PTRN - NASDAQ

Good day, and thank you for standing by. Welcome to the Pattern Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Hamish Chung. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining Pattern's earnings call for the third quarter 2025. Before we begin, I would like to remind everyone that today's discussion may contain forward-looking statements based on our current expectations, assumptions and forecasts about future events. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our latest filings with the Securities and Exchange Commission for more information on these risks and uncertainties. We may also refer to certain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. Joining us today are Dave Wright, our Co-Founder and Chief Executive Officer; and our Chief Financial Officer, Jason Beesley. Today's earnings is being webcast, and a replay will be available on our Investor Relations website following the call. Following our prepared remarks today, we will open the call to questions. I'll now turn the call over to our CEO, Dave Wright. Dave, please go ahead.

Thanks, Hamish, and good afternoon, everyone. Thank you for joining us today, and welcome to our first earnings call as a public company. In Q3 2025, Pattern delivered record results for our key 3 metrics: revenue, net revenue retention and adjusted EBITDA. Revenue grew 46% year-over-year to $639.7 million, driven by both new and existing brands. We had strong execution across both U.S. and international markets. Net revenue retention, or NRR, reached an all-time high of 122%. Adjusted EBITDA increased 88% to $41.1 million, reflecting a 6.4% margin, up from 5% a year ago as we continue to gain scale operating leverage across our global network. Our new brand partner pipeline also remains robust and is exceeding expectations, setting us up well for continued momentum. We delivered standout growth across our non-Amazon marketplaces. Total revenue not attributable to Amazon grew 81% year-over-year, reaching $47.1 million in Q3 2025, reflecting the effectiveness of our channel diversification strategy and the strength of our core platform across multiple marketplaces. Revenue outside Amazon represented 7.4% of total revenue in Q3 2025, up from 5.9% in Q3 of 2024. International performance was also robust, underscoring the global demand for our platform that can address the complexities of operating at a global scale. International revenue grew 72% year-over-year to $52.9 million in Q3 2025, representing 8.3% of total revenue, up from 7.0% a year ago. Before Jason walks through the more detailed financials, I'll outline our business model, market position and the secular trends shaping e-commerce and AI, along with our strategic priorities for scalable, profitable growth. Pattern operates as a technology infrastructure layer powering global e-commerce. We provide a thin intelligent layer across global e-commerce, enabling brands to accelerate growth, simplify operations and reach consumers across more than 60 marketplaces and emerging digital surfaces worldwide. Our core strategic differentiator is the intelligent technology and AI layer that powers everything we do. We monetize our technology by purchasing inventory directly from our brand partners and selling through global channels. This inventory-bearing approach reduces friction, aligns incentives and allows brands to focus on what they do best, creating great products and building customer relationships. Our partnerships are deep, long term and highly sticky. This is because we not only drive revenue growth but also manage the complexities that come with selling on marketplaces around the world. Whether customers shop through marketplaces, social platforms or the emerging world of agentic shopping, Pattern plays the same essential role, connecting brands and consumers through a unified data-driven layer that removes friction and maximizes performance across the entire digital commerce ecosystem. We sit squarely at the convergence of e-commerce and artificial intelligence, 2 of the most powerful forces shaping global e-commerce. Regardless of how or where consumers choose to shop, our role remains consistent. We provide a thin intelligent layer that connects brands to demand across every major marketplace and platform. This channel-agnostic model allows us to remain indifferent to customer channel shifts. whether that's traditional e-commerce or the emerging world of agentic commerce. The consumer remains healthy and secular trends continue to support sustained e-commerce growth. E-commerce continues to gain share across major markets, and we expect this trend to accelerate as global logistics improve, driving greater efficiency and accessibility. Emerging technologies such as robotics, autonomous delivery and drones will further reduce costs and increase fulfillment speed, while consumer-facing innovations like agentic commerce simplify the shopping experience. Collectively, these advances are driving a global shift towards digital commerce. At the same time, AI is reshaping digital discovery, transforming how consumers find, evaluate and purchase products. These dynamics reward precision, brands that manage content, pricing and availability dynamically to meet consumers where they are. That's where Pattern excels. Our platform leverages over 46 trillion customer journey data points across search, discoverability, content, pricing, logistics and behavior. Each signal strengthens our continuous optimization loops, making our model smarter and delivering measurable, repeatable impact for our brand partners. Even modest gains in visibility or conversion can translate into millions of dollars in additional sales for our brands, and we capture those improvements consistently at scale. At the core of our approach is a simple but powerful formula: revenue for a brand equals traffic times conversion, times price times availability. I will now outline our 4 strategic priorities for sustained growth and operational scale across the evolving global e-commerce landscape. Number one, investing in the intelligence layer. We continue to invest in our core technology and AI infrastructure, the intelligence layer that powers Patterns model. This layer is advancing to support agentic workflows that are nondeterministic and capable of executing complex tasks at a fraction of traditional costs. As consumer behavior shifts towards agentic and automated purchasing, our platform's ability positions us to lead this evolution. These investments also strengthen our marketplace and international expansion capabilities, reinforcing our ability to scale efficiency. Number two, expanding channels and markets. Channel diversification remains a key growth driver across international and non-Amazon platforms. Growth from Coupang accelerated in Q3 faster than any other marketplace onboarding in our company's history, up more than 150x from the prior quarter. We also see strong growth potential in TikTok and other emerging social platforms where user engagement has become a core differentiator. As logistics advantages become increasingly commoditized, engagement metrics such as time spent on platform will become stronger indicators of future sales. We expect social and LLM-driven ecosystems to capture a growing share of consumer discovery and transactions. Number three, reducing brand friction. Our focus is on making it easier, faster and more cost effective for brands to execute global platform-agnostic e-commerce. We accomplished this through integrated technology, scalable logistics and exceptional service levels that simplify complexity. As vast amounts of data become more accessible, consumers will increasingly distinguish between products that are truly exceptional and those built primarily on marketing. Our goal is to free up our partners' time and resources so they can focus on building great products and advancing R&D. As consumers become more discerning, brands that innovate and deliver genuine quality will capture outsized sustainable growth. Number four, driving scale and efficiency. Scale is a strategic moat and a key source of our value for our brand partners. With Pattern's technology, logistics and global scale, we operate at a cost structure and price point for brands that we believe the brand simply cannot achieve on their own. Each transaction strengthens our data models, enhances our efficiency and increases our operating leverage. Pattern is built for the future of e-commerce. The forces reshaping our industry, AI-driven discovery, social engagement, automation and global logistics innovation are accelerating faster than ever. We are not just adapting to these shifts. We're helping to find them. Our platform stands at the intersection of intelligence and execution, connecting brands and consumers seamlessly across every digital surface. As technology and data continue to advance, we see an era where speed, precision and creativity determine the winners. Pattern is positioned to lead that future, empowering brands, capturing opportunity and driving the next wave of global e-commerce growth. With that, I'll hand it over to Jason to walk through our financial results in more detail. Jason, take it away.

Thanks, Dave, and thank you, everyone, for joining us today. We delivered strong financial results for the third quarter 2025, reflecting broad-based strength across our platform. Revenue was $640 million and adjusted EBITDA was $41 million, representing year-over-year growth of 46% and 88%, respectively. We also achieved record NRR of 122%. What we think is so exciting about our business model is that we grow existing brand partner revenue in 3 primary ways: one, optimizing existing product growth through our technology; two, launching new products; and three, expanding across marketplaces and geographies. First, technology optimization of the e-commerce equation is a large portion of what continues to drive our base NRR. In Q3, growth was primarily attributable to traffic and conversion improvements. Traffic is driven by our advertising tool, Destiny, which executes over 14 million bid changes per day, and conversion is driven by content optimization tools such as our content brief and improved product imagery via the portal. Second, new product launches. The acceleration of our year-over-year growth was primarily attributed to brand partners launching new products this quarter. While the timing for new product launches is driven by brand partners, we focus on perfecting the execution of launching those products to e-commerce marketplaces globally. Third, new marketplaces and geographies. While Amazon is still our biggest marketplace, revenue from non-Amazon marketplaces was up 90% year-over-year, which drove total revenue not attributable to Amazon up 81%. We believe this progress demonstrates the runway ahead of us and our ability to drive marketplace diversification over time. Total international revenue was $53 million, up 72% year-over-year, driven by particular strength in Europe, China and the Middle East. Our international growth was driven by both new and existing brand partners, with each cohort contributing approximately half of total international growth in Q3. We are also happy with our pace of new brand partner wins and expansions. We added new partners in a range of categories, including pet supplies, baby products, home and kitchen, office products, electronics and health and wellness. We improved our year-over-year revenue growth rate in new brand partners compared to the prior quarter. As a reminder, revenue from new partners can fluctuate quarter-to-quarter and is dependent on many factors, such as existing inventory positions, cleanliness of the distribution channel and the brand partners' readiness, which is why we evaluate the contribution from new brand partner revenue on an annual basis. Turning to operating expenses. We achieved operating leverage across all expense lines while simultaneously investing in R&D to fuel future growth. We realized $92 million in stock-based compensation and related tax charges in the quarter related to our IPO. Excluding the impact of the IPO-related costs, total expenses would have been approximately 94.2% of revenue compared to 95.9% in Q3 last year. To go deeper into our underlying cost drivers, we look at disaggregated expense categories, including cost of goods sold, fulfillment costs, marketplace commissions, technology and SG&A. Operational efficiencies, combined with product and marketplace mix drove favorability year-over-year in our variable categories such as cost of goods sold, fulfillment and marketplace commissions. Excluding the indirect initial public offering costs we realized in the third quarter, SG&A would have been $52 million or 8.1% of revenue compared to 8.6% in Q3 2024. The improvement as a percent of revenue was driven by leverage from new initiatives and to some extent, timing of hiring. We expect to continue to realize efficiencies while making strategic investments that we believe will drive future growth, namely in sales and R&D. GAAP net loss was $59 million, which includes a number of IPO charges, including SBC and related taxes. Adjusted EBITDA was $41 million, up 88% from $22 million in Q3 2024. Net income attributable to common and preferred shareholders was negative $223 million in the third quarter. This is inclusive of onetime dividend adjustments that were triggered by the conversion of certain shares as part of the IPO. This resulted in a GAAP loss per share of negative $2.19 based on 102 million average weighted basic and diluted shares outstanding. Turning to cash flows. We look at cash flows over a 12-month period as a result of the timing of marketplace payments we receive and payments for our inventory from brand partners. Last 12-month free cash flow, which is a combination of operating cash flow minus investing cash flow was $71 million, up from $49 million in Q3 '24, driven by profit flow-through, offset by investments in continued warehouse automation and the launch of our West Coast fulfillment center in Las Vegas. This performance aligns with our strategy of generating strong cash flow growth and keeping our business model capital-light. Turning to our balance sheet. We raised $135 million net of fees and expenses in our September IPO. And as of quarter end, we had $313 million in cash and cash equivalents with 0 debt. Stepping back to give you a broader perspective on the capital efficiency of the business prior to our IPO, Pattern raised a total of $229 million since inception to build out our global e-commerce business and support our $150 million investment into our technology stack. As of June 30, we had $215 million in cash and cash equivalents with 0 debt. Adding in free cash flow generation for Q3 means that excluding IPO proceeds, we generated more cash than we have raised. Despite the new infusion of capital from our IPO and the massive opportunity ahead of us, we will remain stewards of capital, balancing high growth, strong profitability and positive cash flow generation with a market opportunity in the trillions. Before I discuss our outlook, I first want to quickly address the macroeconomic landscape. So far, as our results indicate, we have not seen any material effects on our business or decreased consumer demand for products in our portfolio. The potential direct impact of trade policy changes to our business is minimal, but it's difficult to predict the consumer reaction to what will likely result in higher prices as well as potential supply chain disruptions. We could encounter potential future headwinds in light of consumer sentiment or behavior changes related to economic and geopolitical factors. We're closely tracking developments as the landscape continues to evolve, but again, we are not currently seeing an impact. We are having a record year and are pleased to see the momentum continue into the fourth quarter. For the fourth quarter, we expect revenue in the range of $680 million to $700 million, representing 32% to 36% growth year-over-year and adjusted EBITDA in the range of $38 million to $40 million, representing 44% to 48% growth. Our guidance reflects continued success across our 3 vectors of growth with existing brand partners as well as traction adding new brand partners. As it relates to expenses, our investment priorities are: one, further strengthen our technology moat in AI-driven technology and automation, optimize decision-making and improve efficiency across the platform; and two, accelerate our go-to-market as we continue to deepen our penetration in existing and expand into new categories, marketplaces and geographies. Our Q4 guidance implies 5.7% adjusted EBITDA margin at the midpoint, up year-over-year, but down from Q3. Quarterly margin fluctuations are typical in our business due to variables such as product and marketplace mix. Overall, it's important to view our margin in the context of our strategic philosophy, disciplined execution, continuing to invest in technology and sales to capture growth while maintaining profitability.

Thanks, Jason. We're really happy with our results so far and excited for the future. In closing, we continue to deliver market-leading growth, positive cash flow and sustainable profitability. We are part of defining and redefining the future of e-commerce through AI, unlocking significant opportunities for innovation and growth. We're adding new brand partners, deepening our existing partnerships, launching innovative solutions and scaling globally. It's an exciting time to be in the digital commerce space. It's changed more in the past 2 years than in the previous 10, creating incredible opportunities for innovative, fast-moving companies like Pattern. Our formula is working, and we are just getting started. I want to thank the entire Pattern team for their hard work and dedication. The results we've achieved reflect their relentless commitment to excellence, and I couldn't be more thrilled of what we're building together. With that, we'll now open the call to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Doug Anmuth with JPMorgan.

One for Dave and one for Jason. Dave, can we get your views on agentic commerce more broadly and just how you expect it to shape the shopping path in coming years? And then what the puts and takes are on the big marketplaces and then also for Pattern? And then, Jason, can you provide some more color just on revenue growth from existing and new brands? I don't think there was a breakout unless I missed it. But just trying to get a little more color there and then how you're doing in terms of diversifying vertical mix as well.

All right. Thanks, Doug. Okay. So in terms of agentic shopping, I mean, it is just -- it's really fun, I guess, right now to watch that unfold. No one knows exactly where we'll be. But I think in general, we can all be confident in believing the ground is shifting. So just a couple of ideas here. One is we do know that the volume of product search and discovery. The numbers that we have right now is about 38% of all -- in the U.S., people are using the likes of ChatGPT for some sort of what they would consider shopping. Now 53% of that right now is product research. But there's even things like about 30% is just creating shopping lists and so on and so forth. So I think one thing we can be pretty confident in is where you spend your time, you will likely buy. So if you think of your own behavior and our collective behaviors, I think we've gravitated in a significant way to LLMs. And I think naturally, if they can make it easy and high trust and have a logistics infrastructure that backs it up, I believe we'll see quite a shift into that agentic world. And I think there'll be some very big winners that come out of those changes.

Great. And then, Doug, on your question on revenue growth, I would say, as far as existing, that was the strongest part of our growth as demonstrated by the 122% record NRR that we had. And that was across all the 3 vectors that we talked about growing there, particularly tech was strong in the world of traffic and conversion. We also had product line expansions this quarter in Q3 that were bigger than they were in Q2. So that helped accelerate the growth. And then, of course, you saw in our prepared remarks, the very strong international growth and marketplace growth and diversification there. On the new brand side, we did have extended growth year-over-year when you compare the quarterly growth rates. So that improved year-over-year in Q3 versus Q2 year-over-year growth. And on the category mix side, we're seeing growth across all the categories. If I was to pick out 2 categories that were particularly exciting this time around, it would be beauty and DIY tools, which both grew over 100%, which we're excited there. So we continue to mix up our categories, mix up our marketplaces and diversify across the board.

The next question comes from the line of Ralph Schackart with William Blair.

Dave, obviously, a lot of attention and investor focus on agentic e-commerce. Just maybe kind of follow up on Doug's question there. It seems like you're in a pretty strong position to help your brands with this transition given the technology you have and insights you have. Maybe you could sort of provide some perspective how you could help brands during this transition. And then maybe just on net revenue retention, exceptionally strong this quarter. It sounds like a lot of positive things are coming together. But how should we think about this metric going forward?

Okay. A couple of thoughts. I'll hit the NRR real quick, and Jason will finish off. In terms of -- I mean, we're fabulously positioned, honestly, in the agentic space because if you think of our technology platform, it's a thin layer. It's agnostic as to where consumers go. So we don't really -- we're just helping brands win wherever they win. And if you think of some of the data we have, which is bottom of funnel, you probably saw we released our GEO Scorecard, which will essentially take some of that bottom-of-funnel data, keyword, keyword phrase type data and reverse engineer it into questions that can then provide a brand guidance on, okay, what is their reach? Do they show up when a search is done across the different LLMs? What is their rank? How do they stack up against other brands and what's the sentiment? And then how might we go about impacting that? I believe you'll have really material wins there in that what you might -- anything that becomes a bit of a digital knife bite is where Pattern will likely come out on top for our brands. We just have a data moat we've been amassing over 12 years. It's almost perfect timing. So I think we'll continue to see tremendous results there. We are waiting to see the talked about results get more live on the LLMs. I know that they've made some great progress with the ACP announcement and so forth. And the only live marketplace to date is Etsy, and it's still quite difficult to find anything on those channels and see how it works in practice. But as soon as that hits, we're ready with our brands. We have a lineup. We have a group of brands that are ready to go. And as soon as that button is pushed, we'll be pressing the revenue button there. Okay. And I'll just say one thing on NRR because I'm just so -- I like this metric more than any other metric simply because if we win here, for one, we can count on revenue in future quarters. And this is an indicator of our machine works rather than just a sales motion, anybody can build a sales motion. But if you can build a sales motion on top of solid retention, you know that the machine works, then you can really count on long-term growth. So I think you'll -- Jason will walk through the specifics, but you'll continue to see us be just obsessed by this number. And obviously, just phenomenal results this quarter on that front.

Definitely. Yes, Ralph, to David's point, 122% is the most we've ever had. We're obsessed with growing our brand partners over a very long period of time through the technology innovations and other levers that we have as part of that formula. I think in terms of going forward, it's important to consider even a 3-year average going forward would put us an elite company on this metric when you compare it to how other companies do. And of course, we're going to have the lapping impact that we need to think about when we look in the future. We're not providing guidance at this point on NRR or forward-looking stuff there, but those are things you would want to keep in mind.

The next question comes from the line of John Colantuoni with Jefferies.

Great. So as you continue building international capabilities, talk about key areas of investments needed to help activate on the opportunity and give us your perspective on how you envision geographic diversification contributing to new and longer-term growth? And number two, in terms of guidance, maybe you could just talk to what's embedded in your outlook for 4Q revenue in terms of contribution from new and existing brand partners. It looks like the midpoint implies a high single-digit percentage sequential increase relative to the third quarter, which is a bit less than what you've done in the past couple of years. So I'm just curious if you're embedding some conservatism into that.

Yes. Thanks, John. In terms of international, I really appreciate the question. I think it's sometimes overlooked in this world of agentic on the opportunities there. If you think GMV and following GMV around the world, Pattern will naturally grow here. And it is one of our strongest moats simply because it is so hard for a brand to execute within a cost structure that -- relative to the sales opportunity if you're a single brand. This is where the scale of Pattern really starts to come through. I'll throw a few numbers out at you. Europe grew 73% APAC grew 68% MENA grew 222%. So just tremendous growth internationally and is really helping our overall growth numbers, and you'll see that over the years, I'm sure. So the investment there, we've made many of the key investments. If you think about the structures, now we continue to invest in technology, but the underlying technology is quite modular in that the core of how it operates is the same. And then we will have a team that we will designate to say, okay, we need to adapt this core underlying set of technologies. We need to have a module that will adapt it for, say, the APIs and the methodologies that a Walmart might use or that a Coupang might use. But the investment is much less. And then if you think logistics, for us, you need quite a light footprint and we can leverage existing logistics infrastructure. I think it's why you'll see us start winning bigger. The faster worldwide logistics infrastructure develops, you'll see us follow that development because that's where digital will start to win in general.

Thanks, Dave. John, yes, on guidance, when we look at Q4 and we think about what's built into that, we think that 32% to 36% growth is very strong when you consider the lapping impact of the strong Q4 we had last year and really take that in the context there. It really is a nice, nice result. It also includes us growing adjusted EBITDA of 44% to 48%, which has us again, year-over-year gaining a bit of leverage. In terms of our philosophy on guidance and new brand partner revenue, on that, we'll continue to make sure that when we look at that, we will not focus so much specifically on one quarter with that metric as we will the general trend. So our pipeline looks very good there. We're very confident in it. But when we provide guidance, we don't put in what I would call the more speculative portions of that metric because we want to provide a really solid foundation for people's expectations. The other thing on the guidance that I think is important for people to note is that Q4 is growing -- the EBITDA is growing faster than revenue, which shows that overall, our model continues to work. If you take a step back and just put the guidance in Q4 plus our year-to-date performance in context, we're going to deliver almost $2.5 billion in revenue with a growth rate in the high 30 percentages, 6% adjusted EBITDA margin. We're really, really, really impressed with that. I think it sets us up really nicely for this year and going forward.

Yes. And I might just layer on one nerdy data point that I had the team run for us. If we look at all public companies and we said, okay, once they clear $1 billion, let's say that's at scale in terms of revenue. then what are elite growth rates. And our growth rates for this year puts us in the top 3.1 percentile as we calculate it, I'm sure there's probably different ways to look at it, but that's very close. So it's pretty exciting. And the neat thing about our model is as long as those NRR numbers stay strong, we can continue to grow at levels that I think that everyone would historically and in the future, people would say it would be elite levels.

Our next call comes from the line Colin Sebastian with Baird.

Congrats on the IPO and the first results here out of the gate. Dave, I appreciate you outlining the 4 strategic priorities. And I was just hoping you could detail maybe more of the product road map for the intelligence layer and reducing brand friction as you see it unfolding over the next year, including the role that logistics plays, I think, in that. And then, Jason, related to that, maybe tying the pace of investment going forward, the balance between automation internally as well as executing on that product road map in terms of how that leads to margin expansion going forward.

Yes, Colin, thanks for the question. I've never been more excited product road map-wise. Over the next quarter and the last quarter, I mean, we're working on some things. I guess a couple of principles that you could probably anchor on to think about. One is one of the things we're asking ourselves now in the world of agentic workflows and if you think a nondeterministic workflow as opposed to workflows historically where you define step 1, 2, 3, 4, now you can take data and you can -- has memory, so you can remember interactions that you've had in the past, you can remember what winning and losing looks like. So the question would be now can we operate a brand without touching a keyboard. That's one of the things that we're testing. And if the data is rich enough, the sensors are rich enough, we believe we can and possibly e-com might be the most ready for an agentic workflow model that I don't know of anyone that's further along right now on that than we are. So we're very, very excited there. You'll see more of that in the future -- in the very near future. And then in terms of logistics, of course, we continue to build technology there. That would be a long discussion to have. But the technology there is largely geared around efficiency and scale. So can we reduce costs for brands in a way that would be somewhat unprecedented. And we know we're not going to jump in there and compete on the last mile. But there is a space in there in terms of middle mile efficiency where there is enormous dollars to be saved. And I think that's where Pattern can operate at scale and make -- in terms of the complexities that exist out there, we can dramatically simplify it.

Maybe just building off of Dave's point first. As it relates to logistics, Colin, you asked about, we take a capital-light approach to that. It is very much focused on the software that drives logistics and some of the machinery and automation inside the warehouse, but we don't have a lot of warehouses relative to most logistics groups. We have light cross-dock warehouses. We launched recently our Las Vegas warehouse. We've seen great, great efficiencies there. We're really excited about that. And we'll keep adding those as needed as the volume drives that. But generally speaking, our capital investment is about 1% of revenue. On the technology side, that is where we're very excited in investment, as you can tell from Dave's comments on the road map. And we actually expect that we'll probably grow that investment faster than revenue in the near future. And that will be a slight drag on margins, but we think it will more than make up for it in the efficiencies we get in the long term and the impact that it has on the e-commerce optimization that ripples across all our brands and supports our world-class NRR. The last thing I'll say just generally about our philosophy is we are very focused on running a fast-growing profitable cash-generating business with a huge opportunity ahead of us. We're not solely focused on a little bit of leverage every quarter. We're going to invest in sales and marketing and tech to drive that bigger EBITDA dollars prize, if you will, versus specific leverage in any one quarter or 1 year.

Our next call comes from the line of Eric Sheridan with Goldman Sachs.

When you think about building density in certain verticals in e-commerce, can you talk a little bit -- I know it's a bit of a bigger picture question, but can you talk a little bit about building density around SKUs and brands and merchants by vertical and the flywheel effects that, that can create for you as a platform in terms of generating outsized returns over the long term?

Maybe provide me a little more insight into what you mean around density there.

As you go deeper with respect to a larger array of brands in any particular vertical, talk a little bit about how the scale effects of having a wider array of brands in a specific vertical might make that vertical act differently from a unit economic standpoint?

Yes, that makes sense. Well, the largest advantage that you'll see as we continue to grow and scale density there will be data advantages. So for every customer data journey input that we add to the model, it just gets better and better. And of course, as you add verticals and different products, you just -- the models continue to learn and get better. And then just pure scale across both international and U.S. and different verticals just gives you the ability to build technology and logistics infrastructure that a brand just could not build on their own at the same price point. And small bits of precision -- I'll give you an example. We took our overall conversion rate for Pattern, all products that we support, which is over 100,000 products, and we moved in -- from quarter-over-quarter of last year, conversion at its core from 15% to 17%. And if you think about the dollars that, that drives for brands in both organic winning in just pure mathematical dollars, and then you're not paying for those -- that's not advertising driven. That is figuring out what content converts. And that is a game of enormous amounts of data and precision. So that's where density really comes through and it is just incredibly helpful for brands, and it's why you're seeing a lot of the NRR results that you are.

Our next call comes from the line of Brian Pitz with BMO Capital Markets.

Dave, growth from revenue generated outside of Amazon was very impressive. I think you said it was up about 81% year-over-year. You talked about that being driven by new marketplaces and geographies. Can you maybe help us understand how important the recent launch of Coupang was and the contribution of that 68% APAC growth? And then any additional color maybe on the Europe growth as well because I think that rate was even higher. And then I've just got a quick follow-on.

Yes, great question. Okay. So Coupang generated -- we attributed $4.5 million in the quarter on Coupang. We expect $11 million for the end of the year. So phenomenal growth, still in the grand scheme of things as yet, still very small. But even inside the U.S., we had some really strong marketplace growth. like Walmart grew 96%. TikTok shops grew 392% off of a small base. But I think where we're really starting to see great traction is our ability to consume information and execute for brands across -- we just continue to expand the marketplace reach. And the numbers are somewhat staggering, but they shouldn't be that surprising. It's where GMV is and it's where the consumers are. And it's why you see such great results.

Awesome. And then maybe just on the new brand partners, a quick comment. Can you talk about the time line to convert some of those partners and verticals? I know you mentioned like pet supplies and home. How long have those been in the pipeline? And did you see any benefits of the IPO on actually raising awareness with those brands to accelerate some of those wins?

Yes. That was one of the benefits of the IPO. So I think the pipeline for us is quite long, honestly. So from the point of initial interaction, it's about 90-plus days for us to close a deal. And then from the point of closing the deal, then we have ramp curves where -- and this is the part that Jason sort of inferred is quite lumpy. So if a brand has -- some brands will have a full 9 months of inventory in a channel and some will run very lean at a couple of months. So we'll sign a deal, and then it will take us anywhere from sometimes 2 months, sometimes even 1.5 months before we'll see a material revenue to -- sometimes it's a year before we see real revenue on the outside end of that. But what we can tell you is all of our bookings numbers that we track internally look fantastic, and we're exceeding all expectations there. That is what will end up translating into all of that new partner revenue.

The next call comes from Justin Patterson with KeyBanc.

Dave, I'd love to hear about some of your product priorities into the coming year. Obviously, GenAI is changing at a very rapid pace. So I would love for you to just expand upon some of the tools you're bringing out to advertisers, especially as it pertains to just visual capabilities.

Yes. Thanks for the question. I referred earlier to what we call the intelligence layer. That is our top priority. We have the bulk of the company working there. And you can almost think of that as -- well, I'll give you a couple of thoughts here. If I were to say, hey, what is your favorite enterprise application? Usually, when you ask that question, people give almost a blank stare and they want to say none. So I think that the way applications work and the way that our brands and our teams will interact with applications in the future will change dramatically. We will be more chat-based, more chat data based. And so I think MCP server integration, data across all of our platforms integrated into a reasoning model where we can take all of this data and integrate it into a reasoning model and then be able to execute without any human interaction. That is where we're focused. I see enormous cost advantages there. I see the ability to execute globally that would be somewhat unprecedented for us, even -- I couldn't have dreamed of being able to do what we could do 3 years ago. I probably wouldn't even written up that playbook before the transformer models. So that is largely where our focus sits is on that intelligence layer, both on the execution side and the interaction side on how we'll actually interact with it. I'll give you one fun example that we're working on. So one of the things that takes a brand a while to get up to speed on is, okay, what's the market look like? Say they're selling a product like a creatine. What is everyone else doing in the space? What could I be doing different? We're going to drop a podcast in the morning that breaks down, okay, here's all your inventory levels. They can listen to it on the way into work. Here's what everyone else is doing. Here's where you're winning, here's where you're losing, Here's maybe some content ideas. And then when they get to work or they get into their first meeting with Pattern, we can immediately execute on it or they can just verbally say, I like that idea, please execute that strategy. And by that evening, it is done. And so if you -- I mean, it's almost hard to imagine this world, but we're actually seeing the fruits of it come live.

Are you still there, Dave?

Yes.

I want to make sure. The next call comes from the line of Bernie McTernan with Needham & Company.

I know this call has been focused a lot about agentic shopping. I was just wondering, is it the same way when you're talking with your customers? And just trying to get a sense in terms of is that -- is this one of the drivers of the strong net revenue retention you're seeing or helping to drive conversion of the new brand partners? And then second, I just wanted to ask on margins. So EBITDA margin is up 140 basis points year-over-year. I understand that there can be puts and takes on the different variable lines. on the cost structure, but it seems like there was just like a broad outperformance or an aggregate outperformance. I just wanted to get a sense in terms of like what drove it this quarter and how we should think about the 50 basis point improvement year-over-year for next quarter?

Yes, I'll take the first bit of that in terms of NRR. NRR is just -- is an aggregate score of almost winning. So if we take a brand from the U.S. to South Korea on Coupang, that will count as net revenue retention, and we count that as a win. If we can increase traffic for a brand or conversion, that will add to our NRR numbers. All of these things are where brands -- if a brand wants to work with Pattern or continue to work with Pattern, that will be the core driver. Do they feel like they're winning? So I think that's where you'll continue to see us focus is -- but right now, it's broad-based. It's technology-based, it's international based. And then it's on top of that, it's efficient.

On the margin side, Bernie, I would say the most exciting thing within all of that improvement is if you look at the disaggregated expenses, excluding all IPO-related costs, the SG&A bucket is going from $8.6 million to $8.1 million. A lot of that is being leveraged on our general global agentic costs. That has been under a lot of the force of margin expansion when you look on a regular basis for the past few years. We believe that will continue to happen because we’re constantly looking for a crisis there every year. Where we’re investing the margin is in the sales and marketing technology, particularly technology. We will probably invest faster than we’ve done in the past. The rest of that year-over-year margin improvement we see is generally mixed up across slightly different unique economics, and that will grow across all of our variable costs. That does not have any important order. That is why we are going to be a bit too obsessed with margin expansion in one specific order. We will not look at it on an annual and long-term basis.

The next question comes from the line of Mark Kelley with Stifel.

I just want to ask you about when you look to expand into different verticals and you're receiving inbound requests from newer brands or newer businesses that maybe you haven't worked in that vertical and you look at your distribution and fulfillment footprint, I guess, can you remind us, are there any categories that just don't make sense for you for whatever reason? And I guess I would put your distribution network as maybe one of the reasons. And then second, maybe it's a bit too early to ask you this question, but have you seen any uptick in inbound requests from brands that you haven't worked with as a result of the IPO? I know sometimes that raises people's profile.

Okay. Yes, first question, and it's a great one. And I would say, at the beginning of this year, one of the areas where we were -- we didn't really have a competitive offering was in the oversized space. And that was just simply logistics. Most of the marketplaces don't offer a competitive logistics offering and final mile delivery option for oversight. And pre-IPO, I think this is fine to talk about, but we have a partnership with Chewy. Chewy will manage our large and oversized network. So we'll use 4 of their nodes, one of our nodes. They're going to leverage our fulfillment technology within their warehouses. And so that gives us the opportunity to almost to expand anywhere, except in areas where you would almost just inherently understand they're not great for e-com. One example is we tried to work with Kellogg's. And if you think cereal, it is just a tough go e-com. You're talking shipping a large box of air and you're trying to beat an in-store at $4. So you're going to lose money there. So I would say, inherently, things that are not e-com friendly will always be hard for us as they will be hard for anybody else. And then -- but everywhere else should be largely, at this point, open and ready for business.

The uptick from the IPO, our pipeline is looking great. Yes, we have seen a bit of an uptick. All of that will need to be converted through the funnel, as Dave confirmed and then brought online in terms of real revenue sales in the future.

The last call comes from the line of Austin Riddick with Evercore ISI.

A quick one for me. Just as -- how should we be thinking about EBITDA margins as the mix begins to shift to non-Amazon and international? Is there any, I guess, unit economic differences by region or marketplace?

Good question. Yes, there are differences in unit economics across marketplaces, particularly in the commission side. Fulfillment rates obviously are different in every country. We have a SKU-by-SKU way that we assess those specifics on the variable cost side, and then we solve for the purchase price that we're going to pay to the brands based on those unit economics. So the net impact of that is it does cause mix across the lines, but we're solving generally for the same unit economics. And so as we grow, it scales nicely and you don't have what I would say, EBITDA on bottom line mix there. You just see it on the specific lines in the disaggregated expenses themselves.

Great. Thank you. I'm showing no further questions at this time. I will now send it back to Dave for closing remarks.

Just in closing, I just want to just appreciate the team. I mean we talk a lot internally about a concept called T sport. Executives and I think companies in general function as a team. It's almost the ultimate team sport. It's really fun to be part of. And I couldn't be more excited for what we've done and what's to come, especially in this ever-changing landscape. I'm thrilled. And thanks for everyone who joined the call. Thanks for your time. Thanks for your willingness to take a look at Pattern. I think it will be a fun journey ahead of us.