Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Marley Spoon Q4 FY '20 Quarterly Results Investor Conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Fabian Siegel, CEO. Please go ahead.

Thank you, and good morning, everybody. Thanks for joining our investor call. My name is Fabian Siegel, Founder and CEO of Marley Spoon, and I have with me here today, Jennifer Bernstein who just joined us at the end of last year as our new CFO. So yesterday afternoon, we released our fourth quarter results for our financial and calendar year 2020, and we are looking forward to presenting to you today these results as well as providing you with an update on the business. And at the end, as usual, we'll open the call up to your questions. Now 2020 has been a quite historic and challenging year for most of us, starting with the bushfires in Australia and then being dominated with the global COVID-19 pandemic. And for us at Marley Spoon, this year was operationally, therefore, quite challenging but overall, very successful as we experienced an acceleration of customer adoption towards online shopping. Now throughout this tumultuous year, Marley Spoon and Dinnerly customers were happy that they could rely on some form of normalcy with their weekly boxes that kept arriving and that allowed them to provide a home-cooked meal for their family in the middle of this pandemic. And at the same time, throughout the year, many new customers discovered our meal kits and have subsequently shifted from the supermarket to a better way to cook with our Dinnerly and Marley Spoon meal kits. Now those new customers have demonstrated loyalty in all regions that is on par with or better compared to what we experienced in prior years. Financially, we finished 2020 with a strong fourth quarter performance. Revenue in the quarter grew 103% year-on-year on a constant currency basis, landing at EUR 69 million. We also experienced our fourth consecutive quarter of sequential subscriber growth, which is a new metric we've introduced and which Jennifer will comment on further in a bit. The growth was driven by all regions, with the U.S. leading at 146% revenue growth at constant FX compared to the prior corresponding period, and this performance has resulted in the U.S. now representing 50% of global sales. Throughout the quarter, we have continued to see elevated frequency and average order size as well as overall very good unit economics compared to the pre-COVID periods. Because of these great unit economics, we decided to continue to invest in marketing in order to build our recurring revenue subscriber base, and at the same time, marketing efficiency continued to improved year-on-year with marketing expenses as a percentage of revenue decreasing to 12% in the quarter compared to 17% a year earlier. Operationally, we faced some challenges, primarily in the U.S. and Europe and disruptions in our growing workforce due to COVID-19 and peak e-commerce volume due to the holiday season and sustain logistics capabilities and access to production associates were infected by this. Now those operational challenges should ease as we left the holiday season behind us and the global vaccine rollout gains more traction. Now despite those temporary challenges, our global contribution margin, 29% for the quarter and operating CM, defined as CM in the impacts of marketing vouchers and fixed costs such as access relating to site leases reached 37% in the fourth quarter. In order to prepare for future growth, we continued to invest during the fourth quarter in our technology platforms. Milestones included completing a global rollout of our new ERP system and finalizing our in-production machine learning infrastructure, which is currently operating our taste profile algorithm and demand forecasting models. At the same time, we continued to grow our engineering teams to accelerate investments into our technology platforms throughout 2020. Now the strong growth paired with good unit economics and contribution margin led to our third consecutive quarter of profitability, landing operating EBITDA at EUR 1.2 million compared to a loss of EUR 2.4 million in the prior corresponding quarter. Overall, this topped off a great year where we doubled revenue, for the first time delivered positive operating cash flow while being breakeven on an operating EBITDA basis for the full year. With this, I would like to hand over to Jennifer, who will walk us through some of the top line metrics, segment update, cash flow as well as cover our 2021 guidance.

Thanks, Fabian, and good morning, everyone. I'm pleased to be here with you guys today. So the strong growth that Fabian discussed in his remarks was underpinned by positive developments in our key top line metrics, including our newly introduced metric, active subscribers. This measure is defined as the number of customers who have an active subscription, meaning they ordered or skipped a delivery on an average weekly basis during the quarter. We favor this metric, believing it to be a better indicator of the development of our business and quality of our customer development by limiting the impact of onetime trial customers. This is particularly relevant, given our seasonal swings in marketing activity. Our active subscribers for the quarter grew 78% versus the prior corresponding period, driven largely by the U.S., which saw its active subscribers more than double in the quarter. Number of orders and number of meals also grew significantly across every region, contributing to an increase in our average global order value versus the previous year of 6% on a constant currency basis. The strong top line translated to a contribution margin globally of 29%. We delivered this margin despite continued headwinds associated with COVID-19 and the peak holiday shopping season for e-commerce. Now looking to our performance on a regional basis, we saw strong delivery across each segment. In the U.S., we delivered net revenue of EUR 34 million, which represents growth versus the prior corresponding period of 146% on a constant currency basis or 129% in reported terms. Demand for both our brands as well as category growth were strong, and the customer acquisition environment was extremely favorable. This surge in top line growth, aided as well by a price increase implemented at the end of December, helped us expand margin 3 percentage points versus the prior year to a contribution margin of 26%. The U.S. also delivered its third consecutive quarter of operating EBITDA at nearly EUR 2 million, compensating for some operational headwinds related to labor and wages. Our business in Australia delivered nearly EUR 22 million of revenue or 59% growth versus the prior corresponding period. The easing of the COVID-19 pandemic, combined with the transition to warmer weather and the holidays, impacted the business. At the same time, we consciously rebalanced marketing activity to the U.S. and to Europe. Contribution margin was strong again at 36%. Our third fulfillment center in the country opened in December in Western Australia with the launch of Dinnerly. The launch of Marley Spoon will follow in 2021. Australia also continued to deliver positive operating EBITDA, contributing nearly EUR 3 million in the quarter. And finally, our European business also had a strong quarter, delivering nearly EUR 13 million in revenue, nearly doubling the business versus the prior corresponding period at 95% growth. Europe's acquisition environment was very strong. And despite labor and logistics headwinds, the region delivered contribution margin of 25%. Europe also delivered operating EBITDA at breakeven, excluding in the company's global headquarter costs, paving the way for Europe to stand as our third profitable operating segment. Moving on to cash. We delivered a strong quarter in cash terms, ending the year with EUR 34 million, a significant improvement versus the prior corresponding period, owing in large part to our capital raise of AUD 56.6 million on October 26 last year. We saw cash from operating activities at minus EUR 3.6 million for the quarter, which was expected in light of the seasonal variations in our business. We are pleased to share, however, as Fabian mentioned, that for the full year 2020, Marley Spoon delivered positive operating cash of EUR 3.1 million for the first time in the company's history. Coming back to Q4, we invested EUR 2.5 million in our business in the quarter, with capital expenditures going toward expansion of or purchase of new equipment for our fulfillment centers in Sydney, Melbourne and Texas. We also invested in product development related to proprietary digital platforms. In Q4, we also repaid our outstanding senior secured debt of nearly EUR 7 million to Western Technology Investment. This repayment, combined with the conversion of interest-bearing bonds to equity for an amount of EUR 61 million, led to a substantial transformation of our balance sheet. Now looking ahead to 2021, we have already seen a strong start to the year, given the retention of customers acquired at the end of 2020 as well as strong traction in new customer acquisitions. We are seeing strong growth in online meal kit adoption, a trend that we expect to continue. We're, therefore, providing guidance of revenue growth between 25% and 30% year-over-year. We are also expecting improvement in our contribution margin, albeit expanding at a slower rate than in previous years. For 2021, we expect to deliver between 30% and 31% contribution margin, which is 100 to 200 basis points higher than 2020. And with that, I would like to hand it back to Fabian.

Yes. Thanks, Jennifer. As mentioned earlier, 2020 was really remarkable. And so we doubled revenue, we improved 2020 contribution margin year-over-year, despite significant operational challenges and provided, for the first time in our history, positive operating cash flow for the full year. Now we continued to have high expectations with regards to 2021. The new year has started across all regions, and we prepare ourselves for another year of strong growth. In order to fulfill this expected growth, you'll see us investing more into our global fulfillment centers and software platforms. The platforms we've built to date provide us with the ability to create personalized direct-to-consumer service brands such as Marley Spoon, Martha & Marley Spoon and Dinnerly, and our manufactured-to-order supply chain allow us to personalize our service offering to a degree that's hard for traditional retailers to replicate. Now this puts us in a very good position to continue to gain market share as customers continued to switch from offline retailers to online shopping. Now today, Marley Spoon is a global fast-growing operating cash flow positive business that's expected to generate more than AUD 500 million in revenue this year, with strong balance sheet and have just our third consecutive profitable quarter on a global basis. At the same time, we're actually just getting started. So we expect to continue to grow rapidly at rates of unit economics over the coming years. Thank you for taking the time this morning. And with that, I'd like to open the call up for questions.

[Operator Instructions] Your first question comes from Owen Humphries from Canaccord.

Well done on strong results. Just a couple of questions for me. Maybe just touching on the growth in the U.S., the 146%. Can you maybe just talk on -- is there any specific product that is having the biggest driver of growth? Is it Dinnerly now a much larger part of that business?

Well, Dinnerly has been quite successful since we launched it in the U.S. and same applies for all the other regions. It's now globally available in all 3 regions. And it's become a quite important part of our business. But this tremendous growth that we're seeing, we're seeing it actually across all brands. So we can't single out 1 or the other, so we're seeing it really across brands, the traction. Maybe even a tad stronger in the Marley Spoon product, but again, growth in those brands across the regions.

Okay. Good one. And what's the percentage of revenue that Dinnerly is of group revenue? Did you guys discuss that or disclose that?

We don't disclose this for competitive reasons. It's been -- it is a significant part of revenue in the U.S. and also in Australia. And Europe has started last year. So we launched in Germany. We're just about to launch also in the Netherlands. So there, obviously, it's just in its early stage. But we do believe, from a positioning perspective, it's important to have both the Marley Spoon brand and then a budget brand with Dinnerly in the market that has worked very well in Australia.

Okay. And just touching on the unit economics, obviously, that's the foundation of your business and business model. Can you just -- pre-COVID, you're talking about 3x over 3 years with payback being 6 months. That's 3x. Can you maybe just highlight where we are sitting now in the last kind of last 6 months on that number?

Yes, that's an interesting one. I mean we've been always reiterating that we have a 6 months payback and a 3x return over the lifetime of the customer. And then we've been saying since March last year that this is better now. And before, it was already great, 6 months payback, a 3x return is a great return on capital deployed and then it's been better. And then we've been waiting, embracing ourselves for it to go back to normal and that somehow is not happening. So it's quite interesting. So unit economics continued to be quite favorable. And that is, on the one hand side, still because there is slightly elevated basket sizes. You've seen 6% up year-over-year. And that, of course, has an impact on LTV. We see slightly higher frequency and this has an impact on LTV, but also, we continued to see a very well [indiscernible] environment, not only in the ability to acquire customers at scale but also the CPAs. And so we'll talk more about this once our full year results get released in a couple of weeks at the end of February when we normally update on unit economics and so we'll be able to dig a bit deeper. But yes, we see anecdotally, in some regions, 12 weeks payback. Now we see 15 weeks payback, 14 weeks payback, it's really favorable and that's why we are also quite confident for the growth specs in 2021.

Good one. And just the last one for me. Obviously, you're targeting 25% to 30% growth, which is obviously strong, given what you're having in FY '20. Are you expecting to over-index in any specific region on that growth? Obviously, U.S. is tracking above that as you have to lap that. Just talk me through -- obviously, your projects are dynamic and you move money where it's most accretive. But can you just talk me through right now where you see growth [indiscernible]

Yes, absolutely. I mean we always said in the past that you shouldn't benchmark us on where we grow as the benefit of having a global business that does to shift acquisition volumes where we see the most stable environment allows us to very actively optimize the way we deploy capital. And that's, by the way, also a reason why in Australia in the fourth quarter, we saw, despite strong growth, 60% year-over-year, still less growth in the other regions, which was, on the one hand side, of course, you had a slightly -- you have the summer season, you have the post-COVID, people want to catch up. But also we could have grown, but we saw better it is on the other regions. So you will see also in 2021 that we will shift wherever we see the best environment. But U.S. will continue, we expect, at least now, one of the largest growth drivers, but we will see strong growth across all regions, with U.S. probably leading the way. And given that this is 50% of our overall business and you will see that will have a big impact on the overall growth as well.

Your next question comes from James Ferrier with Wilsons.

First question's around contribution margin and the guidance for calendar '21. That margin expansion that you're expecting, is that all coming from what you call the operating contribution margin? Or do you expect some operating leverage to come through on the fixed cost items there? Is that more of the source of margin expansion?

James, it's Jennifer. I would say the market expansion is probably more driven operationally. So there's a lot of investments that we're doing against manufacturing. We're doing process automation and improvement and some other operational improvements. And on the fixed costs, we talked about this in our December release actually. We're investing heavily in R&D and our proprietary digital platform, really focusing on helping advance our innovation in personalization, improving the customer experience. And so there is some uptick in G&A on account of that. We've also, you may recall reading, introduced some new leaders to our team. So we've got a new head of people operations. We've got a new head of -- sorry, head of Europe CEO. So the fixed cost base has grown, as you see some of that annualization effect between the R&D and the expansion of the leadership team. So the margin expansion is really going to be driven by operational improvements.

Okay. That's very helpful. Looking at calendar '20, you talked about the growth in orders per customer and order value. Do you see that trend continuing into calendar '21 in the context of your guidance? Or do you expect those metrics to maybe reverse a little bit, normalize a little bit?