ContextLogic Inc. (NASDAQ:WISH) Q3 2022 Earnings Conference Call November 9, 2022 5:00 PM ET
Company Participants
Randy Scherago – Vice President-Investor Relations
Joe Yan – Interim Chief Executive Officer
Vivian Liu – Chief Financial Officer and Chief Operating Officer
Conference Call Participants
Kunal Madhukar – UBS
Laura Champine – Loop Capital
Steven McDermott – Bank of America
Operator
Good day and thank you for standing by. Welcome to Wish’s Third Quarter 2022 Earnings 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 Randy Scherago, Wish’s Vice President of Investor Relations. Please go ahead.
Randy Scherago
Hi, everyone and welcome to Wish’s third quarter 2022 earnings conference call. I’m Randy Scherago, VP of Investor Relations. And joining me today are our Interim CEO, Joe Yan; and our CFO and COO, Vivian Liu.
Today’s prepared remarks have been pre-recorded. 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 Joe’s and Vivian’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, the turnaround timeline, consumer experience and engagement, expectations regarding merchant relationships and strategic partnerships; the potential impact of our strategic, marketing and product 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 our 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 Wish’s Interim CEO, Joe Yan.
Joe Yan
Thank you, Randy. I would like to thank everyone for joining our third quarter 2022 earnings call. This is my first earnings call since I joined Wish two months ago. I’m excited to be part of the Wish team at this important moment in the company’s evolution. I joined Wish as I see tremendous growth opportunities for the company as one of the world’s largest mobile ecommerce platforms. Wish’s vision is to unlock the vast potential of ecommerce for the underserved, value-oriented consumers around the globe. I believe that Wish is uniquely positioned to capitalize on the growth where cross border ecommerce and the emerging trends in social commerce intersect.
Today, I will start by highlighting some of the major accomplishments by the team, my observations on how the macro environment conditions are affecting Wish, then share our Q3 financial highlights, followed by updates on the foundational pillars of the business. Vivian will then comment on our operational efficiencies, provide a deeper dive into our third quarter financial results and share the fourth quarter guidance.
Lastly, I will provide additional closing remarks before opening up the call to your questions. Stepping into the interim CEO role two months ago, I was immediately impressed by how much the Wish team has done in strengthening the foundation of Wish over the course of one year, improve app experiences, reduce shipping time and improve on-time delivery rate, adopt a new pricing practice for buyers, implement new commission structures for merchants, launch a rebrand campaign, relaunch our women’s fashion category, and this list goes on.
Many of these foundational fixes are in full swing, improving buyer experiences on the Wish platform and deepening our relationships with global merchants. We have received positive feedback from both our merchant and buyer communities, reflected by our improved customer NPS and merchant NPS results this year over last year.
At the macro level, we experienced a higher level of economic uncertainty that emerged in both our North American and our European markets, which we believe to have impacted consumer buying behaviors. Our value-oriented consumers, particularly in Europe, have been impacted by the dramatic rise in energy costs, which translated to a slowing of discretionary spending across the region. We expect this uncertainty to continue, potentially impacting our buyers’ behaviors in the upcoming holiday season and even into 2023.
During these challenging economic times, we will remain committed to our value-oriented consumers who seek out the Wish shopping experience to get more for their money. At this time, I will share some high level financial highlights for the third quarter. Total revenues were $125 million, down 66% from the third quarter of 2021, mostly driven by lower ad spend and our new pricing practice which was fully effective in Q3.
However, I am glad to note that our order volume grew from Q2 to Q3, the first sequential quarterly growth since Q1 2021. Our Adjusted EBITDA in Q3 was a loss of $95 million, which was favorable compared to our previous guidance of a loss of $110 million to $130 million. Our balance sheet remains healthy with a balance of $837 million of cash, cash equivalents and marketable securities and no short-term or long-term debt.
I will now quickly highlight some of the progress we have made on two of our foundational pillars, improving the Consumer Experience, and Deepening Merchant Relationships. Over the past twelve months, we have made tremendous investments to upgrade the mobile app, improve listing quality, reduce delivery time, and enhance customer services and better address our buyers’ pain points.
Those improvements were first reflected in customer NPS results. As previously shared, we have seen customer NPS improve compared to last year. Next, we have seen significant improvements in refund and order cancellation rates. Our monthly customer refund rates have fallen 34% from January to September of this year, and customer order cancellations dropped 68% within the same time period as well.
I would also like to update you on our relaunch of Women’s Fashion offering which was started in mid-August. The new experience is now available across both the Android and iOS platforms. Data so far shows that both add-to-cart rates and average order value are improving within the new Women’s fashion experience. We also now have over 2,700 women’s fashion merchants on-boarded in this experience providing a wide range of over 160,000 women’s fashion garments and accessories to our consumers.
As we continue on our path to improve the customer experience, we will focus on the areas that enhance the ease of use, interactivity and entertainment value of the platform. One example is our new logged-out experience. Under this new design, consumers on iOS, Android, mobile and desktop web will no longer be required to download and install the app and create a new account in order to browse the products available on Wish. We have made great strides in deepening and enhancing our merchant relationships.
Throughout the year, the Wish’s Standards Program continued to improve the quality of merchants and listings on Wish. We also enhanced transparency in our pricing practice with both our buyers and merchants globally.
Additionally, we began implementing a new commission structure in Q2 to align with the industry practice and bring greater clarity and more competitive commission rates to our merchants. We rolled out the new rate cards for European markets in Q2 and successfully completed the global launch by deploying to the Rest of the World, including the U.S., in Q3.
We now also offer our merchants more tools to merchandise their products on Wish. We already have banners, collections, and store fronts, but will be adding in certain markets a dedicated Deals Hub where merchants can showcase their products even more. During the month of November, we will be running Everyday is Black Friday campaign where we will have daily deals and weekly flash sales for our popular categories such as electronics, accessories, home, toys, gifts, and fashion. For the month of December, we will continue to run daily and weekly Holiday sales. We intend to partner closely with our merchants in providing great value and satisfying holiday shopping experiences to Wish customers.
At this time, I would like to turn the discussion over to our CFO and COO, Vivian Liu, to discuss our operations, as well as our third quarter financial results in more detail.
Vivian Liu
Thank you, Joe. First to comment on the third pillar of achieving operational excellence, we believe that a competitive logistics offering is a critical differentiator to our global merchants. Therefore, we are committed to improving our logistics operations in terms of Time to Door and on-time delivery rates.
During the third quarter, we overcame multiple COVID-related lockdowns in China. The average TTD in five of our major markets has improved by five days since the beginning of the year. Our on-time delivery rate was around 92% in the third quarter, an improvement from approximately 80% during the third quarter of last year.
We are also taking steps to expand our merchant base outside of China. In Q3 we officially launched our merchant operations in Vietnam with a highly capable and driven team on the ground. We will continue to expand and strengthen our merchant bases in Europe, Southeast Asian countries and Americas. Over time, we expect this initiative to enhance our product variety in categories important to Wish and reduce our reliance on any particular country for merchandise supplies.
Now, I would like to discuss the financial results for the third quarter of 2022. I will also be providing adjusted EBITDA guidance for the fourth quarter. In Q3, we had 24 million monthly active users, MAUs and 16 million last 12 months active buyers, which was a decline of 60% and a 65% respectively year-over-year. This decline was mainly driven by the cumulative reduction in marketing spend over the past year.
Our total marketing spend during the past four quarters, Q4 2021 through Q3 2022 was approximately 85% lower compared to the marketing spend of the four quarters prior. Marketing spend was the most important driver of our top line performance from a year-over-year standpoint. We noticed that the decline in MAUs has started to stabilize. Further, Q3 was the first quarter since Q1 2021 where our MAUs increased quarter-over-quarter. As Joe mentioned earlier, order volume also increased in Q3, the first sequential quarterly growth since Q1 2021. We’re cautiously optimistic that over time more operational metrics will show similar improvements.
Total revenues in Q3 were $125 million, a decline of 66% year-over-year. The decline was across core marketplace, ProductBoost and the logistics. The revenue performance was attributable to lower marketing spend as mentioned above and as a new pricing practice implemented throughout Q1 and Q2 this year. As communicated during the previous earnings calls, we expected those pricing changes to drive a better customer engagement and a pricing transparency with our merchants, but for the near-term create downward pressure on both revenues and the profits. Q3 was the first quarter where the new pricing practice was fully effective at a global scale.
Thirdly, we believe that the high inflation rates and the market uncertainty in most of our buyer markets, particularly the European markets also contributed to the revenue decline year-over-year. Q3 growth profit was $34 million, a decline of 80% year-over-year. Gross margin was 27% versus 45% in Q3 2021. The gross margin decline was driven by the aforementioned pricing changes as well as the Logistics business, which has a lower margin now contributing a higher percentage to the total revenues.
Total operating expenses were $162 million in Q3 2022, a reduction of 30% year-over-year from the $230 million in Q3 2021. Net loss was $124 million compared to a net loss of $64 million in the third quarter of 2021. Our Q3 adjusted EBITDA was a loss of $95 million compared to an EBITDA loss of $30 million from Q3 2021. The EBITDA performance year-over-year was mainly driven by the movements in the revenues and the gross profits described earlier. However, the Q3 2022 EBITDA results does compare favorably to our guided loss of $110 million to $130 million. The more favorable EBITDA outcome versus our guidance was due to lower than expected marketing and outside services spend, as well as higher than expected gross profit.
Our Q3 free cash flow was negative $100 million, a significant improvement from a negative free cash flow of $344 million in Q3 2021. We ended Q3 with $837 million in cash, cash equivalents and marketable securities with no debt.
Now, turning to our outlook. We expect adjusted EBITDA to be a loss in the range of $90 million to $110 million for Q4 2022. As a reference point, our estimated revenues in October, 2022, the first month of Q4 is expected to be flat or slightly down when compared to our revenues in July, 2022, the first month of Q3. As the global economy continues to experience uncertainty due to geopolitical risks, high inflation and interest rate hikes, we will remain focused on operational efficiency and unit economics. Building upon the much strengthened Wish foundation and with a strong sense of urgency, we’re actively working to acquire and retain customers more efficiently, drive organic growth and improve the lifetime value of our core customers.
Before turning the call back to Joe, I also like to address another topic for investors. On October 28, 2022, we received a letter from Nasdaq so that we were in non-compliance with the Nasdaq listing rule that it requires listed securities to maintain a minimum bid price of $1 per share. The company has been provided 180 calendar days or until April 26, 2023 to regain compliance. The management team will be considering a number of alternatives, including the possibility of reverse stock split to bring the company back into compliance with Nasdaq listing requirement. We remain committed to creating shareholder values first through the successful execution of our turnaround plan and developing a strategic path to long-term sustainable growth and the profitability.
Now, I will hand over the call to Joe for his closing remarks.
Joe Yan
Thank you, Vivian. To close, I will leave you with a few final thoughts. During the past two months, I have been able to assess the situation, draw up plans and begin to drive execution. I was able to hit the ground running since I was previously at Wish as VP of Merchant Services in 2020, and I have spent most of my career in operations of e-commerce companies.
So I would like to share a few notes with you that are based upon what I have seen this last two months as interim CEO. First off, it’s a simple fact that turnaround are hard. I have met with all of our teams and I am tremendously impressed with the dedication everyone has shown to make this turnaround successful. What I have seen over and over is that Wish employees have been making top decisions over the last year to make sure we are building for long-term success, implementing simplify the pricing, changing the commission rate structure and significantly reducing our spend. With difficult decision that is clearly reflected in our short numbers, but those fundamental changes have also set us up with a strong foundation for us to leverage for the next stage of the turnaround.
What’s ahead of us is to use this platform now to accelerate our pace of innovation and to drive the product toward our mission. Bargains Made Fun, Discovery Made Easy. That’s why I’m excited. Discovery is a completely different approach to solving search and the relevancy in e-commerce. It’s like the more in real life. We take people who have a general intent to purchase something and inspire them to build a basket of interesting items that delight them at a reasonable price.
This is the fun experience for buyers and off cost. We are working hard to make this more fun with gamification and incentives. This is also fun for Wish employees to build as we are a technology company, and this is cutting edge data science and personalization at scale, along with bold user experience and design innovation.
Where I’d like to end my discussion today, is to highlight what my focus will be for the next several quarters. My plan is to build much stronger operational muscle across all of our teams. Our vision is amazing, but that is not where we need to focus. What we’re going to fight for inch-by-inch, is making sure that we can drive business results using all of the tools and capabilities we’ve built or can build as a technology company. This is what I joined Wish to do, and I invite all of you to join me as we push forward with the transformation of this company.
At this time, operator, could you please open the call for the analyst and investor questions?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Kunal Madhukar with UBS. Please go ahead.
Kunal Madhukar
Hi, Thank you for taking the question. A couple if I could. One could be on the GMV side. So you saw an uptake in MAUs, and you saw an uptake in order volumes. Yet that the commission rate is maybe lower now, but what was the GMV trend on a Q-over-Q basis, if you could get a sense of that? And the second thing is, you spent $80 million in marketing and you generated $40 million of core marketplace revenue. That’s 2x the revenue. So can you help us understand where that marketing spend went, how much of that was brand and rebrand building versus performance marketing in order to help us understand what’s happening with the marketing spend? Thank you.
Vivian Liu
This is Vivian Liu. Thank you very much for the question. So first on the GMV. We don’t share a lot of details about the GMV at this time. But what I would concur on your comments is that the GMV was impacted by the pricing change that we implemented at first half of the 2022, which was fully effective for Q3. So when we – as previously shared, when we change our pricing practice, which is mostly to simplify and to be more in compliance or consistent with the market of practice that was expected to drive downward pressure on the revenue and the GMW as well. So GMV certainly was impacted by that. But going forward, this will be the – it’s already implemented since Q3 and going forward, this will be a constant factor in our GMV performance and revenue performance.
Your second question is about the marketing spend. Again, it’s a detail of how much we spend our performance marketing versus that rebranding. That’s a detail level we don’t disclose, but it is true that the total marketing spend that you see in the financials includes both. And we started our rebrand campaign Q3, and it will actually continue throughout Q4. And obviously, it’s a very hard to quantify how much GMV is driven by the rebrand marketing.
Usually there’s a delay effect of the rebrand marking. But we do believe that is the right thing to do and convey the new image of Wish and drive the brand awareness and customer acquisition, all that. Having said all that, I do agree that we may still – we have done a lot to improve the efficiency of added spend overall and we will continue to do so, right? And it’s a very high focus for us to make sure that wherever we spend $1, whether it’s digital or marginal spend, we make sure we have we – we spend on the areas that provide higher return for the dollars. So we will continue to focus on marketing efficiency for the foreseeable future.
Kunal Madhukar
Thank you.
Operator
Thank you. One moment for our next question. And our next question comes from Laura Champine with Loop Capital. Your line is open.
Laura Champine
Thanks for taking my question. I’m still – I’m a little confused at the spread between marketplace revenues and logistics revenues. I did not expect the logistics revenues to outpace marketplace. What’s driving that dynamic? And how – with that in mind, the comments that where I think that GMV in October was flat or slightly down versus July, is that true or are you talking about overall revenues?
Vivian Liu
Yes. So thank you for the question. First on the logistic versus the core marketplace. So there are drivers that can be impacted both such as volume, right? And I think as Joe mentioned, I mentioned as well, Q3 to Q2, we actually experience increasing on our volume. So that’s a tailwind for both marketplace revenue and the logistics revenue. However, the pricing changes that we mentioned earlier, that has a much more impact on the core marketplace revenue versus logistics, because that’s a price – changing the pricing practice that mostly kind of impact on the product price, right, on the platform and with very little impact on the logistics revenue.
So that’s the main reason why the logistics revenue performed a lot stronger than the core marketplace revenue in Q3. Again, as a reminder, we started to implement the pricing changes in Q1 and Q2, and the Q3 was the first quarter where the new price is fully effective globally. So this is the first quarter where we see arguably major impact on the core marketplace revenue for the first time. I’m sorry, can you repeat the second question if you don’t mind?
Laura Champine
Sure. The question was about the spread between logistics versus marketplace. And really when you talked about the trend in October being flat to slightly down versus July, are you talking about total revenues or is that GMV?
Vivian Liu
Sorry, I was talking about total revenue. That’s a comment on the total revenue October versus July.
Laura Champine
Okay. Would you expect longer-term for logistics revenues to be higher than marketplace revenues?
Vivian Liu
We expect longer term, net of all the pricing changes and the changes in the commission structure, which impact more on the core marketplace versus logistics in the near-term. Now, longer term, we expect both to be highly correlated with the volume on the platform. So as we continue to improve the user experiences and the overall platform features and as we continue to drive volume, we expected both to start to show much stronger momentum, both core marketplace and the logistics.
Laura Champine
Got it. Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from Michael McGovern with Bank of America. Your line is open.
Steven McDermott
Hi, this is Steven McDermott for Michael McGovern. I was just wondering on the last call, you mentioned about aggressive recruitment, kind of three months later, the macro has only security further, so how should we think about managing G&A and costs in the last quarter and going into 2023? Thank you.
Vivian Liu
Thank you for the question. So we have been working very hard on managing our G&A and marketing just general OpEx. And I think if you recall at the beginning of the year we not only reduced our marketing spend pretty aggressively. We also announced the limited restructuring on the workforce and reduced our headcount by 18%. So and I think a lot of people hear the news in the marketing – in the past few days, and as a company, we were actually ahead of the curve.
And over the year, we have managed our employee expenses pretty efficiently and effectively, and that stays pretty low. But in some of the critical areas we do need to recruit and attract high quality talents. Because end of the day we are a hitech company and we continue to drive innovation and build the important product features for the customers and our merchants.
So we will continue to be very, very focused on cash flow optimization, cost attendance, operational efficiency. And that’s why in my prepared remarks, we highlighted all the three things and unit economics that will continue to be our focus for 2023. But we started this journey arguably a lot earlier than many other companies and it will continue to focus on efficiency.
Steven McDermott
Great. And then if I could add another question, how many points of pressure do you guys estimate the pricing changes affected revenue, and how should we think about comps going forward? I know you said it’s already in Q1, but just kind of like the magnitude of these pricing changes. Thank you.
Vivian Liu
Yes, thank you for the follow-up question. It really varies by product and product category and also even product level. It was a pretty complex pricing practice. We had it before, which was why – to some extent it could it be a little bit confusing to the buyers and the merchants and which was the reason why we simplified it and make it more straightforward, transparent and building to improve the user trust and engagement of our merchants.
So it was very long way of saying it’s hard to quantify, but it’s very – I would say it’s very material impact overall. If you look at what we did in the first six months, 2022 and the impact is definitely material. As I said, Q3 is the first quarter where that new pricing practice is implemented globally, and going forward it will be consistent, but if you compare our Q3 and Q4 performance to last year, before we started this change, it would be apples to oranges in terms of top line performance.
Steven McDermott
Got it. Thank you. Appreciate it guys.
Vivian Liu
No problem.
Operator
Thank you. [Operator Instructions] All right, this concludes the question-and-answer portion of today’s call. At this time, I would like to turn the conference over to Wish’s 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
Ladies and gentlemen, this does conclude today’s conference call. You may all disconnect and have a wonderful day.
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