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VIA EDGAR AND HAND DELIVERY
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-6010
Attention: | James Allegretto |
Scott Anderegg |
Mara Ransom |
Lisa Sellars |
Re: | Farfetch Limited |
Amendment No. 2 to Draft Registration Statement on Form F-1 |
Confidentially submitted on August 2, 2018 |
CIK No. 0001740915 |
Ladies and Gentlemen:
On behalf of Farfetch Limited (the “Company”), we submit this letter to the staff of the Commission (the “Staff”). The Company intends to file Amendment No. 1 (the “Amendment No. 1”) on approximately September 6, 2018 to the Registration Statement on Form F-1 filed on August 20, 2018 (“Registration Statement”) with the Commission through its EDGAR system. The Company previously submitted a Draft Registration Statement on Form F-1 on a confidential basis pursuant to Title I, Section 106 under the Jumpstart Our Business Startups Act with the Securities and Exchange Commission (the “Commission”) on May 30, 2018 (the “Draft Submission”), as amended by Amendment No. 1 to the Draft Submission on July 11, 2018 (“Submission No. 2”) and by the Registration Statement on Form F-1 on August 2, 2018 (“Submission No. 3”). The purpose of this letter is to respond to the comment letter to Submission No. 3 received on August 21, 2018 from the Staff.
For ease of review, we have set forth below each of the numbered comments of your letter in bold type followed by the Company’s responses thereto. Unless otherwise indicated, capitalized terms used herein have the meanings to be assigned to them in Amendment No. 1, and all references to page numbers in such responses are to page numbers in Amendment No. 1.
August 24, 2018
Page 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cost of Consumer Acquisition and Engagement, page 72
1. | We note your response to comment 2 and your revised disclosure. We note that you consider the amounts underlying the LTV/CAC ratio calculations to include commercially sensitive information. Please help us understand why the components of CAC would be commercially sensitive when your disclosure indicates that your demand generation expenses reflect fees paid to various media and affiliate partners and would appear to be aggregated for purposes of this disclosure. Alternatively, please provide us these amounts supplementally so that we can understand how you arrive at these ratios. |
Response: The Company respectfully acknowledges the Staff’s comment and advises the Staff that the amounts underlying the LTV/CAC ratio calculations are commercially sensitive because competitors could use the individual components, combined with the LTV/CAC ratios, to calculate changes in the Company’s media strategy. Approximately 85% of the Company’s annual media spend is bought through auction processes, and competitors’ actions could therefore materially increase the Company’s demand generation expenses. If the Company’s competitors can identify CAC and LTV separately, together with third-party traffic data from various media intelligence services (e.g., Alexa, Similarweb), they could build a robust picture of where the Company is purchasing efficient new media opportunities, allowing such competitors to identify any significant changes in the Company’s media mix over time, and the Company believes it is likely that they may copy the Company’s media investment strategy. This could directly raise the Company’s costs as an increase in the number of participants in a media auction leads to higher costs-per-click. Where more competitors are participating in the same media auctions, the Company would either lose traffic volume, and therefore GMV, or the Company would need to increase spend to acquire the same traffic volumes. |
2. | We further note your response to comment 2 where you state that you do not intend to include LTV/CAC ratio disclosure on an ongoing basis but you believe that the ratio is helpful to initial investors’ understanding of the business. Please tell us how you have determined that you will not provide this disclosure in future filings. Specifically, explain to us why this information would not be useful to future investors if, as you indicate in your response, you believe it is helpful to investors in your initial public offering and, as you indicate in your disclosure, in light of your belief that you can generate a higher LTV over time or can spend less on demand generation to achieve a comparable return. |
Response: The Company respectfully acknowledges the Staff’s comment and advises the Staff that, on an ongoing basis, the Company’s statement of operations data will provide sufficient information to allow investors to measure the Company’s performance, including in regards to demand generation, for which the related expense is disclosed in the notes to the Company’s consolidated financial statements. In the Company’s initial public offering disclosure, the Company believes it is helpful to provide more detailed information about how it acquires consumers to allow investors to gain a better initial understanding of its business. The Company’s LTV/CAC ratio is an enhanced level of disclosure to help investors understand the Company’s history and the improvement in efficiencies of its marketing capabilities. On an ongoing basis, however, the Company’s Operating and Financial Review and Prospects disclosure and consolidated financial statements will provide adequate information on which investors can meaningfully analyze the Company’s business, in particular regarding demand generation expense and demand generation expense as a percentage of Adjusted Revenue. |
August 24, 2018
Page 3
Our Products, page 106
3. | We note your response to comment 6. Please revise your discussion of the increase in your app’s contribution to GMV to explain if the increase in app use results in an increase to total GMV. If there is not a causal relationship between app use and total GMV, please clarify that fact in your disclosure and explain the significance of the increase in app use. |
Response: The Company respectfully acknowledges the Staff’s comment and will add the following underlined disclosure to page 110 of Amendment No. 1:
We believe that the increase in popularity of our app demonstrates the changing dynamics of consumers’ shopping behavior and that the increase in app use results in an increase in GMV. From 2016 to 2017, our app’s share of GMV has increased from 13% to 27%, and for the six months ended June 30, 2018, our app accounted for 21% of total visits to our Marketplace.
Notes to the consolidated financial statements
Note 2.3 Summary of significant accounting policies
e) Revenue recognition, page F-11
4. | We note your response to comment 8 along with your disclosures here and in Note 4. We have the following comments. |
• | We note your explanation that non-delivery services are not considered to be distinct from the overall performance obligation of facilitating the transaction between sellers and consumers using your platform. You further state that you act as a principal with respect to the non-delivery services and they are recognized on a gross basis; and you act as an agent with respect to the facilitation of the transactions and recognize revenue on a net basis as a commission. Please tell us how recognizing revenue for a portion of a single performance obligation on a gross basis and the remaining revenue from the same performance obligation on a net basis complies with paragraph B34 of IFRS 15. If possible, please tell us the amount of revenue recognized in each period related to these non-delivery services. |
• | Please provide us your analysis regarding how you determined that delivery revenue should be recognized on a gross basis. Tell us the amount of revenue recognized in each period presented. Reference B34 through B37A of IFRS 15. |
Response: The Company respectfully acknowledges the Staff’s comment and advises the Staff that:
• | The Company’s primary performance obligation is to act as a commercial intermediary between sellers and end consumers, where it identifies itself as an agent earning commission based on the seller’s retail price per item and, therefore, recognizes revenue on a net basis. The non-delivery services represent amounts billed to the sellers by the Company for activities related to the Company’s primary performance obligation, such as packaging, credit card processing, settlement of duties and other transaction processing activities, which do not constitute separate promises to the customer. The fees for these activities are included within the commission the Company earns from its sellers. The |
August 24, 2018
Page 4
related consideration is combined and recognized concurrently with the commission revenues upon satisfaction of the performance obligation, which is arranging the sale between the seller and end consumer. The Company’s previous reference to non-delivery services being recognized on a “gross basis” was intended to convey that the consideration received for these packaging and transaction processing activities is included in revenue while any associated costs are part of the Company’s fulfillment efforts. For the year ended December 31, 2017, a total of $89.4 million was included in revenue relating to these non-delivery service charges. |
The Company has revised its disclosures in the consolidated financial statements to clarify its description of these non-delivery activities. These changes are appended to this response letter as Appendix A, and the Company will reflect them in Amendment No. 1.
• | The Company has concluded that the delivery service is a distinct service provided to the end consumer and that it controls the delivery service by directing third-party shipping partners to perform the service on the Company’s behalf. The Company is primarily responsible for organizing the shipping service, and, as set out in the terms and conditions on the Company’s website, the arrangement for the shipping service is between the Company and the end consumer only. The Company has existing contracts in place with several shipping partners but ultimately has overall responsibility for providing the shipping service from the sellers to the end consumer under its contract with the end consumers. The sellers are not party to these contracts. The following indicators support the Company’s conclusion that it is the principal with respect to the delivery services: |
• | The Company has full supplier discretion as far as which third-party shipping partners to use at any time; |
• | The Company has full latitude to determine the fees charged for these services and separately negotiates the amount it pays to its shipping partners; |
• | The Company bears the risk of loss if the delivery charges fluctuate; and |
• | The Company assumes responsibility for settling any delivery issues with third-party shipping partners if anything goes wrong. |
For the year ended December 31, 2017, the Company recorded total revenue of $41.6 million relating to delivery services.
* * *
Please do not hesitate to contact me by telephone at (212) 906-1281 with any questions or comments regarding this correspondence.
Very truly yours, |
/s/ Marc D. Jaffe |
Marc D. Jaffe of LATHAM & WATKINS LLP |
August 24, 2018
Page 5
cc: | (via email) |
James Maynard, Farfetch Limited
Ian D. Schuman, Esq., Latham & Watkins LLP
Joshua Kiernan, Esq., Latham & Watkins LLP
Jeffrey Vetter, Esq., Fenwick & West LLP
James D. Evans, Esq., Fenwick & West LLP
Katherine K. Duncan, Esq., Fenwick & West LLP
August 24, 2018
Page 6
Appendix A
[changed pages enclosed]