We were positively impressed with the Q1 ’22 results that Rover (NASDAQ:ROVR) delivered, and feel confident that this growth story is only in its early stages. In this article, we will not go into much detail about the company since we already did so in another article where we described what the company does and why we believe it has a competitive moat. We are big fans of platform businesses like this one, and we believe Rover has a bright future as the leader in matching pet owners with per service providers.
Looking at Q1 2022 results, revenue of $27.8 million was up a 128% year-over-year. Gross Booking Value, or GBV, grew at 137% to $153.7 million. New bookings were up 76%. Total number of booking were 1.2 million, and adjusted EBITDA was negative $4.8 million. We find this results quite promising, especially the growth in revenue and GBV.
In Q1, international sales grew to 7% of GBV, up from just 3% in the year prior. The most important international markets are Canada and eight countries in Europe.
During Q1 worldwide new customer acquisitions were 179,000, an increase of 76% from Q1 2021. Most of this customer acquisitions were in the United States, but this quarter also saw accelerating growth in European new customer acquisitions, alongside particularly strong growth in Canada.
One area where we were a bit disappointed was customer acquisition cost, CAC, which went up quite considerably. In theory, this shouldn’t pose a problem as long as the estimated life-time value (LTV) of the customer remains significantly above CAC, and the company makes a good return on its investment. Still, it is a little disappointing that it is getting more expensive to acquire new customers, and even more disappointing that they plan to stop sharing this metric. This is what they had to say about this point during the most recent earnings conference call:
[…] worldwide CAC in Q1 increased to $16 compared to $7 in Q1 2021. While we are deliberately increasing our marketing investment, we continue to see strong efficiencies across paid and organic existing channels. And now to give a little bit more context on our change in reporting beginning with our Q3 earnings release this year, we’re going to transition away from disclosing CAC. Instead, we’re going to focus on marketing as a percentage of revenue.
In Q1 2022 non-GAAP marketing, which excludes stock-based compensation, was 25% of revenue up 400 basis points from Q1 2021. Long term and adjusted seasonally, we expect non-GAAP marketing as a percentage of revenue to be between 18 and 25%.
If the marketing numbers were a bit disappointing, the financials cheered us up again, since the numbers shared were quite good in our opinion. The company was able to maintain a very high level of liquidity with total cash, cash equivalents and investments of $279 million, flat from Q4.
First quarter average booking value ABV was $132, up 31%, largely driven by a 15% average increase in price per service, with the skew of higher increases in overnight services. It is important to note that prices are set by pet care providers and not by the company itself. Providers initiated significantly increasing prices in Q2 2021, and has continued since. It is interesting to see that this 15% increase is significantly above the rate of inflation, and how the company’s platform self-adjusts prices depending on economic conditions, without the company having to worry about it.
Cost of revenue in the first quarter was $7.8 million, or 28% of revenue, compared to $4.2 million, or 34% of revenue the prior year. The 600-basis point improvement was largely driven by the scaling of revenue and leverage achieved on the portion of costs that are more fixed in nature, like software and technology costs.
The company also recorded a gain of $4.6 million on the redemption of its outstanding warrants. The good news is that these warrants no longer pose risk of dilution.
Overall, the company’s business is growing nicely, and its recovery from Covid is in line, but ahead of travel, as can be seen in the slide below. We are very impressed with the growth the company has been able to deliver, and without losing huge amounts of money in the process. It is one of the rare companies growing at spectacular rates without a crazy cash burn rate.
It is difficult to value small growth companies like Rover using traditional metrics. Rover being a two-sided platform, we believe the most important financial figure to be gross booking value, or GBV for short. This represents the size of the “economy” taking place on the platform, and we believe that the company will figure out how to get its fair share from this activity. At the rate GBV is growing, we think it will get close to $1 billion this year, and coincidentally that close to the market cap at which Rover is currently trading.
In fact, given the amount of cash and equivalents and investments that the company has, while having basically no debt, the enterprise value is even lower, at around $745 million. We think the company is a good value, with an enterprise value below what we estimate GBV to be for 2022.
Using traditional valuation metrics like EV/Revenues, the company does not look as cheap at ~4.2x. Looking at earnings estimates for the next few years the company does not look cheap either, but we believe that as revenues grow, and operating leverage takes hold, the true earnings power of its platform business model will come to light.
Based on analyst estimates compiled by Seeking Alpha, the company is trading at a 45 p/e on FY 2024 earnings estimates. While this appears high, we believe the company has a long runway of high earnings growth.
For the second quarter of 2022, the company is guiding revenue in the range of $41 million to $43 million and adjusted EBITDA of break-even to $2 million. For the full year 2022, they are reiterating prior guidance of revenue in the $160 million to $180 million range, and adjusted EBITDA of $17 million to $21 million.
The midpoint of their adjusted EBITDA range implies an 11% adjusted EBITDA margin, approximately flat with the full year 2021 and is inclusive of a normalizing investment in marketing, scaling investments in the product, and a full year of Public Company costs.
We were very impressed with the growth Rover delivered in the first quarter of 2022, and it reinforces our belief that this is a platform that can continue to grow quickly for some years at least. We were a bit disappointed that the customer acquisition cost increased significantly, and that the company will no longer report it.
At the rate Rover is growing, we estimate that the size of its “economy”, or GBV as the company calls it, will reach close to $1 billion in 2022. With the company trading with an enterprise value of ~$745 million, we believe shares are cheap. Using traditional metrics, the company appears expensive, but we believe the earnings power of its platform business model will eventually be substantial.