proceeding to book.
Ralph Schackart: Actually, really helpful color. Just maybe kind of switching gears to international. It seems like some good growth there and you gave some good metrics. Just curious, is that just years of hard work all coming together? I think you talked maybe some increased marketing. Maybe just a little color in terms of what's driven that growth?
Brent Turner: Sure. Ralph, this is Brent. Thanks for the question. We're excited about Europe. We're excited about international generally. I think one of the things that's -- and this could be our rebound year, particularly in Europe, given that they opened a little bit later than we did here in the United States generally. I think one thing that we believe is a driver of our growth is that, to your point about a bunch of hard work, we did get out into market with our blog and with our PR investments well ahead of the rebound to try to increase awareness, particularly in Europe. And we think we've done a good job there. We think that where we are in awareness, unaided around 11% in most nations aided bouncing between 20 and 30 is well ahead of where the U.S. business was at a similar level of scale. We think that helps explain some of the maturation of the metrics and some of the growth over there right now.
Operator: Our next question comes from Maria Ripps of Canaccord.
Maria Ripps: Just to follow up on your full year guidance. So in addition to in consolations is there anything else you can maybe share in terms of new users to the platform, user retention perhaps spend per user or any specific regions or markets to highlight there?
Tracy Knox: I was going to say in terms of new users to the platform, we had 260,000, which I think was our all-time high on new customers. And that is a combination of the U.S. and Europe, which Brent just laid out, we're seeing strength in Europe, but we're also still seeing strong new customer volume in the U.S. From a cohort or an LTV perspective, we are seeing much higher ABVs this quarter than we did last year. And so based on that and stronger retention, these look like our best customer cohorts yet, and we're seeing -- we're projecting the highest LTVs yet.
Aaron Easterly: Maria, this is Aaron. It's good to hear your voice. There's a little bit of additional color commentary on the new customer side. What we are looking at the TSA data is actually pretty interesting for us. There's normally a seasonal gain between June and July in terms of U.S. air passengers. This year, actually has had the smallest gain from June to July of any of the last 4, including 2020. And that's both on an absolute basis, meaning that there was actually more the increase in the number of air passengers in 2020 was actually higher than it was this year. You also see slowing in the rate of growth versus last year in the U.S. air travel data. And similarly, when you compare 2020 to 2019, 2022 has never caught up to 2019, part of the explanation for that maybe that there's less of a business travel rebound. But when you actually look at those numbers, the gap versus 2019 has actually been growing since April versus closing. So we think that there's a little bit of a travel dynamic that really only became noticeable towards the end of the quarter. And then we noted also, we're seeing a similar trend in Google with regards to the amount of people that are looking for these services, then we would expect seasonally based on what we saw in May and June.
Tracy Knox: So I think Maria that's -- is elevated cancellation rates continuing through the end of the year and ongoing softness in demand. Those are the 2 things.
Maria Ripps: Got it. That's very helpful. And then maybe just on your continued strength in Europe. Is there anything you can add in terms of sort of maybe broader macro dynamics there? And then sort of more broadly, can you maybe just talk about the competitive dynamics in some of those key markets. And you did say that your brand awareness is getting stronger there. But sort of what's the level of broader category of awareness across some of those key markets?
Brent Turner: Maria, it is Brent. It's good to hear boys. In terms of the competitive dynamic, there is a set of small and, frankly, similarly sized competitors in Europe, which makes it a different competitive dynamic than the United States. And so we -- and we do think that one of the reasons we've been able to build brand awareness for ourselves in Europe is because there actually is a category that players, each of whom is driving awareness of themselves. And so -- and so the players, each of whom is driving awareness of themselves. And so -- and so the idea that you would go online to find pet care is actually considered a thing, so to speak, in Europe whereas when the U.S. business was at a similar level of scale that was not true. I don't know that we are as clear on level of scale that was not true. I don't know that we are as clear on macro environments that might be tailwinds for us aside from the fact that the geographies they're opening up. But I can say that from the standpoint of some of the things that we've tried to do to build awareness in the United States, in some cases, they have been more successful in Europe. And in fact, one of our top blog posts in the globe over the past, I think, 9 months has been a dog named Spain, which has been actually quite viral.
Aaron Easterly: Maria, the one other thing I'll add to that piece is that -- with regards to the competitive dynamics, it actually varies by country. There are some pan-European players. There are some country-specific players. When we look at the metrics we track for relative growth and size in the major markets that we feel confident, we seem to be gaining material share. So dramatically higher growth rates than the competitive set, although it's still earlier in Europe than it is in the U.S.
Operator: Our next question comes from Eric Sheridan of Goldman Sachs.
Eric Sheridan: Just wanted to better understand you meant by upgraded ROI metrics with particular channels, evidently that you're looking at maybe in a different way than you have in the past? And the second part of that question would be are there any channels you're finding greater or rising level of efficacy with from an ROI standpoint that would have maybe caused you to readdress some of those ROI metrics internally? And then secondarily, you talked about obviously dialing back the marketing investments in the back part of the year. Can you just give us a little bit better sense of your lead time of how you think about dialing up or dialing down marketing investments based on what you see in terms of end market dynamics?
Brent Turner: Sure. Thanks, Eric. I love these questions. So over the years, we have, like most companies that are attempting to build a category struggled with a set of approaches for trying to quantify the return of channels that are a little bit more a funnel. We have worked with ClickStream. We worked with panel data. And one of the pledges that we thought we could make once we get to a certain level of scale is simply go to a methodology that's a little bit more geographic test over control. The spins that you need to do on a test basis are a little higher they were not practical when we were more subscale, but today represents small parts of our marketing budget, and it's what we've moved to. Now it's not a straightforward thing to do. There's quite a bit of instrumentation and refinement in terms of our cost of approach to make these work. But this is the way we decided to move, particularly for our social YouTube linear TV, streaming TV channels like that. And it's been fortunate. I've been pleased with our analytics team because on a variety of fronts here, largely because we've been able to sort of sidestep a lot of the sort of device tracking complications that have come up because we don't those things to quantify our ROI. In terms of the lead time to dial back, the channels that take the longest are our streaming and linear, although I have to say we are able to turn those around in single-digit weeks. And YouTube, obviously, is instantaneous. It's a matter of bidding, not only is it a matter of on, but we can change the way we bid. Other channels that we have been working with recently, I think we've said in previous calls that we are pretty happy with how YouTube is going. We continue to feel that way and have moved beyond viability testing to incrementality testing. And we continue to have a road map in front of us that we're excited about. And as we mentioned -- as I think I mentioned on the call, all of this has to do -- channels that are -- take more quarters to return, involve a little bit more of a judgment around the macro climate. And so we are reserving the right to pull the reins on those if we feel like some of the assumptions that we use in our analytical modeling are coming on to doubt because of deterioration in the macro economy, and we were able to make those changes fairly dynamically.
Tracy Knox: I think importantly -- Eric, it is Tracy. Importantly, right now, even with the elevated cancellation rates, the marketing investments that we're continuing to make, we believe, have positive ROI and payback for the long term.
Operator: Our next question comes from Cory Carpenter of JPMorgan.
Cory Carpenter: First, hoping you could expand a bit just on the behind the single-digit million dollar investment you're making in service offerings. How did you come to that being the right level of spending maybe what attracted you to dog training in particular? And then secondly, could you just talk about what you're seeing with return to office trends there and how that's impacting your daytime service?
Aaron Easterly: Sure. With regards to the investment, the investment for the second half of the year is inclusive of dog training as well as perhaps 1 or 2 other items, that we haven't shared publicly yet. Now with regards to training, our mission of Rogers to make it possible for everyone to experience the unconditional level of the pet. We want to remove the barriers for people to get pets and also the barriers are keeping them. So we think dog training and helping people have a great relationship with their pet and minimize stress is very much in line with our mission. We think it's the type of service that people would reasonably expect Rover to provide. And we think it's an interesting incremental revenue and profit pool for us to go after. And so for all those reasons, it seemed like a logical first step into this area.
Operator: Our next question comes from Andrew Boone of JMP Securities.
Andrew Boone: Hi. Thanks for taking my question. I want to go back to marketing. If I go back to the spec deck and kind of the initiation, the target was kind of 25%. So as we think about your marketing spend and kind of that target level, how do we think about you guys coming back to that? Or is this more of a structural change where you guys may be able to pull more margin out of that? And then secondly, as we think about just higher pricing across the platform and understood you guys said that you're not seeing any change in conversion. Can you talk about how this impacts maybe the transition of the gray market on Rover? Do you think there is any slowdown in terms of the incremental buyer that may be still using friends and family?
Tracy Knox: Andrew, this is Tracy. I'll take the first one, and maybe Aaron will take the second one. But in terms of the 25% of revenue, as we had laid out in the original stack deck, yes, we think we can be more efficient than that over the long term. But there will be seasonality in the numbers. So we -- I think maybe it was last quarter, said that we think the realistic range is 18% to 25%. So you can see for the first couple of quarters, we were trending more towards the high end of that range, but we noted towards the back half of this year, we will trend down on that percentage. If you were to go back and look at prior 2019, that rate was much higher as a percentage of revenue. Additionally, when the cancellation rate is high, marketing as a percentage of ultimately realized revenue is also high. So that 24% that we had in Q2 was actually artificially high due to the cancellation rate. So we do think we will do better than that 25%, and we do have line of sight to above 30% long-term EBITDA margins. And then Aaron, was how -- does this help us with transitioning the gray market?
Aaron Easterly: Yes. I think when you look at the business right now, we're seeing not only gains in the expected lifetime values from price points but also units. So we're seeing that our overnight customers are actually booking more units on average, so longer duration stuff, some combination of duration and frequency. And so that isn't indicative of kind of somehow more bleeding into shadow markets actually kind of indicates the opposite. In a world in which we have not seen return to work materialize in a major way, and our daytime services remain laggards, seeing that type of gain in units is incredibly positive on that front. And there's not a reason to believe there's any increase in disintermediation or related topics.
Tracy Knox: And then I would just add on the return to office. And I think Aaron has noted this before that to the extent that more people are staying home for more of their days, we actually think that, that could be a benefit to our overnight services because people will more likely want to escape their house and take more frequent weekend trips or overnight trip.
Operator: Our next question comes from Lauren Schenk of Morgan Stanley.
Lauren Cassel: Maybe just two more modeling questions. What cancellation rates assume that the high and low end of the new guidance into the full year? And then second, how should we think about ABV growth in the back half of the year?
Charlie Wickers: Lauren, with regards to cancellation rates, we have continued to see them elevated here into July. And so think about them for the second half of the year in both scenarios is continuing to remain elevated. With regards to ABVs, the way to think about that is from where we are today, adjusted for seasonality. So if you go back to 2019, you can look at the seasonality changes from Q2 to Q3 and Q3 to Q4, to utilize those seasonality changes and apply them to what we had in Q2 that would be in line with what we're thinking for the second half of the year.
Tracy Knox: And I would say what elevated cancellation rate means we were at 14% for the full quarter, but we've said the cancellation rate trended up through the back half and through July. So we're currently trending in that mid-teens rate, and that's what we are assuming is going to happen going forward, Lauren.
Aaron Easterly: With that perspective, the historical rate is closer to 9% to 10%. And Lauren, good to hear your voice as well. Just for a little bit more clarity on the ABVs. We do expect seasonal gains in ABVs. We typically see longer duration stays Thanksgiving and Christmas. So that typically increases a little bit. That being said, the rate of unit price growth has been slowing down more recently. So we don't see a reason for that to go backwards, but we wouldn't necessarily expect the ongoing acceleration of unit price.
Operator: I'm showing no further questions at this time. I'd like to turn the call back over to Aaron Easterly for any closing remarks.
Aaron Easterly: Well, thank you all for attending our Q2 earnings call. I'm going to spend a minute and thank Tracy for her service. Tracy, it's been wonderful to have you here at Rover. I know when you joined Rover, you had planned on retiring prior to join us. And when you came on board, you thought that, that retirement would probably be something like 2020. When I look at the 130% growth we achieved our first year as a public company, the switching to producing cash flow, the market share gains. I am incredibly happy that you decided to stay those extra couple of years. Thank you for that. And thank you for being a leader during the last couple of years, deeply appreciative. For everyone on the call, thanks for joining us today. We continue to be excited about our mission, and look forward to updating you next quarter.
Operator: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
