Farfetch Limited
Q4 2019 Earnings Call Transcript

Published: 28 Feb 2020

[Operator:]

Good afternoon. My name is David and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Farfetch Fourth Quarter 2019 Results Conference call [Operator Instructions]. Thank you.I would now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder you may begin your conference.

[Alice Ryder:]

Thank you. Hello and welcome to Farfetch’s fourth quarter and full year 2019 conference call. Joining me today to discuss our results are Jose Neves, our Founder, Co-Chair and Chief Executive Officer and Elliot Jordan, our Chief Financial Officer.Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them.For a discussion of some of the risk factors that could cause actual results to differ, please see the Risk Factors section of our Annual Report on Form 20-F, which was filed with the SEC on March 1, 2019 and our Annual Report on Form 20-F for 2019 to be filed with the SEC. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release and the slide presentation, both of which are available on our website at farfetchinvestors.com.Finally, we point out the heightened market uncertainty created recently by the spread of the Novel Coronavirus or COVID-19 which is affecting many companies. It is possible that our performance and projections discussed on this call could be impacted by the disruption this virus is causing in China and as we’re learning elsewhere.And now, I’d like to turn the call over to Jose.

[Jose Neves:]

Thank you, Alice. And thank you all for joining us today. I’m very pleased to be speaking to you about our results on 2019 which was a landmark year for Farfetch and ended with an extraordinary record-setting Q4, where we meet expectations in terms of top line growth, other contribution margin and adjusted EBITDA. 2019 marked the first year of our second impacted as a company which I like to call “Chapter 2” and here in which we cease incredible opportunities made possible by the strong foundation we build throughout chapter 1.At the group level including our physical stock and brand platform activities following the acquisition of New Guards Group or New Guards, last August. We generated a record $2.1 billion of growth merchandise value or GMV for the year. As always GMV is net of returns that is comparable to retailers’ revenues. This made Farfetch the largest global online destination for in-season luxury for the first year in our history.In 2019, we continued to catch our market share and as a result, our digital platform GMV for the full year was just under $2 billion. This represents an all-time annual high for Farfetch and 2019 growth rate of 40%, which means we grew almost twice as fast as the online luxury industry. Moreover our market share gain was truly global. With GMV from each of our three marketplace regions EMEA, APAC and the Americas growing faster than the online luxury industry.At the same time, we maintained a strong focus towards our path to profitability and delivered more than 500 basis points of adjusted EBITDA margin improvement over the prior year reflecting our increased scale and efficiencies as well as New Guards profitable operations. Our strong 2019 results highlight our execution of the four pillars of our Chapter 2 strategy which were outlined at the time of our IPO. As a reminder those pillars work, one; improving consumer economics and growing our consumer base. Two; increasing product supply in our luxury seller base. Three; investing in new technologies and innovation. And four; building the Farfetch brand.Turning to the first pillar, we continue to attract and retain an incredibly valuable consumer base in 2019. We exhibited average order values or AOVs of $608 and LTV to CAC paybacks of less than six months. This strong magic underpinned our investments in expanding and engaging our consumer base throughout a year as we grill active consumers 50% to end year with 2.1 million. We also enhanced our value proposition for our consumers with the springs 2019 rollout of Access, our spend-based loyalty program.And I’m pleased to report I think less than one year we had more than 1 million members across the five tiers ranging from bronze to private client who are already demonstrating the benefits of the program. Compared to the controlled group, we’re finding Access members are significantly more engaged and shop more frequently at higher AOVs. To-date the results sparks to an incredible 23% of leads on gross transaction values on average for Access members.As such we will continue to rollout the program to more customers as well as make additional investments into technology, experience and benefits to drive further uplift in 2020. The idea behind Access is to connect with a private client of today and tomorrow. Private client represents our highest spending and most engaged consumer segment. During the year, we expanded our results to serve this fast growing and highly valuable customer. We now have over 100 stylists servicing our VIPs in 20 cities around the world.We also continue to see traction behind Fashion Concierge. Our conversational commerce solution which is part of our offering to private clients. This unique business has generated some of Farfetch’s highest value transactions. And in January Fashion Concierge broke the record of the highest single sale on our marketplace. $1 million of fine jewelry and watches sold to a private client customer.Now onto the second pillar, increasing product supply and our luxury seller base. Our strong top line performance highlights our success in leveraging our global platform to go after the $100 million opportunity that we see in online luxury. And with luxury brands increasingly moving to reduce full sale in favor of direct consumer distribution strategies. Our unique e-concession model has positioned Farfetch as the multi-brand digital partner of choice.As a result, our brand relationship strengthened in 2019 and we nearly doubled the rate of direct brand signings with e-concessions on the Farfetch marketplace, accelerating to grow almost 40% more than 500 tier end. Overall, supply has never been better. In Q4, we offered Farfetch marketplace consumers a record number of skews across our highest other number of brands over 3,400.At the start of the year, we’re already had the largest selection of luxury online and with 100% three-year retention of our top 100 brands and over 1,200 total supply partners. It has only gone from strength to strength. And for our third pillar, investing in new technologies and innovation. In addition to operating digital distributive platform at scale and surpassing the demands of our growing transaction levels. Our tech team has been ahead of development and innovation in 2019.We launched many products and features. We improved the experience for our customers, partners and sellers including Inspire. An in-house developed recommendations engine which applies AI and machine learning technology while our proprietary customer preference data to improve the search and discovery experience for our consumers. With passive Inspire for over 12 months against best-in-class third-party AI algorithms and ours is now winnings. Meaning we’re building proprietary competitive advantage in AI driven personalization that we’re using across all our customer touch points. Web, mobile and emails.Over to our augmented retail initiative we’ve successfully launched the star of the future pilot for Chanel’s, [indiscernible] Harrods selection boutique and based on the extraordinary impact we’ll leave it on the customer experience in 2020, we’re planning to expand the rollout to additional Chanel boutiques. A key 2019 initiative has been behind developing features and services to support the launch of Harrods global e-commerce solution. And I’m ecstatic to report that as of yesterday Harrods.com is live on the Farfetch platform.We are thrilled to be providing them all the features of the Farfetch platform including e-concession, global logistics including to China and e-commerce management combined with operations and technical support to power Harrods global regional strategy in the coming years. As a result, Farfetch is now enabling Harrods offering of its extensive product catalog including categories which are important to the partner store such as beauty, food and wine and homeware.In addition to signing Harrods in 2019, we saw strong momentum behind Farfetch platform solution during the year. Not only did our curiosity shine a unit power that we share presence for 80 plus global luxury brands but FPS also expanded their launch partners to 18 by the end of the year including three e-commerce site for LDMH brands. To-date in 2020 in addition to Harrods FPS also launched two sides for new gas brands Off-White and Zambrero, bringing FPS operated sites to 21. We’re pleased to see that our technology investments are paying off.And finally turning to our fourth pillar; building the Farfetch brand. Building was for the Farfetch brand has been one of our biggest opportunities and was an area of greater focus in 2019. In March, we launched Farfetch communities which showcases bespoken entire content on the marketplace between to inspire and help consumers find the things they love. Not only did it enhance our consumer experience but in the case of Gucci’s Open House Series. It was an opportunity for a longer term content collaboration who highlights their collections from the perspective of the global Farfetch community over an eight month campaign on the Farfetch marketplace.Last week, we were also excited to announce Farfetch BEAT, dubbed as the future of jobs by the media. A new program which will offer jobs from the most coveted brands and products, every single week at a global scale via the Farfetch app. We are thrilled to have some of our top brands partnering with us on Farfetch BEAT. As well as new gas brands and stadium goods and we will forward to offering some incredibly popular clubs.To give you a sense of the potential from these launches when the Off-White Nike Air Jordan 5 shot earlier this month, it generated an incredible 16 million hits per minute across the platform at its peak. Beating our highest traffic peak on Black Friday in 2019 and crucially with zero digital marketing spend. I would now like to update you on the New Guards acquisition as we just passed the first six months milestone. I’m extremely happy with the New Guards contribution totals the core Farfetch business already.And of course with a strong performance of our new connected wholesale segment, the brand platform. In the second half of 2019, the New Guards portfolio of brands in aggregate sold mug than any other single brand on Farfetch and powered some of the hottest exclusive jobs all of which squarely advanced our strategic goals of building our Farfetch brands accelerating our marketplace right wheel and boosting demand with free traffic. All of these factors contributed to the outstanding performance of Farfetch’s core business in Q3 and Q4. Additionally, brands have been incredibly excited about the prospect of a combined Farfetch and New Guards regarding highly desirable luxury consumers to our platform. And today, brand relationship are healthier than ever before with 49 brands directly joining the marketplace since August.Finally from a financial standpoint, our results clearly indicate New Guards is extremely capital efficient and [indiscernible] with respect to free cash flow and profitability with minimal inventory risk.A huge thank you to our teams who work relentlessly to integrate New Guards. In the short span of three months post-acquisition we leveraged our fulfillment by Farfetch infrastructure to start supplying New Guards brands direct to our consumers or DTC and power their brand on current businesses. Given that New Guards drove $36 million of digital sales in Q4 alone of which only approximately 20% was DTC. This gives you an idea of the enormous potential of the New Guards portfolio when this channel is fully optimized. Clearly, the New Guards acquisition has already proven to the great strategic feat for the core Farfetch business that we expected it to be. And in fact, it is surpassing my expectations in every regard.Turning now to the Novel Coronavirus which is to the forefront of people minds. We are monitoring the evolving situation casually and naturally. Our priority has been the health and well-being of all our teams. From a trading perspective currently, we have not seen a material impact including in China, Korea, Japan and Italy. With February sales in this market growing year-over-year that both the marketplace average.Given the current contours of the situation, we believe our distributive platform model is particularly well suited to weather this issue. Our access to more than $3 billion of third-party inventory treating in thousands of stock points, in the 50 plus countries where we start supplying and the unique ability to tech into it, to service millions of customers in 190 countries through multiple possible combinations of shipping routes and logistics providers make the Farfetch model particularly resilient to this type of situation at least in its current shape.The current trading trends are confirming this so far and make us confident in the resilience of our business and our forecast for full year 2020. Notwithstanding this, as I mentioned the situation remains uncertain and we will closely monitor it, as it evolves. Specifically in relation to China, we continue to see significant opportunity in this market whose consumer base according to Bain [ph] is expected to represent about 45% of the luxury market sales by 2025. With half of purchase is being made in Midland China.For the past five years, we have been building our abilities in this key market investing in a localized tech, [indiscernible] operations and acquiring us throughout the China unit in 2018 and top [indiscernible] in 2019. We are very pleased to see our China market GMV growing faster than the rest of our marketplace in Q4. This strong performance was driven by our own channels including the Farfetch app and website, which together represent the vast majority of our China sales. Which more than compensated for the slower than expected ramp that we are seeing from the JV channel?Overall our investment in China are yielding strong results and have established Farfetch the premier luxury gateway to China where we are committed to being the partner of choice with our one stop integrated solution for helping luxury brands develop and implement digital strategy to crack this major market.Turning now to Elliot to discuss our financial results and outlook.

[Elliot Jordan:]

Thanks Jose and hello, listeners. I’m very pleased to be sharing with you the financial results for Q4, 2019 which represent another excellent quarter for Farfetch. We’ve beaten our own expectations of growth and profitability thanks to an acceleration across the marketplace within digital platform, significant revenue and profit contribution from the brand platform as well as continued operating leverage across the group. This strong finish to the year means our total GMV for 2019 was $2.1 billion up 52% year-on-year with the digital platform growing at 40% year-on-year.In the fourth quarter, we delivered Group GMV of $740 million, 59% above Q4, last year. The digital platform delivered $629 million of this GMV, growing 36% year-on-year or 37% at constant currency and delivered a sequential improvement in order contribution from 31.3% to 32%. This is an outstanding performance underpinned by strong results from the Farfetch marketplace which forms 90% of the digital platform GMV.Q4 revenue on the digital platform grew 37% year-on-year to $226 million with third-party take rate of 30.4% and an increase in our mix of third-party sales to 12% of GMV, of which 1% is first-party original. Our fulfillment revenue grew 75% year-on-year reflecting a significant reduction in funded promotions which are offset against this revenue stream. As a percentage of GMV, our spend on promotions was the last it has been in six quarters. With fewer promotions quarter-on-quarter our digital platform grows profit margins stepped up 135 basis points versus Q3, 2019.Fewer promotions also help support year-on-year gross margins although this benefit was more than offset by the mixed impact of our first-party business which is currently delivering a gross margin below our medium-term expectations. We continue to engage with customers across a broad range of channels with compelling content, contributing to organic traffic, optimized search engine marketing attracting new customers and a strong social presence promoting the Farfetch brand.We also focused our retention on driving at downloads. Overall, our demand generation expense as a percentage of GMV is stable quarter-on-quarter at 8%. The results of this activity are pleasing with 180,000 net new customers in the quarter, higher at engagement, a spike in a retention metrics and significant GMV uplift via our Access loyalty program. All spend on promotions with digital channels is aligned to our customer acquisition and engagement strategy and deployed within strict day-to-day cost of sales targets and monthly lifetime value to customer acquisition cost payback ratios. The result is a healthy base of 2.1 million active consumer. Payback of tech within six months of acquisition with the Q2, 2019 cohort now profitable and improving lifetime values of previous cohorts measured over a 24-month time period.The brand platform delivered $102 million of GMV and connected wholesale revenue and contributed $48 million of gross profit at a gross margin of 47%. This gross margin is now net of licensing fees that are paid to brand owners which following the completion of our New Guards acquisition are included in the cost of revenue. Product margin before these costs is 55%. Consistent with the margins New Guards delivered pre-acquisition.Q4 revenues on the brand platform are primarily associated with shipments on orders for the upcoming spring summer 2020 shopping season. With the result driven by strong demand across the portfolio including Off-White, Palm Angels and Heron Preston. On top of the wholesale revenue, New Guards is delivering on a strategic rationale with a clear and positive impact on the digital platform. We can see that strong collections of first-party original brands are driving customer engagement and traffic across the digital platform. This has led to New Guards brands delivering $36 million of the digital platform GMV.Moreover these brands are delivering a strong Halo effect on the other 3,400 brands available on the marketplace with a number of baskets with both a New Guards item and an item from another brand growing 81% year-on-year in Q4. Consolidating now two platforms and our stores Group gross profit less demand generation which we view as our variable contribution with $125 million up a healthy 108% from $60 million in Q4, last year.Turning now to fixed cost, we are delivering underlying operating leverage. Our tech spend and our G&A cost were 6.7% and 35.6% of adjusted revenue respectively with G&A incorporating non like-for-like cost associated with the brand platform plus a larger than expected bonus accrual compared to release of accruals in Q4, 2018. This is a result of the stronger performance we delivered across the quarter.We expect further operating leverage in the years ahead with marketplace economies of scale, growth of clients on top of the tech platform plus expanding brand platform sales delivering revenue growth ahead of the growth of our fixed cost. In terms of progress towards profitability, our Q4 growth improving economics and significant operating leverage has delivered an adjusted EBITDA loss of $17.9 million almost half, a $35.6 million loss from Q3. This resulted in an EBITDA margin of minus 5.3%. This demonstrates the power of the financial strategy at work and provides further confidence that we will deliver on our goal of achieving profitability at the adjusted EBITDA level in 2021.Now turning to the Q4, $50 million charge for depreciation and amortization. A step up from prior periods is predominantly driven by $30 million amortization of intangible assets that we have acquired over the last 12 months. Including brands from the acquisitions of New Guards compared to non-such charge last year. As well as $5 million of depreciation of right of use assets which were recorded within G&A before the adoption of IFRS 16 on January 1, 2019? This is the equivalent accounting standard as FASB ASC 842.Our Q4 share-based payments charge of $42 million was primarily associated with our Farfetch for all employee share incentive program. We believe employee share ownership supports total focus on creating shareholder value over the medium to longer term. During the quarter, we incurred $6 million of transaction related legal and advisory expenses included in other items and a loss of $11 million due to the revaluation of equity linked liabilities held at fair value. Predominantly in relation to the non-cash consideration payable Chalhoub successful Middle East joint venture. There was no such items in the fourth quarter of 2018.The resulting loss after tax for the quarter was $110 million or $0.34 per share. Adjusted EPS was an $0.08 loss per share which is ahead of consensus. In terms of liquidity, we increased our cash and cash equivalence balance by $4 million during Q4. Closing the year with $322 million on hand. This position was generated from the favorable working capital dynamics associated with Q4 being our largest quarter as well as the cash contribution from New Guards. Subsequent to year end, we added to our cash balance issuing $250 million of convertible senior notes to Tencent and Dragoneer. In conjunction with this transaction, we have cancelled the undrawn EUR300 million loan commitment that had been in place since August 2019.Turning now to our expectations for 2020, we start the year as the market leader of the end season global online luxury market. Our business model has positioned us as the partner of choice for luxury suppliers and we have developed a strong consumer offering. This position means we expect to continue to gain market share with Group GMV for 2020 between $3 billion to $3.1 billion representing 40% to 45% annual growth including the acquired brand platform which we expect to deliver approximately $470 million to $510 million of that GMV, at a gross margin of 45% to 47%.We expect the digital platform to grow in line with our medium term expectations at around 30% year-on-year to deliver GMV of $2.5 billion to $2.56 billion. The year-on-year growth will be back weighted as we continue to bounce the work started in Q3 last year, the step back from promotions and focus more on our full price business, as we aim to maintain digital platform order contribution margin above 30%. With expectations for further operational leverage, we estimate an adjusted EBITDA loss between $70 million to $80 million representing a $40 million to $50 million improvement over 2019, which will deliver a substantial step forward in adjusted EBITDA margin versus previous years.Noting what Alice mentioned at start of this call. I’d now like to look specifically at Q1. We expect year-over-year Group GMV growth of 44% to 51%. With respect to our digital platform you’ll note that in Q1, 2019 we grew 50% on a constant currency basis on top of 67% growth in Q1, 2018. With the currency impact now largely annualized in real terms we’re comping against very strong growth. As we balance our full price position, out spend on customer acquisition and engagement plus manage volumes across our channels to ensure sustainable long-term market share gain. We’re expecting Q1, digital platform GMV growth of 20% to 22%. Across the rest of the year, we expect higher growth to result in around 30% year-on-year growth for the full year 2020.The brand platform is expected to deliver GMV of $100 million to $120 million across Q1 as we see continued strength from the spring summer ’20 selling program. Finally, we estimate a Q1, 2020 adjusted EBITDA loss of $30 million to $35 million and to finish the quarter with a healthy cash position of $415 million to $430 million. Jose.

[Jose Neves:]

Thank you, Elliot. 2019 was a landmark year for Farfetch and could not have ended better with a record-breaking Q4, where we bid expectations both in terms of top line growth, other contribution margin and adjusted EBITDA. We continue to gain market share across our regions. Further entrenched ourselves as the partner of choice for luxury brands and surpass other incident global online luxury players to become the clear leader in our space.We are also already seeing meaningful strategic, branding and financial contributions from New Guards. As we look towards 2020 and beyond, we are excited by the prospect of continuing to build on our leadership position. I believe 2020 is going to be another year of strong market share capture, stable unit economics and leverage of our investment to continue on our path to 2021 profitability at an adjusted EBITDA level.I’m very confident of all the amazing work being done by our teams all around the world and would like to take the opportunity to congratulate all Farfetcher’s for a record-breaking 2019 as we start 2020 from a position of strength. Thank you.

[Operator:]

[Operator Instructions] Your first question comes from the line of Louise Singlehurst with Goldman Sachs. Your line is open.

[Louise Singlehurst:]

There’s obviously going to be lots of questions probably around a bit of Coronavirus as well given the set to new slow, but just it’s a great progress in the strength of AOV the margin improvement you’re seeing in the fourth quarter. just on the back of what we’re seeing and the risks around demand for the industry particularly across the boutique partners that you have, is there a risk that will be excess stock coming through to the platform. You’ve done such a good job to reduce the level of promotional activity. But is there a risk that you have to manage a little bit more with the current situation.And then followed on from there, my second question would be in – given the current environment do you think there could be an acceleration in brands really trying to accelerate the move from traditional wholesale to going direct on the e-concession platform? Thank you.

[Jose Neves:]

Hi Louise, this is Jose. Thank you for your question. The Farfetch business model 90% of the inventory we have accessible to sell on our channels is third-party inventory meaning we take no inventory risk and that such, in the event that there is a buildup of inventory, we obviously hope to be a positive fast forwarding industry and in this difficult moment and the one of the channels that is actually growing very fast including in the territories that has been effected and as such we hope to be positive sort of amused and trading for our boutique partners and for our brand partners. But we obviously are not taking risk on the fast majority of our inventory position and as such I don’t see a risk to trading our margins.And on our second question, it was already happening. So the move to e-concessions is very, very clear. It has accelerated in 2019. It was a fantastic year for our direct brand relationships. The number of e-concessions grew 40%, trendier at over 500. It accelerated both New Guards it was an acquisition that was received with excitement by many CEOs, many Heads of the Groups who sent me congratulations straight after that acquisition. They’re excited about all the things we’re doing about the brand, community, Farfetch BEAT and we actually added 49 e-concessions since August. So yes, it’s very exciting on that front.Brand relationships have never been healthier and we hope to continue to be a source of very fast growth across all the key geographies including those that unfortunately have been affected by these tragedies [ph].

[Louise Singlehurst:]

That’s very clear. Thank you.

[Operator:]

Your next question comes from the line of Doug Anmuth with JP Morgan. Your line is open.

[Q –Doug Anmuth:]

I wanted to ask two. First just on discounting and promotions. It’s pretty clear that your levels are down significantly, but can you just talk about the broader industry in terms of what you’re seeing and kind of how far through the cycle you think we are and working through this perhaps over the next few quarters. And then second, maybe I’ll take the other side of the COVID risk around inventory. But do you have any concerns about the supply chain out of Europe and Italy in particular and is there anything at all factored into your 2020 guidance around that. Thanks.

[Jose Neves:]

Thanks Doug. So in August, we spoke to you and to the whole community about the promotional environment and just to remind everyone. Essentially, we had three messages. The first message was that, online wholesale was becoming increasingly promotional and that brands were divesting to move toward e-concessions. The second message was that, we decided to moderate our growth to a still fast market share capture around 30% to 35% and that will leave to a stabilization of our other contribution. And the third message was that we, we were going to take leadership position in this industry and that we were going to find a formula to navigate this promotional environment independently of our loans this transition phase with brands would take.And I’m very, very pleased that six months after we delivered on each of these three points. So in terms of the move away from online wholesale to e-concessions it’s quite clear. I can give you some recent example of earnings calls where this was addressed in the last earnings call speaking about Gucci. Management was very clear, that Gucci was going to prioritize their direct online channels and e-concessions. As far as I’m aware Farfetch is the main e-concession that Gucci operates.We have another example, Tod’s clearly said that they were going to phase out wholesale, de-prioritize wholesale and he’s asking direct online channels. I’m pleased to say Tod’s is one of the 49 brands that joins the Farfetch marketplace with an e-concession in the last few months. Prada another example was very clear in their earnings call since then our market sources indicate they have stopped working with our main competitor altogether and will all gather online wholesale competitors, they restricted them to sales in their territories only. So there are numerous examples. So the brands are definitely taking action and obviously this strong growth of our e-concession channel prove that the second half of our prediction that they would double down on Farfetch. It’s clearly happening.On the second promise, we did deliver what we said we were going to deliver. We actually hit our growth, our 30% to 35% in both Q3 and Q4 and we actually over delivered in terms of matching stabilization and have sequentially expanded our margins both in Q3 and Q4. And the third, message that we had in August we also delivered on that. We are now the clear leaders in this space and we have found the formula, this formula of strong market share capture balance with stable unit economics and easily bring a very steady path to profitability.On your second question regarding the Novel Coronavirus. We had very, very distributive and diverse supply base. So we saw supply from 50 different countries. We saw supply from thousands, literally thousands of inventory points in these 50 different countries. We use New Year of - routes and logistics partners in combination to service over 2 million customers in 190 countries and we think we’re more resilient and not prepared than retailer or an e-tailer who would typically either rely on physical traffic if you were a retailer or one or two or three very few logistics hubs to conduct our business.So I think we’re particularly well positioned notwithstanding that of course the situation is changing every day. So far, we have seen no material impact in the logistics across our entire business both supply and demand. Of course in China we know the Hubei Province has logistics restrictions, but obviously it was a very limited in terms of the impact of trading. And as such, we’re very confident and to that sense, we’re confidently giving guidance both for Q1 and for the full year of 2020 and we hope also to be a source of release and positive news for our cherished partners who in some cases need help in these situations.

[Operator:]

Your next question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

[Q –Oliver Chen:]

Regarding the environment and promotional environment, at large. What are you seeing in terms of how that will evolve and your thoughts on the forecast and how it may interplay with your very disciplined strategy to focus on engaged customers? Would also love your thoughts on why your AI technology was leading, if it had to do with the strengthen of your training set or deep learning backwardation models and then Farfetch BEAT. It looks like quite an innovative, powerful, new generation kind of concept. How should we think about how that may manifest in traffic as we look at our models and what you hope to do with that business as a marketing and/or loyalty driver? Would love thoughts. Thank you.

[Jose Neves:]

Thank you, Oliver and welcome to our call. Great to hear your voice. So on the promotion question I think I addressed most of the salient points with that, I would add that the current level of spending in promotions is the lowest in six quarters for our business and I firmly believe we found a formula, balancing growth which we’re guiding 30% growth for the digital platform, 50% growth overall for the Group in 2019, that’s very strong growth. And we run our business based on LTV CAC models. Promotions are part of the mix. Some promotions are adequate and are brand-friendly, boutique-friendly, customer-friendly. And thinking free switching for active members, special gifts when you go one level in Access etc., etc. so we will continue to balance the several demand generations channels.For us it is crucial to make sure we’re building very, very valuable cohort. I’m very pleased that whilst we adequately a leader in the industry and growing at 30% where the latest available members from our closest competitors were single digits. We still have a CAC to LTV payback of less than six months which as you know in e-commerce and to side market places is best in class. And therefore it’s all about all the channels. Affiliate displays, changes in marketing, some level of targeted promotions and how do we balance that?I believe we have found a formula and independently of how long this transition period of brands re-achieving from online wholesale and building down on direct channels and e-concessions independently of how long that transition will take. We have found a great formula and a great balance. This is also about organic traffic and you touched on it. We are very excited about this. We’re very excited that our top future brands have called the CEOs beforehand to let me know about its great opportunity they were incredible engagement confirm, they want to be part of it, across [indiscernible] is our portfolio with NGG and Stadium and we think we can create tremendous organic traffic through these jobs.It is very difficult for the luxury industry to move from a seasonal cycle to a job cycle. It’s operationally difficult. It’s difficult to do it digitally. It’s difficult to do it globally including China and Middle East, Russia, Brazil and that’s what we’re delivering to the brand. This is an incredible channel to be more close to real-time and push categories as they’re excited about products that they’re excited about and leveraging the power of our great community.

[Operator:]

Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

[Q –Jason Helfstein:]

Could you give us some help specifically I guess if we think about the cadence around the digital order contribution margin over the next few quarters? And then just secondly on the virus you mean, to the extent that do you have data that shows that customers who are in affected areas they maybe engaging with your site more, even though they may not be converting as much and then, you wonder when you come out of this, have you actually seen changed behavior that you benefit in that shopping a year from now or something like that? Thanks.

[Elliot Jordan:]

Jason, it’s Elliot here. Just in terms of the order contribution obviously extremely pleased to see the sequential improvement coming out of Q2 and Q3 and now into Q4. We’re obviously still annualizing the fix of the promotional environment last year as Jose was saying, we obviously changed our strategy to focus on full price and align ourselves with the brand partners on the e-concession really from July. So we still got a couple of quarters if that’s annualized through and that’s important to note for the first half and then how we see the second half evolving in terms of delivering the overall 30% growth for the digital platform in terms of GMV and that should be in mind also when we’re thinking order contribution. Obviously, we’ll see some improvement from that over the year. But I think you should keep in your models, focus on it being in the low 30s for the time being just as we navigate all of the changes that we’re putting through in terms of readjusting to the full price model and how that works.You’ll note from my commentary earlier on, that newer contribution still being held down by the margins on the first-party business. The key area of focus for us to continue to drive the gross margins on that first-party business and also slow the growth of that business down and allow the third-party business to sort of click on again to help bring the order contribution on average up and also a focus on benefiting from all the way we’re doing and the moment around at down lows engaging with customers and just being in terms of digital channels and start to see some of the benefits of the organic traffic coming through from either those head down loads or the BEAT program that Jose was just talking about. So improving order contributions as we move forward, but I would keep it in the low 30 just for the time being.

[Jose Neves:]

Oliver, apologies. I didn’t answer your Inspire question. Just went to that, it is an in-house proprietary algorithm. We have an unrivalled dataset, so that’s a great start. We see sales from 3,400 brands. We see not just online transactions but we also see the offline transactions as we’re synchronizing real-time with the stock and the transactions of the boutiques and the brands. And of course we’re larger in not just sales but obviously in traffic and interactions and anyone else in the industry. That of course combined with our luxury AI and machine learning algorithms which was been perfecting and passing against third-party algorithms that are best-in-class. We were not winning one-year ago, we were very close and we fine-tuned and continued to improve on those machine learning models.And recently, we consistently started getting the third-party algorithms rather and we’ve now switched to Inspire which is also much more qualitative. So the quality of recommendations the luxury level and the fashion acumens say of this algorithm is also superior to the more generic solutions out there. So I think this is very positive. This is really creating a great experience for our customers. But also is proprietary competitive advantage that we will continue to build on and we’re happy that our investments in technology are working across the bar and this is great example of that.

[Operator:]

Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

[Q –Ike Boruchow:]

I guess Elliot, two questions. Great platform GMV growth in the fourth quarter and 30% guide for the year looks good. I’m kind of confused on the Q1, the 20 to 22. Could you help the building blocks here? I mean I know Stadium goods is rolling off. I’m not sure if something is going on with 1P sales, the Harrods ramp up I mean. I’m just trying to understand what this lull is for Q1 then reaccelerates going forward.And then my second question is Jose you seemed to be pretty confident about talking about breaking even or heading profitability in the next fiscal year. Is there some – can you help us understand what kind of contribution margin is baking into that assumption for you guys to get there? I’m just kind of curios playing on, what your model implies for you to hit those targets? Thanks so much.

[Elliot Jordan:]

Of course, Hi Ike. Let’s go second question first. In terms of getting to breakeven in 2021, absolutely very confident on that position. I think the results of the last quarter really highlight the power of the financial strategy went into working while driving solid top line growth, bringing the order contribution margin up and then importantly on underlying basis leveraging the fixed cost base and that’s what closing the gap in terms of our negative position back up towards profitability.As I look to the growth for the full year. Obviously, we’re annualizing the acquisition of New Guards Group contributing significantly across the 2020 period. But with the marketplace really performing well over the full year we’re seeing good market share gains and that’s obviously driving cash contribution over the fixed cost base and moving towards profitability. So very simple model. Reach about gets profitability. You don’t need to put in your models much more then low 30s in terms of an order contribution on the digital platform to hit breakeven. We’re in the place at the moment where, if you have – and your numbers is probably a good place to be. I’m assuming we’ll be above 30% making good slow progress to improve that to our 60% target over the longer term. But for 2020 breakeven, we don’t need to necessarily push that forward too far.In terms of your first question, I think it’s important to focus on the fact that we’re now the largest player in this space with $2 billion GMV for last year and forecasting $3 billion for the year ahead. It’s definitely put us as the leader in this position and as we see it back at the IPO. We’ve always expected the digital platform in totality to grow at 30% over the longer term as we continue to grow ahead of the market which we forecasted as growing around 20%. And that’s what we guide into for the full year sticking to that long-term growth trajectory and as far as I see it before our nearest competitor is from what we can tell growing in low single digits.So we’re definitely storming ahead of others in this space because of the superior business model that we have. And managing to that 30% target, we have to think through about the comps that we had, Q1 last year. We were growing at 50% on a constant currency basis and that’s on the back of 68% from the year before. And so whilst we navigate that comp, plus also work through two more courses of pulling back on promotions which as I said before we started in July and balancing the full price position. We see Q1 growing at 20% to 22% and then obviously that picks up towards Q2, Q3 and Q4 to balance out the 30% overall. And as you see it absolutely digital platform as a whole is growing to that position and of course Harrods now live will build into that as we ramp the amount from now on onwards for the rest of the year.

[Operator:]

Your next question comes from the line of Steven Yu [ph] with Credit Suisse. Your line is open.

[Q –Unidentified Participant:]

So Jose, you touched on a slower integration with JD. So we’re wondering if you can elaborate a bit on where you are in that process. Are you still working on the presentation or is there another issue? And I believe your partner with JD logistics in China also, so you’re presumably not seeing as much in delivery headwinds. And Elliot, the DTC mix for New Guards. I believe at the time of the acquisition was mid-single digits or so and you’ve talked about ambitions [ph] to significantly expand that overtime. So how much of this is baked into the 2020 digital platform growth guidance parameters? Thanks.

[Jose Neves:]

Thanks, Steven. And the business in China is firing from all cylinders. We’re extremely pleased with the execution there. It’s our market number two. It’s growing faster than market number one, so it’s closing the gap to the west. It’s a very, very unique positioning we have in China. There are not many western companies and in luxury none, as far as we’re aware that has the infrastructure we’ve created there. We have 400 people on the ground in Beijing, Shanghai, Hong Kong. Domestic logistics, cross-bottle [ph] logistics, data center on the other side of the firewall, a complete proprietary app created by Chinese engineers and product managers. Native Alipay which had pay login by phone etc., etc. so we’re very, very pleased that our own channels firing from all cylinders which means we’re in full control of our destiny.The JD channel is growing. It’s ramping up. It is slower than what we expected and we continue to do tons of things to optimize it. From data science, who sees the button? It’s exposed to 3 million out of the 300 million users of the JD app. Refining that data science algorithm is obviously crucial. Conversion rate in terms of the landing page, product categories, AOVs, merchandising, etc., etc. all of those levers have been pulled. It is a small part of our business in China and growing slower than what we originally expected. But I think the main and most powerful message for me, is that we’re in control of our destiny in China and our own channels are exploding. So very, very happy with overall with that matter.

[Elliot Jordan:]

Yes and just on the DTC for New Guards. I mean this is super exciting area of the acquisition. I’m pleased to say that actually we’ve now launched two of brands websites for New Guards on our Farfetch platform solutions, so not only going live with Harrods. But the team has delivered and pretty quick succession websites to the brands. I encourage it to go under the Off - White website in particular. You may have been one of the millions of visitors that sort of checked out the drops couple of weekends ago and that obviously is all now part of the DTC, the direct-to-consumer channel which is about 20% of the contribution for New Guards to our digital channels. So the $36 million that we see it over the quarter that came through from New Guards on the marketplaces about 20% of that number is direct-to-consumer. That’s a good balance.I think you know part of the reason why how multi-brand boutiques excited about the future with Farfetch is that they’ll have access to brands from New Guards portfolio. We obviously want to encourage them to sell those brands on the marketplace as well and we see that as a great way to support their businesses and continue to enrich the partnership that we have with our partners. So 20% to 25% direct-to-consumers is a good number to have in your mind. Obviously, if the direct brand websites pick up and we see substantial demand shift to websites like Off-White.com that number could change. But in terms of my forecast and I’m keeping it in that sort of 25% category.

[Operator:]

Your next question comes from the line of Ed Yruma with KeyBanc Capital Markets. Your line is open.

[Q –Ed Yruma:]

I guess first as a segue for the last question. It seems like you got some momentum in Off-White. I guess how do you feel about the existing distribution footprint. I know you’ve been trying to make more of it on the site but kind of do you feel like you’ve cleaned up the stage. And then second, as we think about the model for this year. Obviously, you guys had some nice leverage on both G&A and tax spend. Would you point to either those as being kind of outsized as we get to the guidance you provided? Thank you.

[Jose Neves:]

So I’ll answer the first question. We’re implementing selective distribution strategy for the brand platform. This is best in class, the best brands in the luxury industry from the all the image is carrying [indiscernible] etc. Have these selective distribution arrangements in place. This means that NGG is asking the wholesale clients to limit their online transactions to their territories as legally obviously they’re allowed to do and is part of very well regulated selected distribution agreements. As a result, some relationship were exited with some of main players.The order book is nevertheless extremely strong as you can see from the numbers. A lot more disciplined in terms of geopricing, control of mark down and control of promotions is being applied naturally. And this is a time of lines and actually in line. I mentioned Prada, I mentioned Gucci, Tod’s but I could go on and on and on. The best brands are protecting their price integrity and NGG is New Guards is not any different. So that is well advanced and in place and is not having a material impact on the brand platform business as you can see from the numbers. But we’ll have a very positive impact on the digital performance of the DTC channel which is going to benefit from more price discipline and less promotions for our New Guards brands. So really happy on that front as well.

[Elliot Jordan:]

Hi Ed, just in terms of leverage moving forward. I’m expecting to see good leverage actually coming across most of the fixed cost as we move through 2020 into 2021. The technology is one area where the teams as we’ve been talking about been doing a phenomenal amount of achievements. We’ve obviously invested in that team over recent years and delivered with the Harrods rollout and an amazing step forward in terms of the capacity and the capabilities from the platform. Obviously, the growth of Harrods will leverage that work, so we should see some leverage across the digital platform and therefore revenue over that technology spend so more leverage there. And then in terms of the other fixed cost areas.The teams in production and our customer service and operations team. They are also just focusing on efficiency as we move forward. Using new tools that the technology team have been developing for them to serve customers better, to reduce the contact order ratio, to speed up, resolution of customer queries. And that’s an area where we’re seeing leverage moving forward, but not just focused on that team. Most of the corporate functions see an increase revenue per employee driving leverage and we’re really with a key focus on growth of 30% per annum this year and drive towards profitability. The teams are very focused on that as a goal. So leverage across most of the areas for the year ahead, is what I’m seeing.

[Operator:]

Your final question comes from the line of Lloyd Walmsley with Deutsche Bank. Your line is open.

[Q –Lloyd Walmsley:]

Two if I can. First on New Guards, can you guys talk about the strength of the product pipeline in terms of both product from existing brands and maybe even new brands, anything you’d call out for this year on either front? And then secondly in terms of the Harrods launch. Can you kind of give us a view of some of the things that have gone better than expected or any challenges you’d flag and then has that driven any meaningful pick up in other conversations with other department stores following the launch? Anything you could share that would be great.

[Jose Neves:]

Hi Lloyd, on your question regarding New Guards. We’re delighted to receive a stamp of approval from the creative community as well. As you may have noticed two new brands shine the portfolio, Opening Ceremony and AMBUSH in January. The creative directors behind these brands are incredibly talented and incredibly respected in the industry. Carol Lim, Humberto [indiscernible] KENZO [indiscernible]. Varbal [ph] and Yoon [ph] from AMBUSH and amazing creative minds. They I feel they’ll collaborate with Dior in terms of the high jewelry collection. So it’s great to see that it’s not just a business world and consumers, but also actually the creative community.Clearly seeing that we’re going to build the brands of the future and wanting to participate in this model which is tremendously powerful. So we will continue to grow the existing portfolio of brands, Off-White is growing very well. But for example Palm Angels is growing super fast. You can see then in terms of Google Trends and search trends faster actually than any other brand in the NGG portfolio.Heron Preston, new brands such and Kirin Peggy Gou, the Korean Influencer and DJ, who we started the brand with from scratch. So it will be a mix of small, but very, very high potential existing brands and also completely new concept from scratch. We didn’t acquire a conglomerate or a group of brands. We acquired a studio. They are true brand platform that will create heat after heat and we can see that in the data, we can see that also in terms of the excitement from the whole creative community and obviously translating that into clicks and shopping baskets as well.On Harrods, we are extremely pleased. I can share with you that we’ve launched on the day the effect date that we signed with Harrods one year ago. And if you think that Harrods is a multi-billion operation with tens of thousands of products. [Indiscernible], we didn’t have before on our API such as beauty, food and beverages, homeware. Incredible complexity in terms of their sophistication. In terms of their loyalty programs, etc., etc.This is an incredible achievement. So this proves that Farfetch is not a retailer and is not just a marketplace. We are true technology platform that service of an entire $300 billion industry and yes, we are talking to many other department stores. If you’ve seen we have 21 companies using our proprietary platform to develop their digital strategies including AT [ph] in China on our WeChat suite products via clear off with China including Chanel and exclusive deal to develop the star of the future which has been very successful and has been rolled out. 21 customers on FPS including multi-billion Harrods and we are very excited about that part of the business. It’s going to leverage the strong investments we’ve done in technology over the first 10 years of this company and provide a very accretive, very high margin and very profitable revenue stream for our business for many years to come.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.