elumeo SE

XETRA:ELB

Earnings Call Transcript 2023-Q1

[Florian Spatz, executive]

Yes. Good morning and welcome to our Q1 2023 financial earnings call. And together with my colleague, Dr. Riad Nourallah, who will guide you through the key developments of the first quarter of this year. So when we presented the full year 2022 figures 2 weeks ago, as you remember, we have already indicated that the first 2 months of this year took place on a totally different economic circumstances compared to previous year.

In 2022, until the 24th of February, so before the outbreak of the war, our business was still marked by highly positive COVID-19 effects. Since then, inflation rates increased and the consumer sentiment went down quarter per quarter -- per quarter with Q4 2022 and Q1 2023 being the 2 quarters with the all-time lowest consumer sentiment ever measured by the desired software consumer platform.

And not surprisingly, this had a significant impact on the total German jewelry and watches markets that went down by 30% in Q1. So for elumeo in Q1, our sales declined by 13.5% to EUR 10.8 million. And adjusted EBITDA is at minus 169,000, which is the first negative quarter since beginning of 2020. Despite this revenue decline caused by the economic context, elumeo succeeded in outperforming the market.

And as I'm going to show you in the next slides, stabilized its business in the second half of Q1. In light of the operating performance, elumeo has launched a program to improve the operational sales and the cost performance. The total volume of the program is EUR 1.6 million with EUR 1 million coming from cost savings and EUR 600,000 coming from items that increased the gross profit margin.

And yes, I will present you details on this program in one of the next slides. Also, as presented 2 weeks ago, our Italian business was successfully restructured in 2022 from a 24-hour broadcasting -- from a 24-hour broadcasting channel to a 4- to 6-hour transmission window. And this allowed us to continued profitability also in Q1 of this year.

Our innovative video shopping at Jooli continued to develop very nicely and grow in all main KPIs. And a very important milestone was launched yesterday, which is the real-time AI-based product feeds with a very promising start. Regarding the outlook for 2023, we confirm what we have said 2 weeks ago, we expect our sales to remain stable compared to last year and our adjusted EBITDA is expected to be in the positive low single-digit million range.

So I'm going to skip these slides and go directly to the business development since Q1 2021. As you can see, this quarter is the first negative quarter that we had to record since Q1 2020. So let's come to the key developments of this first quarter and I would like to start with an overview on the total market and because it is important to see Q1 under the aspect of the economic environment in these first months this year was drastically different compared to last year.

You can see this in the chart on the left side that shows the huge difference in consumer sentiment between beginning of 2022 and beginning of this year. And the impact that this had on the total German online jewelry and watches market was significant. You can see this in the chart on the top right side. Total revenues declined by 30% quarter-on-quarter.

And the Bundesverband E-Commerce & Versandhandel said in their analysis on the first quarter that as an effect from the negative consumer sentiment, customers postponed temporarily purchases that are not urgently needed. And out of the 20 different product segments measured by the segment, jewelry and watches and had to record the highest decline in sales.

But also the tele-shopping market in general that also sells product of daily needs went down by 14% in Q1. Yes. In light of the operating performance and also the volatility due to the effects of the war that are difficult to predict, we are following the rule hope for the best, but prepare for the worst and launch an action plan for operational improvements with a total volume of EUR 1.6 million.

The action plan is based on 38 items that will improve sales, gross profit margin and cost performance. The biggest part, of course, is the cost performance with EUR 1 million. As you can see on the top, the first group of items concerns the gross profit margin improvements, which are specific sales and marketing activities, bringing customers back and focusing on our high-end customers.

We are renegotiating with our vendors, the purchase prices and we're lunching new collections based on price points and performance data we gained in the first weeks of this year that are currently over-performing compared to the general range of jewelry that we are offering in order to improve the profit per show minute.

The second biggest group of the action plan concerns the personnel cost improvement. In order to temporarily reduce personnel cost, we will make use of the instrument called Kurzarbeit, short-time work and the huge advantage is that we can adjust the amount of Kurzarbeit needed and always quickly go back on full personnel resources once needed and very quickly and easily.

Third group is our online marketing cost improvements. There are several improvements on different channels. We are focusing the customer targeting, making more use on the further developed AI-based campaigns. And that will allow us to reduce the customer acquisition costs, so having nearly the same amount of potential new customers at a lower cost.

And of course, one could say that it would be possible to further reduce online marketing expenses that, of course, are much higher than EUR 100,000 for the rest of the year. But this would not make much sense because, of course, we are -- we don't want to slow down the new customer acquisition. We are acquiring customers in a profitable way. We are further reducing also the management salary for a total saving of EUR 100,000.

So this includes the salary of us, managing directors, and some leading managers. And finally, we planned also cost improvements for Jooli in the amount of EUR 100,000. So here you see details about the performance of our life business in the first quarter. In the chart on the left side, you can see the growth rates from January to March, always compared with the previous year months.

And as you can see, the negative growth comes from the first 2 months. But as I said, took place under -- yes, totally different economic circumstances. In the second half of Q1, especially in March, we have been able to stabilize our revenue. And as you can see in the chart on the right side, we increased again the number of new customers and active customers.

Yes, this slide is further developed also from our full year presentation, including now also the Q1 data and you see the positive effect of the restructuring of our business, as I said from 24-hour to 47-hour, we -- this broadcasting saving was accompanied by this -- the drop that this cost in revenue was accompanied by a disproportionately high savings in TV broadcasting costs.

And we returned to profitability also in Q1. And we are currently doing improvements on customer reactivation campaigns to further increase profitability. Yes. Let's take a look at our web-shop business. You can see that -- you see the different first quarter since 2018. So Q1 2023 remains on the very high level of the COVID-19 driven quarters and clearly, above pre-pandemic level.

But the negative consumer sentiment in Q1 resulted also in a slight reduction of 3% of the revenue in the web-shop. However, compared to the online jewelry and watches market that dropped 30%, it's a clear out-performance of the market. And since April, we are back on growth with revenue that increased by 8% compared to the previous year month.

Very interesting milestone that we launched a couple of weeks ago is the new on-page search engine in our web-shop that would guide customers more directly and more easily to their preferred jewelry piece, and we expect a significant improvement of the shopping experience for our customers, for existing customers and for potential new customers. And we already see an improvement in the conversion rate.

So first data looks very promising. Our video shopping app Jooli continues to grow in all main KPIs. And besides the growing number of channels and videos watched, 2 important KPIs look very interesting. The average watch time per user improved by 376%, arriving at 5.6 minutes per session. And the retention rate has improved by 40%, which is highly important because it means customers come back, customers like the app and customers spend an increased amount of time in the app.

Jooli is making major progress on product maturity and a very important milestone has been released yesterday, it's AI-based realtime feeds, which is adapting to the user interest instantly. So after 5 interactions, which takes a couple of seconds, the app starts to display only videos of interest for the customer. We expect a significant increase of video impressions, of retention and of conversion.

And yes, the next important milestone is the launch of Jooli Pay. Jooli Pay is an in-app-based checkout for customers offering all major payment methods and will be launched in India together with Kotak Mahindra as a banking partner to fulfill the payment and in a highly regulated Indian market. This is a very interesting partnership and we will offer also cash on delivery, which is by far the most preferred payment methods in India.

As for the outlook, additional features in H2 2023 will be released, for example, we are building a virtual assistance with AI-based voice assistant, which is also very interesting for the Metaverse prototype. The picture that you can see on the bottom right side, an automated safe on-boarding for our merchants, so merchants can easily create in our platform and without having an operation manager involved in their account in the back end.

So this will help us to scale even faster the merchant acquisition in integration per RP with the shop systems. So the order gets directly into the shop systems and platforms. And finally, as already mentioned, we are working on an improved Metaverse app and this is really a highly interesting important step towards the immersive future of home shopping. In short, a very interesting project we are doing together with .

[Riad Nourallah, executive]

Yes. Good morning. Let's come to the financials. As Florian already indicated, we compare 2 different quarters. 2022, a lot of customers were at home during coronavirus. Right now in Q1 2023, we faced really a strong customer reticence. Revenues went down by 13.5%. Nevertheless, we succeeded in keeping a stable gross profit margin. It's above 50%. Adjusted EBITDA after 11 consecutive quarters, it's the first time negative.

Nevertheless, we succeeded in keeping stable personnel costs. Let's take a look at the adjustments we made. So we start with a negative EBITDA of minus EUR 575,000. Apart from currency FX, the major effect comes from the project Jooli, the investment we make in the video shopping app. And as a second part, we have expenses concerning the dismissal of the lawsuit of Kat Florence.

Let's take a look at the main KPIs. In Q1, we succeeded in generating a positive operative cash flow. I think this is the most important point. Concerning the other KPIs, I think that confirms we like the strong business also in relation to the market that we succeeded in generating the same equal amount of new customers as in Q1 2022.

Let's take a look at the outlook. So our outlook is confirmed. The major part comprises the cost-saving program, which has a volume of roughly EUR 1.6 million. Nevertheless, of course, we face a high volatility concerning the economical FX caused by the war in Ukraine. Our forecast is quite cautious. But nevertheless, we say, okay, that will have a stable development concerning the adjusted EBITDA, which will be in the low single-digit range.

Sales is expected to be in the mid positive and mid-negative single-digit corridor. The web-shop will grow and the gross profit is expected to remain stable at above 50%. Overall, adjusted EBITDA as we expected in the low single-digit million range.

[Florian Spatz, executive]

Yes, many thanks. This was the Q1 2023 call, and I would now like to open the floor for your questions. [Operator Instructions].

[Florian Spatz, executive]

And I see Mr. Frey, you raised your hand. So we are working on -- yes, you should be able to open the microphone now.

[Joerg Frey, analyst]

I hope you can hear me now.

[Florian Spatz, executive]

Yes, perfectly.

[Joerg Frey, analyst]

Yes. And I guess we've always been -- yes, it has always been clear that January and February would be the difficult months in the year-on-year comparison. You presented now the life business in March turning positive. Has this trend continued or do you have -- do you see any sign that, well, this is -- this positive trend is ending, just probably, first of all on these exit rates you are seeing in the quarter and particularly April and May, early part of May?

[Florian Spatz, executive]

Yes, exactly. So we see that our business has stabilized. And as I've shown in the web-shop, we are growing with 8%, which is I think already a significant growth rate. And so yes, it's -- as you said, it was expected for January and February and I think now the business is on a stable basis for the upcoming year -- for the upcoming months.

[Joerg Frey, analyst]

And do you see any difference regarding your -- the performance of your merchandisers depending on price point, is their lower price points, particularly performing or anything that you can easily change the assortment, which -- where you think you've probably a wrong mix or anything like that?

[Florian Spatz, executive]

There's a slight improvement of lower price points. So we always see some changes in the performance of our jewelry collection. So this is an ongoing process, not only a particular one in Q1, but we are doing this always. But yes, in Q1, we see a slight shift towards silver jewelry. And there are possibilities together with our manufacturers and partners to make use of this trend.

And to provide thanks to our fast supply chain in a very quick way in only a couple of weeks, more products in the price point sweet spots in order to do also something on the product side to improve the performance.

[Joerg Frey, analyst]

Great. And regarding your cost savings program, you -- lots of experience, obviously, with short-term labor. First of all, when precisely does this start and a bit of -- what's your general mood in the company? Well, I guess, are you seeing your employees complaining more about lower money? Or is there lower wages in general? Or is there bit more than mood well. It's actually quite fine to work 20% less probably in the summer months and return to full time once business picks up, probably in the fall, just some thoughts on that one.

[Florian Spatz, executive]

Yes. So we will start this from June on. So very quickly now. And yes, I think we can say that the mood is we found a way to introduce this in the company that no one is affected in a way that is too bad. And I think everyone understands why we do this and also see how the development is getting better and that it's a temporary measure we need to do. And yes, of course, there might also be someone saying, okay, having 1 or 2 hours free in the summer, might not be the worst thing. So in general, yes, of course, we are very focused on getting back on track, on getting our performance improved, but the mood is not too negative. And I'm very proud of the whole Juwelo team.

[Joerg Frey, analyst]

Yes. I think that's an important asset. Going back to Jooli, the EUR 250,000 that you've adjusted for Jooli looks well, say, very, very, very lean. Have you cut back a lot to -- did you just adjust less because I saw marketing in general has not changed basically. So just some color on that probably what you've changed regarding Jooli cost and push.

[Riad Nourallah, executive]

Okay. And maybe I can shed some light on this. Seems to me that kind of I tend to start businesses whenever there is a crisis about to happen. So I have now almost 2 decades of good strapping experience. First business I launched right after the dot-com bubble burst; second business, which is Juwelo, I launched straight in the financial crisis of 2006 and 2007 and now Jooli.

Just as Florian said in the very beginning, whenever I started businesses, I followed the advice of Mr. Jack Welsh, the former CEO of GE, hope for the best and prepare for the worst. So when we designed Jooli -- we designed Jooli on the basis that it would have the lowest possible operational fixed costs so that we could continue regardless of how the economy changes. So we have a very small team, our core team of programmers consists of only 5 tech people.

And then from the very beginning, as you all know, we decided that we will roll this out not only in Germany, but with the main focus in India, where we have a pretty big team of 10 people now, in order to gain scale in the Indian market and to be able to prove the business case in the Indian market because in India, the cost of producing the proof of concept will be roughly 10% to 15% of what the same cost would be in Germany.

So we did scale some cost down, but very carefully, as you can see, kind of run time cost for the full year was roughly EUR 1 million. Now the run time cost for the full year would be in the region of EUR 900,000. So we've been very cautious in getting the business back because we see the huge potential of Jooli. And since we also in Q1 continue to have a positive cash flow and also a stable cash situation overall in the business. We can continue to invest into this and to see that we can develop this further.

Continuing into the second half of 2023 when we will start the monetization of the business, this will change to a degree because once we have positive user economics, then we will also be able to spend more money on marketing. And then we will start seeing how we can finance Jooli potentially also. Externally, we will see whether we get attractive options that create shareholder value for the shareholders of elumeo. But that is basically required only to scale the business, in order to develop the business further and kind of develop platform itself, we will not be required to get the external financing.

[Joerg Frey, analyst]

Sounds good. And regarding the start of monetization. Well, you mentioned payment now and the live feed. Is there anything on your side where you see a risk that as a postponement with the start to monetization.

[Riad Nourallah, executive]

No. I don't think so. In the beginning of this year, we basically had 2 huge projects for 2023, which is Jooli Pay, so bringing the check out process into the app and the real-time feed. And we made a conscious decision to introduce the real-time feed first because this will take more time to optimize. It has been launched 2 days ago and we chose a cautious approach and launched it with 25% of the customers first in order to see whether this runs smoothly.

Last night, we have been able to roll this out now to 100% of the customers. So everybody receives the real-time feed now, which recalculates the video feed that we play to our users every 5 interactions. But clearly, this would not be the perfect user experience from day 1 because the algorithm will have to learn and get better. And this is why we decided, let's go with the real-time feed first.

And now we will focus on introducing Jooli Pay and we're pretty much down the road on that already. We have chosen a banking partner with Kotak Mahindra Bank. We're in the process of choosing a preferred shipment partner in India so that we can also offer cash on delivery to households in India, which is an important shipment method in India. And we believe that we will be on track to launch this around June this year. And then we will see how much traction we will be able to get amongst our customers.

[Joerg Frey, analyst]

One last question. I don't want to monopolize it too much. But Kat Florence is obviously annoying, but can you remind me a bit -- I think you have also something to gain in this process because you've -- wasn't there a counter lawsuit that she -- that you are seeking damages from here, can you remind me a bit about lightening outcome?

[Riad Nourallah, executive]

Yes. We have -- basically, we have 2 damages lawsuits that arouse out of this entire collapse of the cooperation between us and our Thai investors. The first is against Kat Florence, which is the wife of the former Board member and Vice Chairman of the . She, in 2019, walked away out of a 5-year exclusive distribution agreement that she had with elumeo and started to sell jewelry to our customers directly, which is illegal under German law.

Unfortunately, this process took quite some time and we received the final verdict only this year. Fortunately, the verdict was favorable for us, which means we received a positive verdict in the second instance that it was not allowed what she did and that she is supposed to pay us damages. And now we are seeing how we are going to explore this and how much damages we are going to get from her.

We have to be cautious on that front because she is using a company and sapphire for that. And obviously, we have to be careful not to get a big title against the share company that then simply goes fast. And then we have a second lawsuit going on, which is against our former Board member, Don Kogen. That is the lawsuit that stems from a shipment of jewelry that he has made from the warehouse or that we have to assume he has made from our warehouse in PWK to a share company that appears to be under his control.

That happened during the time of the collapse of PWK in 2019 and '18. That shipment had a total volume of EUR 1 million and comprised of gemstones that were later sold under the brand of Kat Florence in U.S.A. on a TV station in the U.S.A, which is called Gem Shopping Network. So we filed a damages lawsuit for that and needed to have additional information what exact jewelry was sold in the U.S., how the TV station in the U.S. had obtained this jewelry.

And we received an injunction from the court in Atlanta where GSN in U.S.A. has their seat that GSN is supposed to provide this information because they didn't provide this information voluntarily. And based on that injunction, Kat Florence filed a defamation claim in U.S. saying that we had a lag that she was doing illegal things, which we never did.

And that was a lengthy lawsuit that took over 1 year in Florida to get rid of. But finally, we received the verdict saying that this was a complete nonsense and the case got thrown out of court. Unfortunately, in the legal system in the U.S. is a little bit more plaintiff-friendly than it is in Germany. Meaning that, we had a significant cost in this EUR 150,000 in order to get this thrown out of court because we took this very seriously and made sure that we kind of didn't have any bases uncovered.

But we cannot claim these in this cost. So this is what happened. But kind of the damages claim itself, which was brought forward in Florida could theoretically now we filed again in Georgia and Atlanta, but fortunately, Georgia -- the Federal state of Georgia in the U.S.A. has a statutory limitation for damages claims out of defamation of 1 year and this year has passed. So the likelihood that this claim will be refiled from our perspective is fairly long. Sorry for the lengthy explanation.

[Joerg Frey, analyst]

No. Just let me quickly summarize if I got it right. So basically, the risk of further meaningful cost for you out of this lawsuit is close -- very low, but you might get some certain damages hopefully, that you can recover.

[Riad Nourallah, executive]

Correct. We are dealing with a group of people who have acted enormously irrational throughout this entire process of the closure of the factory. There would have been many possibilities to do this in a much smarter way, which would have been beneficial to all of the shareholders. And if that had been done in a smarter way, we will be talking about share prices between EUR 2.50 to EUR 3 at the moment but unfortunately, the reality has been the way the reality has.

And we as management of elumeo have to deal with the reality and not with dreams. So it's unfortunate. It's been very irrational. I cannot rule out that they will do other irrational moves sometimes in the future. But up until now, I believe that the total money spent from their side on suing us left, right and center is in excess of EUR 1 million in cash. And I believe that their appetite to burn more money in trying to get something out of us is about to get a little bit lower.

[Joerg Frey, analyst]

And hopefully, they have to give you something.

[Riad Nourallah, executive]

And I have to say we have perfect score. That is 10 lawsuits that either we initiated or they initiated and we up until now won all of them and we intend to achieve this way.

[Joerg Frey, analyst]

Perfect track record. Well, let's keeping us across that all the positive momentum continues also in the operating business. And well, thanks for your elaborate answers.

[Riad Nourallah, executive]

Okay. Thank you very much...

[Florian Spatz, executive]

So I do myself. Also would be great if you could setup microphone on. Yes, there is a question of Mr. Pop in the chat.

[Riad Nourallah, executive]

Okay. I will answer that question. And also Mr. Pop has raised his hand. So maybe you would ask a question by voice.

[Unknown Analyst]

[Foreign Language].

[Riad Nourallah, executive]

Yes. [Foreign Language]. Please allow me to answer the question in English anyway because the entire call is in English. The question was essentially to ask whether we were planning to get external financing for Jooli, which I can confirm. And we have said this from the very beginning where we launched Jooli that in the long run for Jooli to be able to lift to its full potential, we will need additional financing for Jooli.

And this will be financing that will not be able to be paid out of the cash flow of elumeo. Up until now, where we're in the process of kind of fine tuning and getting the product perfect. We have been able to do that out of the cash flow and product development as such is something that we will continue to be able to do out of the cash flow of elumeo. The thing what we will need external financing is to scale the business, so to get more users into the app and to convert these users into buyers and to reconvert these users by incentives.

This is expensive project and for that, we will go to the market and ask in organized manner for investors to come up with proposals on how much they would want to finance this and what kind of shareholding they would expect from Jooli. And I assume that we will be able to shed some more light on how this is progressing throughout the second half of this year because the main component for that will be the monetization because this is what all of these investors will be waiting for and asking for an over to come up with a proper valuation. I hope this answers your question.

[Florian Spatz, executive]

Okay. So I don't see further questions. So many thanks for your time. Thanks for your continued interest in elumeo. Good bye, take care and see you soon. Bye-bye.