Hi, everyone. I'm Lauren Schenk, Morgan Stanley's Small and Mid-Cap Internet Analyst. I'm excited to be joined this afternoon by Aaron Easterly, Rover's Co-Founder and CEO. One disclosure of mine before we begin. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk. Maybe let's start a little bit bigger picture. For those that are not as familiar with the Rover story, can you start by talking about what you built, and the differentiation and strategy of the business? Sure. Rover is the world's largest pet care services marketplace. Ultimately, we got into this business 'cause we think having an animal is great. Our mission is to make it possible for everyone to experience the unconditional love of a pet. We thought that the logistics of care was the primary barrier to that. If we could solve the logistics of care, make it convenient, affordable, easy, so that you could live your life and have a pet, more people will adopt into pet ownership. We started with the focus on just overnight. What do I do with my dog or my cat when I go on vacation? We expanded into daytime services and subsequently expanded into training as well. We have six services now, in 10 countries. Our biggest market's the U.S., but about eight countries in Western and Northern Europe as well as Canada. Great. You've mentioned, a TAM of about $80 billion. Maybe talk about what the inputs are of that and the opportunity you see ahead in some of those different categories? The most exciting and simultaneously the scariest thing about launching this business was the TAM question. We estimated about the existing commercial market for non-veterinary commercial pet services was about $9 billion in the U.S., or is now. The math didn't make sense. When you look at how many people have pets in the U.S., how often they travel away from home on vacation, like, so how many nights a year, what's the theoretical value of a night, you quickly get to a disconnect where the theoretical TAM should have been closer to $100 billion, but the actual TAM, you know, at least according to third-party estimates, was probably closer to this $10 billion. It turns out that the delta was really driven by 90% of pet owners that when they leave town, they don't use a commercial option. They call their father-in-law, their neighbor, their friend, and see if they can pawn their animal off on somebody else. The light bulb for us was, wow, you have 90% of the opportunity that has no entrenched competition. Your father-in-law is not gonna invest millions of dollars in a tech platform to hold on to a pet sitting business that he doesn't wanna be doing to begin with, and is only doing out of sense of obligation. We're like, man, if we could get any amount of that to convert to a commercial market, we can probably capture, like, 90%-95% share of that which converts. The question has always been, well, what percent could you ever get to convert? It's kind of unknowable. Since the early days of the business, about 2/3 of our business is coming from people that were previously using friends, family, and neighbors. More recently, we started to measure that for newer pet owners, a lot of newer pet owners are just defaulting to Rover as their first and only solution versus ever considering friends, family, neighbors. The business is mostly about category expansion. We think that about $80 billion is the addressable piece in the U.S. right now, if you include daytime services as well. There's still a reasonably wide range around that estimate. Okay. You talked about boarding, daytime sitting, drop-ins. You also recently acquired a small pet training business. How do you think about expanding the services offered on the platform, and the decision to build versus buy as you think about those new opportunities? Sure. We're a fairly unique asset. I would say, if you're old enough, you remember the dot-com boom and subsequent collapse. You also remember that a bunch of silly pet-related businesses were kinda the poster children for bad ideas during the dot-com period. The pet industry kind of suffered from a lack of venture capital investment, tech investment for a better part of two decades. It wasn't until Chewy really got going that kind of interest was revitalized and like, oh, you can build interesting tech businesses in the pet space. Mm-hmm. The result of that is that there is a relative lack of scaled pet tech companies. If you look at the space in the U.S. and say, okay, who are the pet tech companies that have ongoing transactional relationship with millions of pet parents? It's Amazon, Chewy, and Rover, if you look at the digitally native ones, and we're the only one on the service side. That's kinda like, wow, that's exciting. Like, you have an industry, if you include vet and other types of services, is incredibly fragmented. We'll adopt more technology, and we're the only one that has a footprint on the service side. We think that there are lots of opportunities to expand potentially into grooming, in some cases, physical care, maybe insurance, maybe we expand into training, maybe adoption. We are kind of indifferent between building ourselves and M&A. M&A can get you time to market, but sometimes comes with a premium and an execution risk. We're also inclined to test incrementally in an intelligent fashion. When we launch new offerings, we typically test in a couple markets and shut them down if we don't like them. Our path to expand our service lines will likely be iterative. Okay. Maybe we're on the topic of acquisitions. How do you think about capital allocation more broadly? Yeah, I think it's probably one of the most important things you can do as a CEO is to figure out, like, what is really the best use of capital. We recently announced that the board had authorized a $50 million buyback. At the time we went public, we maybe raised a little bit more capital than we actually thought we needed, but we were a travel-adjacent business in a pandemic, with a kind of a big opportunity in front of us. The possible downsides of the pandemic economy to some degree have been realized. It hasn't really impacted our business. The business has grown very fast, from about $108 million last year to $174 million this year. That was up from about $56 million practically the year before. It's grown very fast and while improving our profitability or our EBITDA. We just haven't really seen a need for all that capital. Our lean is we'd like to invest it, first and foremost in accelerating the business at good unit economics and good earn back. We're happy to consider M&A. If not, we'll return it to shareholders. Right now, we think that the balance sheet's strong enough that we can potentially look at all three simultaneously. Okay, great. Let's shift gears to 2023. In your initial outlook for this year, you contemplated a mild to moderate recession in the guidance ranges. You're not necessarily expecting a major decline or pullback in travel. Maybe talk about how you thought about forecasting this year with the expectation in mind that maybe there's some economic softness. Well, the pet industry, one of the nice things about the pet industry is it tends to grow even during recessions. The service side is maybe gets hit by the recessions a tiny bit harder, but I think in the Great Recession, it was like maybe down a point or two at peak. We kind of view a recession dynamic as kind of suppressing what would have otherwise been the growth rate versus causing us to go negative. Certainly, our baseline growth is big enough that you could have a fairly sizable recession and still hopefully grow at a reasonable clip. We, we think it's right and prudent to plan for a recession. In our view, which could be wrong, is that we expect that to be more pronounced in the second half of the year, maybe Q3, Q4. We think that our baseline growth is big enough that it's unlikely to cause us to go negative, but could temporarily suppress kind of some of the year-over-year comps for the business. Travel is, I think, generally pretty strong right now. Travel can get hit hard by recessions, and we have a business that hasn't been through a normal recession. In general, when you travel, the price you pay for your dog sitter is a very small portion of the overall amount you spend on your vacation. If people trade down in travel by staying at a less expensive hotel, staying at a less expensive Airbnb, it's unlikely to affect our business. Our business is likely gonna be impacted only by people choosing not to travel. Okay. Moving to cancellation rates, they've been trending upward post-pandemic. I think they were up in 4Q a little bit, 14.6%, still above kind of the long-term average of 8%-10%. What brings those back down, or do you expect those to come back down, and what would the drivers of that be? With regards to most of the drivers of the cancellation rates, has been pandemic-related stuff. If people get sick, they cancel. In a little bit of a still not sure I can mention this without a certain amount of emotional pain, but one of the hard things about the pandemic for our business is that when the pandemic first hit, we actually had negative net sales, where cancellations from prior bookings more than outweighed any new bookings coming in. I'd never been part of a business that had negative sales. I didn't even know it was possible. We've continued to see the impact of cancellations as waves roll through. Over the last 12 months, 18 months, we've also seen a dampening of that relationship compared to the COVID prevalence in the population. Wave rolls through, we see a little bit of a spike in cancellations. People get sick that were planning to travel or sitters get sick. That rolls through, and it goes back down a little bit. But if you look at the holiday wave, which actually had a similar amount of COVID prevalence in the population as the summer wave of BA.5, the effect on our cancellation rates was noticeably less pronounced. We think it's a dampening effect over time, but in terms of the guidance we gave, we didn't plan on the dampening. If the dampening does happen, and it feels like at some point it kinda has to, there could be some upside in the plan, but we're assuming some ongoing effects of cancellation rates due to COVID. Okay. One of the highlights of the last 12 months has been the growth in average booking value. You did note on the last call that you do think you're seeing some pricing sensitivity and leaving a little bit of demand on the table. Understanding you can't dictate what price your sitters charge, how are you thinking about maybe balancing that pricing dynamic a little bit better? As the economy reopened, people started traveling, as there was in place, we saw a pretty massive increase in the price per unit. Sitters and walkers set that. I think, like, in the teens from a year-over-year perspective, maybe even more some months, the weird thing about that is we're like, wow, like, we hope that's not suppressing demand. We look for the better part of 12 months, we could see no impact on conversion rates of those higher prices. Over the last year, like, not only have our LTVs expanded, our taker has expanded, our actual units have expanded as well. It's like, there's nothing there that actually speaks to anything bad going on. As we ran some experiments with how we rank sitters, including diversity of price points, one of the things we saw is that if there was at least a little bit higher mix of lower price points, the conversion rates would be up noticeably. How does that reconcile with what we saw last year? Well, it turns out, like, our conversion rates would have been drifting up had prices not been rising as fast as they did. It's a good problem to have in the sense that you're choosing between substantially higher prices or actually accelerating conversion rates. We'd like to figure out how to maybe get the happy spot of both. But we've seen that play out a little bit. We... The effect of prices, particularly in a cautious economic environment, could have an impact. The research we've done suggested that the higher prices last year was a net positive, meaning that our revenue and take rate and profitability was higher than it would have been with lower prices. When you look at the year-over-year comps for things like new customer and repeat bookings, we probably would have driven more transactions as prices were more stable. Okay. Maybe let's shift to marketing. You also talked on the call last week about how you're shifting or you're expanding your marketing spend to be focused a little bit more on video streaming or video-enabled channels. Maybe talk about marketing spend for the year and customer acquisition costs more broadly. Sure. Rover has very strong unit economics and has for a long time. During the pandemic, we had absurdly good unit economics because we shut off so much marketing because of the risk profile of the business. We got to something that was absurd, like 20 to one, 30 to one type LTV to CAC, instantaneous earn back type ratios. More recently, we want to kind of target a five-year value of something like between five to one versus the all-in advertising CAC or seven to one. Somewhere in that range is where we want to get to, which is still really good unit economics. Our plan has been to increase the marketing channels over time. The reason for that is as conversion rates drift up, as our geographic coverage drifts up, as our LTVs go up pretty rapidly, more and more marketing channels become profitable over time. We've been in the process of testing new marketing channels. Over the last year, we've really seen kind of the most progress in terms of making different forms of video profitable for us and have the, you know, good earn back timeline and LTV to CAC ratio that we've been used to. That's been a nice surprise. It's become a bigger part of the mix, but given how much marketing we shut off during the pandemic, we always kinda knew that there was gonna be a, you know, multi-year process of trying to get back to a normal mix and testing the new channels. Are there any marketing channels that you're pulling back on where you're seeing lower ROI? you know, Like, search as a marketing channel is interesting 'cause, like, you can pull back because you don't like the ROI, and you can pull back because there isn't volume to be had. There, search kind of auto-adjusts with category demand to a large degree and economic environment. You know, if, you know, bad economy environment where there are less people traveling, less people needing our services, we would expect search to go down, but not so much from an ROI perspective, more just there's less volume to be had. I think we've discontinued tests we weren't in love with, but I don't think we've actually said, to a large degree that this thing was working great and now it's not at all. I think in our training business, there was some a little bit of digital spend that we pulled back on for that reason. Within the core marketplace, I don't believe we've had much of that. Okay. Let's talk, Ramon, about the customer cohorts sort of pre and post-COVID. What are kind of the key differences you're seeing between those two groups? Any differences in services, location, anything like that? Before COVID hit, we were maybe roughly 65%, 70% overnight versus daytime services. COVID hit, initially, the daytime services were the only things that were going on, workers, nurses that had to go into work still needed a daytime care. As we reopened, people started traveling again before they started going back to work. We saw overnight as a fraction of the total increase about 10 points, from 65 to 75. That happened mostly within the first six months, first nine months, one year after reopening. Since then, it's been relatively steady growth across all the service lines, but that means that the service mix hasn't reverted back to pre-COVID norms. It's still higher on the overnight side. The overall LTVs have continued to go up. In most years pre-COVID, they went up every year. That's kind of, like, started again the last couple years. The mix is, maybe a little bit less weighted on the daytime services, a little bit more on the overnight. We've also seen that the people that had not yet developed the habit of Rover before the pandemic hit, those cohorts recovered the least. Going into the pandemic, the 2019 cohort was, you know, roughly our best ever, you know, close with, I think 2018. It was hit the hardest by the pandemic. If you'd only used Rover once or twice before the pandemic hit, we were less likely to see you afterwards. On incremental, net take or net revenue basis, most of the cohorts have recovered, at least on their incremental contribution to very close to where they were pre-pandemic now. Not all exactly equal. You've discussed a 30%+ long-term EBITDA margin. Could you talk about your progress in sort of achieving that and specifically in 2023 where we should sort of end up? Yeah. I think the last two years we've kind of reramped the fixed cost structure, reramped and normalized our marketing and still grew our operating margins. We look forward to doing that again this year. We expect it to be a little bit of a slower, steady pace. I think our full year this year was low, a little bit above 10%, I think 12% above the 11% last year. I think we would wanna notch that up and get $25 million-$30 million of Adjusted EBITDA on a revenue base of a little bit over $200 million, and this year was $20.8 million Adjusted EBITDA on a revenue base of $174 million. A gradual step up in operating margins as we get towards 30%. The ultimate pace that we get there is gonna be a function of the revenue growth over the next couple years. We feel really confident in the targets. When we decided to go public, we thought 30%+ operating margin was the right number and the math on it we spelled out for people. At the time, we had thought 25% of net revenue would be used for marketing. We've revised that down to be 18%-25%. If we were confident 30%+ prior to thinking our cost structure was actually gonna be lighter, we're probably more confident now. Great. one of the questions we're asking all of our companies, and it's sort of a pervasive theme, is AI. how do you see AI, the growth of large language models impacting Rover's business? Is this an area that you're looking to invest in? I think this is an area you're gonna have to at least consider. In our business, we are marketplace people. We've been data science people from day one. We've tried to incorporate AI where appropriate, machine learning, algorithmic learning, into how we've managed the marketplace from the beginning. That's kind of our thing. That being said, the advances more recently are different. You could imagine we do a lot of content marketing. We have one most trafficked pet blogs in the world. You know, you could imagine actually creating compelling content around animals much more efficiently than you could before. That would be interesting from a content marketing and perspective. We monitor a lot of the conversations taking place on the platform. Things like, hey, is someone's behavior indicative that they could be a threat or a trust and safety issue? What was the agreement between these two individuals? 'Cause, you know, someone is saying that this person didn't do what they say they're gonna be or say they're gonna do. We monitor that, the opportunity for those type of AI models to digest and understand that with a lot less human review and a lot less human model calibration is really high. That's exciting for us. If we can better predict which sitters that are new to Rover are gonna be the best, that's really interesting to us. We do a pretty good job with that, and we can assess how people are doing after we start to get more data on them, but that'd be great if we could accelerate that process. Thinking in those areas, it could be, all of that could be, incredibly useful to our business, and we look forward to exploring some of those in the coming years. Great. We have a few more minutes. I don't know if there's any questions in the audience. If not, I have a couple more. All right. Maybe I'll ask you all to do a two-parter. One, what are you most excited about for Rover in 2023? Two, what do you think the market most either underappreciates or misunderstands about the business? I think in 2023, there are some areas of investment that frankly we've wanted to do already that are gonna start to finally hit, see the results this year. We spent a good chunk of our product investment over the last 18 months, doing things like payment processor transitions, tax compliance, public company compliance. We're excited to turn a little bit more of our attention back to launching new services. We just launched a line of walking gear for sitters and walkers that's Rover branded. There's some features and expansions of Rover that we expect to roll out or test in the next year that I'm really excited about. In terms of the thing that the market most understands about us, I think, it was always gonna be a little bit of a tough thing to try and land, that this business has really good operating leverage, but you're not gonna see that in the next year and a half because we cut so deep during the pandemic that we had to normalize our marketing spend and our fixed cost structure. It was always gonna be hard to land. The business has 80% plus cash margins on revenue, and so a large portion of that will drop to the bottom line. I think the market, to a large degree, for a lot of the companies that came out over the last year or two, have taken more of a we'll believe it when we see it approach. There's probably no shortage of companies that maybe shouldn't have become public companies. If you look at our last couple quarters, you can see that a lot of our departments, G&A products are largely fixed, and you can start to see the incremental fall through to the bottom line now that we've largely brought our normalization to a conclusion. I think the market doesn't fully understand yet the operating leverage in the business, but will. Okay. Excellent. We can wrap it up there. Thank you so much for your time today. Thank you. For joining us.