D-MARKET Electronic Services & Trading Q1 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome and thank you for joining the Hepsiburada Conference Call and Live Webcast to present and discuss the First Quarter 2024 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. Nilhan Onal Gokcetekin, CEO; Mr. Seckin Koseoglu, CFO; and Ms. Helin Celikbilek, Investor Relations Director. Ms. Celikbilek, you may now proceed.

Thanks, Operator. Thank you for joining us today for Hepsiburada's first quarter 2024 earnings call. I'm pleased to be joined on the call today by our CEO, Nilhan Onal Gokcetekin, and our CFO, Seckin Koseoglu. The following discussion, including responses to your questions, reflects management's views as of today's date only. We undertake no obligation to update or revise this information except as required by law. Certain statements made on today's call are forward-looking statements, and 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 supplemental slide deck, today's press release, the 6-K, our Form 20-F filed with the SEC on April 30th, 2024, and other SEC filings for information on factors that could cause our actual 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 press release for a presentation of the most directly comparable IFRS measure and relevant IFRS to non-IFRS reconciliation. As a reminder, a replay of this call will be available on our Investor Relations website. And with that, I will hand it over to our CEO, Nilhan.

Thank you, Helin. Welcome, everyone, and thank you for joining us. I'm delighted to be with you today to present our first quarter results. It has been a strong start to the year as reflected in all our results. Notably, we beat our GMV and EBITDA guidance for the quarter. Good execution, accelerated by the favorable base effect of last year due to a tragic earthquake, drove 138% year-on-year GMV growth. Adjusted for inflation, our GMV growth was a solid 43%. Our gross contribution margin improved by 150 basis points to 12%, marking the highest since our IPO. Our EBITDA continued its uptrend, rising 120 basis points year-on-year to 2.4% of GMV on an unadjusted basis. Adjusted for inflation, our EBITDA as a percentage of GMV improved by 70 basis points year-on-year to 0.8%. These results are a clear sign of our winning strategy. Now, let's have a look at a few of our operational metrics. Being Turkey's most recommended e-commerce brand once again with an NPS of 73 is a great source of pride. We are committed to advancing this performance to the next level. Our active customer base was 12.1 million with an additional 171,000 customers. We are glad to see growing interest in our appealing loyalty program, which has scaled to 2.6 million members by the end of May. We recorded 29.3 million orders with 22% growth during the quarter. Our order frequency over the last 12 months reached 9.8, which is up 30% year-over-year. With an active merchant base of almost 102,000, we expanded our selection by 38% to nearly 248 million SKUs. Now, let me provide a snapshot of our quarterly progress on our top four strategic priorities. First is our loyalty program, Hepsiburada Premium. The program's growing customer base signals customer satisfaction with our proposition. This is also evident by the program's strong NPS. Additionally, premium members' higher frequency significantly contributes to our overall growth. Moving on to our second priority, which is differentiation with superior delivery services. Our superior delivery services are realized with our in-house company HepsiJet. Merchant preference for HepsiJet services has risen significantly this quarter. Jet delivered 68% of total parcels on our platform, which is up by 5.1 percentage points year-on-year. Its 82% next-day delivery ratio among retail orders also confirms its integral role in our ecosystem. HepsiJet brings wider satisfaction to the Hepsiburada customer. Its fast, reliable, and high-quality service reflects in our strong customer satisfaction score of 87. Our third differentiator is Hepsipay. It's scaling its offerings with additions to its already comprehensive suite of payments and lending services. The fourth is our ability to offer our strongest services to off-platform customers. Let me start with HepsiJet, which has more than doubled its volume year-on-year in Q1. Accordingly, with 3.2 million parcels delivered, its off-platform volume corresponded to nearly 33% of its total Q1. On the next slide, I'll elaborate on Hepsipay, including its off-platform performance. Let me dive into how we are providing these cutting-edge solutions with Hepsipay. In the current economic climate of high-interest rates, being able to offer a suite of alternatives is a significant advantage. In January, we took the further step of including our consumer finance loans to this suite. Meanwhile, our BNPL solution is the largest non-bank BNPL solution in the market. Overall, our BNPL and shopping loans were utilized in over 1.1 million orders over the last 12 months. On a broader scale, over the last 12 months, total lending volume through our platform tripled compared to the same period last year and reached TRY8.1 billion, roughly equivalent to $290 million. Hepsipay aims to grow this business line profitably and take a sizable share in Turkey's $34 billion consumer loan market. In this capacity, we will continue to leverage Hepsipay solutions, as well as those from our partner banks, to grow our e-commerce business. Aside from affordability, our financial services also encompass the payments business. In offline retail, Hepsipay leads the market with its 15.7 million wallet base covering 18 million store cards. Our one-click checkout solution, Pay with Hepsipay, is also live at 28 key retailers, just within less than a year of its launch. Hepsipay aims to capture a substantial share both in key accounts as well as in Turkey's sizable online SME market. Now, let's discuss our guidance as we lead through the second quarter. We observe the continuation of challenging macroeconomic conditions and a cooling of consumer demand to a certain extent. Yet, our platform maintains its relevance for consumer purchases as their trusted household brand. Accordingly, we expect to deliver growth around 75% year-on-year in Q2 2024. With that, GMV growth in the first half is expected to double year-on-year. With continued prudent cost management in place, we foresee an EBITDA within the range of 1.8% to 2% of GMV. As a reminder, our GMV in Q2 last year was 1.5%. So we expect to deliver a year-on-year improvement in our profitability in Q2. The figures I referred to are unadjusted for inflation. With this, I thank you very much for listening and leave the floor to Seckin, our dear CFO, to provide further insights into our financial performance.

Thank you, Nilhan, and welcome everyone. I'm glad to share that we had a robust start to the year with solid performance across all metrics. Adjusted for inflation, GMV grew by 43% in quarter one. Strong GMV growth was driven by 17% average order value growth and a 22% increase in total orders. Given the tragic earthquake in February last year and its inevitable impact on our business, last year's low rate also had a positive impact on this growth performance. Gross contribution margin continued its improvement trend and reached 10.5%. Higher margins, coupled with disciplined OpEx management, resulted in TRY289 million EBITDA at 0.8% of GMV. For more detailed insights, let's move on to the next slide. First, our GMV performance. 43% of GMV growth came through 29.3 million orders in quarter one. Our last 12-month order frequency also increased by 30% to 9.8. Our marketplace operations comprised 68% of our business in quarter one 2024, at around the same level as quarter one last year. There was nearly a 1.4 percentage point shift towards non-electronics within GMV this quarter, in line with our strategy. Now let's look at our revenue growth dynamics. The 45% revenue growth in the first quarter was achieved mainly through a 38% retail and a 32% marketplace operations revenue growth. Delivery service revenues, which correspond to 14% of total revenues, nearly doubled year-on-year due to solid momentum in our off-platform business, coupled with annual rises in unit delivery service charges above inflation. Our advertising services revenues doubled during this period as well. Meanwhile, other revenue lines grew by 148%. This remarkable performance was mainly driven by a fourfold growth in loyalty subscription revenues and increased fulfillment service revenues compared to quarter one 2023. On the margin side, adjusted for inflation, we recorded a 1.2 percentage point rise in the gross contribution margin, reaching 10.5%. Margin improvement was largely attributable to the higher contribution from delivery service revenues from off-platform, as well as advertising revenues. Now, let's proceed to our EBITDA performance. We recorded 0.8% EBITDA as a percentage of GMV in quarter one 2024, representing a 75 basis point improvement on a yearly basis. This was primarily due to a 1.2 percentage point rise in gross contribution margin, partially offset by a 0.5% rise in shipping and packaging expenses. Now, let's look at our cash flow dynamics. The cash generated from operations was TRY1.5 billion in quarter one 2024, up from TRY102 million a year ago. A TRY778 million improvement in changes in working capital year-on-year accounts for more than half of the increase. Other components include a TRY277 million increase in EBITDA, TRY137 million increase in changes in operating monetary gain, TRY136 million increase in other non-cash items, and a TRY26 million increase in realized FX gains. With TRY426 million in CapEx, our free cash flow was around TRY1 billion in quarter one 2024. Let's move on to the next slide and take a look at our key takeaways. We would like to leave you with the following from today's presentation: our robust topline growth in the first quarter exceeded our guidance. Adjusted for inflation, we recorded 42.5% GMV growth on a year-on-year basis. Our gross contribution margin continues to improve by 1.2 percentage points, reaching 10.5%. We recorded TRY289 million EBITDA, corresponding to a 0.75% rise in EBITDA as a percentage of GMV. With this performance, we generated a strong free cash flow of TRY1 billion. Our solid overall performance confirms our sharp focus on winning with loyalty, cultivating our sustainable differentiators, and expanding our B2B services as a turnkey e-commerce solution partner for merchants. As we reflect on the good start to 2024, we are committed to growing in a sustainable and profitable manner going forward. Thank you for listening. We can now open the line for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. The first question comes from the line of Gulsever Muharrem with Kona Capital. Please go ahead.

Thank you very much for the presentation. My question will be regarding the eight holidays that are moving from Q3 to Q2 this year. What would be the impact on the GMV for the second quarter in your view? Thank you.

The impact of the eight holidays is actually incorporated in our quarter two guidance. As you know, we had two eight holidays in quarter two, both of which are already incorporated into our top-line guidance.

I understand that, but my question is, if the eight holidays would stay in the third quarter, what would be the GMV growth for this quarter?

This typically impacts our business. During holidays, offline sales go up and online sales are affected. So probably if one was in July, we would have at least a percentage or two upwards in the growth trajectory.

Ladies and gentlemen, there are no further audio questions at this time. We will now proceed with the written questions from our webcast participants. The first webcast question comes from Asif Sattar, who's a private investor, and I quote, 'What is our market share in the online retailing in Turkey? We operate in the category in the market? How is our performance versus strong competition from Amazon in Turkey?' Thank you.

Dear Asif, thank you so much for your question. So for Amazon, they are not publishing their results for Turkey. We will not be able to provide a conclusive comment, but from the public data regarding any active customer usage, we are seeing that they remain a very small player in Turkey. That's number one. Number two is, how we are assessing different segments that we have a right to win. Obviously, number one is electronics. We have significant share growth based on GFK data in Q1. We are already around 32%. On top of this, we gained share in all our key categories. The other data source we look into is Nielsen for non-electronics categories. As you know, home and mom-and-baby are very critical segments for us. The needs of households, particularly women, give us a competitive advantage. We are seeing significant share gains there too. Overall, we had a strong quarter. We cannot share an exact online share in Turkey since it is not reported, but we are clearly outperforming our competitors with significant share wins.

The next webcast question comes from Maxim Nekrasov with Citi, and I quote, 'In which categories do you see higher slowdowns starting quarter 2024? Do you see consumers trading down or decreasing frequency?'

Maxim, thank you so much. Generally, the slowdown can be observed. The critical part is discretionary spending. The number one category I would highlight is computers. As you know, computers are more discretionary, and there is some deferral of demand. The other category is TVs, where we are expecting some recovery with the upcoming Euro Cup and Olympics in Q3 as well. The trend we observe is trading down and deferral of demand rather than a significant decrease in the frequency of online shopping. Thank you, Maxim.

The next webcast question is a follow-up question from Maxim Nekrasov, and I quote, 'When do you expect to start booking tax expenses?'

Sure, I'll take this question. We do not expect to pay corporate taxes in 2024 as we have tax incentives in place, typically related to R&D initiatives without any time constraints. Most likely, we will start paying taxes in 2026.

The next webcast question is again a follow-up question from Asif Sattar, and I quote, 'What is our EBITDA margin on a US GAAP basis in this quarter, and what is the expected EBITDA on a US GAAP basis forecasted for the next quarter?' Thank you.

We do not report our financials on a US GAAP basis.

The next webcast question comes from Badar Shamim with Generation PMCA Corporation, and I quote, 'Any plans to grow your services in developed markets including North America?'

We do not have plans at the moment to expand Hepsiburada and launch in North America. Having said that, Turkish collections are very popular in various parts of the world. We started conducting tests with integrations to other marketplaces to facilitate micro-exports from Turkey. For instance, if you visit Walmart today, you will see our private label products already being sold in those stores. We will continue to expand our cross-border services with smart integrations rather than large investments into this new market.

The next webcast question is a follow-up question from Asif Sattar, and I quote, 'What is the expected incremental GMV increase due to the Jumia partnership this year?'

Look Asif, we are very excited about the Jumia partnership. First, let me clarify that MENA is a region for Turkish collections. We are excelling in the home category in Turkey with small domestic appliances that are exportable. Jumia has tremendous potential for building this partnership with us. We are still in the building phase. I expect most of the impact to begin next year as we enter fulfilled by Jumia. We are making the first shipments, which will take some time to arrive. We are selecting very cost-effective methods for entering Jumia and reaching relevant customers. So nothing significant is expected this year, but definitely watch this space for improvements next year as we complete our integration and leverage their existing traffic with various partners.

The next webcast question comes from Grant Felgenhauer, who is a private investor, and I quote, 'Are you considering a local equity listing in Turkey?' Thank you.

We recognize the potential benefits that a dual listing could bring and are actively exploring various options to determine the best course of action for our stakeholders. As part of this process, we are evaluating market conditions, as well as regulatory requirements involved in a dual listing. At this point, we haven't made a concrete decision regarding a potential listing on Borsa, Istanbul, but we will keep the market informed as we progress and make any definitive decision. In the meantime, we appreciate your continued support.

The next webcast question comes from Sinan Chin with Amber Road Investors, and I quote, 'What drives management's confidence that it will continue to grow share as global cross-border e-commerce platforms consider entering the Turkish market?' Thank you.

Thank you, Sinan. I think a few things give us confidence that we will sustain and continue to grow share despite global cross-border platforms. Firstly, Turkey has a very competitive supplier base. As you look into the global cross-border success stories, they have strong playbooks, but they lack competition like that in Turkish fashion and home, which tends to be very economical. Secondly, affordability is a critical factor in Turkey. We are currently the only online company with a payment license that can provide installment options in categories like cosmetics, FMCG, and mobile phones. This remains a primary purchasing driver for Turkish online shoppers. Furthermore, we excel in all our quality metrics and have consistently been the NPS champion in Turkey. We are open to competition and appreciate the new entries, which will raise the standards for Turkish customers. Finally, we are also building cross-border capabilities, aiding our growth: we recently launched our first product in a test environment. We signed partnerships with Jumia to develop business together, and thus we will continue to expand our cross-border business as we grow our Turkish operations as well.

The next webcast question comes from James Hayes with Lucerna Global Capital, and it's a series of questions. The first question is, can you provide an update on the various regulatory initiatives that may constrain the activities of larger competitors in the market? The second question is, which items are expected to kick in early 2025? Are there any additional regulations to take effect later this year? Finally, the free cash flow in the quarter was quite impressive; can you provide any medium-term thoughts around free cash flow generation capacity for the full year of 2024? Thank you.

Thank you, James. Those are great questions. By 2025, several regulatory initiatives will constrain the activities of larger competitors in Turkey. Several factors include, first, the imposition of license fees which will affect larger online players with a disproportionate market share, resulting in significant payments to the government. Secondly, private label sales, which represented a crucial stronghold for Alibaba in Turkey, will be banned. We anticipate continued impact from the reduction of advertising promotions as well. So, these three factors, combined with a more democratic environment in Turkey that supports small and medium enterprises, could continue to adversely affect the large competitors in the market. Regarding your cash-related questions, I will turn it over to Seckin.

Thank you so much for the question. As you know, free cash flow generation consists of two components: EBITDA and net working capital management. We will continue to grow our EBITDA year-on-year on a full-year basis. Therefore, we will improve upon the key drivers of cash flow for the full year. Concerning the networking capital side, I would note that, as higher interest rates and government actions to curb inflation begin to pan out in the market, all companies will closely monitor their working capital requirements. However, we will always remain a negative working capital business. As our business continues to grow in the top line, it will serve as an important factor in increasing our free cash flow. While seasonality may affect quarterly results, we are committed to improving our free cash flow position throughout 2024.

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