GoTo’s new CEO inherits a tough balancing act

INDONESIA’S biggest technology company, GoTo, appears on track to hit profitability targets. Since GoTo announced a narrowed first-quarter net loss and positive contribution margin in April, shares in the company have climbed about 18 per cent on the Indonesia Stock Exchange.

Market observers seem optimistic that the company can keep up its momentum. GoTo is aiming to bring adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) into the black by the fourth quarter of 2023. But the key challenge for the group, and its new CEO Patrick Walujo, is in ensuring that the pursuit of profits does not come at the expense of healthy growth.

GoTo’s on-demand services and e-commerce segments are already experiencing declines in gross transaction value (GTV) ever since cost cuts set in.

Meanwhile, the Q1 average take rate for on-demand services – the percentage of transaction values that GoTo keeps and also the group’s biggest revenue contributor – slid quarter on quarter for the first time since Q1 2022.

As GoTo slashes subsidies to focus on higher quality customers, investors will be watching closely to see how much growth tapers off – an indicator of whether the company has created enough value for which customers are willing to pay.

On Apr 27, GoTo posted a net loss of 3.9 trillion rupiah (S$354.1 million) for Q1 ended March, 41 per cent narrower compared with a year ago. The group – formed through the merger of ride-hailing and delivery service Gojek with e-commerce platform Tokopedia – grew its gross revenue 14 per cent to six trillion rupiah. Net revenue, adjusted for incentives and promotions, more than doubled to 3.3 trillion rupiah after the company cut spending.

GoTo also reported hitting its first profitability milestone, which in February was brought forward by four quarters. Contribution margin, which is based on revenue minus variable costs, turned positive at 0.4 per cent of GTV.

On an adjusted Ebitda basis, GoTo’s loss for the quarter narrowed 67 per cent to 1.6 trillion rupiah.

Great expectations

The results have mostly impressed analysts. Maybank initiated coverage on the stock on Jun 16, with a “buy” call and a target price of 153 rupiah. The research house highlighted the group’s improving operational efficiency and potential to tap into Indonesia’s rising middle class, estimated at around 55 million to 60 million people.

GoTo has had to make drastic moves to convince investors of its profitability commitment. It slashed 2.6 trillion rupiah off its incentives and product marketing spend in Q1, down 39 per cent year on year.

In March, it axed 600 roles from its workforce, adding to the 1,300 staff it cut last year. These cuts helped it reduce monthly fixed expenses by about 20 per cent in January and February.

GoTo believes that its measures will pay off by the end of this year, but at the expense of GTV and transaction growth throughout the first half.

“Slower growth is driven by the conscious decision we have made to weed out low-quality, subsidy-driven transactions as we calibrate our business for a future in which every user can be profitable,” said GoTo’s outgoing CEO Andre Soelistyo in an earnings call on Apr 27.

Analysts have been encouraged by GoTo’s cost optimisation and monetisation efforts. Sales of dynamic advertising offerings with better ad relevance, for instance, helped push up take rate for the e-commerce segment.

GoTo has also combined Tokopedia’s fulfilment unit and Gojek’s e-commerce same-day delivery unit under a new GoTo Logistics, for economies of scale.

Still, some market observers have flagged that the company might only sustain its profitable drive in the short term.

UBS, for instance, downgraded the stock from “buy” to “neutral” after a review of the company’s market-share data.

It thinks that GoTo should be able to meet its target of adjusted Ebitda breakeven, but is concerned that the company is ceding market share across most of its segments faster than competitors, particularly in food delivery and e-commerce.

“In our view, this raises the question of whether the hard-attained profitability could be sustained into 2024 or if the company has to reinvest to regain/hold share,” UBS analysts wrote in a Jun 8 report, while lowering their price target from 153 rupiah to 130 rupiah.

Lightstream Research’s Shifara Samsudeen, who publishes on SmartKarma, highlighted that average take rate for on-demand services fell to 21.8 per cent in Q1, from 23 per cent in the previous quarter.

“GoTo’s ambitious profit targets will prevent the company from fully exploiting growth opportunities… we would remain on the sidelines as cost cutting measures would not be sustainable once falling growth rates force GoTo to start spending again on these expenses,” she wrote on Apr 28.

The cost of acquiring or retaining customers is likely to remain high. The company has a strong competitor in every category it operates in.

GoTo also has the weakest balance sheet among the three large South-east Asian Internet companies, the UBS report said, with net cash of US$1.7 billion compared with Grab’s US$5 billion and Sea’s US$3.7 billion. This could limit its ability to fight back for market share.

As GoTo shifts gears to what it calls “high-quality users”, it will need to be able to extract the most value out of each customer while keeping its cost base low.

Making headway

Early indications show that the company has made some headway. While average transacting users (ATU) fell 10 per cent to 58 million in Q1, GTV per ATU rose 37 per cent from a year ago.

This could be a double-edged sword. While the higher average value of transactions per user means that GoTo’s marketing dollars are spent more efficiently, it also means that GoTo stands to lose more in the future if it cannot stem the decline in ATU.

Despite economic headwinds, analysts are sanguine about GoTo’s high-margin fintech prospects, particularly the momentum of Bank Jago.

The upcoming appointment of private equity star and early Gojek backer Walujo as CEO, which is subject to shareholder approval on Jun 30, has also sent a positive signal to investors that GoTo is serious about its targets.

Still, Walujo could have a hard time steering the company as it walks a fine line between profitability and growth. Shares of GoTo have plunged 65 per cent since the initial public offering in March 2022, closing at 118 rupiah on Tuesday.

Even as the hunger for profitability grows, investors will need greater assurance that GoTo can achieve breakeven without long-term consequences. Whatever Walujo’s next steps are, they will be closely watched.