Welcome to PetMed's Conference Call to Review the Financial Results for the Fourth Quarter and Fiscal Yearend March 31, 2022. [Operator Instructions]. At the request of the company, this conference call is being recorded. Founded in 1969, PetMeds is your trusted pet health expert and America's most trusted pet pharmacy, delivering prescription and nonprescription pet medications and other health products for dogs, cats, and horses direct to the customers. PetMeds' markets its products through national advertising campaigns, which directs customers to order online or by phone and which are intended to increase the recognition of the PetMeds brand name. PetMeds provides an attractive alternative for obtaining pet medication in terms of convenience, price, ease of ordering, and rapid home delivery. At this time, I would like to turn the call over to the company's Chief Financial Officer, Mr. Bruce Rosenbloom.

Thank you. And I'd like to welcome everybody here today. I would also like to remind everyone that the first portion of this conference call will be listen-only until the question-and-answer session, which will be later in the call. Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties. These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. We have identified various risk factors associated with our operations in our most recent Annual Report and other filings with the Securities and Exchange Commission. Now let me introduce our CEO and President, Matt Hulett. Matt?

Thanks, Bruce. Good afternoon and thank you for joining us. This earnings call is the 8-month mark since I started as the new CEO and President of PetMed. Throughout this time, I've remained committed to clarity and transparency with investors and key stakeholders as to the progress of our strategic transformation. To be clear, PetMeds pioneered the online pet prescription business over 26 years ago, and that is a legacy of which everyone at PetMeds is very proud. However, in recent years, growth has slowed and outside of a significant 2020 uptick in sales related to the pandemic, our leadership position has slipped. I continue to believe that PetMed is a terrific company with a talented and dedicated workforce serving a large and loyal customer base. During today's earnings call, we will share with you some early indications regarding the stabilization of our core business and articulation of our new strategy and tangible evidence of operating progress towards the execution of that new strategy. I reiterate that my commitment is to be open and transparent as to how we are engineering the transformation of this iconic company. Today, I'm going to divide my prepared remarks between our core prescription business and our pet health expert strategy, with more time spent on the latter, including some specific steps we have already taken towards executing on this broader strategy. I have a number of key points I want to communicate to you today. So for clarity, I've organized them into 3 themes. The first theme is the stabilization of the core business where the significant revenue declines we've experienced over the past year have begun to moderate. For example, our revenue in the fourth quarter decreased 7.9% year-over-year compared to a decrease of 12.7% for the preceding 9-month period. While January and…

Thanks, Matt. During the review of our financial results, we will compare our fourth quarter fiscal quarter which ended on March 31, 2022, to last year's quarter that ended on March 31, 2021. I would also like to highlight that we introduced new non-GAAP financial metrics last quarter, adjusted EBITDA and adjusted EBITDA per share. We decided to include these new metrics because they are key measures used by management and by our Board to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital, Adjusted EBITDA and adjusted EBITDA per share provide a more accurate picture of our underlying profitability and also highlight the more recent increases in noncash stock-based compensation. Throughout our most recent fiscal year, we've faced a unique situation comparing 2 totally different environments between 2020 and 2021 mostly post-pandemic. As we move forward into our first full fiscal year, the year ending March 31, 2023, with our new marketing partnerships, agencies, and processes, and with many of our highlighted initiatives firmly in place, we expect to be much more efficient with our variable marketing spend with improved results. For the current year, fourth quarter sales were USD66 million compared to sales of USD71.7 million for the same period the prior year, a decrease of 7.9%. While we were disappointed with the overall sales results for the quarter compared to the prior year, we were encouraged by the sales trends we saw in January and February, which were only down in the low-single digits. However, as Matt mentioned earlier, as a result of colder weather this spring, we saw a delay in the flea, tick, and heartworm season, resulting in a decrease in demand for flea, tick, and heartworm control products in the month of March. In contrast, in…

Thanks, Bruce. We embarked on a new journey 8 months ago when I joined the company. In evaluating and planning for our future, we wanted first to reexamine how we saw ourselves as a culture and company, and then we delved into redefining our company's core purpose. We looked at where we excel today in the market and how we consistently solve our customers' pain, and we use that as the starting place for our re-envisioning process. Through that work, we identified a clear market need to have a brand and company focused on being the trusted pet health expert. In many ways, we have served this function for our customers for over 26 years. If you think about it, selling prescription medication represents perhaps the most difficult quarter of the pet ecosystem. It involves both collaboration with and authorization from veterinarians, combined with dispensing controlled substances, and complying with regulatory requirements, et cetera, in short is hard. When you contact us either online or over the phone, we're paying extra attention to your pet's specific health needs with important and customer-specific details like monitoring for drug interactions and ensuring the accuracy of your pet's prescription. We now have the capability to extend those demonstrated competencies much further. To that end, I am pleased to unveil our new vision and mission. Our vision, every pet deserves to live a long, happy, healthy life. Our mission, PetMeds aims to be the most trusted pet health expert by providing incredible care and services that are affordable to the broadest group of pet parents. In order to realize this vision, we need to execute on our mission through the strategy I would like to share with you next. Next slide, please. We are now ready to talk about our long-term strategy with some…

[Operator Instructions]. The first question is from the line of Erin Wright with Morgan Stanley.

Great. What are you seeing quarter-to-date in terms of demand trends and the progression of the flea and tick season that you said was off to a somewhat slower start here, but should we anticipate a meaningful bolus here associated with parasiticides in the current quarter? How do you anticipate that playing out from what you're seeing?

Bruce, do you want to take that and I can follow.

Sure. Erin, as we mentioned, during the quarter, we started out very strong. Obviously, once we hit March, we definitely saw a drop in demand unlike what we saw in the previous March 2021. We've also have gotten similar information for manufacturers of the slow flea and tick season. So that's something that I think all of us have seen. In the past, we've gone through delays in season or season coming early in the year. I would say that traditionally, it's a 6-month period. In the past, it has extended. We'll just have to see how it plays out in the current quarter. But yes, we definitely saw that in March, and we'll see how it shakes out for the June quarter.

Yes. The only thing I'd add to that that Bruce said is, we do have a concentration of flea and tick and heartworm. And so we are feeling quite confident that costs were starting to even out in January and February. And so unfortunately, you can't control the weather. We do have category concentration in those areas. So we're confident that we have a very long loyal returning base. So when the Earth heats up, we anticipate that reorders will get back to where we expected them.

Okay. And then two quick follow-ups here. Given some of the initiatives around advertising and the spend for the quarter, how should we be thinking about advertising spend in fiscal 2023? Should we anticipate a step up from here as a percentage of sales in the coming quarters? I guess, help us frame that in terms of how you're thinking about advertising spend. And then in terms of the telemedicine partnership, can you describe a little bit more on the financial contributions for you? And will this be material for you near term?

Yes, I'll take the last question first and then throw it over to Bruce. I'm thinking on the telemedicine piece, it is a pretty exciting opportunity since we are in the prescription space as a core offering to consumers. Obviously, we want to be in front of that trend of having consumers literally at their fingertips, have the ability to connect to a vet either on their desktop or on their mobile device and have prescriptions delivered to their doors. We aren't really guiding to how big this opportunity is. It's really, really new. The VCPR relations which connect the consumer with a vet are relatively new as well. We see the regulations loosening over time and that we see more demand for consumers. So we're not really guiding, per se, and we love to excite folks on the upside as this partnership develops. Partnerships are very hard to forecast, as you know, but we're very excited about it. And we think this is the best team in the pet telemedicine space in Vetster. This is a seasoned team that we've started to get to know very well. They come highly recommended from the travel space and they know marketplaces extremely well and have had multiple successes of building up marketplaces. So we're highly confident that this is the right team and product and business model for us to put our bet around and to start growing demand around. On the other comment, Bruce, do you want to take that and I'll follow?

Sure. As far as advertising, so for the quarter advertising was down about USD800,000 or about 20% from where we were last year. And I would say that we were somewhat on target to spend somewhat similar to where we spent in the previous year. Obviously the slow start to season we pared back our spend due to that, and we expect to spend probably similar to what you saw last year, but we expect to be more -- much more efficient with our spend. And if there's areas that we can lean in that are producing a much better return, obviously, we'll take advantage of that when we see it.

Yes. The only thing I'd add to that to -- and it's exactly right. We want to make sure we were spending money when there was demand because consumers were paring back flea and tick and heartworm. We decided not to accelerate that. The other thing that we decided to do is introduce this LTV to CAC number. And the 2.5x that you saw, that could change over time as we start doing front and invest. We want to be very smart about how we scale our demand. 2.5x may be on the high end. It could be lower than that. It just depends on the types of consumers that we're finding and where we think there's a spot to invest. So that gives you some direction of where we're going. But it should be higher than you've seen in the past, but we're going to be very performance-oriented around -- the 2.5x is a pretty efficient LTV to CAC. I think that might move around a little bit.

And the next question comes from the line of Corey Grady with Jefferies.

I wanted to follow up on the new marketing strategies and partnerships. And maybe ask you to spend a little more time talking about areas where you're seeing signs of validation in terms of return and areas where you are continuing to test.

Thanks for the question. I'll jump on this one. Yes, again, I want to remind you, and I think you know this, after our discussions that much of what we've done to date has been really building kind of a basis, a platform for growth. As you can recall, last quarter we had some inefficiencies. We implemented new marketing operations technology, new marketing partners, and we've been really testing a lot. We've been testing new customer segments that are younger and more digital native. And I think the headline is we're seeing a lot of interest in pet health expert strategy, standing for something that's more positioned around your pet's health versus kind of a broader play with a everything store for a pet, really consumers are responding to that. So we're going to adjust our positioning and our creative around that game, and we're starting to see some early positive signals around that. And as that starts to scale, I think our media mix will scale. I think the way we spend our dollars will definitely scale, and we'll scale profitably. I would like to point out there's 1,000 out of 3,000 -- Russell 3000 companies are not profitable. We tend to grow profitably and find net new customers. And like I said on the earnings call, really customers understand that PetMed stands for pet healthcare. And I think that's a really exciting proposition for customers.

Got it. That's helpful. And then I was wondering for my second question, if you could quantify the sales impact from the delay of flea and tick season. And then how did results for the quarter in terms of sales composition, reorder versus new order, how did that compare to your expectations coming into the quarter?

I'll start and then, Bruce, do you want to finish?

Sure.

Yes. As we said on the earnings call, January and February, were trending actually to where we wanted to. We started to see the evening out of those comps. That was a really important metric for us. And I think we've been really transparent about net new customer growth has been an issue for the company for a while. It's something that we're going to continue to work on, and we're actually pretty optimistic that, that will improve. And unfortunately, March was just colder than anticipated. So we were anticipating returning customers to be more flat year-over-year than what you saw. And Bruce, do you want to add any other color to that?

I would say that I think the -- obviously, the surprise in March, when you look at the 2 Marches, season was really strong last year. So our reorder numbers were much higher. I would just say that you're comparing 2 totally different Marches between an early on-time season versus a delayed season. And so you have those 2 dichotomies there. But again, I think reorders were probably out of the 2, we were -- that was probably more affected from the delay in season than when we -- what we would expect it going into the March quarter.

[Operator Instructions]. And the next question comes from the line of David Maley with 1102 Partners.

You mentioned that the Vetster is the first of many transactions. Should we expect transactions to be of a similar size? Or is it likely that there might be something that's much bigger down the road? And I guess, if so, would that be the deal that would lead you to eventually pare the dividend?

Thanks, David, for your question. I think there's 2 parts to that, obviously. I'll take the first part and then I'll take the second part. The capital allocation side is we have a lot of cash, and the cash hasn't really been put to use. And so as we fill out those puzzle pieces that I mentioned on the call around care, around wellness, diet, medication, we think we're pretty good on medication and there's other areas where we really need to fill in. And what's driving that is really our customers really want to have more products. They want more basket from us. They want more services that are aligned around pet health. And that's driving really some of our thoughts around how to accelerate whether it's an investment, M&A, or an investment partnership that you saw in Vetster. So we're going to continue to look at those types of opportunities. Things that we discussed in earnings calls like insurance, certainly that leads to more of a partnership type of profile. But certainly, we're open to M&A as well. As asset prices start to settle down, as the economy starts to change, I think there could be some more buying opportunities there. But we're open to filling in those puzzle pieces using cash. And on the dividend side, we have a commitment to the dividend. One of the things that we're looking at as a management team that we discuss all the time as new customer growth starts to get figured out, and we have better calculus around that. We understand the types of recurring customer acquisition we can start driving. That's probably the time that we'd start discussing how fast we want to grow the company. But as you know, we've struggled with new customer growth. And so…

Yes. No, that's good. That's good color. Really appreciate it.

There are no further questions at this time. I will now turn the presentation back to the host.

Thank you, operator. As you just heard, the future of PetMeds is much broader than just a prescription e-commerce company. We are building our strategy out and working hard to transform into a broader e-commerce and subscription brand that reflects and leverages our status as the trusted pet health experts. I will continue to detail our progress and look forward to providing you with updates in the not-too-distant future. As always, thank you to all of our employees, customers, partners, suppliers, and investors for your continued confidence and support. Thank you for listening in. Operator, this ends the conference call.

That does conclude today's conference. We thank you for your participation and ask that you please disconnect your line.