ContextLogic Inc. (NASDAQ:WISH) Q1 2023 Earnings Call Transcript May 4, 2023

ContextLogic Inc. misses on earnings expectations. Reported EPS is $-3.83 EPS, expectations were $-3.8.

Operator: Good day and thank you for standing by. Welcome to Wish First Quarter 2023 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. [Operator Instructions] I would now like to turn the conference over to Ralph Fong, Wish Director of Investor Relations. Please go ahead.

Ralph Fong: Good afternoon, everyone, and welcome to Wish’s first quarter 2023 earnings conference call. I’m Ralph Fong, Director of Investor Relations. And joining me today are our CEO, Joe Yang; and our CFO and CEO, Vivin Lu. Today’s prepared remarks have been prerecorded. There is also a slide that has been posted to our Investor Relations website, which is available for your reference. Once we are finished with Joe and Vivien’s remarks, we will hold a live Q&A session. The remarks made today include forward-looking statements that are related to, among other things, our financial expectations, business and turnaround plans, logistics and operational efficiencies, including flat rate shipping initiatives to improve customer experience and engagement, expectations regarding merchant relationships and strategic partnerships, the impact of our strategic marketing and product initiatives, including ad spending and promotional events execution time line of the authorized share repurchase program, supply strategy, ESG efforts and anticipate a 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 prescribed in today’s earnings release and our per audit 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.

With that, I will now turn the call over to Wishes CEO, Joan.

Joe Yan: Thank you, Rob. I would like to thank everyone for joining our first quarter 2023 earnings call. On this call, I will share with you our Q1 financial updates, discuss the business highlights and the key strategic focus for 2023. Vivian will then provide a deeper dive into financial results, should the second quarter guidance and comment on our operations. Finally, I will provide additional closing remarks before opening up the call to your questions. In the first quarter of 2023, we generated total revenues of $96 million, down 49% year-over-year. The revenue decline was largely driven by the unfavorable impact from the pricing changes implemented by the end of the second quarter of 2022, combined with our lower advertising spend in the quarter.

On the bottom line, we reported adjusted EBITDA loss of $62 million in Q1, which was well ahead of the guidance range of a loss of $70 million to $80 million. This better-than-expected EBITDA result was attributable to the uneconomic improvements made throughout the quarter, which Vivian will provide more color later on in the call. We ended the first quarter with cash, cash equivalents and marketable securities of $627 million. We began our transformation journey in 2021, and I’m happy to say that the work carried out in the first quarter of the year and throughout this past month has been another positive step in the transformation of the company. I will now discuss the recent business highlights. First, as part of our efforts to drive basket building and improve the customer experience, we introduced favor shipping and eligible orders in the U.S. in late January, followed by other major markets throughout Q1.

Since inception, we have low out Frary shipping to over 20 countries, including the U.S., Canada, Australia, the U.K., Italy, Spain, France, Germany, Czech Republic, Japan, Brazil, Mexico, Central — we believe freely shipping remains a critical component in addressing one of the major pain points amongst our users on the wish platform. Not only has this improved the shopping experience for our customers. It has incentivized them to build larger baskets. Our internal data shows that the average transaction value increased by double digits attributable to the launch of Freddie shipping. This is encouraging for the team, and we are confident ferry Shipping will continue to have a positive impact on other values, conversion rates and customer retention going forward.

Second, the Wismer shopping event was a success for the company. I’m very pleased that Wismar, which ran from March 30 to April 5, was well received by our merchants and buyers. More than 7,000 merchants participating the week-long shopping event, enlowering over 800,000 product listings and 92,000 doorbuster deals. Importantly, we saw more than a 30% increase in GMV and more than 50% order volume growth during the weeklong shopping event. I’m pleased with the strong results. Coming out of the event, we have seen a lot of momentum and a lot of excitement from our merchants, buyers and employees alike. Additionally, which must allow us to activate and reengage with our dormant or inactive users as one of the priorities for us is to leverage our broad merchandising offering to activate our accumulative user base.

More importantly, I’m proud of our team’s functional collaboration and execution. A special thank you to our employees for their dedication, hard work and efforts which must make the first in a series of major shopping events planned throughout 2023, and it has taught us valuable license, and we expect to leverage what we have learned to build on that success in Q2. Following the Wishes event, we will be running other merchandising events across the 60-plus markets we serve throughout the year. and the merchandising events will be available not only on mobile app platforms, but also mobile web, which is becoming an important channel for our platform distribution, at which we’re excited about our merchandising strategy and expect merchandising events to result in incremental GMV growth, user acquisition and retention.

Third, in March, we announced that our online marketplace has returned to app stores and search engines in France after the French regulators have lifted the listing measure. France is a strategically important market for wish, and we are excited to welcome new and inactive French user back to our platform so that you can enjoy all the enhancements we have made to the shopping experience. Over the coming months, we’ll be banning up our marketing activities in France to ensure our customers know we are back. Fourth, in the first quarter, we formed a strategic partnership with e-commerce integrator based linker, e-commerce human service provider, ships and e-commerce shipping solution provider, ShipStation and Shipping easy. As a result of partnership established between wish and the base linker, more than 18,000 European merchants can now connect with his users seeking a discovery shopping experience.

From the business development perspective, this is an exciting opportunity as we look forward to adding more merchants to the wish marketplace and bringing them together with our wish community across the globe. In the past year, we have made a lot of improvements to our overall time to door and on-time delivery rates. — and the partnership with Shipt, ShipStation and shipping easy, allowed us to build on that success by providing even more logistic fulfillment capabilities to our merchants and delivering an overall better experience to our users. Fifth, as we continue to optimize the browsing experience, we introduced a number of enhanced personalized category navigation and the category product feeds on both Android and iOS. The improvements we have made to the category browsing experience are for the benefit of our users.

This has helped them explore the wish catalog in a fun and engaging way. Brown through the breadth and the depth of the wishes product category and discover products through shopping expiration, essentially, the wish app is designed to help users discover new and exciting products even when they are not searching for anything specific. We want to facilitate exploration and highlight specific moments where our recommendation can drive users’ engagement. In addition, personalization of our platform will go far beyond product recommendations. We will continue to strive to tailor every expect of the app experience to our users’ preferences from which modules to show them to the sequence in which they encounter them, we will look at their interest priorities and which attributes of our products matter most to them to continuously adapt the experience to their needs.

Finally, we continue to improve our operational excellence. In Q1, our on-time delivery rate was promos 92% compared to approximately 86% during the same period of 2022. We also saw our average time to door further improve in the top market we serve, possibly impacting customer order consideration rates, refund rates and the customer experience. Our customer order translation rates dropped more than 50% year-over-year in Q1, and the customer refund rates also declined within the same time period. Moreover, we continue to see improvements in customer NPS and encouraging buyer conversion and customer retention trends in Q1 versus a year ago. In particular, payer conversion and customer retention improved by 18% and 10%, respectively, in the first quarter of 2023 when compared to the same period last year.

Bringing it all together, I’m pleased with the progress we are making as we continue on our transformation journey. Now I would like to spend a couple of minutes discussing our strategic focus. As I mentioned, last quarter, we strive to grow bioretention through repeat purchases this year, which I would like us to expand on. Over the past 18 months, we have improved the merchant quality and the listing quality. Our key focus for 2023 is to keep improving the customer experience, which we believe plays a pivotal role in driving user growth. As part of our growth strategy, we intend to increase our DAU by investing in our guest experience, accelerating the use of incentives for buyer conversion and further driving operational excellence with our unpaid and paid channels.

Some of key initiatives include: delivering higher quality messaging will push notifications, e-mails and SMS to drive user back to the WIS platform. Refining lending pages that encore discovery for gas users coming in from apps and e-mails, reducing friction on the website or mobile web for gas users to enable them to discover products as to car and TransAct. — providing upsells and incentives for grain the mobile users to motivate them to adopt the app. — offering the incentive to encourage users back to the app as well as launching a referral program to drive engagement with additional shoppers and optimizing our unpaid marketing efforts and modernizing our app to generate channel growth. At which our team is continuously looking for ways to provide world-class supply quality, making sure that we are serving our users with products that deliver great value.

Through elevated quality and competitive prices, we are partnering closely with our merchants to showcase the best selling products within our highest performing categories, including home and garden, beauty and health fashion and consumer electronics. To that end, we’re introducing our supply strategy, which we believe will be a critical component to our success going forward. Broadly speaking, we will leverage cross-functional collaboration between our category management, supply sourcing, logistics and merchandising teams to drive differentiated and quality supply. Vivian will provide additional details of our supply strategy later on in the call. In summary, our vision is to unlock e-commerce for the underserved by giving users access to a wide selection of affordable goods and providing merchants with success to millions of users globally and which is all about creating the fun, easy and personalized discovery shopping experience that provides the best value for our users looking for the delight in life.

On our last earnings call, I outlined the key strategic initiatives to improve our business, and I’m pleased that we are making strides towards each of our initiatives. — specifically our conversion rates, buyer retention and the customer satisfaction. Going forward, we will be doubling down on executing on our supply strategy to further enhance our users’ basket building experience and drive repeat purchases by encouraging users to build their next basket. As one of the largest mobile e-commerce platform in the world, I’d say a large part of which is success is really driven by innovation. Before I ramp up and turn the call over to Vivian, I would like to reiterate our commitment to innovation. From the user and merchant experience standpoint, which will continue to innovate and invest in capabilities and product features to further improve the user experience on the wish platform.

Discovery is our North Star, which we believe will enable us to further strengthen our competitive position in the market going forward. In particular, our team will be exploring initiatives to incorporate a holistic supply strategy into our real-time personalization engine, leveraging videos, social components and a new AI-driven shopping experience to engage the line and drive meaningful basket building opportunities for our users. I have been impressed with our engineering talent, and I’m energized about the future and the growth opportunity ahead of us. With that, let me now turn the call over to our CFO and COO, Vivien Liu, to discuss our financial results in more detail and give you an update on our operations.

Vivian Liu: Thank you, Joe. Now I will add more color on Q1 financial performance, provide Q2 financial guidance and expand on the operational priorities for 2023. On the user metrics, we had a 14 million monthly active users and the 12 million last 12-month active buyers in the first quarter of 2023, which represented a decline of 48% and 57%, respectively, year-over-year. The decline was mainly driven by the cumulative reduction in ad spend over the past 18 months. On a quarter-over-quarter basis, monthly active users were down 30%, and the last 12 months, active buyers were down 8%. And mainly driven by the fact that ad spend in Q1 was about 54% lower than that in Q4 as we continue to focus on unit economics during 2023. It’s also worth noting that due to improved conversion rates, the decline in buyers is less significant than the decline in users on a quarter-over-quarter basis.

As discussed in our prior earnings call, performance marketing will remain an important driver for user retention and growth. But our goal is to increase the efficiency of paid ads and become less dependent on digital advertising. As Joe shared earlier, as part of our efforts to drive user growth, we are investing in more organic channels such as e-mail and push notifications, affiliates and the merchandising events to engage and retain our users more effectively and more cost efficiently. Moving on to other financial metrics. Total revenues in Q1 were $96 million, a decline of 49% year-over-year. This decline was across core marketplace, product boost and logistics, mainly driven by reduced added and the new pricing practices that were fully implemented by the end of Q2 2022.

I — the new pricing practices made our listing prices more transparent and competitive. However, similar to what we experienced last quarter, it adversely impacted our Q1 revenues and EBITDA, resulting in an unfavorable comparison to the prior year. Q1 gross profit was $20 million, a decline of 69% year-over-year. Gross margin was 21% versus 34% in Q1 2022. Gross margin performance was mainly driven by the decline in marketplace gross profit due to the price changes, as outlined earlier. That being said, Logistics gross margin saw significant improvements in Q1, driven by increased combined ratios as a result of the introduction of flat reshipping in multiple geographies. Total operating expenses were $113 million, a reduction of 10% year-over-year.

Lower ad spend, reduction in outside services and reduced employee headcount accounted for a majority of the reduction in operating expenses. Excluding stock-based compensation expenses, total operating expenses were down 32% year-over-year. Our net loss was $89 million compared to a net loss of $60 million in the first quarter of 2022. The year-over-year increase in net loss was largely due to lower revenues and an increase in stock-based compensation. Our adjusted EBITDA was a loss of $62 million compared to an EBITDA loss of $40 million in Q1 2022. The year-over-year decline in adjusted EBITDA was largely driven by lower revenues and the impact of our new pricing practices. However, Q1 2023 EBITDA result exceeded the guided range of a loss of $70 million to $80 million.

This result was primarily attributed to our strong focus on unit economics in 2023. We have seen improvements in unit economics at a transaction level since last year. Operating cash flow and free cash flow for Q1 2023 was negative $92 million compared to a negative operating cash flow of $146 million and a negative free cash flow of $148 million in Q1 2022. The year-over-year improvement in operating cash flow was primarily driven by favorable changes in working capital. We ended Q1 in a financially healthy position with $627 million in cash, cash equivalents and marketable securities and no long-term debt. As of March 31, 2023, we had approximately 23 million shares outstanding. The shares outstanding at quarter end had been retroactively adjusted for the 1 430 reverse stock split, enacted on April 12, 2023, to bring with into compliance with the minimum beta price requirement for continued listing on NASDAQ.

As of April 26, 2023, we were back in compliance with a minimum data requirement. I would now like to provide guidance for the second quarter of 2023. Based on the feedback from the investment community, we will provide quarterly revenue guidance in addition to the EBITDA guidance, starting this quarter. For Q2, we expect total revenue to be in the range of $91 million to $102 million and adjusted EBITDA to be a loss in the range of $60 million to $75 million. This EBITDA performance is partially driven by expected higher ad spend in Q2 to drive buyer growth. In Q2, we expect a sequential decline in revenue to moderate potentially seeing the curve flatten out in Q2 or Q3. On a year-over-year basis, Q2 revenue is expected to decrease due to lower ad spend and the change in pricing practices as outlined before.

As we look beyond the second quarter of 2023, we expect a stronger second half relative to the first half 2023, driven by continued operational improvements and the seasonality. Please also note that starting in Q3, our pricing practices will be consistent with those in the second half of 2022. As such, the year-over-year comparison for our financial performance will no longer be unfavorably impacted by the pricing changes, which were fully effective by the end of Q2 2022. As Joe discussed, I will now provide more color on our supply strategy, which aims to further enhance the quality of supply and the customer experiences on wish. First, within which identity, our home and life narrative will focus on delights and essential for less with a differentiated user experiences for each.

Second, we will prioritize resources for high-touch categories, starting with fashion, home, consumer electronics, beauty and health, to higher manage the product quality and the customer experience in those categories. Third, we will continue to enhance the supply diversity, freshness and quality through strategic sourcing. This includes identifying differentiated local merchandise in our key buyer markets as well as cross-border supply opportunities with the flagship merchants from Asia. We will continue to diversify our merchant network through geographic expansion outside of China. We are committed to expanding and strengthening our merchant bases in Europe, Southeast Asian countries and Americas. Our goal is to enhance the product variety and reduce our reliance on any particular country for supply.

Fourth, building on enriched app features and the success of Wish [ph], we intended to connect the quality supplies with the customers through personalized discovery and merchandising. We believe that combining value for price and the fund shopping experiences is key to driving buyer conversion and retention. Fifth, our logistics capability gives us a competitive advantage in the market and has been a significant driver of the improvement in the customer and the merchant NTS. We expect logistics to play an instrumental role in the continued success with our supply strategy. In the first quarter of 2023, the average time to door in 6 of our major markets improved by 8 days when compared to the same period of 2022. Furthermore, our on-time delivery rate was around 92% in the first quarter, an improvement from approximately 86% in the same period of last year.

Our goal for the year is to roll out the 15-day time to door initiative in all major geographies for which. Additionally, we plan on implementing forward deployment capabilities in China, which is expected to help reduce our delivery time to approximately 10 days for high-velocity products listed on wish. Since we embarked on the turnaround journey, supply quality has been a high priority for which, as Joe mentioned earlier, we have achieved significant improvements in this area, resulting in lower refund rates, lower order cancellation rates and higher customer NPS. While it’s very clear that our customers enjoy the new wish shopping experience and is that we are on the right path. There’s more to be done. With the end-to-end supply strategy which is committed to creating more value for customers while enabling merchant success by promoting merchandise that brings freshness, good quality and competitive prices to the platform.

Before turning the call back to Joe, I’d also like to address 2 more topics for investors. We are being very focused on turning around the business, which has also taken steps to bring more positive impacts to the communities we serve. For example, as part of our efforts to reduce carbon footprint, we are consolidating more parcels in a single shipment without compromising our time to door or on-time delivery rate. Additionally, we continue to make the last mile delivery more efficient and more eco-friendly their local pickup options versus home delivery. Millions of buyers are leveraging the local pickup services to save on shipping costs, also helping to protect the environment. We are committed to making continuous improvement in ESG and expand ESG-related disclosures through our filings and Investor Relations website.

Secondly, in April, the Board authorized a $50 million company stock buyback program, representing over 25% of our market cap as of April 30, 2023. The share repurchase program demonstrates the Board’s and the management’s confidence in the future of our business and our commitment to creating long-term sustainable value for our shareholders. With that, I will now turn over the call to Joe for his closing remarks.

Joe Yan: Thank you, Vivian. It has been 18 months since we embarked on our transformation journey. And as a reminder, our foundations for growth are built around 3 fundamental pillars: improving the customer experience, deepening our merchant relationships and achieving operational excellence. I’m very proud of what our employees have accomplished in each of those areas, but also recognize we still have a lot more to accomplish for the final success of our turnaround. Looking ahead, we plan to provide our users with robust basket building experience from beginning to end, offer a variety of exploration capabilities and drive repeat purchase by encouraging user to build their next basket, which we believe is key to optimizing our unit economics. We are restendlessly focused on executing on our growth and supply strategies to put our business back on the path to attaining growth. At this time, operator, could you please open the call for Q&A.

Q&A Session

Operator: Thank you. Our first question comes from the line of Steven McDermott with Bank of America.

Operator: Our next question will be coming from the line of Laura Champine with Loop Capital One moment.

Operator: All right. Thank you so much for that. And as a reminder, everyone to ask a question, you will need to press star 1 on your telephone and wait for your name to be announced. So the Q&A roster — our next question is coming from the line of Mike Sang with UBS.

Operator: Our next question will be only from the line of [indiscernible]. Your line is now open.

Operator: Our next question will be coming from the line of [indiscernible] with UBS.

Operator: All right. Our last question will be coming from the line of Steven McDermott with Bank of America.

Operator: Thank you so much for the right. At this time, we will actually set in a few more questions for our question-and-answer session. As a reminder, to ask a question, you will need to press Star 1 1 on your telephone and wait for your name to be announced. So as we compile the Q&A roster. Okay. So that was our final question

Operator: Okay. Well, this will conclude our question-and-answer portion of today’s call. At this time, I would like to turn the conference over to Wish CEO, Joe Yan for closing remarks.

Joe Yan: Thanks, everyone, for joining our earnings conference call, and we look forward to talking to you throughout the quarter.

Operator: Okay. Ladies and gentlemen, this does conclude today’s conference call. You may all disconnect, and have a wonderful day.