Q2 2022 ContextLogic Inc Earnings Call
Good day and thank you for standing by welcome to wishes second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the Speakers' prepared remarks, there will be a question and answer session to ask a question during this session.
You'll need to press star one one on your telephone I would now like to turn the conference over to Randy Xray go with wishes Vice President of it better relations. Please go ahead.
Yeah.
Hi, everyone and welcome to wishes second quarter 2022 earnings Conference call I'm, Randy <unk>, Vice President of Investor Relations and joining me today are CEO , Vijay Talwar, and our CFO and CMO Vivien live today.
<unk> prepared remarks have been prerecorded. There is also a slide deck that has been posted to our IR website, which is available for your reference.
Once we are finished with Vijay in <unk> remarks, we will hold a live Q&A session.
Remarks made today include forward looking statements that are related to among other things our financial expectations is this and turnaround plans the turnaround timeline consumer experience and engagement expectations regarding merchant relationships and strategic partnerships the potential impact of our strategic marketing and <unk>.
Initiatives, including AD spending and the rebrand.
And the anticipated return on our investments and their ability to drive future growth.
Our actual results may differ materially from the results implied by these forward looking statements if certain risks materialize or assumptions prove incorrect.
Forward looking statements involve risks and uncertainties, which are described in today's earnings release, and our periodic reports filed with the SEC.
Any forward looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them.
Also during the call we will present, both GAAP and non-GAAP financial numbers and metrics a reconciliation of non-GAAP to GAAP results is included in today's earnings release, which you can find on our Investor Relations website, and which is also filed with the SEC.
A replay of this call will be posted to our Investor Relations website.
I'll now turn the call over to our two wishes CEO J tower.
Thank you Randy I would like to thank everyone for joining our second quarter 2022 earnings call.
We'll start the call by providing a high level overview of our corporate rebrand.
Then I will share some progress highlights around two of our three foundational business pillars.
Moving the consumer experience and deepening our merchant relationships.
After my comments, Vivian Liu our CFO and our newly appointed CFO , who will discuss our third foundational pillar achieving operational efficiencies.
He will then share our second quarter numbers in more detail and provide our third quarter financial forecast.
I will then provide some closing remarks before opening up the call to your questions.
An important part of my role as viciously has been to focus on our turnaround and rebuild a strong foundation for the company.
This has entailed improving and fixing many operational aspects of the company.
But another very important part of my role has been to focus on transforming vicious corporate culture.
Two one that embraces innovation.
Challenges the status quo and.
And enables us to consider where we can take this company over the next three years.
Today, I would like to start by discussing the rebranding of rush.
Part of our first pillar of improving customer experience.
Richards beginning in earnest this month.
The rebranding will highlight many of the fundamental changes that we've made at which in recent months.
<unk>, the new consumer experiences.
<unk> customer service.
Mr delivery better on time delivery rates, our new pricing strategy and the overall increase consistency.
The new rich marketplace.
We will begin rolling out our rebranding stages.
Starting in August incorporating a new logo, a new design a new imagery.
The rebrand will be supported with a multichannel advertising campaign that is planned to run in our largest markets beginning in August and running throughout the holiday season.
In recognition of all the changes underway at wish.
We have also taken the opportunity to reevaluate our mission as a business.
Our new mission statement.
Bargains made fun.
Discovery made easy more accurately reflects our renewed focus on helping value oriented consumers.
Discover listings of new products, while having fun and a frictionless and convenient way.
Once we are successful in making discovery easy.
And bargain shopping fun.
And believe it will in turn create positive word of mouth, among our consumers ultimately, resulting in higher sales growth.
Our investments in the consumer experience have resulted in continued improvement in our net promoter scores from March through June .
Further we have seen impressive gains in our consumer feedback scores gathered by one of our larger advertising partners.
They provide a score on a scale of zero to five with five being the highest.
Based on the feedback they've received from people who have likely made a purchase from ads.
They have observed our consumer score improving from below two in 2021 to a high of four seven in 2022.
This effectively moves us from among the lowest performing merchants to among the highest in less than a year.
Our marketing team has been diligently testing for additional consumer marketing channels.
Plan is to diversify our marketing spend to balance our traditional media outlets like TV and radio with newer platforms like Tech talk on Snapchat.
This will have much greater appeal, among our target Gen Z and millennial consumer base.
As we continue our path to improve consumer experience I am excited to announce that we have completed a soft launch on Android of a revamped womens fashion offerings.
The new experience balances function and inspiration by introducing filters.
<unk> feeds and much much more.
We are happy to report that early fashion buying trends were better than we even anticipated.
We saw the number of transactions and GMB for fashion increase.
Our transactions amongst Gen Z consumers increased by double digits.
We plan to build on this success with a much broader ramp up of women's fashion from mid August to mid November .
We plan to eventually have over 2000, new fashion merchants on boarded.
And over 150000 fashion skus available to consumers to choose from.
Our second pillar is deepening our merchant relationships.
During the second quarter, we continued with the invite only process for.
Our onboarding, a new merchants, while also raising greater awareness about our risk standards program.
The program has already started to have positive impact on the business leading to a reduction in customer refund rates.
We continue to be diligent in our removal removal of merchants, who violated our policies and do not consistently deliver a good customer experience.
Starting in Q2, we rolled out a new commission structure to bring greater clarity and a more competitive commission rate to our merchants.
This change was first implemented in Europe in Q2 and will be deployed to the rest of the world, including U S. In Q3.
In the second quarter of this year, we began a monthly survey of our merchants to better understand their needs and garner their overall sentiment towards fresh.
The initial findings for our merchant NPS survey indicate that merchants value the ease of Onboarding.
Our global customer traffic.
And our logistics support.
We will continue to survey our merchants to learn more about how to make rich and even better marketplace for their businesses.
At this time I would like to turn the discussion over to our CFO and COO Vivian to discuss our third pillar as well as our financials.
Thank you Vijay.
Before discussing the financials.
I'd like to share updates on our third pillar, which is about achieving operational excellence.
Recognizing the importance of timely delivery to our buyers.
<unk> invested in our logistics and shipping services.
As a result, we.
We were able to register and on time delivery rate of 94% with Q2.
And 18% improvement year over year.
In early 2021.
Our time to door was on average three weeks.
Which would put us at a disadvantage among our peers.
Improving our time to door has been a strategic priority of our new management team.
Over the past 12 months.
Our efforts.
<unk> double digit improvement in time to door.
Our goal is to rollout a 15 day contour initiatives.
In all major markets for Wes.
In 2023.
I would also like to take a moment to discuss our business development.
<unk>.
Global life, our merchant base outside of China.
We believe that over the long term.
It's important to diversify sources of products from other countries in Asia.
North America.
Europe and South America.
As such.
Accelerating our investment in.
Select countries to expand our sourcing capabilities and shorten the distance.
<unk> merchants and buyers.
Through new merchants.
We're adding variety and that's to the core categories on our platform.
Electronics.
<unk> home decor and hobby products.
I would now like to discuss the financial results.
For the second quarter of 2022.
I will also provide adjusted EBITDA guidance for the third quarter.
And additional information on the revenue trend throughout the month of July .
Our Q2, adjusted EBITDA was a loss of $58 million.
An improvement over a loss of $67 million from Q2 2021.
The EBITDA result compares favorably to the loss of $90 million Q1 hundred million dollars.
Had previously forecasted in Q2.
The more favorable EBITDA outcome was mainly driven by lower than expected ad spend.
Employee related expenses and outside services.
In addition, certain operating expenses were delayed as we continue to evaluate our spend plan for the second half of 2022.
We maintained a reduced the level of Edison through much of Q2.
But it began to ramp up in the month of June .
The relatively low level of AD spend in Q2 continued to impact our user metrics and our financial performance.
We had a 23 million monthly active users and.
And the $20 million last 12 month active buyers in Q2.
74% and a 62% decline respectively year over year.
Total revenues were $134 million.
A decline of 80% year over year.
This revenue decline was across core marketplace.
Product boost and the logistics.
It's important to call out two major drivers for the revenue decline.
First.
The low ad spend.
I just spent in Q2 with just 11% of that in Q2 of last year.
Which was the main reason for the revenue decline.
Second.
We continued to simplify prices for our buyers throughout Q2.
While the price changes that reduce the <unk> and the revenues in the near term.
We're confident that that bring our practices more in line with industry standards.
Improved user experiences.
Accelerate our volume and our revenues over time.
Q2, gross profit was $42 million.
A decline of 89% year over year.
Gross margin was 31% versus 59% in Q2 2021.
Gross margin performance was driven by a decline in marketplace profitability, mainly due to the rollout of <unk>.
The aforementioned price changes to all geography.
As well as the lower margin logistics business contributing.
Percentage of total revenues.
Total operating expenses were $133 million in Q2 2022.
A reduction of 73% year over year.
Operating expenses were 99% of revenues for Q2, 2022, compared with 76% of revenues in Q2 2021.
Lower ad spend.
Outside services and the reduced employee headcount.
Accounted for a majority of the reduction of operating expenses.
We will continue to focus on operational efficiencies to drive EBITDA and cash flow upside.
Our Q2 free cash flow was negative $67 million.
A significant improvement from a negative free cash flow of $205 million.
Q2 2021.
As compared to Q1, we also saw a $79 million improvement in <unk>.
Cash used in operating activities.
Due to cost efficiencies.
The favorable changes in working capital.
We ended Q2 with a solid position of $947 million in cash.
Cash equivalents and marketable securities.
Now turning to our outlook for Q3 2022.
We expect adjusted EBITDA to be a loss in the range of $110 million to $130 million for Q3 2022.
Q3, EBITDA loss is expected to be higher than that in Q2 for three reasons.
First we plan to increase our AD spend in Q3 to coincide with the holiday selling season.
Second we.
We will be investing more to drive which is global rebranding.
The rebranding efforts will ramp up throughout Q3 and Q4.
Third the changes to simplify prices for users are now implemented globally.
Higher Ed spend rebranding investment.
And the price changes all drive long term benefits.
Buyer acquisition and the retention.
Lower EBITDA for the quarter when the initiatives are first implemented.
As a reference point.
Our estimated revenues in July 2020 to the first month of Q3.
We're down approximately 14% relative to our revenues in April 2022.
The first month of Q2.
However.
This decline does not necessarily represent.
The expected revenue performance for the entire quarter.
July was the first month after the full implementation of price changes.
And therefore, the revenue decline in July relative to April was anticipated.
But I'm very excited to share that.
All their volume in July increased over that in April .
We expect our total order volume to improve in Q3 versus Q2.
We're cautiously optimistic.
We are starting to see the success of the turnaround.
Reflected in more operational metrics.
Higher order volume and the reduced refund rates.
After we have observed improvements in our NPS score since last Q3.
Finally, I would like to remind everyone.
About two notes.
First.
Our AD spend has been kept at a much reduced level since July last year.
The headwinds in the economy, plus our price changes also created a downward pressure on our top line performance during the first half of 2022.
Our financial focus this year to date.
<unk> EBITDA and the cash flows.
Both the register any material improvements.
Year over year.
Second.
For the second half of 2022.
Higher Edison.
And our strategic initiatives, such as the relaunch of the fashion category.
Once the flywheel restarts.
Transaction volume should result in increased merchant and vendor payments.
Creating favorable operating cash flows through the change in working capital.
We're cautiously optimistic that we may started to experience such benefits in Q3.
Now I will hand over the call to Vijay <unk> for his closing remarks.
Thank you Vivian and congratulations on your recent promotion as well.
While we have made many fundamental changes to the operations of risk during the year, we cannot ignore the global macro environment, which has changed dramatically in the past six months.
Governments around the world are tightening money supply and raising interest rates to tamp down inflation.
As a global e-commerce marketplace, we are not immune to the changes in consumer spending habits, particularly among the lower income households, that's sharp on our marketplace.
There has been.
A slowing of consumer discretionary spend due to higher energy prices increased food costs, and then emerging recessionary environment.
While these macro forces are at play we remain committed to increasing our spending plans and deploying the fundamental changes that we've made to our pricing strategy.
These elements will impact our growth plans for the second half of 2022.
As I shared in March of this year. This is an 18 to 24 month turnaround effort and we will continue to make progress toward that timeline.
While we cannot ignore nor can we influence those global macro forces, we remain laser focused on improving and fixing the many operational aspects of our business and reaffirm our commitment to successfully executing our turnaround plans.
Before I wrap up our call with some closing remarks, I would like to note some corporate governance changes that occurred today.
Peter <unk> escape the founder of fish has resigned from the Companys Board of directors Peter served as the Chief Executive Officer from the company's inception in July 2010 through February 2022.
Since inception.
Served as chairman until April 2021, and then as a director until now.
Without Peter's vision and legacy we would not be here today.
Under his leadership, which grew from a small challenger brand into a leading global marketplace.
On behalf of the entire board ambitious management team I would.
Like to thank Peter for his contribution contributions and dedicated service to the company.
Peter has converted all his high voting class B shares into Vish class a shares.
As a result, we now have a single class structure with voting rights parity for all this shareholders.
In conjunction with Peter's resignation the board of Directors has elected Larry could show.
As an independent director to vicious board.
Larry is the CEO of a place for mom of healthcare service company.
Gary has more than 20 years of experience driving transformation and growth with data and technology companies.
I am very excited about Larry joining the board.
Garrett rich I want to acknowledge a number of employees that have recently been promoted internally into new and our expanded leadership roles.
Vivian Liu our CFO will also serve as chief operating officer.
As part of our new COO role, she will lead our global logistics and merchant operations.
<unk> Shah has become our new chief administrative officer in this role he will lead both our legal and HR teams, including recruiting which is a big focus for us right now.
Darrin Jan has been given an expanded role as both chief product officer, and Chief customer officer with clear accountability for customer service and net promoter score.
Jerry Lewis has been promoted into a new role as our interim CTO, where he will lead our technology and engineering teams.
Mauricio Monaco has been promoted to a new role as the Chief Merchant Officer, Mauricio will lead our merchant and logistics product and strategy.
I would like to thank these recently promoted individuals for their hard work and determination that enables our turnaround progress.
To close I'll leave you with these final thoughts.
First.
A concentrated effort to rebrand the company and an exciting new story about which is the result of our dedicated employees, who believe in our turnaround strategy.
Second a relaunch of the women's fashion category on our marketplace has begun to attract new customers and drive growth.
Third we have continued to make progress in reducing delivery times.
And removing friction from our customer experience, which has resulted in improvements in net promoter score and consumer satisfaction and refund rates.
The entire team at Vish has made great strides to transform the culture of vish into a more collaborative company that is based on transparency fairness.
Truth and shared mission.
Bargains made fun.
Discovery made easy.
I am pleased with the progress we are continuing to make as we journey back into profitability.
None of this would be possible without the amazing team we have.
Thank you all for your hard work and commitment.
Vivian and I are happy to field your questions.
Certainly ladies and gentlemen, once again, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
Yes.
Our first question comes from the line.
Doug Anmuth from Jpmorgan Your question please.
Hi, Thanks for taking my question, you've got Westley on for Doug.
Just kind of thinking back to last quarter. You guys had noted revenues were down 30% in April relative to January .
They were down again, 14% relative to April .
How did things trend through the rest of the quarter as we navigated some of the macro pressures.
What were some of the biggest headwind.
And then just a follow up on that.
What are you seeing now thats kind of giving you the confidence that kind of restart reaccelerate the flywheel in the back half. Thanks.
Okay.
Thank you for the question so first of all as I mentioned.
April .
In July revenue declined about 14% relative to April we actually saw the volume increase the maturity relative to April and we do expect that the volume momentum to continue for the rest of the quarter, so without providing a specific revenue guidance for the entire quarter, we feel pretty good about where we are heading in terms of <unk>.
As mentioned earlier.
Ron first of all start with MTS.
Refund rate and we have been seeing improvements in those metrics for a while now.
And the next metric fallout or should it be.
And now we start to see the volume improvements for actually a couple of months now.
Then after that we expect to see benefits from revenue and.
Cash flow and lots of it at least in a profit eventually.
So you mentioned the macro economic headwinds yes.
Inflation the recession.
Having an impact on everywhere right and where we are in.
In the same boat with.
But we are not only we're feeling the pressure and I would say we are confident about stepping up the investment at this time.
We are very excited and encouraged by the group since we have seen so far and we are ready.
Holiday season is coming and we.
The operational improvements are.
We have we have seen a lot of.
<unk> implemented a lot of improvement in the operations.
The green shoots and we're ready to go back and restarted the flywheel and that's why we are.
Increasing our AD spend in Q3 throughout Q4.
So overall I feel very good about how Q3 Q4 is heading but I will let VJ add additional color as well, yes, I think from our biggest headwind standpoint, it's probably fair to call out some regional differences as well. So we did mentioned last quarter as well that we saw some pressure on the European business. This quarter, we continue to see that pressure.
Which I think was.
Aggravated by the change in currency as well and so that caused a little bit of pressure for us overall, but overall the underlying trends are much more positive right. We can talk about the confidence.
<unk> talked about NPS last quarter, but now <unk> seen that translate into orders increasing seeing the on time delivery rate being at 94% seeing sort of green shoots in terms of customer retention all of these give us confidence that we want to move forward.
We're obviously heading into the biggest time period from a retail calendar perspective, and we want to make sure. We take advantage of this holiday season. So we are being aggressive going into the holiday season, and last but not least we had we've had a pretty good.
Sort of test and learn kind of environment from a marketing standpoint, as well so making sure that we're getting are.
Return on investment from the marketing dollars and how we want to optimize that and quite honestly how much. We wanted to diversify so that were not dependent on any one or two channels for that as well. So all of that kind of comes together.
Great. Thank you.
Thank you and as a reminder, if you have a question. Please press star 111 moment for our next question.
Yes.
And our next question comes from the line of Laura Champine from Loop capital. Your question. Please.
Thanks for taking my question it's about.
The EBITDA beat that came from lower ad spending.
What drove you to cut the initially planned I remember the last conference call, we talked about you're stepping up AD spend early in June versus August was it just that you werent seeing the results you expected.
Advertising more expensive or theyre, just issues delivering that you had not previously anticipated.
Yeah. So Laura if you remember what we talked about honestly as originally we talked about the fact that starting last July we cut they're going to cut AD spending and we were really not going to pick up AD spending until August of this year than we've talked about the fact that we're starting to see some green shoots, especially with the customer feedback and we've thought about pulling that forward a month or two so.
We talked about pulling it forward it would have been pulling forward mostly into July , which obviously is not in the quarter numbers.
A little bit into June , but the June numbers are small and I think this is one of the reasons, we pull forward because anytime you start to increase ad spending.
What do you have to do is you have to have a nice ramp up otherwise you really impact the return on that investment. So we did plan on it we didn't execute maybe as much as we wanted to in June . So maybe it was slightly behind so it didn't change anything in April or May where maybe you are slightly behind because again you have to ramp that up.
A fiscally responsible way and that sometimes takes a little bit longer and so we've had a lot of learnings that came out of June as well as in July . So we feel like we're very well set for the original strategy, which was to ramp up in August had we not had those call. It 45 to 50 days of learning, we would've probably been a little bit more trouble, but we were more or less ex.
According to the plan that we had laid out so we did increase a little bit in June a lot more in July and then you'll continue to see month on month increases between now and the end of the year.
And you did make a comment in passing about recruiting being an important part of what you're up to right now what type of of talent are you, bringing into the company and should we see a material step up in G&A expense as a result.
Yes, so the first thing I want to remind everybody that on March 1st this year, we announced that we are laying off about 15% of our pause I would just say that we started out I mean, we read a lot more about that in the news today, but we started out probably six months ahead of everyone else.
That said, we did kind of manage the head count.
Much more closely for the last six months, because we wanted to manage the.
The expenses with the potential sort of ramping up of orders and revenue in that piece of it. So we are just more recently started to get more aggressive from a recruiting standpoint, most of the recruiting is actually focused on our tech talent and product management talent as well as a little bit on data on the data side as well so it's mostly.
A high powered.
Technology sort of related talent and that's really what we're focused on while we are looking to add more I think net net we will still be down in terms of net number of people end of this year relative to end of last year, because we're starting from a base that significantly lower and then also.
Didn't replace a lot of the talent in the first half of the year to manage the costs down so while there may be a slight uptick the reality is it's not something that we are overly concerned about because we manage that number pretty well and we continue to.
Be really careful on where they are adding head count.
Understood. Thank you.
Honestly, it's just a good time to be recruiting right now.
Uh-huh makes sense so.
Thank you Laura.
Thank you and once again a few happy question at this time, Please press star one one.
Okay.
And our next question comes from the line of Tyler Seidman from Credit Suisse. Your question. Please.
Hey, guys.
Mr. Taylor.
So two questions for me.
Slide 16 in the deck.
It shows in the regions, where you have your merchandising.
Obviously most of them.
We are still based in China at this point.
Can you update us on what percent of these merchants.
In China versus U S.
And the rest of the world.
And then just secondarily.
One more on the advertising spend in the back half.
Are you seeing any pressure.
On performance ads.
Given the current environment.
Kind of how do you think about.
Breakdown.
Performance marketing versus brand advertising as you can.
Two to ramp in the back half.
Yes. Thank you for the question. This is Dave I'll take the first part of question I'll, Let me address the second one.
First question. So we have started to diversify.
Our merchant base.
I would say this year.
Ergo and we've made a lot of progress in terms of recruiting merchants from outside of China. If you look at the merchant count at the distribution of the merchant.
China versus outside of China.
Change that I would say materially.
We did a move the needle I think.
It's still more than 60%, new China, but does that person data has improved from diversity standpoint maturity in the path of the year.
We are working on is the T&D distribution. So the Chinese merchants are still.
Come to the platform with a very price competitive merchandise and frankly, good value proposition and that's why they still contribute.
Every high percentage of Dnb on the platform despite it being a smaller percentage in the population. So our next step is really to focus on helping.
Bringing the next layer of diversity from a product standpoint, and the <unk> contribution standpoint, and it really helps the new merchants to be more assertive on the platform and that's our focus and as I mentioned.
We have doubled down efforts and other.
Lot of initiatives going on to bring that chief rotation, and we probably ought be the investor community. Once we have more.
But.
Is a very high priority for us as a management team leveraging cover the second part. The second question is really more about the performance marketing side of the business.
What I would say on that so keep in mind that we have pulled back marketing and the magnitude of $80 to 90% year on year for the last two or three quarters and what that means is if you look at our 2023 spend even our planned spend what we're planning to spend in the first half of the year relative to the second half of the year. It's a massive difference. So when you look at the growth.
Trade in our performance our overall marketing budget, we have probably the exception to the rule right as the economy has come down there's probably a lot more companies are pulling back on marketing, we're kind of doing the opposite.
That puts us in a very unique position so.
<unk>.
In a position now where we are spending significantly more than we did in <unk>.
Our plan to spend in the second half of the year than we did in the first half and we are doing it at a time when the overall environment is a little bit less competitive. So I think it's a very it is the right time for US. We're also finding that consumers overall are looking for.
Lower prices and trading down because the dollars are stretched in terms of the external environment. So again, attracting sort of the right consumers at our price points.
Is the right time to do to do that as well in terms of the second part of the question in terms of performance marketing the overall marketing brand marketing.
We will continue to be heavily focused on performance marketing.
The only differences.
For the first couple of quarters, we really not doing much on the brand side. So we are probably 90% to 95% focus on performance marketing that might for the back half of the year look more like 70%, 80% in sort of 90% to 95%, but overall disproportionate amount of our money will still be spent on sort of digital marketing and performance marketing, but we are putting some <unk>.
Significant money, both including and on television and radio.
On.
The rebranding effort that we're doing which starts in the middle of August So that's kind of how the overall picture kind of breaks down.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to management for any further remarks.
No. Thank you everyone for joining us today really appreciate it.
Bye everyone.
Thank you. Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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Okay.
Okay.
Yes.
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