ContextLogic Holdings Inc. (LOGC) Earnings Call Transcript & Summary

Great. Thanks for joining, everybody. My name is Doug Anmuth. I'm the Internet analyst at JPMorgan. It's our pleasure to have with us today Wish Co-Founder and CEO, Peter Szulczewski; and CFO, Raj Bahri. So Wish is one of the largest global e-commerce platforms, connecting 100 million plus MAUs in 100 countries to more than 550,000 merchants. The mission is to bring affordable and entertaining mobile shopping experience to billions of consumers around the world. It targets an underserved market, catering to value-conscious buyers, many with the household income below $75,000, through affordable and mostly unbranded products. Peter cofounded Wish in 2010. Prior to that, he served in various positions at Google, including as technical lead and senior software engineer. Raj joined Wish in late 2016, and before that, was CFO at Jasper and also at Trimble. So welcome, Peter and Raj.

Thanks, Doug.

[Operator Instructions] So feel free to type a question in there, and I'll do my best to work that into the discussion. So let's kick off. So Peter, you co-founded Wish, as I mentioned, in 2010. You've led the company as CEO since. Just looking back, what problem were you trying to solve with Wish? And how has the company evolved over the years?

Yes, Doug. Look, we founded Wish to really help the underserved consumer segment that really has been neglected by existing e-commerce offerings. So this is a massive population of value-conscious consumers that work really, really hard to make a living, but really cannot afford sort of expensive brands or sort of the kind of very convenient logistics, expensive sort of logistics solutions that I think we are very accustomed to. So we aim to bring affordable goods and services to this underserved population. We want to help merchants. We want to help manufacturers, many of which are sort of small family businesses as well all around the world. And I'm really proud of the success that we've had to date. We have over 100 million consumers visiting the platform each month and over 0.5 million merchants, as you mentioned, selling products to this user base. On any given day, we have transactions in over 100 countries. And we were able to reach the #1 most downloaded shopping app 3 years in a row now. We generated $2.5 billion in revenue in 2020, and we're growing at about 34% year-over-year.

Okay. That's great. So how do you think about the size of the market opportunity here just in this value-conscious buyer segment of e-commerce? And then -- and I think some people kind of think about Wish a little bit as like an online dollar store. Is that a fair comparison?

Yes, Doug, that's a good question. I mean, global e-commerce is obviously massive and growing quickly. In 2019, it was $3.4 trillion. I think by 2024, it's projected to be above $6.3 trillion. And we think that our strategy in terms of focusing on value-conscious consumers and specifically on the mobile experience, smartphones, which basically comprises of about 63% of global e-commerce in 2019, and will probably go to about 71% in 2 or 3 years. So I think it's a massive market. Again, we're focused on consumers that earn less than $75,000 a year. We believe there are over 1 billion such consumers around the world that fit this profile. And this discount category represents a small but really quickly growing portion of overall retail TAM. In terms of our comparison to a dollar store, I mean, we're similar in that we both serve similar types of customers. So we sell products at value prices. And we make sure that our customers are able to get the most bang for their buck. And many dollar stores haven't really invested in e-commerce. We have a long tail of SKUs, and we continue to sort of add products into our catalog. So in a way, our shopping experience is somewhat discovery-oriented, similar to sort of dollar store experience. And in some ways, we've been adding more types of verticals, more product categories, most notably, similar to sort of dollar stores as well. Our consumables and CPG goods have been growing rather quickly.

Okay. Let's hit on some of those. So data certainly is core to Wish. I think one of the unique things about the business is that it is driven by discovery and not search, as you mentioned. And I believe it's 70% of the sales actually do not involve a search query today. What drove you toward this discovery-based shopping experience? And if you could give us some examples of how you're utilizing data most effectively.

Yes, of course, Doug. So when we founded the company, we wanted to focus on smartphones, and we wanted to focus on bringing the best possible products via this very discovery-oriented, navigation-based experience on smartphones and really focusing on servicing up products that consumers might not even be aware of their existence. So depending on sort of all the types of things that our consumers tap on, add to carts, potentially ignore as well, so there's negative signals as well, we capture all that, and we try to create a personalized feed, almost sort of shopping as entertainment, a TikTok of e-commerce in a way. And when I was at Google, I really saw the impact that technology can really have on the world. And we've taken the approach of really leveraging all those lessons and bringing this discovery-oriented experience that's a lot more fun on your smartphone to as many consumers as possible.

And how are you using data? Just when you think about your marketing efforts, which are an important part of the business, discovery, pricing and then some other areas, if you could give some examples there.

Sure. Yes. I mean, our global marketplace is underpinned by data and technology. That's the foundation of the team. We're mostly -- the first 30 or 40 employees were mostly either engineers or data scientists in one way or another. So we built a platform with the right algorithms. The more data that we have, the better we get over time. So with every single usage we built, the system where every single tap makes the experience better for every type of customer, and at our level of scale, we're able to sort of pinpoint and create personalized experience for almost anyone that's visiting our platform and optimizing over time, not just sort of what we're doing within the feed and the recommendation algorithm that drives it, but also taking all those lessons and building out our marketing channels in various geographies.

Okay. Let's talk a little bit about dynamic pricing. Fairly unique, I'd say, at least certainly among the companies in kind of the e-commerce space that a lot of people are familiar with. How should we think about the contribution of dynamic pricing today and then just where it can go over time?

Let me take that question, Doug. So dynamic pricing is a way to optimize pricing without impacting conversion. Because of our price elasticity algorithms we have, we know how to price the products. We started this journey 4 years ago. So we've been doing it and getting better at it every year. It has contributed more and more every year to our top line and bottom line because it's pure margin that goes to the bottom line. At this point, it's fairly prominent, like it's in every country, every geography. I don't think there's much significant room to improve it further. We'll always play with it around the edges, take it a bit down, doing -- take it a bit up depending upon what the condition warrants. So it's historically been really good for us. We have optimized it. Now it's like at the margins, we take it up and down depending upon what we want to do on the conversions.

Yes, Raj. And just to add to that, I mean, we can only sort of do this well because we just have such a large volume of engagement around our products, and we leverage data and our technology to optimize things like dynamic pricing. So it's been good to us, and we will sort of continue to leverage that tool.

Okay. Let's talk about the merchant mix. If you could help break it out a little bit more just from a geographic and then a category perspective. And how do you think about that mix kind of changing over time?

Yes, Doug, that's a great question. So traditionally, we started by going to really sort of the source as close to the manufacturer as possible and the world's factory, which happens to be in China. But diversifying our merchants geographically and by category has been a key priority for us. So since 2019, we increased merchant partnerships in North America, Europe, South America by nearly 5x. And in the U.S. alone, we actually grew merchant partnerships by more than 400% last year. And it's probably surprising to most people, but 5 out of our top 10 sellers on our platform are actually U.S.-based merchants, and they're only selling into our American customers, into the U.S., which represents about 1/3 of our customer base. And yet, they're some of the largest merchants. So we continue to have success. In terms of branded volume or volume of orders coming from branded goods, which tend to be priced higher, we went from 3% in 2019 to 6% in 2020. So that continues to grow. And then countries all over the world, like Africa, South America, Eastern Europe are sort of key growth markets for us. And they have large and growing populations that tend to skew towards sort of value-conscious households. And within sort of these markets, we tend to have sort of rapid growth on the consumer mobile side, and we continue to make improvements as well as adding various types of categories. So going into sort of heavier, larger items like furniture, potentially branded electronics, like large screen TVs and smaller items, which are more sort of high repeat purchase frequency like consumables, which we're testing out within our -- within sort of drop shipping, but as well as with our Wish Local partner network.

So it sounds like -- so you think that, I guess, the percentage mix should kind of continue to increase in terms of branded goods, higher -- some higher AOV products but then also CPG and consumable products as well.

Absolutely. So we intend to complete our catalog as fully as possible. Our mission is to become the default shopping destinations for hundreds of millions of value-conscious or value-oriented households. And in doing that, we have to sort of continue to add more products into the platform. We now have over 50 product categories. So anything from accessories, gadgets, apparel, sort of hobbies goods, we continue to add higher ticket price items when we go after local merchants, whether it's in the U.S., Europe, Brazil. More branded goods, I mentioned electronics, furniture. And even moving more into the sort of high intent category. So traditionally, we've been sort of much more on the discovery-oriented side, which is great because we can generate the awareness and the demand for specific products. But as we sort of continue to build out the categories and build out the sort of expansion, not just sort of category-based, but in price and size, and especially with Wish Local, our ability to have customers come and pick up forward deployed goods basically in real time, we will -- and we are experiencing and seeing higher AOVs and order values.

Okay. All right. I do want to circle back on Wish Local in a little bit. Let's talk, though, about the pandemic. It had a different impact on Wish, a more negative impact, quite frankly, than on most other e-commerce companies. Can you just talk about the reasons for that and how Wish is doing now as things are beginning to return to normal?

Yes, Doug, that's a great question. So obviously, world was affected in many unexpected ways. In many ways, we saw the consequence of the pandemic very, very early. Yes. I remember January 20, January 21 of last year. Because our supply chain -- the majority of our supply chain is actually based in China, and we saw that shut down completely. So businesses across China were impacted very early on even before the virus spread globally. Clearly, we saw that. And we had really, really big disruptions in our supply chain early on. And then things got even more difficult for us because we rely on cross-border drop shipping. And most of our goods are actually shipped in the undervalue of passenger aircraft. And when first countries like the U.S. and then subsequently Europe blocked flights from China, that really reduced our logistics capacity and our ability to actually meet our customers' expectations in terms of delivery times. And then subsequently, China actually started blocking flights from all over the world, and that sort of continued to hurt us. So in the short run, we scrambled to try to find viable solutions. In some cases, we have to switch to ocean freight. And in other cases, we just had to pay much higher prices, but we did disappoint a lot of customers by not meeting those delivery windows. So that was extremely challenging for us. And then in Q2, we had a strong recovery. The demand was really, really high. We grew 67% year-over-year in the second quarter of last year. And then, of course, due to the stimulus, it was also sort of positive for us last year. But at the same time, as I mentioned, there were just severe disruptions in our sort of global logistics network because we don't have as much inventory forward deployed in the sort of -- on the demand side, [ near ] the consumers. Since then, I think everyone sort of understood the challenges. We worked closely with our logistics partners. And it actually helped us tighten up those relationships and integrate closer with both the cross-border logistics carriers first-mile as well as tighter relationships with our last-mile. So there were longer delivery times. We're now at sort of record lows in terms of delivery times worldwide, and we are committed to earning back the trust of our customers.

Okay. Let's talk about your marketing efforts. So you've changed things a little bit over the last couple of quarters. You're focusing more on higher LTV buyers in Europe and the U.S. and somewhat less on some of the emerging markets where logistics were still delayed and buyers were lower LTV. Can you just talk about how that's worked out kind of over the past couple of quarters and currently? And then just when do you expect to reengage more with India and Brazil and some of the other markets where you pulled some of the spending?

Yes, Doug, that's a great question. So what we saw is countries where the logistics infrastructure had sort of very limited capacity. We saw very poor logistics performance. So again, time to -- what we call time to door was -- got really, really bad. Just its capacity to deliver goods with sort of any type of a reliable customer experience was limited in a lot of these markets, like Brazil, India and other emerging markets. So we really kind of pulled back the growth initiatives there until we can improve the customer experience. We sort of -- and we also deemphasized sort of low-value items that are sort of shipped individually. And so strategically, we focus on engaging high LTV users. That's obviously reflected in our strong core marketplace revenue per buyer. But it does have negative impact on MAU growth and somewhat on buyer conversion. We are working really hard on getting those markets back. There's various ways that we're doing that and getting those sort of single item low order value transactions across all markets. So for example, in South Africa, we were able to actually create a very integrated experience with South African Post where we can put SLAs on the actual last-mile logistics carrier. And really, we bring back that market and potentially leverage the same strategy to get other emerging markets back that we pulled away from and open up new ones. And then in other markets like Brazil, we're making significant progress in scaling our Wish Local network. So we added 1,000 stores just in the first quarter of this year. And that allows us to really cost effectively ship these goods with potentially a commercial carrier with high performance and reliability. Two markets where, frankly, the customers are looking to make those trade offs. They're actually looking to save $3 or $4, $5 or euros by taking 5, 10, 15 minutes and pick up their orders from a store nearby.

So you've clearly shown you're willing to be flexible as the environment changes in terms of marketing spend. But I guess, what does this mean for MAUs and active buyer metrics on a quarter-by-quarter basis going forward?

Doug, your question is, how does things get back in the quarter going forward? Is that...

Yes, just kind of impact on MAUs and active buyers, just given some of the marketing strategy changes that you've put in place.

Yes. So it's clearly impacted things negatively in the short term from Europe. You mentioned emerging markets and then also the fact that we are not focusing on the really, really low-value kind of people who buy $5 single-digit item. But going back half, we plan to kind of reverse both. We are planning to enter more emerging markets. And also, we're figuring out ways how to engage with those people who were not buying those single low-value item. Maybe there's opportunity to forward deploy them in bulk and engage with them as we go in the back half. So we have -- look, I wouldn't say it was a temporary pullback, but we're trying to get back into those markets again.

Okay. So let's talk about customer retention, just coming out of the pandemic. It seemed to weigh on the 1Q numbers and then also on the 2Q outlook here. If you could just talk more about what's actually going on with retention. And then how do you reengage these customers, earn their trust again basically and then just ultimately drive higher frequency of purchases?

Yes. So clearly, last year, Peter mentioned that we got severely damaged by the infrastructure breakdown we had in logistics, consumers we had a bad experience. And we are working to reengage with them, and Peter can talk different strategies. We are working on SMS messages, discounts, e-mail notifications, retargeting to Facebook towards those people. But it takes time to get them reengaged and having them come back on the platform. But we're doing a lot of things to -- we already work with logistics. We're working on product quality. We're working on category expansion. And all those things, we believe, will lead to a better experience and having more chance of getting those customers back on the platform. Peter, I don't know if you have anything else to add.

Yes. No, Raj. I think it's great. I mean, just to add on top of that, I mean, I think almost by necessity, I mean, we've done so much work, and I'm proud of what the logistics team was able to do, especially throughout 2020, not only because of the challenges of the pandemic, which was super unexpected, but also with countries like the U.S. renegotiating their participation in EU. So I think we've built out sort of an amazing cross-border logistics solution, especially if you include Wish Local. Just the cost advantages that we have are massive. And this is something that continues to resonate with customers. And retention is basically our #1 priority moving forward. So we have all kinds of strategies in order to do that. But sort of most notably, now that we sort of solved logistics, that's up quite a bit. Now we're focused on category expansion, especially into sort of consumables, which our customers have to replenish. That comes sort of with a regular cadence, and we're super excited about our opportunity in terms of expanding into those types of goods. And we believe that leveraging our Wish Local sort of store partner network is probably the best way to do it. We think that we can match big box stores like Walmart on price, but we'll beat them on proximity because we'll be much closer to the consumer with our sort of these little stores that act like our warehouses. So super excited about our initiatives around retention, category expansion and some of the tactical stuff as well.

And how are you seeing this play out, Raj, just in terms of cohort dynamics, perhaps for the most recent set of -- the most recent cohort versus maybe pre-COVID level type of cohorts. These are higher, newer customers skewing more higher LTV. I mean, is that also playing out in the activity that you're seeing from them early on?

Yes. I mean, customers we're acquiring new clearly are not the issue, right? They are more LTV that we monetize more, they're getting better experience. So it's more like people who bought during that period of time, how do we get those cohorts recovered? That's where we are. I said, we are sending e-mail notifications. We are working on SMS campaigns. And they're coming back, and it takes time. They buy their experiences. So that would take a bit of time and maybe a little bit longer than what we thought originally going into the year. But we've done that. We have retargeted people before. We know how to do it. And it just takes time for them to show back into the business results.

Okay. Let's shift gears to the European VAT. So the EU is removing the VAT exemption on items below EUR 22 starting July 1. So I believe that's 70% of products sold in the EU that could see perhaps up to like a 20% increase in prices, which we kind of roughly put that in the 30% to 35% of the business overall, where there could be some kind of impact. I guess, are those the right numbers in terms of how to think about it? And what are the ways that you can offset some of the effect here starting July 1?

Yes. So most of the world, 2.5 years ago, marketplaces were not responsible for collecting sales taxes, and then things started changing. In most of the countries, U.S., Australia, everybody now has -- we collect VAT on a marketplace. So just for perspective, we are now -- we're pretty much at 0. Now we are collecting annually more than $200 million a year in sales tax and giving it to the different tax authorities. So we've done this before. It has happened, and we know how to do this. The only difference is, EU VAT, it tends to be higher than U.S., for example, the sales taxes tends to be in the 5% to 7% range. This is a bit higher. It's a 20% range. So that's a bit of a variable. And we also are working with merchants to see how we can offset some of these increases and cover some of these. So consumers don't see those kind of price increases. So we are working through that at this point of time. We have done it. Now all other platforms will have similar increases on those priced items. So from that perspective, also there's some mitigating factors. But we'll talk more about that in the next -- when we meet next time.

Okay. And assuming that you're reporting earnings, I don't know, I'm assuming kind of early August or something like that...

Yes. We would have at least 6 weeks of experience.

Yes. Okay. Got it. All right. Let's talk about logistics. So this has been a pretty big change for your business, how you've built out this network of logistics partnerships. Over the last few years, really driving faster, cheaper delivery and doing it on a global basis and getting to kind of the 85% of orders now that you're end to end on. Can you just talk about the advantages for Wish, for the merchant, for customers and a little bit more on how you're operating logistics in this asset-light way?

Yes, Doug, that's a great question. So logistics, obviously, has been one of our core focuses. We launched our own logistics network in 2019, really, in response to sort of expected changes to the UPU Treaty and really sort of overall sort of increasing logistics costs globally, specifically when -- as relating to sort of drop shipping out of China. So since then, we launched a lot of new logistics offerings-related technology and sort of data science around it. Like you mentioned, we performed all logistics services on behalf of our merchants for now approximately 85% of the transactions. In Q1, as we reported, logistics revenue was $245 million, up 338% year-over-year. So really already reaching kind of $1 billion revenue run rate. And as we get more efficient, that revenue will contribute positively to our gross margin as well. So in terms of our logistics network, look, we have sort of more control of the process. We can provide a better and more reliable experience. We benefit, and we pass that benefit off to our merchants in terms of our volume cost discounts. And really sort of with our ability to navigate customers to change their sort of checkout cart basket sizes and our combined center as well. And today, shoppers obviously have sort of really, really high expectations on logistics. So this is challenging when it comes to drop shipping. But either through sort of direct partnerships or our ability to sort of combine things and sort of put SLAs on both sort of performance and cost, we -- it's sort of really, really big win, especially if you sort of extend it and beating this drum over and over again and to sort of pick up from store, which is relatively unique. And again, it's not going to work sort of for wealthy customers that want to buy convenience, but there are plenty of households that are looking to save $5, EUR 5 and trading that off for giving up 5, 10 minutes of their day. So we will continue to sort of extend what we've done in terms of our logistic services to as many merchants and e-commerce transactions as possible.

Okay. And then, Raj, just how should we think about the kind of profit impact, the margins in logistics. I mean, you can certainly see in the financials going back over the last couple of years when you started to build it out, there's kind of the immediate impact on gross margins. Now that you're up to 85%, do you feel like you can pull back on perhaps some of the subsidies that you've been providing and have a profitable logistics business here? And over what time frame?

Yes. Absolutely. We use subsidies to encourage merchant adoption earlier, but merchants are now fully engaged and they like the platform. On top of it, we are driving a lot of synergies by getting discounts from our third-party providers and to our datas, also -- science also figuring out what's the optimized routing and moving the parcels from one point to another. So we're seeing a lot of efficiencies from that point of view. And then more and more bundling leads to more and more savings. It just saves last-mile logistics cost, whether it's in Wish Local and so forth. So yes, we are very highly optimistic that logistics is no longer going to be a drag in terms of making -- losing money on the platform.

Okay. Let me shift gears. So you announced with earnings recently that Wish was appointing Jackie Reses to -- as Executive Chair. Just curious, Peter, if you can explain what drove the move and then also what her operational role will be within the organization and kind of what she'll focus on versus what you're going to focus on, how you think about that going forward.

Yes, Doug, that's a great question. So look, I mean, I'm super excited, right? So I've been pursuing Jackie, first and foremost, to join our Board. And then once I sort of got to work with her even more closely, really convinced her to join us full time. So super excited about her role. And she brings a ton of experience in focused areas where I sort of didn't have as much experience and sort of haven't sort of been able to focus as much. So she will help build and scale our team, our leadership team as well as sort of strengthen our business and operations organizations as well. She obviously has like super relevant experience. Her expertise through Square in terms of our strategy with financial products and extending credit to customers that very likely sort of need it, especially during a time like the pandemic when sort of unemployment is high for the lowest echelon of sort of value-conscious consumers and households, as well as sort of obviously relevant being on the Board of Alibaba and her experience at Yahoo as well in terms of scaling e-commerce, scaling technology businesses. So really looking forward to leveraging all her knowledge and expertise in these areas and continue to build the success story at Wish and meeting our sort of long-term objectives and achieving our mission.

And do you feel like there are other places potentially where you'd like to add management talent across the organization?

Oh, absolutely. I mean, we're already seeing the benefit of having Jackie on board. And part of sort of the focus is sort of building out a world-class leadership team. As I mentioned, we have transactions in any given day in over 100 countries. We need to build out sort of a global ops team, a global sort of business development, business marketing team. So we don't really have anything sort of to share today, but obviously, we're seeking top industry experts and talent in these roles, specifically sort of operations, business development and merchant partnerships.

Okay. And then maybe just to wrap up. You mentioned, obviously, Wish Local a couple of times. I was just hoping you could talk more there. We've seen kind of how it's increased as a percentage of orders, 7% in 1Q. And then you have a few markets, I think Mexico, Spain, Italy, where it's 20%, 30% of orders. What's different about those markets? And how do you think about Wish Local working on a global basis?

Yes, Doug. So yes, I mean, in Mexico, Italy and Spain, Wish Local sort of orders that are ordered to pick up from store already reach 39% in Mexico, 30% in Italy and 22% in Spain. So I think early data suggests like we're seeing sort of increased purchase frequency from those users. But in terms of why those markets took off, one is especially a place like Mexico tend to be much more value-oriented. So when it comes to our advantage in terms of pick up from store, which is saving a lot of money on the cost of fulfillment, that goes sort of a lot longer or goes way more valuable in a place like Mexico than potentially a wealthy country. But we think that this will be a huge competitive advantage in any market. And it will allow us to actually even bring back those sort of low order value, single item transactions when we forward deploy these goods into stores. And then when it comes to sort of Italy and Spain, back to sort of my point in terms of our operations and sort of business development teams, we just got lucky and got lots of sort of high-quality stores in the right areas, New York customers, but this is something that we're looking to replicate basically everywhere. And yes, it was sort of 7% of orders in the first quarter of this year were order to pick up from store. But in April, that's increased to actually 9% of order volume. And it continues to sort of be a great product market fit for value-conscious consumers, and it continues to be extremely valuable for the stores, not just in terms of the pickup fee, but driving foot traffic into them. And we will sort of continue to expand our way to actually help these stores survive and prosper through a very, very difficult period. But I couldn't can say enough about how excited I and the team about Wish Local and the opportunity there.

Okay. Great. In the interest of time, we're going to leave it there. But thank you, Peter. Thank you, Raj. Appreciate it very much. And thanks, everybody, for joining.

Thanks, Doug. Thanks for having us.