D-MARKET Electronic Services & Trading Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. I am your Chorus Call Operator. Welcome and thank you for joining the Hepsiburada Conference Call and live webcast to present and discuss the First Quarter 2022 Financial Results. All participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. At this time, I would like to turn the conference over to Ms. Helin Celikbilek, Investor Relations Director. Ms. Celikbilek, you may now proceed.

Thank you for joining us today for Hepsiburada's first quarter 2022 earnings call. I'm pleased to be joined on the call today by our CEO, Murat Emirdağ, and our CFO, Korhan Öz. The following discussion, including responses to your questions, reflect management's views as of today's date only. We do not undertake any obligation to update or revise this information except as required by law. Certain statements made on today's call are forward-looking statements. Actual results may differ materially from these forward-looking statements. Please refer to today's earnings release, as well as the risk factors described in the Safe Harbor slide of today's presentation, today's press release, the 6-K, our Form 20-F filed with the SEC on May 2, 2021, and other SEC filings for information about factors which could cause our results to differ materially from these forward-looking statements. Also, we will reference certain non-IFRS measures during today's call. Please refer to the appendix of our supplemental slide deck, as well as today's earnings release for a presentation of the most directly comparable IFRS measures, as well as the relevant IFRS to non-IFRS reconciliations. As a reminder, a replay of this call will be available on the Investor Relations page of Hepsiburada's website. With that, I will hand it over to our CEO, Murat.

Thank you, Helin. Welcome, everyone, and thank you for joining us today. Before diving into the first quarter dynamics and our actions in more detail, let me quickly recap our memory on the operating environment in Q1 2022. The challenging macroeconomic conditions continue to shape the operating environment, including the rising inflation in Turkey and global markets, continued devaluation of the Turkish Lira, ongoing challenges in the global supply chain, and headwinds from the tragic war in Ukraine. Nonetheless, our solid performance underscores the strength of our business model, as well as the strength of our customer and merchant value proposition. Accordingly, we delivered 8.3 billion GMV, corresponding to an 84% year-on-year growth in line with our expectations. A strong order growth of 53% year-on-year was mainly instrumental in this performance, driven by healthy growth in active customers and order frequency, which I will discuss in more detail on the next slide. Similarly, we had a strong revenue growth of 82% on a yearly basis, mainly driven by the increased share of 1P operations, which grew by 92% in revenue. Our gross contribution margin was 8.3%, lower by 1 percentage point compared to the year-on-year comparison, while the continued sequential margin improvement was achieved by 1.2 percentage points on top of the previous quarter, in line with efforts for our path to profitability. Our best-in-class customer experience, powered by our robust logistics and technology infrastructure, was once again confirmed with our NPS leadership in this sector, with a significant improvement of 4 points compared to Q4 2021. We strongly believe that customer experience is a long-term success factor for our business, and we are keen to continue building on our strength. We are grateful for our customers' trust in our brand. As payment options become more important in customers' eyes, Hepsiburada stands out with its innovative payment solutions and services such as multi-credit card payments, payment in installments, instant customer loans, store credit such as Buy Now Pay Later, and charge to billing ability with a telco partner. In this context, Hepsipay continued its expansion in our customer base, reaching 7.1 million opened wallets by the end of the first quarter, up from 5.2 million just a quarter ago. We are excited about our financial services as they continue to progress towards evolving into a best-in-class fintech solution across online and offline channels. Now, let's take a closer look at the first quarter dynamics. We took a firm step into the year despite several challenges that I already mentioned. We are glad to share that all of our core growth drivers continue their momentum, which is one of the key building blocks of our strategy. Our active customer base grew by 27%, reaching 12 million. Our order frequency reached 4.9 this quarter, up from 4.1 a year ago. Our strong performance in customer experience, enhanced by our nationwide logistics network and data-driven marketing, helped create an important role in the consistent increase in both of these indicators. We achieved a broader active merchant base and wider selection resulting in improved availability across long-tail products and services. With nearly 83,000 active merchants, we now have over 110 million SKUs on our platform. Compared to the first quarter of last year, our selection particularly increased in the fashion and supermarket domains. Our unique 1P-3P hybrid model allowed us to quickly adapt to the changing operating environment where our robust multi-operations have provided us great flexibility with product availability and pricing in a rising inflationary environment. Last but not least, it is important to reiterate that we believe our financial solutions complement our customer value proposition quite well, especially in the current macroeconomic environment. Therefore, in February 2022, we launched a new store credit solution called Buy Now Pay Later, marking a first in Turkish e-commerce. While the early demand for this new store credit solution has been encouraging, we plan to scale our offering cautiously and roll out new features gradually in the remainder of 2022. Let's take a deeper dive into our progress with respect to our value proposition for our customers, as well as our merchants. We designed our customer journeys to provide peace of mind to our customers with compelling experiences, including frictionless returns, next-day delivery, and convenient two-man handling cargo service, all enabled by our robust logistics and technology infrastructure. As a result, based on FutureBright market research, we continued our NPS leadership in the market in Q1 with an NPS of 72. Likewise, we remain focused on enhancing the end-to-end customer journey for HepsiExpress, our on-demand delivery service including groceries, water, and flower services. By monitoring our perfect order ratio performance and constantly exploring different service models, we aim to achieve a more sustainable business model in the long-term. Our comprehensive merchant value proposition and our progress in enhancing merchant lifecycle management helped us increase our active merchant base to around 83,000 in Q1 2022, up by 55% compared to a year ago. As a result, the number of SKUs reached roughly 111 million with continued expansion in non-electronics and long-tail products, up by under 10% compared to last year. In parallel, the penetration of our value-added services amongst our merchants continued to grow. HepsiJet delivered around 53% of total marketplace parcels in Q1, and the number of merchants using Hepsi logistics fulfillment services reached 330, up from 191 at the end of the previous quarter. Moreover, over 9,000 merchants used adtech solutions HepsiAd in Q1 2022, compared to 6,000 a year ago. At HepsiGlobal, the number of active SKUs reached 2.7 million with over 1,400 participating merchants. With our fourth-quarter capabilities, we aim to enable our merchants to export their products through our convenience model. Following this pilot phase, we began enabling export to the Azerbaijan market in the first quarter of 2022, which we aim to scale gradually with a strong focus on customer experience and an asset-light business model. We are committed to standing by our customers and merchants as a reliable companion as we continue to enhance experiences. Let me now elaborate on a strategic update in our portfolio, Hepsipay, and our progress in financial services at Hepsiburada. At Hepsiburada, our innovative payment solutions and services played an instrumental role in our customer value proposition. We offer a wide range of solutions such as one-click checkout, payment in installments, multi-credit card payments, instant customer loans, store credit such as Buy Now Pay Later, and charge to billing ability with a telco partner. In this context, our wallet solution, Hepsipay Wallet, continued its strong momentum by reaching 7.1 million in Q1 2022. In the first quarter of 2022, around 40% of total GMV was processed through Hepsipay Wallet. In February 2022, we also launched a new store credit solution called Buy Now Pay Later for purchases at our Hepsiburada store, marking a first in Turkish e-commerce. Buy Now Pay Later limits are defined based on the financial history of our consumers, combining their track record at the Credit Bureau of Turkey and their shopping history at Hepsiburada. While the early demand has been encouraging, we remain focused on closely monitoring the credit risk behavior, including early delinquency and default rates before scaling the program. In the current customer experience, the credit limits are up to TRY 5,000 and up to six installments with minimal exceptions. The installments are charged to the user's credit card on the platform. Also, in February 2022, we made progress to enter the consumer finance sector by completing the acquisition of a consumer finance company. Once fully implemented, we expect to be able to offer our customers consumer financing solutions matching their needs, in addition to those already offered by leading banks on our platform. At Hepsiburada, as we keep expanding our capabilities and offering innovative payment solutions, we aspire to evolve into a best-in-class fintech player across online and offline. Before I end my presentation, I would like to remind you of our strategy as we pursue our path to profitability. Our strategy is built on three key institutional priorities: accelerate growth drivers, differentiate and monetize via logistics and technology, and expand strategic assets to offer a diversified ecosystem. Let me quickly provide a brief insight into each. First, attracting more customers, driving further order frequency, expanding our merchant base, and increasing our selection are of strategic importance to us. In particular, we are focused on executing segment-based customer initiatives, primarily addressing women, running targeted marketing campaigns, scaling our automated growth agent journey, and customizing lifecycle management along each stage of the lifecycle for our customers and merchants. Second, we have a nationwide logistics network and footprint, which we will continue to couple with our technological capabilities to further differentiate in both customer and merchant experiences while adding monetization opportunities. Last but not least, we will continue to diligently build a diversified and coherent ecosystem with select strategic assets such as Hepsipay, HepsiExpress, and HepsiGlobal. As we deliver on these executional priorities, our disciplined cash and cost management remains as the core guiding principle on our path to profitability. As we wrap up, we have started the year with a solid growth performance in line with our plan, driven by strong order growth fueled by healthy momentum in our growth drivers. Considering the current dynamics, the limited visibility on inflation trajectory and its impact on consumer behavior for the remainder of the year, we are not making any adjustments to our GMV growth guidance at this time and keeping it around 50%. Powered by our disciplined cash and cost management, we move forward on our path to profitability and commit to not raising capital for another 18 months from the end of Q1 onwards.

Thank you, Murat, and welcome, everyone. GMV grew by 84% compared to the same period of last year when we had already experienced strong GMV growth. The share of marketplace GMV was around 65%, the same level as the fourth quarter of 2021. GMV growth is an outcome of the increase in the number of orders and average order value. In Q1 2022, strong order growth at 63% was instrumental in generating the GMV growth. These order drops came through the continued increase in active customers, reaching 12 million and order frequency reaching 4.9. In our business model, the change in average order value and the inflation trends are not fully correlated. As of the end of Q1 2022, the annual inflation as published by the Turkish statistics institute reached 61%, whereas our order value rose by 13% in Q1 2022 compared to Q1 2021. We believe that several drivers impacted the increase in our average order value in the first quarter. First, consumer purchases shifted towards more affordable alternatives. While making purchase decisions and taking the higher pressure on mortgages into account, customers tend to prefer lower-priced brands or products. Second, the unit sales of certain consumer electronics such as TVs, laptops, and robot vacuum cleaners declined compared to the first quarter of 2021, which could be attributed to shifting demand patterns. Third, 65% of our GMV comes from the marketplace model, where the merchants decide their pricing. Last but not least, while pricing the product, it is likely that having purchased at global prices across 1P and 3P and competitive dynamics in the market play a role. Also, let me remind you that the inflation impact is more likely to be passed on to customers across the food and grocery-related product groups, which only make up a very limited portion of our product mix. It is worth mentioning that Turkey is categorized as a hyperinflationary environment by international practices, due to the fact that the cumulative inflation rate was greater than 100%. Therefore, any company operating in Turkey and reporting under IFRS, including us, will be required to apply International Accounting Standard 29, Financial Reporting in Hyperinflationary Economies to their financial statements for the periods ending on and after June 30, 2022, which will be implemented after more than 15 years. Accordingly, our financial statements and non-IFRS measures such as GMV will be impacted as a result of the implementation of these standards. As of today, we cannot predict the extent and magnitude of the future impact that the application of IAS 29 and related adjustments will have on our financial statements and consequently on our margins. Although we will be reflecting inflation accounting in our financials from the second quarter onwards, we believe we initially restated this quarter's GMV growth through this methodology for exemplary purposes. By using the official monthly consumer price index numbers, the restated GMV growth in Q1 2022 compared to Q1 2021 would be around 19%. In the next earnings call, we will spend more time on the methodologies and implications of inflation accounting on our reporting. Now let's move to the next slide where I would like to discuss our revenue and gross contribution performance. Our revenue grew by 82% compared to Q1 2021, corresponding to 1.2 billion in nominal terms. This performance was achieved by 92% growth in 1P operations, 45% growth in our marketplace revenue, and 44% increase in our delivery service revenue. Our 1P operations served us particularly well at a time when price changes were inevitable and supply chain issues persisted globally. Our gross contribution was TRY 688 million in the first quarter of 2022 with an 8.3% gross contribution margin. While there was a 1 percentage point decline in gross contribution margin compared to the first quarter of last year, our gross contribution margin continued to improve sequentially by 1.2 percentage points in this quarter. This performance is an indication of our focus on the path to profitability. Now, let's take a look at our operating expenses. Our net operating expenses as a percentage of GMV was around 12% this quarter. As a percentage of GMV, our net operating expenses rose by 0.3 percentage points, mainly due to a 1.8 percentage point increase in advertising expenses and a 0.2 percentage point increase in other operating expenses, offset by a 1.7 percentage point decrease in payroll and outsourced staff expenses. The 1.8 percentage point rise in advertising expenses reflects our investment in our brands and growth drivers in a more competitive market environment, where both the need and the cost of marketing increased compared to the first quarter of last year. The 1.7 percentage point decline in payroll and outsourced staff expenses is due to the impact of the share-based payment plan that provided for the cash portion in the first quarter of last year. Normalizing for this item, our G&A expenses as a percentage of GMV would increase by 0.9 percentage points, reflecting the rise in the number of employees and also the annual salary increase. The shipping and packing expenses driven by 63% in increase in unit price applied by our delivery partners remain unchanged as a percentage of GMV compared to the first quarter of last year. Let's move to the EBITDA margin bridge. As a function of the aforementioned drivers, EBITDA in the first quarter of 2022 was negative TRY 303 million, compared to negative TRY 104 million in Q1 2021. This quarter represents a negative 3.7% EBITDA as a percentage of GMV in Q1 2022, indicating a 1.4 percentage point year-over-year decline, whereas it continued its improvement gradually by absorbing 4.3 percentage points from the previous quarter. Our assumption for cost inflation for 2022 is roughly 65%. Nonetheless, we will continue to monitor the trajectory of the inflation rate and dynamically adapt by taking necessary actions to ensure we pursue our path to profitability. Next, I would like to speak about our cash flow dynamics. Net cash used in operating activities increased by roughly TRY 1.1 billion, reaching TRY 1.2 billion in the first quarter of 2022, primarily due to a decrease in changes in working capital. Higher volume of inventory procurements and increased trade and service-related expenses such as advertising, shipping, and other operational expenses in Q4 2021 were paid in Q1 2022, which was the primary reason for such cash requirements. CapEx was around TRY 119 million in the first quarter of 2022, with over 60% of total CapEx corresponding to the costs of employees who are mainly employed for the development of website and mobile platforms, while the remaining CapEx mainly consisted of the purchase of property, equipment, software, and rights. Accordingly, free cash flow was negative TRY 1.4 billion, compared to negative TRY 159 million in the first quarter of last year. Before I end my presentation, let me also emphasize our commitment to focus on sustainable growth with disciplined cash and cost management. Our current liquidity and future plans allow us to say that we have no plans to raise any capital for another 18 months from March 2022 onwards.

The first question comes from the line of Hanzade Kilickiran with JPMorgan. Please go ahead.

Hello. Thanks for the presentation. I have two quick questions. One is regarding the consumption trends in Turkey. We have observed generally very strong reporting in the majority of Turkish companies under high inflation in this quarter and companies claimed a strong pull-forward demand in their sector. Do you also see the Q1 consumption trend as pull-forward demand? And how do you experience the demand in Q2 so far? Because you still keep your 50% GMV growth guidance underwriting the inflationary environment, I try to understand the current dynamics? And the second question is related to your cash flow management. Korhan has already explained about the increase in trade payables, which is the main cause; I mean, the majority of the working capital need is arising from this. What is the reason for this cost in the trade payables? And do you expect to follow a different policy in working capital management in a way to create some inflow by the end of the year rather than outflow because you now have cash in hand? I'm trying to understand the cash burn for the full year. Thank you very much.

Thanks so much for the questions, Hanzade. I really appreciate it. Maybe I can take the first question and Korhan can take the second one. In response to your first question, I guess, you are asking the correlation between our GMV, regarding inflation, as well as the consumer trends in Turkey, right? So, at a high level, I guess it's fair to say there is still very limited visibility on the inflation trajectory and its impact on consumer behavior for the rest of the year. And also with respect to our approach, I guess at this point, I can break it down into a couple of factors. One actually is our GMV; actually, it is a function of growth and an underlying strategy. In the case of our business model, Korhan explained how AOV is not fully correlated to the inflation trajectory. And also on the order side, from customers' point of view, we acknowledged the pressure on consumers' wallets. We are still assessing what the implications will be for the rest of the year, which is why under these circumstances we are prepared to observe the dynamics a little further before making any adjustments to our top-line growth expectations. However, we are confident about our guidance in that sense. Regarding consumers, we do see there is indeed a pressure on their wallets. Customers are seeking more affordable solutions. Luckily, at Hepsiburada, we are well-positioned in that regard by offering a diverse range of affordable solutions such as multi-credit card payments, instant customer loans, installments, and now Buy Now Pay Later and so on. This is how we plan to address that need. We're also aware that consumers are shifting their purchases towards more affordable alternatives, which is again supported by our hybrid model with 1P and 3P and our wider selection. In response to shifting decisions towards lower-priced items, we are also tending to address the EBITDA expectations. Additionally, there is a noticeable decline in unit sales of certain consumer electronics such as TVs, laptops, or robot vacuum cleaners with respect to customer behavior. Those are my insights regarding customer trends. Now, I will hand it over to Korhan for the second question regarding cash flow.

Thank you, Murat. Our free cash flow for Q1 2022 is negative by TRY 1,360 million, and out of this, 360 million is comprised of a net loss for the period. Our CapEx spending is roughly 120 million. The remaining 1 billion arises from the changes in working capital, mainly driven by the trade payables and inventories in our business. The highest advertising and shipping and delivery expense spending typically accrue in the last quarters and are mostly paid in the first quarter of the following year. With scale, those payments are getting higher over time. Due to global supply chain issues and high inflation expectations in Turkey, we procured more inventories during Q4 to prepare for Q1 to ensure that our products are available on the platform, and those payments were made in the first quarter of 2022. Additionally, during Q1, we continued making procurements with shorter payment terms, and in certain categories like electronics, we paid in advance. This has resulted in free cash flow decreasing during this period. I would like to point out that our cash spending will be lower during Q2 and Q3 compared to Q1 2022 and it will be minimal during Q4 if we continue to procure in advance for readiness in the following year. All these effects have already been considered in our business plan and our anticipated cash availability for 18 months, according to this plan. Thank you.

Thank you, Korhan.

The next question comes from the line of Cem Ünal with Goldman Sachs. Please go ahead.

Hi. Thank you very much for the presentation, Murat and Korhan. My question is related to the Fintech arm and Hepsipay. Could you please elaborate further on the monetization of the Fintech arm going forward? And after 2022, what are the plans on that point? Also, related to the Buy Now Pay Later segment, could you please explain how do you plan to manage very high inflation given that there's at least one month of the period that the customers buy and pay after one month? That would be helpful. Thank you very much.

Thanks so much, Cem, for the question. In terms of our overall approach to Fintech and how we view and manage the Buy Now Pay Later segment in this environment, let me address those questions briefly. First of all, we believe the financial solutions play an integral role in our mission of e-commerce, making it a significant part of our strategy. As you know, we offer a wide range of services and solutions, including customer loans, installment payments, multi-credit card payments, and now Buy Now Pay Later. Additionally, we recently acquired a license to offer consumer financing, which complements our product offering. We believe that our unique license, combined with our operational and functional capabilities, leave us well-positioned to evolve into a leading Fintech player in this market, spanning across both online and offline sectors. With that said, Buy Now Pay Later is a capability that we just launched this quarter. It is one of the many tools we see in our portfolio. Also, I want to emphasize that we won’t compromise our disciplined cash and cost management principles even as we work on expanding these features. Let me reiterate that with Buy Now Pay Later, we are currently focused on perfecting the credit scoring, ensuring we demonstrate this service accurately, and continuing to improve the customer journey. Even though early demand for this service seems to be promising, we remain focused on closely monitoring the credit risk behavior, including early delinquency and default rates before scaling our offerings further. Would you like to add anything, Korhan?

You've covered it all, Murat. Thank you.

Basically, Cem, this is one of the many steps we'll take, but we will always exercise caution and opt for a gradual rollout approach.

To add, we will be charging a commission fee to our customers to cover the time lag associated with the Buy Now Pay Later products, and the initial feedback has been encouraging as you mentioned.

Additionally, I should mention how the mechanics work for Buy Now Pay Later. Currently, we set credit limits based on consumers’ financial needs using data from the Credit Bureau of Turkey and their shopping history at Hepsiburada. The experience is primarily offered by our 1P channels, and the credit limits are up to TRY 5,000 with a maximum of six installments and minimal exceptions. It's a controlled phase for us, and we are strictly monitoring progress on that end.

Okay. Thank you, Murat.

Thank you.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Murat Emirdağ for any closing comments. Thank you.

Thanks so much for listening and being with us. I just want to leave you with three key takeaways from this call. First, we believe the Turkish market offers a sizable opportunity given the fact that e-commerce is at an inflection point and is expected to exceed 20% penetration of total retail by 2025. The second key takeaway is that while there are many uncertainties at the macro level regarding dynamics in global and local markets, we have a well-defined and clear strategy to overcome those challenges. And third, we are committed to progressing on our path to profitability with disciplined cost and cash management being our guiding principles. That's basically what I wanted to highlight one more time. I appreciate your time, and thank you for listening.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a good afternoon.