Oddity Tech Ltd. (ODD) Earnings

Management highlights

- Core Issue Context & Progress * The company is navigating a technical anomaly with its largest advertising partner that caused sudden, material CPA increases for Ilmakiai starting in late 2025, with peak 2x higher than expected CPA in early 2026. * May 2026 saw a 28% sequential decline in Ilmakiai CPA from April, marking the first positive trend after multiple months of increasing CPA; the advertising partner estimates 40% to 60% of the excess CPA can be recovered through platform-side fixes alone. * Management attributes the issue to technical algorithm problems (serving lower-quality audiences, negative interaction with the Try Before You Buy model) rather than brand weakness, market saturation, or company-side marketing errors, citing simultaneous identical breakdown across multiple geographies and accounts, and strong 12-month repeat purchase rates from existing customers. * To date, the company has shifted 40% of Ilmakiai's acquisition revenue from Try Before You Buy to a standard purchase model, reducing exposure without hurting unit economics. - New Business & Innovation Progress * Methodic, launched late 2025, offers 28 prescription and non-prescription dermatology products with strong early user engagement (high weekly check-in and care team interaction rates). * OT Labs added two new proprietary products in Q1: Neurexa (a topical eczema treatment) and Zarrelac (an acne scar prevention treatment). Multiple new drug candidates are in late development: anti-aging molecules with positive in vitro results now in human focus groups, an enhanced hyperpigmentation combination treatment in testing, and a novel topical acne prevention treatment in final laboratory validation. - Financial & Operational Context * Q1 2026 net revenue declined 26% year-over-year, which was better than management's prior expectation of a ~30% decline. * Gross margin came in at 69.7%, a 520 basis point year-over-year compression driven by product mix, lower AOV, and temporary costs from algorithm testing and remediation efforts. * Adjusted EBITDA was negative $7 million, adjusted diluted EPS was negative 17 cents, and Q1 free cash flow was negative $21 million. * The company ended Q1 with $667 million in cash, equivalents and investments, and its $350 million undrawn credit facility remains available. * The board approved a new $200 million Class A share repurchase program (replacing a prior $150 million program); the company repurchased ~6 million shares for $82 million in Q1, reducing outstanding shares by ~10%, with ~$167 million remaining in authorization.

Guidance

- Full-year 2026: Management maintains that ongoing media uncertainty limits visibility into full-year financials, but reaffirms that full-year adjusted EBITDA is expected to be positive. If the company recovers 40% to 60% of excess CPA, management expects it would return to 20% revenue growth and 20% adjusted EBITDA margin for a normalized full year. - Q2 2026: Net revenue is expected to decline 25% to 30% year-over-year, and adjusted EBITDA is guided to between $8 million and $10 million. Q2 guidance assumes that CPA will remain at similarly difficult levels to Q1, despite the sequential improvement seen in May. - Longer-term: Management expects normalization of CPA and a return to healthy growth in the second half of 2026 if current positive trends continue. Reduced first quarter user acquisition will create a persistent overhang on repeat sales for the remainder of 2026 even if CPAs normalize, and lower 2026 new user volumes will impact 2027 performance proportional to how quickly the issue is resolved.

Segment performance

Ilmakiai (core beauty brand): Drove the 26% year-over-year net revenue decline in Q1 2026, with first orders down ~50% due to sharply elevated customer acquisition costs (CPA) on the company's largest advertising platform. Repeat orders for Ilmakiai declined 15% year-over-year, as a result of lower prior first order volumes. Spoichard: The brand is also experiencing higher CPA, but the impact is far less severe than Ilmakiai, and it continues to grow. It contributed to a slight year-over-year decline in average order value (AOV) due to product mix shift. Methodic: The newly launched dermatology-focused medical telehealth platform is off to a strong start, on track to meet its full-year 2026 revenue target of $25 million, matching Spoichard's first-year performance. OT Labs: The company's ingredient innovation R&D segment continued product development, adding two new proprietary molecule-based treatments to the Methodic product line in Q1, with multiple additional novel drug candidates in late-stage development.

Risks & headwinds

- The technical algorithm issue with the largest advertising partner has created material negative pressure on 2026 financial results, particularly in the first half, with uncertain timing of full recovery. * There is no guarantee that the recent positive May CPA trend will continue, or that the company will achieve the projected 40% to 60% recovery of excess CPA. * The company relies heavily on its single largest advertising partner (which holds majority market share for U.S. beauty new user acquisition), limiting near-term options for meaningful diversification of user acquisition channels. * The company's 100% direct-to-consumer business model makes it far more sensitive to platform algorithm changes than omnichannel peer beauty brands. * Elevated inventory levels exiting Q1, resulting from lower-than-planned revenue, creates near-term balance sheet pressure.

Analyst Q&A

• Q: What is the cadence of margin and first order growth expected this year, and how much has user acquisition spend been reduced year-over-year? /

  A: The 50% year-over-year drop in first orders in Q1 cannot be fully made up in the second half due to seasonality. Management does not have enough visibility to provide back-half quarterly EBITDA guidance, but remains confident full-year EBITDA will be positive. Total media spend in Q1 was only slightly down year-over-year, but efficiency was drastically worse; the company continues to spend at reduced levels to generate data to fix algorithm issues, as stopping spend would prevent any recovery.

• Q: What drove the 28% sequential May CPA decline, and why is Q2 revenue guidance still for a 25-30% decline after this improvement? /

  A: Improvements came from structural technical adjustments (auditing signals, infrastructure changes, audience and campaign adjustments) and close collaboration with the ad partner, alongside modest budget reallocation; this is the first positive trend after months of worsening CPA. Q2 guidance still projects large year-over-year declines because the overall average CPA for Q2 is still not materially better than Q1, and lost first orders from Q1 will translate into lower repeat orders in Q2, with improvement expected to come in the second half.

• Q: Are you shifting resources away from Ilmakiai to Methodic, can Methodic growth be accelerated, and are there hiring issues for OT Labs biotech roles? /

  A: Management does not face hiring or retention issues for OT Labs, and is not shifting resources away from Ilmakiai, as it expects to resolve the technical CPA issue. Methodic is on target to hit its $25 million full-year revenue target, and management is intentionally holding to this pace to optimize funnels and product-market fit before accelerating growth, which is the appropriate approach for a new brand.

• Q: Are you planning to diversify ad partners, and does Spoiled Child face the same CPA issues? /

  A: The company already advertises on other platforms, but the largest partner holds a majority of the U.S. beauty new user acquisition market, so there is a hard limit to how much alternative platforms can offset the current issue. Spoiled Child is also seeing increased CPA, but the impact is far less severe and the brand continues to grow; once a fix is finalized for Ilmakiai, it will be implemented for Spoiled Child to drive further upside.

• Q: What is the future of the Try Before You Buy model after shifting 40% of acquisition revenue away from it? /

  A: The company has no plans to eliminate Try Before You Buy, as it believes the model delivers a superior consumer experience that replicates in-store shopping. It will maintain the program in a more balanced mix with standard purchase models, and the shift to date has not negatively impacted unit economics after extensive testing.