Contextlogic Inc (LOGC) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Wish Third Quarter 2021 Earnings Conference Call. (Operator Instructions)

And I would now like to hand the conference over to Jesse Beller, Vice President, Business Operations. Please go ahead.

Thank you. Good afternoon, and welcome, everyone. Joining me today to discuss our results are Jacqueline Reses, our Executive Chair; our interim co-CFOs, Brett Just and Jennifer Oliver. Farhang Kassaei, our CTO; Tarun Jain, our CPO; and Wish's new CFO, Vivian Lu, will join us for the Q&A session.

During the call, we will make forward-looking statements about our future plans and financial performance. These statements are subject to risks, uncertainties and assumptions. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. We encourage you to consider the risk factors described in our SEC filings for additional information. The date of this call is November 10, 2021, and forward-looking statements made today are based on assumptions as of this date. We undertake no obligation to and do not intend to update these statements as a result of new information or events. This call is being broadcast on the Internet and is accessible on our Investor Relations website. A recording of the call will be available later today.

During the call, we will discuss GAAP and non-GAAP measures, including adjusted EBITDA, free cash flow and statement of operations data. We encourage you to read our earnings news release, which can be found on our Investor Relations website and on our Form 8-K, which we have filed with the SEC, as it contains important information about our GAAP and non-GAAP results, including reconciliations of historical non-GAAP financial measures.

We will now open with brief remarks, and then we will take your questions. And with that, I'll turn the call over to Jackie.

Awesome. Thanks so much, Jesse, and welcome to everyone.

Before we get into our third quarter overview, I'd like to start with an important announcement that we've shared via press release shortly before this call. As you may have seen, Peter Szulczewski, Wish's Founder and CEO, is stepping down from his role as Chief Executive Officer. Peter made a personal decision that now is the right time to step away from the business and is fully committed to ensuring a smooth transition. Peter will remain CEO until the Board of Directors appoint a new CEO or no later than February 1, 2022. Peter will remain on the company's Board of Directors as well. On behalf of the Board and the entire team at Wish, I want to express my sincerest gratitude to Peter for his contributions to the company.

Since founding Wish in 2010, he's helped scale the organization into a global publicly traded marketplace focused on providing millions of value-conscious shoppers with an entertaining and fun experience. Peter also helped assemble a strong leadership team of highly qualified senior executives which is well prepared to execute on the turnaround strategy outlined in our second quarter call and oversee the company's daily operations while the Board searches for a new CEO. With the foundation Peter helped to develop, Wish is well positioned to continue to evolve and grow.

Now turning to Wish's third quarter results. During our third quarter, we made progress on our turnaround strategy while exceeding the Q3 financial outlook we provided on our last earnings call. We achieved adjusted EBITDA above the high end of our guidance, in part, due to our more efficient digital advertising spend. Beginning in mid-July, we began to significantly cut back our digital ad spend, while we focus on improving user retention and key core marketplace fundamentals. As expected, our third quarter revenue experienced a decline that was in line with the lower digital ad spend. We will maintain a disciplined approach to cash and expense management that corresponds to our financial improvement as we execute on our turnaround strategy.

Two key pillars of our strategy to return to growth are as follows: increase users' confidence in our marketplace and provide a more differentiated and engaging user experience. We remain confident in our ability to return to growth during the second half of 2022 while also positioning Wish to create significant shareholder value over time.

I'd like to share more details about the progress we made in Q3. First, we took a few major steps this quarter to improve users' confidence in our platform. We announced a new program for our merchants called Wish Standards, which is designed to reward merchants that consistently provide an exceptional user experience, while we evaluate merchants across performance metrics, such as product quality, shipping and fulfillment and user review and ratings. We will provide the highest-performing merchants with priority placement across our buying experiences, as well as with commission discounts. The early results are encouraging as we've seen improved transaction NPS, reduced defect rate and improved retention as we ramp up the share of voice for higher-quality merchants.

We've also increased our efforts to proactively prevent, detect and remove misleading, fraudulent or poorly reviewed and low-quality product listings from the platform. We intend to continue these efforts as we offer buyer protection for all qualified merchants -- excuse me, purchases on our platform.

Secondly, we're making progress in reinventing our shopping experience to make it more encouraging and entertaining, and easier for our users to purchase products they love. Our experiments with incorporating live and video shopping into our users' experience is an important component of our modernization initiatives. Wish Clips is a new feature that allows users to shop directly from high-quality and trusted merchant-created videos. We are currently testing this feature on Android devices in the U.S., and we believe that both playback and live video shopping are key components of the discovery-based shopping platform, and we intend to build one of the largest repositories of high-quality shoppable videos in the world.

We also made progress in redesigning our home page through active experimentation, both to make it more visually appealing and to better showcase deals, trends and unique products. And we are testing, allowing users to freely browse the best of Wish without having to create an account.

Providing our users with more flexibility for payments is also a key initiative. In Q3, we partnered with Klarna, a leading global retail bank, payments and shopping service, to allow flexible payment options for our users in the U.S. This is part of a broader drive to expand our buy now, pay later offering. With this Klarna partnership, Wish users in the U.S. have the flexibility to spread the cost of their purchases over 4 interest repayments. We expect this new partnership will drive increased average order volume and revenue.

Third, we continue to recruit additional top-quality merchants and brands to our platform and give them tools to drive their own success. During Q3, we onboarded more than 12,000 new merchant partners. Earlier this week, we hosted more than 450 merchant partners at our Merchant Summit in China. At the event, we announced a variety of new features to support their businesses and the long-term sustainability of the Wish platform. Among these tools, our new Merchant Promotion platform that enables merchants to fund and run a variety of their own promotion campaigns. We believe this will provide our users with better value and reduce our own direct promotion costs, all while empowering our merchants with the tools to easily manage their campaigns. As we focus more on direct-to-consumer brands, we will be launching improved merchant stores that will enable merchants to create customized storefront on the Wish platform. We plan to provide tools for merchants to directly engage their customers and followers around the world.

Our ads product, ProductBoost, has been an effective tool for our merchants to drive incremental conversions and growth. We continue to invest in engaging ad formats, new pricing models and ad load optimizations while delivering compelling ROAS to our advertisers.

On the logistics side, we continued to focus on reducing delivery times, increasing on-time rates and improving consistency while narrowing the delivery window users see at checkout. Despite global supply chain shocks during the quarter, we were able to reduce our delivery times and improve our on-time rates. As we look ahead towards the holiday season, we've taken steps to manage our 3PL costs while ring-fencing air cargo capacity to enable a greater number of preholiday deliveries. Furthermore, to make planning easier for our merchants, we announced we will be maintaining fixed shipping costs for our quality merchants throughout the holiday season.

Along with all the improvements to the user and merchant experiences, we've added to our leadership team to best position the company to execute successfully on our strategy. We recently announced the appointment of Vivian Lu to Chief Financial Officer. Vivian is a seasoned finance executive who recently joined Wish from Shutterfly, where she oversaw the finance function while transforming the business to achieve accelerated top line growth and profitability. Her experience is directly in line with our goals here at Wish.

Finally, I'd like to take this opportunity to thank Brett Just and Jennifer Oliver for stepping in as interim co-CFOs,during what has been a transformational time for the business.

With that, I'll turn the call to Brett for a review of our financial results.

Thank you, Jackie. Please note that some metrics we discuss today will be on a non-GAAP basis. Reconciliation of GAAP to non-GAAP results is included in our earnings news release, which can be found on our Investor Relations website and is filed with the SEC.

During Q3, total revenue was $368 million. That represents a decline of 39% year-over-year and 44% over Q2. As Jackie mentioned, the decline in revenue was driven primarily by our decision to significantly pull back on digital ad spend, while we addressed the operating challenges we outlined on our last call. In fact, sales and marketing spend was only 40% of revenue compared with 64% in Q3 of last year. On a dollar basis, sales and marketing spend was 62% lower year-over-year. Q3 net loss was $64 million, and adjusted EBITDA was a loss of $30 million, well ahead of our high end of our outlook range, in part, as Jackie described, due to more efficient digital ad spend. Adjusted EBITDA margin improved 200 basis points on an absolute basis from Q2 to 8% and 300 basis points compared with Q3 2020.

As expected, our user metrics were directly affected by the lower digital ad spend. Total monthly active users declined 40% year-over-year to 60 million, and last 12-month active buyers decreased 32% year-over-year to 46 million.

As anticipated, each of our 3 main revenue streams saw declines during the quarter. Core Marketplace revenue decreased 55% year-over-year to $183 million, primarily due to lower order volume associated with reduced MAUs and LTM active buyers.

ProductBoost revenue decreased 24% year-over-year to $37 million due to an overall lower volume of impressions that Wish was able to deliver as traffic to the Wish app slowed, driven by the pullback in ad spend.

Logistics revenue in the third quarter was $148 million or a 3% year-over-year decrease, driven by overall lower parcel volume.

Now turning to our costs and expenses. Cost of revenue for the third quarter of 2021 was $201 million, a 17% year-over-year decrease. Non-GAAP cost of revenue, which excludes stock-based compensation, was $196 million, a decrease of 19% year-over-year. The overall decrease was primarily due to lower logistics-related costs as we had significantly lower order volume compared to the prior year.

Gross profit was $167 million, down 54% year-over-year. Non-GAAP gross profit, which excludes stock-based compensation, was $172 million, down 53% from Q3 2020. GAAP and non-GAAP gross margin declined on a year-over-year and sequential basis to 45% and 47% of revenue, respectively, primarily due to a higher mix from logistics revenue, which has a lower margin profile than Marketplace revenue.

Third quarter sales and marketing expense of $147 million were 40% of revenue, down from 64% of revenue in Q3 2020 and 60% of revenue in Q2 2021. Non-GAAP sales and marketing expense, which excludes stock-based compensation, were 39% of revenue, down from 64% of revenue in Q3 2020. GAAP and non-GAAP sales and marketing expense was down 62% and 63%, respectively, year-over-year, primarily due to lower digital advertising spend as we worked to address our operating challenges. We plan to resume our investments in user acquisition once we begin to see positive user engagement trends, which we continue to believe will be achieved in the back half of 2022.

Third quarter product development expenses were $54 million or 15% of revenue. Non-GAAP product development expenses, which excludes stock-based compensation, were $37 million or 10% of revenue as we continue to invest in improving the user experience.

Third quarter general and administrative expenses were $29 million or 8% of revenue. Non-GAAP G&A expenses, excluding stock-based compensation, were $25 million or 7% of revenue.

Looking at our balance sheet and cash flow statement, Wish ended Q3 with a solid cash position of $1.2 billion in cash, cash equivalents and marketable securities. Free cash flow was negative $344 million, primarily driven by our net loss, which was primarily driven by lower order volumes and unfavorable net working capital changes due to the timing of cash outflows to merchants and vendors. The negative working capital changes in Q3 were mainly driven by accounts payable, merchants payable, accrued and refund liabilities. These changes should be onetime in nature to bring us down to the lower operating level. Going forward, we expect free cash flow to remain near breakeven until we start to invest in growth again later next year.

While we are not providing Q4 revenue guidance, we expect Q4 revenue to be below Q3 despite the holidays. This is primarily driven by the benefit of higher ad spend at the beginning of Q3. Specifically, Q4 revenue through the end of October is down approximately 20% compared to our average Q3 revenue adjusted for a similar number of days.

In terms of outlook for the fourth quarter, we expect adjusted EBITDA loss in the range of $35 million to $30 million. We will continue to maintain a disciplined approach to cash management and closely monitor our adjusted EBITDA on a go-forward basis.

Now I would like to turn the call back to Jackie to provide our closing remarks.

Great. Thank you, Brett. At its core, Wish has an incredible opportunity within the mobile e-commerce space. We believe we have the right technology and platform to be a global e-commerce leader, and we are building a great team to be able to capitalize on the opportunity. But certainly, we have work to do. We face macro headwinds and the challenge to enhance our platform into the differentiated and engaging e-commerce experience we know it can be. We will continue to maintain significantly lower digital ad spend, while we focus on improving user retention and key Core Marketplace fundamentals.

We are at the beginning of an aggressive turnaround strategy that we believe will transform the way we operate and improve the experiences of our users and our merchants. We made solid progress during the third quarter, and we are confident that we will be continuing our strategic momentum as we close out 2021 and proceed into the new year. We expect this momentum will build and ultimately translate into growth in the second half of 2022.

So with that, I'll stop. And operator, we're ready for the first question.

(Operator Instructions) We have our first question from Doug Anmuth from JPMorgan.

Yes. This is Neeraj on for Doug. So just a couple of questions. Number one is, just if you could provide some color on the quarterly buyer trends that you used to provide to last quarter. So if you can provide that data.

And number two is I just wanted to touch on the new strategy. So we did not see any update on Wish Local, so is Wish Local priority at all in the near term?

Sure. Thank you so much for your questions. So in terms of the quarterly buyer trends, as Brett mentioned, our quarterly -- our MAUs were down in Q3 and so are our LTM active buyers. And we anticipate that this trend will continue into Q4, driven by the lack of the heightened Q3 ad spend.

And let me add -- thank you for the question, and good afternoon, everybody. I'm Farhang Kassaei, Chief Technology Officer. On the question of Wish Local, yes, Wish Local remains a priority for us. We -- in Q3 and then going into Q4, we focused Wish Local on local pickup and local return, both because these are really good experiences for our buyers. Also, it has cost synergies with our ship-to-home network. So we are improving and expanding our local logistics network, and we are reporting new results as they become available.

But as we talked about, about 10% of our total orders are coming from the local networks, and in some countries, actually significantly more, 40% plus. And that remains unchanged there.

If I can add, the broader meta point that you're going to see us continue to focus on is that we want the experience to be great for our users and where we can do that by providing local pickup that's absolutely core to the strategy. And I think we've got to focus on our two priorities: making the experience great for our users and building trust. And so within that, we'll continue to pursue these strategies that make the experience better for kickoff. That's a key part of our marketplace.

We have our next question from John Blackledge from Cowen.

This is Bill on for John. I have two questions, if I could. You guys were able to tighten the belt on sales and marketing expenses more than we expected in the third quarter. Do you think you could just frame for us your expectations for that spend for 4Q '21 just a little bit more? And then when do you anticipate turning that marketing spend back on? Is that ahead of that second half turnaround? Or just any color there would be helpful.

And then you guys have a solid cash position. And given your expectations for breakeven free cash flow going forward, do you think you could give us an update on just capital allocation strategy and the potential for share buybacks?

Sure. Thank you so much for the question. So on the marketing side of things, our ad efficiency exiting Q3 was actually the highest we've seen since 2017. We continue to take a disciplined approach to our ad spend, and we're going to continue to do so. We're really looking for those green shoots specific to retention, transaction NPS and growth in the loyal user base before we further invest in growth. And the plan still is to invest in growth in the second part of 2022.

On the piece associated with free cash flow, we plan on in the next few quarters before we start reinvesting growth to monitor as we -- monitor our adjusted EBITDA to be low. So we plan on it to be near breakeven until we start reinvesting into growth in 2022.

Finally, on the buyback, we have not been looking at a buyback. We're focused right now on reinvesting in the business and making sure that we stay laser-focused on user trust and the experience that our customers have, and so that's really been our core priority.

(Operator Instructions) We have our next question from Stephen Ju from Credit Suisse.

This is Tyler on for Stephen. I guess just hone in on the active buyer question one more time. Just in terms of your expected buyer count for 4Q, should we be thinking about similar levels versus your October revenue decrease expectation?

Thanks so much for your question. I think it's fair to say that our revenue will decline in line with buyers and MAUs for the quarter.

(Operator Instructions) There are no questions at this time. I will turn the call over back to the management. Thank you.

Great. Thank you very much. First, I'd like to thank everyone for your questions today. We greatly appreciate it, and we look forward to providing you an update on our call next February. Thanks so much. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.