Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Yes. Thank you, and good afternoon, everybody. Thank you 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, our CFO. Now earlier today, we released our first quarter results for the financial and calendar year 2021 -- first quarter for the calendar 2021, and we're looking forward to presenting to you today the results as well as providing an update on the business. Now the first quarter was a strong start into the new year. It was a record quarter on many levels. We acquired more customers than in any previous quarter in the history of the company. We had more active subscribers than in any previous quarter in the history of the company. And most importantly, with more than EUR 77 million in revenue, Q1 2021 was the biggest revenue quarter compared to any previous quarter. Overall, Marley Spoon grew 81% or 83% at constant currency compared to the prior corresponding period. Now all regions contributed to the strong growth, with Europe leading at 108% growth compared to the PCP. By now, the behavior of our customers across regions has mostly normalized to its pre-COVID-19 state, and the growth performance that we have delivered in Q1 demonstrates that we were able to grow our business, not only during pandemic-related lockdowns, but also as markets reopened. Q1 is usually a good quarter for us to invest into customer acquisitions, and this was not different this year. Accordingly, we invested, as you have seen also in prior years, strongly into marketing to continue to build up our back-book of recurring revenue. We acquired more customers in this quarter than in any quarter before, while being at the same time, as usual, very disciplined around acquisition cost targets, payback periods and unit economics. Overall, marketing efficiency improved, with marketing expenses as a percentage of revenue declining to 20% in the quarter compared to 27% in the PCP. Now we continue to see more opportunities for further growth while keeping a high level of financial discipline around unit economics. Because of this favorable growth environment, we are upgrading our revenue guidance for this year, as Jennifer will detail in a moment. Operationally, however, Q1 was more challenging. Now we faced extreme weather conditions in all regions with floodings in Australia, historic winter storms in the northeast of the U.S. and in Europe, and completely unprecedented weather in Texas. In addition to these weather disruptions, we have been experiencing industry-wide impacts from the ongoing e-commerce boom. This boom has adversely impacted access to labor, supply chains and has impacted some of our large logistics partners. Now those operational headwinds, paired with the impact of record customer acquisitions, which led to a corresponding higher share of marketing vouchers, have impacted our contribution margin, which landed at 28%. Because of the seasonal strong marketing investments in the first quarter, we posted an operating EBITDA loss of EUR 5.7 million for the quarter. At the same time, we generated positive operating cash flow of EUR 5.3 million, leading to a record cash balance at the end of the quarter, which puts us in a comfortable cash position to operate the business for the expected growth ahead this year. With this, I would like to hand over to Jennifer, who will walk us through the top line metrics, segment updates, cash flow as well as cover our upgraded 2021 guidance.

Thanks, Fabian. As mentioned, Q1 was a record quarter for active subscribers, growing 86% versus the prior corresponding period, with all regions contributing. This growth in active subscribers was a strong contributor to our overall net revenue performance, which was driven by both acquisitions and the retention of base customers. Looking at our performance on a regional basis. We saw strong delivery across each segment. The U.S. delivered extremely strong revenue for the quarter, growing 82% versus the prior corresponding period or 98% on a constant currency basis due to the weakening dollar. Both brands contributed to this growth, and the strong performance was delivered despite our needing to temporarily close our Texas fulfillment center due to the unprecedented inclement weather in the region, which made it impossible for our suppliers and shipping partners to operate or for our associates to get to work. In addition, as Fabian mentioned, we have also been experiencing industry-wide infrastructure issues stemming from the e-commerce boom, which is causing volume surges and subsequent labor issues and on-time performance challenges for key shippers. Nevertheless, the U.S. is able to deliver contribution margin at 28%, 2 percentage points better than Q1 2020, thanks in part to last year's December price increase. Despite the seasonal strong marketing investment that is customary in Q1, the region broke even in operating EBITDA terms. Australia similarly had strong performance, growing revenue 65% in the quarter versus the prior corresponding period. We saw strong investments across both brands -- improvements, excuse me, across both brands, but in particular, on our Dinnerly brand, which, thanks to the opening of our Western Australia fulfillment center late last year, has grown as a part of our overall sales mix. In margin terms, Australia saw some deterioration versus the prior corresponding period as the Perth FC continues to ramp up operationally. We also saw an impact from the increased sales contribution of Dinnerly, our successful budget offering, thanks to its strong value proposition. Despite the seasonally strong investment into growth, Australia's operating EBITDA landed at breakeven. Finally, Europe had an exceptional quarter, delivering 108% revenue growth versus the prior corresponding period, a record for the region and a testament to the region's increasing scale potential. This growth was achieved given extremely favorable unit economics and, therefore, more marketing investment. Contribution margin in Europe was down 1 percentage point versus the prior corresponding period to 20%, but operating contribution margin was up 1 percentage point. This difference was owing to the increased marketing spend in the period. Contribution margin was also impacted by the installation of and move to a new, more innovative manufacturing process in our fulfillment center, which will lead to greater picking quality and throughput. We are already seeing the signs of the productivity this next-generation equipment is intended to deliver. Excluding headquarter costs, Europe had a loss of EUR 1 million in operating EBITDA, with the volume surge helping offset the incremental marketing. We delivered another strong quarter in cash terms, with cash flow from operating activities positive at EUR 5.3 million. The seasonality of our business and a strong sales quarter helped us deliver positive cash flow following last year's delivery of positive cash flow from operating activities for the first time in the company's history. We continue to focus on managing our key financial metrics with discipline while taking advantage of the attractive growth environment in which we operate. Related to that growth environment is our cash from investing activities, which was a minus EUR 3.1 million for the quarter. We continue to invest for growth and expansion with the new manufacturing technology in our Netherlands fulfillment center, and the new larger facility is expected to be live in Sydney and California later this year. Cash from financing activities also increased in the quarter, thanks to the signing of a new unsecured revolving credit facility with Berliner Volksbank for a total amount of EUR 5 million, a EUR 2.5 million increase versus our previous line with them. Our total cash position at the end of the quarter was EUR 38.4 million, an increase of EUR 4 million versus the end of last year. On our full year 2020 investor call 2 months ago, we issued guidance for 2021 net revenue growth in the range of 25% to 30% and contribution margin expansion to 30% to 31%. After the strong quarter and on account of the continuation of a favorable acquisition environment guided by persisting attractive unit economics, we are raising our full year 2021 revenue guidance to 30% to 35% versus the prior year. Our guidance on contribution margin remains the same. And with that, I would like to hand it back to Fabian.

Yes. Thank you, Jennifer. Well, as mentioned earlier, Q1 2021 was truly a record quarter. I mean we never won more subscribers or generated more revenue in the quarter in the history of the company. Furthermore, we were never in a stronger cash balance position than we were at the end of the quarter. All of that was achieved while we have seen user behavior to have mostly normalized to its pre-COVID-19 state. Now while COVID-19 has accelerated the adoption of online shopping across all verticals last year, the overall switch to online shopping for groceries is still in its early days. Over the past years, we have built a technology platform that allows us to effectively win subscribers for new direct-to-consumer brands that solve recurring everyday problems in a personalized way. Our fulfillment platform today allows us to reach 190 million households. The last year showed how scalable this technology platform is. We believe with our technology platform, our balance sheet strength and our existing family of brands, we are well prepared to benefit from the ongoing future shift to online shopping for groceries. The current growth momentum we are experiencing is expressed in our upgraded revenue guidance for this year. We intend to continue to grow with great financial discipline, focusing on attractive unit economics as we continue to grow rapidly and as we continue to contribute to a better every day for our customers. Thank you for taking the time this afternoon. And with that, I would now like to open the call to questions.

[Operator Instructions] Your first question comes from James Ferrier with Wilsons.

Congratulations on the results. My first question is around the customer numbers. So you saw subscriber growth stronger than customer growth in Australia and in the U.S., but not in Europe. So I suspect that the easing of lockdown restrictions would have contributed to those respective results in the different regions, but are there other factors that you would nominate to explain that stronger subscriber growth over customer growth?

Yes. Absolutely. It is not so much a function of a change in behavior due to COVID-19 normalization. I would see it more as a function of growth. In the past, we have said that the reason why we prefer the active subscriber number is because it's less impacted by short-term impact of trial customers. So as you remember, when we acquire customers for our brands, the usual behavior is that initially, you have a trial sector, say, 50% of customers, they churn quickly, and 50%, they stick with the product. And so as you grow dynamically, the active customer number, which defined as having purchased a box in the last 3 months, is impacted stronger than the active subscriber number, which is really focusing on the continued subscribers that we have in any given week. So it's more an average number over the quarter. Now given that Europe grew much stronger than the other regions in that particular quarter, you would therefore see that the active subscriber number grows faster than the active -- sorry, the active customer number grows faster than the active subscriber number. So that's why I think it kind of shows that this active customer number we feel like is less informative because it's impacted more by short-term quarterly swings in marketing activity, which, in the past, you have experienced now with Q1, for example, being a strong acquisition quarter. And therefore, we always -- since we introduced this active subscriber numbers in, I think, in -- for the fourth quarter last year, we try to focus more on that number. It shows you, I think, a more representative development of the company with less impact -- short-term impact of swings in marketing. And in a way what you pointed out kind of shows you that dynamic or that mechanic here.

Yes. Okay. Second question, back at the full year results in February, you showed us some data around net revenue retention. And I'm wondering if you can comment for us on the progress of the 2019 and the 2020 customer cohorts in relation to that revenue retention trajectory.

Yes. In general, we look at -- or we put out revenue retention on an annual basis because it is a slow-moving metric. So it's something that we wouldn't report out on a quarterly basis. However, I think what's important just to reiterate, what we've seen is that customers' behavior in terms of retention, while it has improved from '18 to '19 and from '19 to '20, we see this very consistently staying on its historic strong retention basis, meaning when in Australia, where we see the lockup easing last year, the big question was, do people leave the service? Do we see churn increasing? And that has not been the case. Now once customers have moved from off-line to online shopping, once they've moved to meal kits and the markets open up again, people go back to restaurants. They go back to see their friends. That's what they miss. Nobody misses going back to the supermarket. And nobody -- wants to go back to the state where weeknight cooking wasn't as easy and seamless as we look it. So the retention and the people staying with the service is, as we expected, it's strong. It's not negatively adversely impacted by any opening activities that we're seeing across the regions.

Okay. Great. And third question is around the contribution margin. So the operating contribution margin was in line with the PCP at a group level despite the operational and infrastructure issues across the supply chain. So that's clearly a good outcome. But the contribution margin at 28% was 150 basis points below PCP. So am I right in saying that, that 150 basis points is essentially the impact of higher voucher usage, which I think you mentioned in the report?

So when you acquire customers, you have the impact of marketing and marketing vouchers. And so there is this impact that you've pointed out. But maybe, Jennifer, I think you looked also into the impact of operational headwinds that we had, and that kind of maybe gives you a good perspective on actually how much impact the marketing vouchers and how much impact the operational headwinds were.

Yes. Absolutely. So we were down versus our full year landing at 28% this year, which was principally driven by the issues in the U.S. The temporary closure of Texas was about 4, 5 days, I think, plus the logistics issues that we're currently facing in the U.S. due to what's really more of kind of a systemic industry-wide problem. We estimated that, that probably cost us about a point of margin. We're also still holding on to our guidance for 30% to 31%, which would suggest a ramp-up as the year goes on. So we anticipated that we were going to probably have a slightly lower Q1 because we were going live, or let's say, working out the kinks of our Perth facility and given the increased spend on the marketing. So -- but if you consider what was happening externally due to the storms, which were entirely unprecedented and made it just difficult to -- well, we just couldn't get boxes out the door that week due to the temporary closure and the fact that logistics has been plaguing us a bit, which we're addressing with moving to some other carriers, we lost about a point because of those issues.

Yes. So just a follow-up there, just to be clear, your -- the retention of your contribution margin guidance, despite that softer first quarter print, is because you've got visibility, in particular, around the easing of logistics constraints, those sorts of improvements is what gives you the confidence to retain that guidance?

It's a number of things, actually. So there's a lot of different activities that we see helping drive the margin expansion as the year progresses. Certainly, a move to some what we call micro shippers, onboarding them to try to mitigate some of the issues with the bigger shippers in the U.S. But we're also always looking at ways to get more scale with our food suppliers, for example, rebates on food cost based on volume, other efforts globally with -- principally in Europe, even with logistics providers to get volume tier pricing, improved rates. The same technology that I mentioned in the prepared remarks in Europe that we rolled out is going to be rolled out to each of our 3 fulfillment centers in the U.S. So that will improve picking quality and productivity. Even we're looking at our payment costs as we sign on new PSPs. So we don't really leave any stone unturned. Certainly, the logistics should improve, and we need to actively improve that to address, again, this kind of systemic industry-wide issue. But the truth is we look where we can across the whole of the P&L to look for efficiency and margin improvement.

The next question comes from Elijah Mayr with CLSA.

Congratulations on the results. I might just sort of drill into where we left off just with the operational impact that's happening in the U.S. You sort of commented on the cost of sort of margin impact there of 1 percentage point. Has there been any impact at the top line of you guys that have been restricted in how many orders you can deliver just because of the limited amount of logistics personnel that are available for you guys?

Yes. I mean we've had certainly also a top line impact in Q1 because of these unprecedented winter storms. As Jennifer mentioned earlier, we had to shutdown our fulfillment center. That means we just couldn't send those boxes. So this is just revenue that's lost. And so that definitely was a headwind. Despite that, I think the revenue is strong, was a record revenue again, bigger than in any quarter than we experienced before on the company. Also when it comes to the overall logistics infrastructure in the U.S., in Europe where we see truly an e-commerce boom, and that's combined with you could even call the labor crisis in the U.S. where it's hard to hire people, and everybody's challenged to hire people, you just can't find people. That, I would say, makes it harder to grow, absolutely. Nevertheless, you could say, if they wouldn't -- if it wouldn't be for those constraints, I would expect one could grow faster because consumers really, I think, has structurally changed a little bit over the past 12 months. They are much more open for online shopping. People will not go back to work 5 days a week. They'll stay maybe 1 or 2 days at home, which makes online shopping so much more convenient. And all these customers that last year, maybe for the first time, started to try one or other online shopping opportunities. Again, they're not going to go back. So I think the answer is, yes, the business growth is impacted by the operational industry-wide challenges that we see due to the boom in e-commerce. And that's -- you could argue, our guidance reflects that. It's an upgraded revenue guidance, but it does reflect the reality that we are seeing. I think from a consumer demand perspective, this is very, very dynamic. We see strong demand, and I don't expect that strong demand to ease also in the coming years. But it's just a personal opinion I have here.

And then just maybe following on from that, how -- because you've had the sort of impacts, I guess, on the labor shortage in the previous quarter in the U.S. as well. So is the trend improving? Are you starting to get more employees and higher retention in? And just, I guess, the impact that, that's having on peak accuracy and maybe sort of any -- some negative customer views that you can relate that maybe to marketing vouchers and just a general trend, if that's sort of improving or you sort of see continued challenges into the coming quarters.

Yes. So we do continue -- we do see an improvement in onboarding, training, quality, accuracy. So that is a trend that's positive. Furthermore, we will roll out our next-generation manufacturing technology in the U.S., and it'll start in the second quarter in -- on the East Coast, which will further help with productivity and quality. So you have these impacts. So I think everything that happens within our 4 walls, we see a continuous process of improvement. I think externally, it's still not easy to hire people. It's just also a reality. The labor crisis is impacting not only us. It's impacting large shippers. It's impacting food suppliers, food manufacturers. So you really see it across the industry. So I think that's just an environment that we have to operate in. I do think we have a very strong value proposition to our team members. I think the Marley Spoon culture goes through the whole company, not -- it doesn't stop in the office, but it primarily goes through the FCs. So I think the people that we bring on board, we see continued better performance and engagement. But what's also true and it's hard to see and predict what will 2021 look like in its entirety. It's also true that there is a labor shortage in the U.S., in general, that we have to operate in.

Makes sense. And then maybe just one more on Australia. You just sort of noticed -- sorry, you noted that the growth had accelerated during the quarter. I was wondering if you could give a bit more color around the reason behind that. Is that just more around the timing of marketing or perhaps comping initial COVID disruption or WA sort of accelerating in its contribution? Just a little color around that.

Yes. It's 2 elements. Number one, Australia always started a bit later in Q1 because of the holidays. And so I think this year also, the holidays were definitely pronounced. People were taking the holidays and using the holidays. So compared to the other regions, Australia always has a little bit of a slow start. So January is always a bit slow, and then it really starts ramping up in February. And then also our facility and our Dinnerly brand, we really started their growth accelerating in February onwards. And that's why we saw this inter-quarter dynamic that we wanted to comment on.

Yes. And then with the active subscribers in Australia, so on a quarter-on-quarter basis, it's sort of only sort of increased by sort of 1,000. Is the expectation that the active customers that you brought in, in the first quarter will then translate into active subscribers in the second quarter?

I think always when it comes to this transition from acquisition, so you have a trial customer and then 50% stay, 50% leave. The people that stay then create a habit. Some people you lose, of course, during the habit forming. And then eventually, you have the strong base of recurring revenue. That dynamic continues to play out. It continues to play out in Australia across all the regions. So what -- you definitely would expect that number then having the same impact here. So you see -- you would expect active subscriber numbers also to grow. Also important to note is we always are very disciplined around acquiring customers at the right unit economics, and we have a global perspective. We, on a weekly basis, rebalance how we acquire, where we acquired which channel for which brands. And sometimes, that means the growth dynamic is more pronounced in one region than in the other. For example, in Q1, we had great opportunities to grow in Europe, which we used, and that means you sometimes shift also marketing and focus from one region to the other. And so that's -- when we always -- when we talk about growth and growth guidance, we always say, we not guide individual regions. We have a global lens. We try to deploy capital as efficient as possible. And so you -- I think it's always important to see that we hit revenue guidance globally, but we don't in the beginning of the year really have a clear sense of where the growth has to come from. And we do that on a very flexible way to allocate the capital efficiency. We've done it in the past years, and we expect to continue to do this also this year going forward.