Jumia Technologies AG Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Jumia's Results Conference Call for the First Quarter of 2023. 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 first quarter 2023 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 May 16, 2023, 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 names 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. So we are now 7 months into the execution of our strategy to accelerate our progress towards profitability. And I'm very pleased to report today very good progress towards this call. In Q1 '23, adjusted EBITDA loss decreased by 51% year-over-year, reaching its lowest level in over 4 years. This is the third consecutive quarter of adjusted EBITDA loss reduction on a year-over-year basis. We are accelerating the pace of loss reduction after a 30% decrease in adjusted EBITDA loss in Q4 '22. The loss reduction this quarter was supported by significant cost savings as we reduced our operating expenses by 32.9% year-over-year. We are examining every cost line in our P&L and driving efficiencies while maintaining our standards of operation and execution. We are very pleased with the progress made so far on costs and we believe that we still have room to drive further savings on fulfillment and tech M&A costs as our efficiency measures continue to yield more results. I also want to be very clear that although we believe cost reduction to be an essential lever for breakeven, it's only one aspect of our broader profitability strategy. The other very important lever for breakeven is obviously growth. And although growth in Q1 23 was affected by a number of headwinds, we have significant growth runway in our markets and we are working on the fundamentals of our business and consumer value proposition to capture this vast opportunity. Let's now review the details of usage performance in Q1 '23. Quarterly active consumers, orders, and GMV declined by 22%, 26%, and 22% year-over-year, respectively. Usage dynamics were negatively affected by a combination of factors in Q1. First of all, the macro environment remains very challenging. High inflation is affecting consumer spending power and restricting sellers' ability to source goods. We also faced a challenging operating environment in Q1 in Nigeria with protests related to the withdrawal of high-denomination currency notes. There were also security concerns around the election period in February '23, but as of today, the disruptions in Nigeria have subsided. Second, we took very deliberate actions that we knew would affect usage in the short term but are the right things to do for the long-term growth and profitability of our business. We recalibrated our product and service portfolio, moving away from unprofitable categories with limited consumer lifetime value. As part of that, we have ceased our first-party growth offering in most countries and significantly reduced promotional intensity behind a number of services on the JumiaPay app. In fact, JumiaPay app services accounted for over 25% of GMV decline and over 40% of orders decline. JumiaPay app services, combined with the FMCG category which includes grocery products, accounted for a total of 55% of the decline in items sold during the quarter. Lastly, for GMV specifically, FX represented a significant headwind and contributed 15 percentage points to the 22% GMV decrease in Q1. Nine out of ten local currencies depreciated against the U.S. dollar, including the Egyptian pound and Ghanaian currency; for example, depreciated by more than 80% against the dollar, while currencies in Chile and the South African rand depreciated by over 10%. We view these headwinds as temporary, and we are working on a comprehensive plan to drive long-term profitable growth in June. The focus of this plan is on getting the basics right across all geographies. The first priority is to improve supply and assortment relevance by attracting high-quality sellers onto the platform. By this, I mean relevant brands, strong local distributors, and importers with a focus on core e-commerce categories such as phones, electronics, home appliances, fashion, and beauty. We have already taken steps to streamline our category mix with the pullback from third-party grocery so we can now focus on getting the right assortment and price points across relevant product categories. We are also working on enhancing seller management tools and processes to improve the experience of our sellers in Jumia. We have started rolling out a new version of our SellerCenter platform which includes a broad suite of seller management tools to help them better manage and grow their businesses in Jumia. Last but not least, we plan to further develop JumiaGlobal. This is a broader platform that allows overseas sellers, mostly from China, to sell on Jumia. Jumia Global is a meaningful competitive advantage for Jumia as it allows us to offer consumer products that are not available locally at attractive price points and within a reasonable time frame. In addition to our commercial efforts, we are working on penetrating our addressable markets more effectively. And we intend to do so by tapping into the large consumer pools located outside of primary cities which are usually underserved by retail as we speak. For that, we are expanding our logistics reach in these areas in a cost-effective manner, mostly through developing networks along relevant logistics routes. These bigger stations are usually operated by third-party partners who work under strict guidelines and supervision from Jumia. The second requirement to expand our reach is to adapt our marketing strategy. This means leveraging relevant local channels to reach these populations, educate them about e-commerce, and engage with them on an ongoing basis. Ivory Coast is one of the countries that's at the forefront of developing e-commerce in secondary cities and rural areas, and there are several learnings we can leverage to replicate the success in other countries. In terms of marketing, we have found that local channels such as local radio, street activation, and Jumia force are much more effective at driving awareness and conversion rates than typical digital marketing channels. That's why we're very comfortable working with much smaller marketing budgets. It is not a question of spending large amounts of marketing; it's about deeply embedding ourselves within local communities to understand what works best for them. On the technology front, we are focusing our development efforts on products and features that enhance the user interface and user experience to make our platform easier and more intuitive to use. Lastly, Jumia Pay has an important role to play in the growth of e-commerce to add more convenience and remove friction at checkout. We are now in the process of rolling out JumiaPay on delivery to allow digital payments on delivery and further reduce the use of cash. None of these actions are quick fixes or shortcuts to growth. These are fundamental improvements to our customer value proposition, so we expect the results to materialize over time. Now, moving on to JumiaPay, TPV was $48.6 million, down 31% year-over-year and down 13% on a constant currency basis. FX effects were a significant headwind again to performance, particularly the 87% depreciation of the Egyptian pound against the U.S. dollar. The drop in JumiaPay app TPV accounted for almost 60% of the total TPV decline. This was a result of our decision to discontinue highly promotional services on the app that do not build sustainable cohorts, such as airtime recharge and watches. This development also led to a decline in TPV penetration from 28% in Q1 '22 to 25% in Q1 '23 despite an increase in TPV penetration in both our physical goods and food delivery platforms. JumiaPay transactions reached $2 million in Q1 '23, down 38% year-over-year. The transactions decline in the JumiaPay app accounted for over 80% of the overall JumiaPay transactions decline. 29% of orders placed on the Jumia platform in Q1 '23 were completed using JumiaPay compared to 34% in Q1 '22. Here, again, the decline in pension was mostly attributable to the reduction of JumiaPay app services in the transactions mix, with JumiaPay transactions penetration as a percentage of orders actually increasing in both physical goods and food delivery platforms. As I mentioned earlier, Jumia Pay continues to be a strategic priority for Jumia, and we're working on making it an even more effective enabler for our e-commerce business. The initial rollout of JumiaPay on delivery in Kenya is showing very good traction. In March '23, which was the first full month of rollout, 20% of postpaid orders in Kenya were completed using JumiaPay. Also, we remain focused on expanding our payment processing activities on our platform in Nigeria and Egypt, where we have previously obtained the relevant licenses to do so. I will now hand over to Antoine who will walk you through our financials.

Thanks, Francis. Hello, everyone. I'll kick off with the review of our top line performance on Page 10. Revenue reached $46.3 million in Q1 '23, down 3% year-on-year and up 24% on a constant currency basis. Marketplace revenue growth, which was 4% and 21% on a constant currency basis, was offset by first-party revenue decline. This was mainly a result of the scale back of the grocery subcategory which was largely undertaken on a third-party basis. Other revenue was down 68% year-on-year, mostly due to the suspension of our logistics as a service offering in most markets, except Nigeria, Morocco, and Ivory Coast. We took this decision in Q3 last year to reduce business complexity and enhance our logistics capacity and efficiency before taking on third-party volumes. Let's now impact the growth dynamics of our marketplace revenue. Marketplace revenue reached $27.4 million, up 4% on a year-on-year basis and 21% on a constant currency basis. This is a robust performance considering GMV was down 22% and 6% on a constant currency basis over the same period. Marketplace revenue growth was supported by strong commissions revenue momentum which was up 40% year-over-year and 61% on a constant currency basis. Marketing and advertising revenue was stable year-over-year and up 32% on a constant currency basis. FX effects resulted in significant headwinds to this revenue line due to the high weight of the Egyptian pound in the marketing revenue mix and its depreciation by 87% against the USD in Q1 '23. Value-added services revenue, which mainly includes logistics revenue from sellers and fulfillment revenue, which includes shipping fees from consumers, decreased by 11% and 21% year-on-year, respectively. This was mostly driven by the decline in volumes. That being said, we are significantly improving the monetization of our logistics services and the pass-through of our fulfillment costs. The ratio of the sum of fulfillment and value-added services revenue over fulfillment expense increased from 62% in Q1 '22 to a record high of 79% in Q1 '23. Moving on to gross profit, which was also resilient in Q1 '23, reaching $28.6 million, up 5% and 24% on a constant currency basis. Commission take rate increases drove a strong expansion in gross profit margin, which went from 10.8% in Q1 '22 to 14.4% in Q1 '23. This gives us a good position as we move forward. Moving on to costs. Fulfillment expense reached $17 million, down 34% year-over-year and 22% on a constant currency basis in parallel with the decline in orders. Fulfillment expense per order, excluding JumiaPay app orders which do not include logistics costs, decreased by 20% from $3.1 in Q1 '22, down to $2.5 in Q1 '23. As a percentage of GMV, fulfillment expense improved from 9.5% to 8.1%. These efficiency improvements are early signs of success of the initiatives we are working on across our logistics chain. These include optimizing our footprint and logistics routes, improving warehousing staff management and productivity, reducing packaging costs, and many more. As we continue executing on these initiatives, we expect to drive further improvement in efficiency compared to current levels. Sales and advertising expense reached $5.8 million, down 69% year-over-year and 65% on a constant currency basis as we continue to bring more discipline to our marketing investment. This drove an improvement in marketing efficiency ratios with sales and advertising expense per order decreasing by 58% from $2 in Q1 '22, down to $0.8 in Q1 '23. As a percentage of GMV, sales and advertising expense reached 2.9% in Q1 '23, which is more than a 4.5% point improvement year-on-year. We are comfortable working with much smaller marketing budgets and we don't believe growth has to come at the expense of marketing efficiency. As mentioned by Francis earlier, growth is primarily a function of how good our customer value proposition is, and if there are any gaps in basics, no amount of marketing spend can effectively address that. That's why we are focused today on enhancing the consumer value proposition where needed to create a sustainable foundation for long-term growth. Moving on to technology and G&A costs. Second, content expense reached $11.8 million, down 9% year-over-year and down 1% on a constant currency basis. Tech is a core part of our DNA and we remain committed to improving the experience of our users through the rollout of relevant products. That being said, there are further savings opportunities for us on the tech cost front as we continue optimizing our tech infrastructure while improving staff productivity. G&A expense, excluding share-based compensation, reached $25 million in Q1 '23, down 16% year-over-year and 5% on a constant currency basis. The staff cost component of G&A expense excluding share-based compensation expense decreased by 21% year-over-year as a result of the organizational changes undertaken in Q4 '22. Note that Q1 '23 figures yet reflect the full impact of these headcount cuts as Q1 still included the last month of some of the leaders. Let's now look at our balance sheet on Page 15. CapEx in Q1 '23 was $0.8 million. We are returning to quarterly levels around the $1 million mark after the logistics and technology investments of last year. Net change in working capital had an inflow impact of $7.4 million, largely due to an improvement in the payable cycle which had a positive cash effect of $6.2 million. Cash utilization for the quarter was $23.5 million. This is a reduction of approximately 60% compared to both Q1 and Q4 '22. At the end of March '22, we had a liquidity position of $205.4 million comprised of $86.9 million of cash and cash equivalents and $180.6 million of term deposits and other financial assets. Our efforts to significantly reduce cash utilization allowed us to meaningfully expand our cash runway. I'll now hand over to Francis, who will walk you through our guidance.

Thanks, Antoine. Our Q1 '23 results show strong progress towards breakeven and further support the guidance we provided earlier this year. As such, we are reiterating this guidance and remain committed to further accelerating our progress towards breakeven. For the full year '23, we expect adjusted EBITDA loss to reach between $100 million and $120 million. At the bottom of the guidance range, this means cutting adjusted EBITDA loss by more than half versus '22 in line with what was already achieved in Q1 '23. We expect sales and advertising expense to reach between $30 million and $40 million. At the bottom of the range, we're talking about a reduction of 60% versus '22. I will reiterate here that although we are cutting the overall amount of marketing spend, we are extremely focused on driving usage growth on the platform. Our marketing spend, although lower, is much more efficient as we tap into more relevant channels for our consumers. In parallel, we continue to work on multiple dimensions of our value proposition in terms of consumers, selection, price, and convenience. Lastly, we expect G&A, excluding share-based compensation to reach between $90 million and $105 million compared to $118 million in '22. This is essentially a reflection of the headcount cuts completed already in Q4 '22 and does not incorporate the benefits of ongoing initiatives such as office space rationalization. We are encouraged by the good progress made this quarter towards breakeven. Going forward, we will maintain cost discipline and drive further efficiencies by redoubling our efforts on the growth front to scale the business towards profitability. With that, we are ready to take your questions.

And our first question this morning is coming from Luke Holbrook from Morgan Stanley. Please go ahead.

I've just got a couple of questions from my side. The first is, it looks like you've raised commission rates quite significantly over the past year now. If I exclude, I guess, cancellations from your GMV, it goes from 19%. I'm just wondering what the reaction has been from merchants over that time. Do you think you're reaching a maximum for the monetization efforts that you put into there? And then, the second one is your actives are down quite significantly year-on-year. I just wondered if you could just talk a bit about the trends through the quarter and into April and May, particularly in light of your sales and advertising falling about 70% quarter-on-quarter?

Sorry, Luke, I didn't get the last — the second question. You mentioned something was down which I…

Yes, your active space is down about 25% year-on-year. So just wondering how it trended through the quarter given your sales and advertising reduction.

So let me start with the first question then. So indeed, we increased take rates through commissions and value-added services last year quite significantly. I think the reaction from sellers was fine. Of course, they were not cheering for that, but sellers understood that we bring value and we're creating a business for them. We made sure that the new commissions were not endangering their business. They understood they had to pay a fair price for the value we are creating. So we had no backlash, no bad reaction from the vendors. The question about whether we've reached the maximum is very hard to tell until you overstep it. The decision we've made at this stage is that we don't want to push further on the mandatory take rate to commissions, mostly because a large part of our growth plan relies on improving the consumer value proposition. This improvement mostly comes in our markets where consumers are cash-constrained, which comes from enhancing assortment, the price points, the availability of goods, and this depends on vendors. So we don't want to be pushing them too hard at this stage because we absolutely need them to enhance the value proposition of our platform and drive long-term growth with low marketing costs. So we're not planning on going further than where we are today. We believe it's a fair take rate that creates value for both vendors and for Jumia. We're satisfied with that level of monetization. I don't want to take the risk to push it too far. Then on the usage trends through the quarter, I think the trend is pretty similar for the whole quarter. I would not say it's correlated with marketing. What happened from the start is that we had a number of deliberate actions that had an impact on usage in the short term. As we decided to pull back from first-party grocery in many countries and stopped intense promotional activity in the JumiaPay app, for example, this had a direct short-term impact on usage that materialized through Q1 quite evenly and that continues to affect some months after that. So I would not comment on specific trends within the quarter. What matters the most to me is that we put together the right building blocks and work on fundamentals to achieve long-term growth. The short-term impact was unfortunately a part of the plan, but we're also very happy to see some improvement at the country level thanks to our efforts in commercial strategy and improved supply and better distribution and better penetration in our markets.

Perfect. Just do you disclose grocery as a percent of your GMV or not then?

There’s big growth front? So you can...

Yes. Yes, grocery in the GMV mix. Do you disclose that given its significance this quarter?

No, we did not disclose it. What we mentioned earlier on is that in the GMV decrease we saw this quarter, JumiaPay app and grocery accounted for 34% of the total decline. That's one-third of the whole decline at the group level. But grocery was definitely not the biggest back category by far. It was certainly the most complex but definitely not the biggest.

Your next question is coming from Aaron Kessler from Raymond James.

Maybe just a couple of questions. First, you mentioned opportunities for additional expense cuts in the P&L. Can you just give us a sense? It doesn't seem like there's much room left on advertising; should we see that's kind of more G&A or just other areas that you can discuss? And then, it sounds like the biggest impact to revenues on a sequential basis was product mix or maybe just rate quarter kind of macro product mix and FX for us.

Okay. So correct me if I'm wrong, but on your first question about the opportunity for further savings across the cost base. The good news is that we see more opportunities for savings, right? I think we've already seen significant impacts on costs, but we keep looking every day and wake up thinking about how we can achieve profitability. If you look at the different items in the P&L, regarding the fulfillment part, we're just at the beginning of a very long process. Our cost per order on fulfillment is currently at $2.5, excluding JumiaPay app. The measures we began a couple of months ago are just starting to yield impact. We still have diverse levels of impact across countries, and when all countries are aligned with best practices, we believe we can achieve further savings. As for marketing costs, I think we've already executed quite a lot. We're confident this is a sustainable level given our initiatives aimed at building better value propositions and driving better penetration across the country. Regarding G&A, we have been reducing costs while also reducing complexity to streamline the organization and reduce the number of business lines. We believe we can continue to achieve savings, especially because the Q1 figures do not reflect the full extent of our efforts. Many salaries are still present in Q1 P&L and will be removed from Q2 or Q3, enabling us to see the full effect of headcount reductions and broader G&A savings in that P&L. We also believe we can achieve additional gains in technology. The tech teams and tech products are making progress in terms of infrastructure, and we can gain more efficiency from the teams. So we are not at the end of our journey. As I mentioned earlier, cost is not the only dimension of the plan, but I want to emphasize that we are not at the end of the journey related to making Jumia a leaner and more efficient company. And then, Aaron, could you please repeat the second question?

Yes. Second question, just kind of on the relative magnitude of the impact to the growth in Q1, the revenue maybe revenues in Q1 versus Q4 obviously declined, just maybe the impact of macro product mix and FX which we called out. Just should we assume product mix was the biggest impact and then kind of macro on that FX or just if you can rank those?

So I will answer directionally. Product mix is changing slowly. By definition, product mix evolves gradually, so from Q4 to Q1, you don't see radical changes that have a visible impact on revenue. Although we're gradually moving toward the top categories that we're focusing on, such as fashion, beauty, TV, home appliances, phones, and electronics. The macro situation is pretty much the same as we discussed a few months ago, and FX is still not helping us with significant headwinds. I would say, no major changes on that front at this stage.

Great. And just maybe finally, anything you would call out in terms of geographic performance? Any major differences you saw among your main regions?

So I will remain a bit directional; we're not disclosing detailed data on an ongoing basis. But directionally speaking, we see that macro is the main driver of the performance for the worst cases, if I can put it this way. We're starting to see some bright spots in some countries where the early actions of the turnaround plan are starting to pay off. For example, we're seeing very strong resilience and good performance on top line, as well as one of the best performances regarding marketing efficiency in countries like Senegal and Morocco. The countries where macroeconomic pressures are most severe are obviously the ones suffering the most. However, overall, the execution quality and consistency of the actions we're rolling out deliver more or less the same results across countries, provided we have a similar macro environment. Thank you.

Your next question is coming from Catherine O'Neill from Citi. Catherine, please proceed with your question.

Great, I've got three questions, if that's okay. The first one is on Jumia Global that you mentioned in terms of bringing overseas sellers on board. I just wondered if you could provide a bit more detail on that in terms of how meaningful you think that could be over time in broadening the proposition. What impact on GMV would that have, and whether those sellers come on at the same take rates? Will we see a sort of impact there? Then secondly, within SG&A, I just wondered how much sort of one-off restructuring costs you'd expect this year and you saw in the first quarter? And then the final question is, if you're talking about there's more efficiencies coming from fulfillment and tech, and the savings in SG&A were fully reflected in the Q1 numbers, I just wondered why you didn't maybe upgrade your adjusted EBITDA guidance. Do we expect to sort of ongoing quite challenging top line? Is that sort of what prevented that?

Okay. Sorry, Catherine, may I please ask you to repeat the second question?

Yes. The second question was just within SG&A or within your OpEx, I just wondered how much one-off or restructuring costs you saw in Q1 and you’d expect for this year that obviously won’t repeat when we go into next year.

Okay, sure. Let me start with Jumia Global. Jumia Global is a business line that's quite well-known to everyone on the call. All big platforms in the world have overseas e-commerce activities like this. Jumia Global for us is a massive advantage, as we've discussed several times before. We deeply believe that our markets are constrained by supply rather than demand. The daily challenge for the African consumer is about finding the right product at the right price in the market where there's simply not enough supply or poorly distributed products. Being able to access that vast pool of Chinese suppliers, mostly Chinese, is a significant advantage for us. It means we can bring consumers in our 11 markets products that are often not available or too expensive because we would have cut off layers of intermediaries with very good service and some checks on quality which will increase trust from the customers. In the process, we're creating a lot of value for both customers and vendors, enabling us to capture a sizable take rate that makes it a very viable business for us. It's a business that's even more relevant for us in emerging markets in Africa than it can be for other players in different places in the world. This is financially strong and viable, and we aim to keep on developing. We have countries with fairly high penetration rates of Jumia Global, and we are actively replicating good practices across most of our 11 markets. So it serves as a very strong asset for us and an essential part of the plan. As for your question on one-off restructuring costs, we did not separate it in the numbers we presented because it was not material. What was more pertinent is that we have retained a series of individuals in Q1 that will lead to a decrease in staff costs in the coming quarters.

No, you're right. It was not material as you mentioned. The key point is that we retained individuals in Q1, leading to lower staff costs in subsequent quarters.

And regarding Catherine's last question, we did not upgrade the guidance. We would be happy to do it in the future if we confirm good progress. That will be a topic for the coming quarters. Right now, we’re working within the guidance set for this quarter, and we consider that we will see further improvement in costs.

Yes.

Thank you. We have reached the end of the question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Thank you, everyone.