Anxiety mounts over Jumia outlook as management admits to JForce fraud
After the revelation from the Africa’s Ecommerce giants on JForce fraudulent sales practice, some analysts say this may proof grave for the company that is already battling with Class A suits.
This Fresh anxiety mounts over Jumia’s outlook as the leading ecommerce company’s second quarter financial scorecard shows that it burned more cash than generated. This, as analysts said is in addition to its internal control weakness.
Jumia listed on the floor of New York Stock Exchange in April, 2019 and the company stock was well received by investors until Andrew Left of Citron Research spooked the market with allegation of fraud due to material discrepancies from the company’s listing document and its presentation.
Jumia confirmed that the issue has attracted series of Class A suits in the United States but management noted that it is at the early stage.
Andrew Left had accused Jumia of inflating metrics. Left was of the view that the value of Jumia Stock is zero, he told our reporter in an email.
In 18 years of publishing, Citron has never seen such an obvious fraud as Jumia,” Andrew had stated in a report.
Andrew Research firm, Citron, highlighted what it calls “material discrepancies” between the confidential investor presentation from October 2018 and what the company told the Securities Exchange Commission.
The differences include: inflating active customer and active merchant numbers by 20% to 30%; and that 41% of orders were returned, not delivered or canceled. Among the risk factors highlighted in the IPO prospectus was the fact that many deliveries failed.
But the management said that 14.4% of GMV in 2018 either failed to deliver or was returned.
“Assuming 41% of orders were returned, not delivered, or canceled in 2018, this implies that almost 30% of orders were canceled in 2018,” Citron stated.
“Since Jumia primarily sells consumer electronics, which should not have this high of a cancellation rate, it wreaks of fraud”, he said.
In its second quarter earnings season, Jumia revealed it there was breakdown in its internal control as related to sales processes. The management confirmed that its JForce team inflated orders, but stated the fraud is not material to the financial statement.
According to the Ecommerce Company, it stated that JForce engaged in teeming and lading deals, though on materiality of the fraud to its financial statements
The management however stated that the transactions in question generated approximately 1% of its gross merchandise volume, GMV, in each of 2018 and the first quarter of 2019 and had virtually no impact on 2018 or 2019 financial statements.
In the review of its sales practices, Jumia said, “As disclosed in our prospectus dated April 11, 2019, we received information alleging that some of our independent sales consultants, members of our JForce program in Nigeria, may have engaged in improper sales practices.
“In response, we launched a review of sales practices covering all our countries of operation and data from January 1, 2017 to June 30, 2019.
In the course of this review, we identified several JForce agents and sellers who collaborated with employees in order to benefit from differences between commissions charged to sellers and higher commissions paid to JForce agents.
“The transactions in question generated approximately 1% of our GMV in each of 2018 and the first quarter of 2019 and had virtually no impact on our 2018 or 2019 financial statements”, the management stated.
As though that was not enough for the ecommerce giant in Africa, it said also discovered in the recent time instances where improper orders were placed, including through the JForce program, and subsequently cancelled.
“Based on our findings to date, we believe that the transactions in question generated approximately 2% of our GMV in 2018, concentrated in the fourth quarter of 2018, approximately 4% in the first quarter of 2019 and approximately 0.1% in the second quarter of 2019.
“This 0.1% has already been adjusted for in the reported GMV figure for the second quarter of 2019”, the management stated.
However, management noted that these transactions had no impact on Jumia’s financial statements.
The analysis of the company result shows that the ecommerce giant performance seems to be riding on high operating cost waves apart from the internally perpetrated fraud sales practice, notably by its JForce team.
Meanwhile, total equity value of the company was adjusted for €983.871 million accumulated losses in the first half of 2019, as against a deduction of €862.048 million at the end of financial year 2018.
Though it recorded improvement in business deals opened and closed, its massive losses remain worrisome and thereby cast doubt on its profitability performance in the short to medium term.
The ecommerce company defines GMV as corresponds to the total value of orders including shipping fees, value added tax, and before deductions of any discounts or vouchers, irrespective of cancellations or returns.
In the result presentation, the management said that during the second quarter of 2019, our GMV increased by 69% year-on-year and our Gross profit grew by 94%.
However, its adjusted EBITDA loss as a percentage of GMV decreased by 562 basis points (5.62 percentage points), operating loss, amounting to €66.7 million, decreased as a percentage of GMV by 148 basis points (1.48 percentage points)” commented Sacha Poignonnec and Jeremy Hodara, co-CEOs of Jumia.
Jumia’s cost structure and lapses in internal control pump air of fresh anxiety over the ecommerce company’s performance outlook, and some analysts are going bearish on the stock.
The first result produce for the public after it listed on NYSE shows that in the second quarter of financial year 2019, Jumia’s gross profit closed at €17.280 million as against its direct expenses claim of €83.931 million that resulted to €66.651 million operating loss.
In April, through the month of May, 2019 Jumia stock increased more than 160% after it listed on the floor of the NYSE, though the Africa’s focused ecommerce giant taunts self as of being of African origin.
Analysis of the result and its business risk show some uncertainties, as post listing revelation that rump up, may be on the way to confirming Andrew Left of Citron Research initial complaints.
Jumia’s total assets expanded 3.55 times, from €142.02 million at the end of financial year 2018, to €400.029 million in June, 2019. The company’s assets grew on the back of massive surge in its cash and cash equivalents, from €100.635 million at the end of financial year 2018 to €332.98 million at the end of its first half.
Significant event that happened in the year is its listing; other company’s activities that boosted its base are investment in property – expanded more than 3 times of its year end carrying value of €5.02 million to €16.74 million.
Total equity expanded about 6times, from €49.848 million to €282.178 million in the first half of financial year 2019. The management provided that number of active consumers at June 30, 2019 was 4.8 million, up from 3.2 million a year ago and 4.3 million at the end of the first quarter of 2019.
The uptrend was achieved as result of continued focus on selection, price and convenience, as we strive to be the preferred online shopping destination for consumers in Africa for all their daily needs, the management stated.
Gross profit also grew faster than GMV, increasing by 94% compared to the second quarter of 2018, as a result of the increased monetization rate. Marketing & advertising revenue grew by 490% year over year and represented 8% of marketplace revenue in the second quarter of 2019 compared to 2% of marketplace revenue in the second quarter of 2018.
We continued to balance strong growth with cost discipline. While delivering strong growth of our topline drivers GMV and Active Consumers, our Sales & Advertising expense as a percentage of GMV decreased by 76 basis points (“bps”), from 6.2% of GMV in the second quarter of 2018 to 5.4% in the second quarter of 2019, reflecting the strong Jumia brand awareness and attractiveness of our platform to consumers.
Adjusted EBITDA loss as a percentage of GMV improved from negative 21.4% in the second quarter of 2018 to negative 15.8% in the second quarter of 2019.
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JumiaPay remained a key focus area and it is now offered in six countries – Nigeria, Egypt, Ivory Coast, Ghana, Morocco and Kenya. Collectively, these six countries represented a combined population of almost 440 million people in 2018, according to data from the United Nations Population Division.
Jumia’s operating loss increased from €41.9 million in the second quarter of 2018 to €66.7 million in the second quarter of 2019 mainly due to an increase in SBC expense.
The management of ecommerce tech firm said, “Since May 2019, several class action lawsuits have been filed against us and certain of our officers in the U.S. District Court for the Southern District of New York and the Kings County Supreme Court in New York.
The claims in these cases relate to alleged misstatements and omissions in our initial public offering prospectus and statements made by our company in connection with our initial public offering. These actions remain in their preliminary stages.
At the conference call, Sacha Poignonnec, Jumia Technologies AG – Co-Founder, Co-CEO said since going public in April, the management have been pleased to see lots of interest in the company and had the opportunity to interact with a broad base of investors and market participants.
Anxiety mounts over Jumia outlook as management admits to JForce fraud