Jumia Technologies AG Q4 FY2022 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Jumia's Results Conference Call for the Fourth Quarter of 2022. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to Safae Damir, Head of Investor Relations for Jumia. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today for our fourth quarter 2022 earnings call. With us today are Francis Dufay, CEO of Jumia; and Antoine Maillet-Mezeray, Executive Vice President, Finance and Operations. We will start by covering the Safe Harbor. We would like to remind you that our discussions today will include forward-looking statements. Actual results may differ materially from those indicated in the forward-looking statements. Moreover, these forward-looking statements may speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the risk factors that could cause actual results to differ from the forward-looking statements expressed today, please see the risk factors section of our Annual Report on Form 20-F as published on April 29th, 2022, as well as our other submissions with the SEC. In addition, on this call, we will refer to certain financial measures not reported in accordance with IFRS. You can find reconciliations of these non-IFRS financial measures to the corresponding IFRS financial measures in our earnings press release, which is available on our Investor Relations website. With that, I'll hand over to Francis.

Thank you, Safae. Welcome everyone and thanks for joining us today. I would like to start with a brief update on our strategy. Antoine and I took on our new roles over four months ago now. Our mandate is very clear: taking Jumia to breakeven and building a growing and profitable business in Africa. We took swift action to support our path to profitability, and while it is still early days and there's a lot more that we're working on, the first results are very encouraging. In Q4 '22, we made good progress on our strategic priorities. One, we have significantly reduced our losses. Two, we have enhanced business focus by terminating a number of non-core activities to support our unit economics. Three, we have driven meaningful cost reduction, mostly visible in fulfillment and marketing expenses, but we're working to drive more savings across the whole cost structure. And four, we have accelerated monetization, which has reached all-time highs in Q4. Let me start with the reduction in losses. Operating loss was down 41% year-on-year, reaching $49.8 million. Operating loss as a percentage of GMV decreased by over 8 percentage points year-on-year to 17.6%. Similarly, adjusted EBITDA loss was down 30% year-on-year, reaching $49.2 million. This takes the full year '22 adjusted EBITDA loss to $207 million, near the bottom end of the guidance range we provided of $200 million to $220 million. So while this is good progress, we believe that we can do much better and this is reflected in our guidance. We expect adjusted EBITDA loss for 2023 to decrease by up to 50% versus 2022. To accelerate our progress towards profitability, we need to be much more focused and disciplined in our scope of activities. We've had a tendency in the past to spread ourselves too thin across a very broad range of activities. We announced in our Q3 earnings call our intention to enhance business focus and terminate a number of projects. These business exits have now been largely completed. We have discontinued Jumia Prime, as the results from Prime in terms of consumer traction and stickiness fell short of our targets. Our markets are probably not major enough for this type of offering yet. We have also scaled back our first-party grocery activity in Algeria, Ghana, Senegal, and Tunisia to support our unit economics and reduce complexity. Grocery comes with a number of procurement and logistics challenges and requires different scales for economics to work. It doesn't make sense for us at this stage to continue investing in this category in countries where it remains sub-scaled. In addition, we have suspended our logistics-as-a-service offering in a number of countries. We continue to believe in the logistics opportunity for Jumia across Africa. However, we need to first improve the efficiency of our logistics to better serve our own e-commerce business. That said, we continue developing our logistics-as-a-service activity in Nigeria, Morocco, and Ivory Coast where our logistics is ready to support third-party volume and where proof of concept has been established. Lastly, we have discontinued our food delivery operations in Egypt, Ghana, and Senegal in Q4. In Egypt, although it's a large market, it is already very competitive with established players. Competing for market share would have diluted our unit economics in the midterm with unclear upside. In Ghana and Senegal, we didn't see attractive returns to justify the investments. If we take all these business exits combined, they represent less than 4% of total GMV, 9% of revenue, and 2% of EBITDA loss. That said, they help us significantly reduce business complexity and free up capital and management bandwidth to focus on core priorities such as growth. One of these priorities is to significantly reduce costs and operate at a much higher level of efficiency. What is visible in the Q4 results is the significant decrease in fulfillment and sales and advertising expenses, which declined by 21% and 41% respectively year-on-year. We are working to drive further efficiencies this year in our fulfillment and marketing costs. We took tough decisions on headcount in Q4, resulting in a termination of over 900 positions, expanding to a 20% headcount reduction. We streamlined functions to create linear, more productive teams, and are fully committed to executing our strategy. As part of that, we significantly reduced our presence in Dubai, cutting headcount by over 60%. Most of the remaining staff is being relocated to our African offices, closer to our consumers, sellers, and operations. The implementation of these changes resulted in $3.7 million in one-off restructuring costs booked in Q4. We expect these headcount reductions to allow us to save over 30% in monthly staff costs starting from March '23 compared to the October '22 cost baseline. Accelerating our path to profitability requires both tighter cost control and revenue growth. A major driver in the reduction of the adjusted EBITDA loss in Q4 was the acceleration of monetization to record highs. Gross profits were up 22% year-on-year and 38% in constant currency terms. Gross profit margin reached an all-time high of 14.5% of GMV, a step up of over 4 percentage points compared to Q4 '21. This was driven by record highs reached across commissions, advertising, and value-added services. We've made very good progress this quarter across monetization and cost reduction, positioning us well to further reduce our losses. Let's now dive deeper into Q4 performance. I will cover operating KPIs, while Antoine will walk you through our financials. Let me start with usage dynamics. We're facing significant macro challenges in several important markets, and this is affecting usage performance on our platform. Inflation is reaching new highs. In Ghana, for example, inflation reached 54% in December, the highest level in over two decades. Another example is Egypt, which is our second-largest market, where the latest CPI print came in at 26% in January. Inflation is putting significant pressure on consumer spending, and the FX crunch we're seeing in many of our countries is creating major supply issues. In Egypt, goods were accumulated in ports due to a shortage of U.S. dollars, impacting our sales. This is important context when examining our usage performance. Quarterly active consumers reached 3.2 million, down 15% year-on-year. This reflects the macro challenges I just mentioned and our deliberate actions to reduce emphasis on categories with challenging unit economics, including grocery and several digital services. Similarly, orders declined by 12% year-on-year as a result of both macro changes and rate category rationalization. GMV reached $283 million, down 14% year-on-year and flat on a constant currency basis. FX was a material headwind to GMV performance in Q4, with local currencies depreciating against the dollar. However, we made progress in reducing the overall rate of cancellations, failed deliveries, and returns. This is an important indicator of operational efficiencies. The cancellation rate as a percentage of GMV improved from 22% in 2021 to 20% in 2022, while the rate as a percentage of orders improved from 16% in 2021 to 15% in 2022. Despite the macro challenges, we're confident about the long-term growth opportunity in our markets, and a core part of our strategy is to strengthen our fundamentals to drive sustainable long-term growth with healthy unit economics. One initiative I mentioned around supply improvements is already showing good signs. For example, in Senegal, we stepped up our commercial efforts in consumer electronics, leading to a nearly 90% year-on-year GMV uplift in Q4. We are replicating similar actions across categories and countries. Now moving on to JumiaPay, JumiaPay TPV and transactions are closely linked to platform usage. In the context of declining GMV and reduced marketing to drive prepayment penetration, JumiaPay TPV posted an 18% year-on-year decline in Q4. On a constant currency basis, TPV was flat. JumiaPay transactions reached $2.9 million in Q4, down 26% year-on-year due to the decline in orders. Despite this, JumiaPay remains a strategic priority, and we are working on product improvements to make it more effective for our e-commerce business. We continue to focus on expanding our payment processing activities in Nigeria and Egypt. I'll now hand over to Antoine, who will walk you through our financials.

Thanks, Francis. Hello everyone. I'll start with the review of our top-line performance. Despite the major challenges we are facing on the macro front, we posted very strong top-line performance in Q4 '22. Revenue was up 7% year-on-year, and 23% on a constant currency basis. This was driven by market-based revenue momentum, which accelerated by 27% year-on-year and 45% on a constant currency basis. On the other hand, first-party revenue was down 15% year-on-year and flat on a constant currency basis, largely due to our decision to scale back the grocery category. Other revenue was down 9% year-on-year and up 2% on a constant currency basis, partly due to the suspension of our logistics-as-a-service offering. Marketplace revenue reached an all-time high of $41.2 million in Q4 '22. Commissions was the fastest-growing marketplace revenue stream, up 81% year-on-year and up 105% in constant currency, reaching a record of $16 million. This was the result of commission take rate increases implemented in Q2 and Q3 '22. Marketing and advertising revenue was up 76% year-on-year and up 96% in constant currency, driven by significant third-party advertisers' revenue. Value-added services also reached a record high at $9.5 million, up 11% year-on-year and up 27% in constant currency due to increased warehousing service revenue. Fulfillment revenue was down 23% year-on-year, primarily due to selective deployment of next-day free delivery earlier in 2022. We are currently making adjustments to the free shipping program, introducing higher minimum basket sizes and further restrictions on geographical scope to support unit economics. The strong marketplace revenue momentum is driving an acceleration in gross profits. Gross profit reached an all-time high of $41 million, up 22% year-on-year and 38% on a constant currency basis. This also led to an all-time high gross profit margin as a percentage of GMV at 14.5%. I'm now moving on to costs. Fulfillment expenses reached $24 million, down 21% year-on-year and 6% on a constant currency basis, partly as a result of orders declining 12% during this period. The ratio of fulfillment expense per order decreased significantly, indicating efficiency gains that we're focusing on to continue driving savings through various initiatives, such as optimizing our footprint and reducing packaging costs. Sales and advertising expenses reached $18.5 million, down 41% year-on-year, reflecting our discipline in marketing investments. These reductions have led to improvements in marketing efficiency ratios with significant decreases in sales and advertising expenses per order. We still have room to generate even more efficiencies by improving the relevance and cost-effectiveness of our marketing channels. A key distinction here is that reducing marketing spend does not mean sacrificing growth. We're focused on driving usage growth while improving unit economics. Some regions within our portfolio are already experiencing faster growth with better marketing economics, and we intend to replicate this model across the group. Regarding technology costs, tech and content expenses reached $14.5 million, up 10% year-on-year due to higher hosting fees. However, on a sequential basis, tech staff costs were down, and we expect further tech cost efficiencies. G&A costs reached $37.1 million for the quarter, including $3.2 million in restructuring costs. We expect these headcount reductions to allow us to save over 30% in monthly staff costs starting from March '23 versus the baseline. We've made good progress in cost reduction in Q4 '22, but this is just a fraction of the work across the P&L. Now let's move to balance sheet and cash flow items. CapEx in Q4 '22 was $2.8 million, mainly for logistics and technology equipment. Net change in working capital had a significant outflow impact due to an increase in trade receivables. We had a liquidity position of $228 million at the end of December, comprising $72 million in cash and cash equivalents and $156 million in term deposits and financial assets. I'll now hand over to Francis, who will walk you through our guidance.

Thank you, Antoine. We remain fully committed to accelerating our progress towards breakeven. For 2023, we expect adjusted EBITDA loss to reach between $100 million to $120 million. At the bottom of this guidance range, this means cutting adjusted EBITDA loss by more than half versus 2022. The progress we made in Q4 '22 alongside initiatives we're currently working on give us confidence in our ability to hit this target. We expect sales and advertising expenses to reach between $30 million to $46 million. In that spirit, we expect G&A, including share-based compensation, to reach between $90 million and $105 million compared to $122 million in 2022. The organizational changes we conducted in Q4 will help us drive meaningful staff cost savings in 2023. Some of the actions we took were difficult, like headcount cuts and business exits, but we believe they were necessary for establishing a solid foundation for profitability. We're also driving cultural changes at Jumia, fostering a culture of innovation with sharper cost discipline. There is very strong buy-in and commitment across the organization to deliver on our strategy. We look forward to updating you on our progress in the next call. With that, we are ready to take your questions.

We will now begin the question-and-answer session. Your first question is from Luke Holbrook at Morgan Stanley.

Yes, good afternoon everyone. Thanks for letting me on the call. You've made a significant reduction in staff—900 positions. You're cutting advertising expense this year. I think you discussed consumers facing macro pressures. So I guess putting that all together, what are the assumptions that you are making from a top-line perspective to hit the adjusted EBITDA guidance for this year?

As we mentioned in the call outlook, thanks for the question. We're not giving top-line guidance for this year, but our assumptions do not foresee material changes to the trends seen in Q4. We are working hard to reverse trends and improve fundamentals, including supply and customer experience.

Okay, understood. And just historically, we've had supply chain issues and macro conditions blamed for underperformance in profitability. If there is a deviation in top line trajectory from what you're expecting, you'll take further actions to ensure hitting that adjusted EBITDA loss guidance, correct?

We will make sure that we hit the guidance.

Your next question for today is coming from Aaron Kessler at Raymond James.

Great. Thank you. A couple of questions. One, just the decline in customers and orders year-over-year that you saw. You said that was mostly macro. Were there any other factors, including scaling back initiatives that impacted customer order growth in the quarter?

Aaron, I didn't catch the second half of the question.

Yes, were there any other factors besides macro that influenced the declining customers and orders, such as scaling back initiatives?

I believe macro is the biggest driver. Inflation and supply disruption are major issues. We have made deliberate decisions to optimize, but macro remains the primary influence.

Got it. And any more details on the significant growth in commission revenues? How much was from higher pricing that you've rolled out or cutting back couponing?

In this quarter, we've reached an all-time high in gross profits as a percentage of GMV. This mainly resulted from commission increases made earlier in the year, alongside record advertising revenues. However, going forward, we will be disciplined on monetization and will focus on it as a byproduct of scale without raising commissions further.

Your next question for today is coming from Lamont Williams at Stifel.

Hi, thanks for taking the question. As you reduce sales and marketing expenses next year, can you discuss the planned shift in the marketing mix?

Great question. We're cutting inefficiencies and focusing on sustainable growth models without sacrificing growth. We aim to rebuild our value proposition category by category, targeting key categories and reaching consumers outside major cities. We will adjust our budget towards ground activation and relevant marketing channels. Our focus is on fixing basics with stronger customer experience.

Thanks. Could you touch on the changes or reductions in digital business lines?

In the past quarter, we became more disciplined in marketing investments across the board. We have pulled back spends on heavily promotional categories on the JumiaPay App, such as airtime sales, impacting sales but aligning with our focus on better economics.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.