Earnings Call Transcript - HEPS Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Mia, your Chorus Call operator. Welcome, and thank you for joining the Hepsiburada Conference Call and Live Webcast to present and discuss the First Quarter 2023 Financial Results. At this time, I would like to turn the conference over to Ms. Nilhan Onal Gökçetekin, CEO; Mr. Korhan Öz, CFO; and Ms. Helin Celikbilek, IR Director. Ms. Celikbilek, you may now proceed.

Helin Celikbilek, IR Director

Thanks, operator. Thank you for joining us today for Hepsiburada's first quarter 2023 earnings call. I'm pleased to be joined on the call today by our CEO, Nilhan Onal Gökçetekin; and our CFO, Korhan Öz. 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 May 1, 2023, and other SEC filings for information on factors that could cause 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 the relevant IFRS to non-IFRS reconciliations. As a reminder, a replay of this call will be available on our Investor Relations website. With that, I will hand it over to our CEO, Nilhan.

Nilhan Onal Gökçetekin, CEO

Thank you, Helin. Welcome, everyone, and thank you so much for joining us. I'm pleased to be with you on my second results announcement call today and present you with our progress during the first quarter. The obvious highlight of this quarter that I'm particularly proud of is our guidance beat in EBITDA as well as in growth. This EBITDA level marked the highest since our IPO in July 21. It's worth noting here that we achieved this despite the unfortunate range of challenges faced by Turkey. In particular, the February earthquake was the largest for Turkey in over eight years. Our robust G&A growth of 78% compared to the same quarter of last year resulted from 24.1 million orders on the back of our compelling value proposition. This growth exceeded the average inflation of 70% over the past 12 months. First quarter GMV growth was at 15% more than sector engine inflation. Continued GMV growth and our strict prioritization of profitability enabled us to surpass our breakeven EBITDA guidance. This resulted from our focus on loyalty in optimizing marketing spending, growing electronics and marketplace operations, and reducing operating expenses. This milestone represented a 4.8 percentage point rise in EBITDA as a percentage of GMV over the same period of last year. This performance was reflected in our sustained leadership of NPS in the e-commerce market in Turkey, where our high-quality services and solutions continue to win customer appreciation. Marking another milestone, the appeal of our value proposition led to a significant surge in the enrollment of the Hepsiburada premium program, which surged to 1 million members. We are proud to note that our program is the first membership-based loyalty initiative locally developed and implemented in the market. It's worth spending another minute on our guidance beat this quarter. Our GMV growth of 78% surpassed our guidance by eight points, and we delivered a strong positive EBITDA of TRY 176 million. This performance confirms the strength of our strategy and the effectiveness of our meticulous execution despite the challenging market conditions. This quarter, our 12-month active customer base remains nearly TRY 11.9 million, mainly due to the earthquake's impact, given its scale affecting over 14 million people in Turkey. We have seen signals of a return to pre-earthquake levels in March. Meanwhile, total orders at around 74 million showed 61% growth year-on-year. Excluding the order of our digital products, such as sweepstakes and lotteries, the order growth in Q1 was still around 9% year-on-year. Our order frequency rose from 4.9% to 7.5%, marking a 52% growth year-on-year and 14% growth quarter-on-quarter. I am confident in our ability to build customer loyalty and drive very strong customer engagement. These are being achieved with our customer value proposition, including delivery and return services, our diverse affordability solutions, and an enhanced loyalty program. On a yearly rise of 21%, the number of merchants who chose to capitalize on our platform has exceeded 100,000 by the end of Q1. Consequently, our selection reached 180 million net sales with a continued expansion of non-electronic categories. Our merchants welcome our end-to-end value proposition from logistics services to advertising solutions in addition to our toolset that enables better merchant life cycle management. As shown on this slide, the February earthquake impacted 6,500 merchants on our platform, with almost one-third temporarily suspending their business. We have taken immediate action to help and support them, leveraging our tech logistics capability. In addition, we launched a two-year program to continue our support. Ultimately, we are in Turkey for the long haul. We are dedicated to leveraging all our capabilities to foster merchants and women entrepreneurs' e-commerce abilities in the regions. As you will recall, in early March, I outlined our defined strategy to win and achieve profitable growth. Before diving into the progress achieved on our priorities, let me summarize this. Number one is winning by customer loyalty through Hepsiburada premium. Our current estimated volume share within our consumer signals strong growth potential here, and we believe we'll be able to optimize our marketing spend. Number two, we will focus on sustainable differentiators that include our affordability solutions, high-quality service levels on the platform, and our superior delivery services. Number three, we'll pursue profitability by focusing on core operations and cost optimization. And number four, we'll offer our best-in-class payment solutions and last mile delivery services to other retailers. These are our strengths that we believe will help deliver very strong B2B income now and in the coming years. These strategies are pivotal in driving customer retention, securing our competitive position while we pursue sustainable growth and profitability. Now, let's have a look at our progress in the first quarter. Achieving 1 million member milestone in ten months highlights the value for money for our loyalty program. We continuously look to improve this program's benefits to best serve our customers. Program members generate a higher monthly order frequency than non-members, which helped us optimize our marketing and advertising efforts. Growing our membership base remains the key objective for this year while we ensure retention. Since July, we have been offering Hepsiburada Premium and its great value for our customers for only TRY 14.9 million per month. Program members are offered free shipping, cash recognition transactions, on-demand streaming TV subscriptions, and several other services and discounts. Independent analysis shows that the NPS of Hepsiburada Premium was 12 points above the company's overall NPS. This score of 87 indicates a strong satisfaction level from program members. Now let me share some highlights on one of our key differentiators, HepsiPay. On our platform, we are well equipped with payment capabilities such as payment with multiple credit cards, payment in installments, and instant shopping loans. Through HepsiPay, we are the only e-commerce player holding payments and consumer finance licenses, and accordingly, we operate a buy now, pay later solution. Here are some highlights of the Q1 performance of HepsiPay. We witnessed continued growth of HepsiPay wallet users to 11.8 million. This was a remarkable 66% rise from Q1 '22 and a 7% rise from the previous quarter. Around 87% of our GMV was generated by HepsiPay customers. The share of total non-card affordability solutions in our GMV now more than doubled and reached 5.8% in Q1 on a year-on-year basis. Around 60% of this achievement came through shopping loans provided by banks with competitive rates for our customers. Meanwhile, our unique products in the e-commerce market, the buy now pay later solution, has been utilized by over 180,000 customers this quarter, on a quarterly rise of 30,000 people. Some 152,000 orders were generated by using affordable solutions during this quarter. We are diligently managing the credit risk also associated with this solution. And with our expanding range of affordability solutions, we continue to offer relevant, accessible options that meet our customer needs in these tough macroeconomic conditions. Now let's move on to HepsiJet, which is another clear differentiator for Hepsiburada. HepsiJet is one of the leading last mile delivery companies in Turkey. Our customers enjoy the flexible delivery options and value-added services of HepsiJet. These include next-day delivery, scheduled same-day and next-day delivery, return pick-up from the customer's address, delivery rescheduling, parcel live tracking during delivery, and even address change or cancellation while en route, and delivery to your neighbor. To the best of our knowledge, it’s the only logistics company in Turkey to provide all of these convenient delivery options with a strong NPS of 89.9 according to our internal reporting based on service conducted in Q1, reflecting its high quality of service. During Q1, our next-day delivery capabilities saw solid improvement, rising 3 percentage points to 84% year-on-year. This performance underscores our commitment to providing a fast and reliable service, particularly through HepsiJet. HepsiJet continued its penetration on our platform, delivering 63% of total quarterly parcel volume, up from 58% last year, Q1 '22. Moreover, our Xlarge arm dedicated to oversized parcels delivered 60% of such shipments, growing significantly from 73% in the same quarter last year. Launched only in early '22, HepsiJet Xlarge's strong customer satisfaction level has contributed to its fast penetration in our marketplace. I find this very encouraging. HepsiJet’s performance highlights our commitment to enhancing customer convenience and strengthening our market position. As we continued our growth, our primary focus remains on driving profitability. With this commitment, we prioritize our core commerce operations and have adopted a company-wide frugal spending policy. We have already initiated a robust review of all call centers to identify improvement opportunities in cost management and operational effectiveness. This strategic approach has enhanced and will continue to enhance our financial performance and contribute to our long-term sustainable growth. The positive EBITDA milestone in Q1 2023 was mainly fueled by stronger growth contributions, optimized advertising spending, and a prudent OpEx strategy despite the continued high inflationary environment and earthquake in Turkey. We are glad to see this promising trend in our pursuit of a sustainable growth and profitability strategy. As already mentioned, offering our logistics services and fintech solutions to third parties is a key strategic priority. By capitalizing on these strong methods, we unlock new revenue streams, enhance our own operational efficiency, and strengthen Hepsiburada's position in respective sectors. This strategic priority strengthens our brand while fostering valuable partnerships and creating a dynamic ecosystem for cross-selling opportunities. With this approach, we are well positioned to deliver sustainable results while shaping the future of e-commerce. Our first strong muscle, HepsiJet, recorded a three percentage point rise in Q1, reaching 72% of its total volume from our platform customers. Total parcel volume delivered to third parties showed a solid increase of nearly 40% in units compared to the same quarter last year. As a new service, HepsiJet initiated the acceptance of payment upon delivery, also known as cash on delivery. HepsiJet is analyzing the possibility of making this service available to all of its customer portfolio. By delivering exceptional value to all of our partners, we anticipate expanding HepsiJet throughout the year. Now let me move to our other strong muscle, HepsiPay. In the first quarter, HepsiPay continued its progress to enhance the payment experience for our customers while working to expand its platform capabilities. Recently, we launched the HepsiPay debit card for use in both physical and online retail transactions, providing another convenient option for users. The HepsiPay debit card is also linked to the QR payment feature, allowing customers to use their debit cards at retailers accepting our payments. In addition, we introduced a new customer loan feature offering our customers even greater flexibility and freedom in their financial decisions. With this offering, our customers will gain access to funds that can be utilized for any purpose as designed, providing them with the financial support as and when they require. This development, combined with our ongoing efforts to expand our product portfolio, consolidate payment options, and improve the user experience, will help us to meet our target of becoming a leading fintech player in Turkey. I end my presentation with a few words on our Q2 guidance. Our robust first quarter performance confirms our successful navigation of challenging market conditions. We entered the second quarter in a similarly tough macroeconomic environment, also compounded by election uncertainty. And yet, we remain cautiously optimistic based on our quarterly performance to date and the strength of our strategy. Accordingly, we expect to generate around 95% year-on-year GMV growth in the second quarter, which is expected to surpass inflation given the 12-month inflation rate of 44% in April '23. Our positive EBITDA growth will also continue. We expect to deliver a percentage of GMV within the range of 0.5% to 1%. These figures are adjusted for inflation. With this, I thank you for listening and leave the floor to our CFO, Korhan Öz, to provide more insights into our financial performance in the first quarter.

Korhan Öz, CFO

Thank you, Nilhan, and welcome, everyone. Despite factors that affected market sentiment, we demonstrated consistent and strong progress during the first quarter. Adjusted for inflation, our GMV growth was 78% in Q1 on a yearly basis, reaching TRY 14.8 billion. GMV growth resulted from over 24 million orders, marking around 61% year-over-year growth fueled by the continued momentum in order frequency. Adjusted for inflation, revenue growth was 79% year-on-year. We delivered a 10.5% gross contribution margin, representing a 2.2 percentage point year-on-year improvement. I must highlight here that EBITDA adjusted for inflation at TRY 176 million was the highest level since our IPO. We achieved this through our unwavering focus on optimizing customer discounts and operating expenses, plus delivering on our compelling value proposition. Let's move on to the next slide to see adjusted for inflation figures. In the first quarter, on an unadjusted for inflation basis, our GMV and revenue growth were 15% and 16%, respectively. In the same period, gross contribution margin increased to 9.3%, with a 5.6 percentage point improvement compared to the same quarter last year. Again, the key highlight in Q1 was the positive EBITDA at TRY 7 million, also adjusted for inflation. Let's move to the next slide to tie this quarter's performance to our pursuit of profitability. Following the improvement trend of previous quarters, we maintained consistent progress on our path to profitability in Q1 2023 as well. Our performance confirms the effectiveness of execution on our priorities. We navigated through the challenges successfully with our hybrid 1P and 3P business model, strong customer experience, data-driven marketing, as well as diverse applicability solutions. Continued GMV and top line growth, along with our focus on cost and customer discount optimization, enabled us to generate positive EBITDA. This milestone represented an 8.3 percentage point rise in EBITDA as a percentage of GMV over the same period last year. On the next slide, let's look into the details of our GMV performance. 15% of GMV growth came through 24 million orders in Q1. This performance was attributable to our value proposition, supported by the appeal of our Hepsiburada Premium loyalty program, our attractive affordability solutions, and data-driven marketing campaigns. Excluding the orders of digital products, order growth was around 9%, while these digital products generated less than 1% of our GMV in Q1 2023. We value the repeat interaction that enabled us with the participating customer segments. During the first quarter, the share of marketplace GMV reached 68% compared to 65% in Q1 '22. We continue to see strategic advantages of 3P in our business in the long term, facilitating a wider selection, availability, and competitive pricing. With that said, 1P operations remain one of our competitive advantages in the market. Meanwhile, the share of non-electronics in the GMV split rose 1.6 percentage points to 43% in the first quarter compared to a year ago. On the next slide, I would like to discuss our revenue and gross contribution performance. First, I would like to give some color on our revenues. Around 16% revenue growth was achieved mainly by a 72% growth in our marketplace revenue, a 51% increase in other revenue that includes advertising and fulfillment services revenue streams, third-party delivery service revenue, and subscription revenues, and a 5% increase in bank PH operations revenue. Our gross contribution margin in the first quarter was 9.3%, with a remarkable improvement of 5.6 percentage points compared to the same quarter of last year and 1.3 percentage points sequentially. This was mainly attributable to lower customer discounts, both in marketplace and retail operations, better inventory management, and the slowdown in the monthly inflation rates. Let's move to the EBITDA performance on the next slide. The 8.3 percentage points year-over-year improvement in EBITDA as a percentage of GMV was mainly due to a 5.6 percentage point rise in gross contribution margin, a 2 percentage point decline in advertising expenses, a 0.7 percentage point decline in shipping and packing expenses, and a 0.1 percentage point decline in payroll and outsourced expenses, which was partially offset by a 0.1 percentage point rise in other operating expenses net as a percentage of GMV. Overall, OpEx as a percentage of GMV was 9.3% in this quarter, thus 2.7 percentage points lower compared to 12% in the first quarter of last year. EBITDA as a percentage of GMV continued its improvement sequentially by 1.3 percentage points from the previous quarter. Our win through loyalty strategy, data-driven marketing, and marketing channel optimization supported overall efficiency in marketing spending. Next, I would like to say a few words on our cash flow dynamics. Compared to Q1 2022, the TRY 2.2 billion increase in cash flow from operating activities mainly resulted from a TRY 1.4 billion decrease in change in trade receivables and payables to merchants and around TRY 270 million increase in change in trade receivables. Better inventory management resulted in faster turnover days, which significantly helped us improve our working capital position compared to Q1 2022. We continue to operate with negative net working capital during the first quarter. The change in net working capital in Q1 was TRY 725 million. CapEx was around TRY 214 million, the bulk of which comprised the cost of tax-related employees who are employed mainly for the development of web and mobile platforms. Overall, our free cash flow was a negative TRY 154 million in Q1 '23 compared to negative TRY 2.3 billion in Q1 '22. This was due to positive cash generation from our operating activities, a combined result of better working capital management and significantly improved EBITDA. Now, I leave the floor to Nilhan for final remarks before opening the floor for questions.

Nilhan Onal Gökçetekin, CEO

Before we end our call, I would like to highlight the five main points of our presentation today. We delivered the highest EBITDA since our IPO of BRL 176 million, and with this, we exceeded our breakeven guidance. We clearly defined our strategic priorities, and I'm glad to see this is delivering robust performance. A 5.6 percentage point improvement in gross contribution margin and an 8.3 percentage point rise in EBITDA have given us confidence for the remainder of the year. Generating positive cash from operations and an improved working capital position resulted in a substantial improvement in our free cash flow. Our strong position in logistics and fintech services suggest additional revenue streams for our core company. To sum up, we have a defined strategy and a strong execution capability that is evident in our results. As a team, we will continue to work diligently with passion to deliver the best possible results and create long-term value for all our stakeholders. Thank you for listening. We can now open the line for questions.

Operator, Operator

The first question is from the line of someone with JPMorgan. Please go ahead.

Unidentified Analyst, Analyst

Thank you very much. Congratulations on a very good set of results. I have a few questions, but I just want to ask only three now. You are guiding a very high level of growth for the second quarter. I just wonder what are the main drivers behind this robust growth that you see in the second quarter? And do you expect a positive trend to continue in the rest of the year? The second question is about your take rates. I mean you have been building up commission rates from very low levels, and you already reached the level of 2018. I think this was the highest level shared since the IPO. So is there any room to improve this going forward? I know you are managing this through a discount, but I don't know if you can cut the discount further. And what could be the sustainable level that we should assume in our models? Maybe I should stop.

Nilhan Onal Gökçetekin, CEO

I'm going to answer the first one, and I'm going to let Korhan add color on the take rate. Thank you so much, Hanzade. The high level of growth guidance we are giving is based on a couple of factors. First of all, in Q1, the growth rate was hampered significantly by the earthquake. Excluding the earthquake, we have shown much stronger growth. So we have confidence. Second, our strong value proposition, affordability solutions and premium is resonating positively with our customers. The third one is our revenue generation from HepsiJet is also ramping up. We are getting stronger attention from our merchants and partners. I think, fourthly, we have built stronger and stronger confidence in our strategy, delivering strong results and customer appeal. That's why I feel very confident in reaching our guidance for Q2 that we established today.

Unidentified Analyst, Analyst

Before going into - Korhan sorry about this, do you also expect a positive trend to continue in the rest of the year, I mean, for the third and fourth quarter? Or do you expect some sort of slowdown in real terms?

Nilhan Onal Gökçetekin, CEO

I believe in our strategy, Hanzade. I think it's working well. It's resonating with Turkish customers. I am fortuitously optimistic in Turkey that we'll be able to deliver a strong set of results in the remainder of the year as well. So my expectation is a continuation of our strong trend.

Unidentified Analyst, Analyst

Thank you.

Korhan Öz, CFO

Thank you, Hanzade, for the question. Like five, six quarters ago, we promised that we would optimize the discounts given to our customers. Since then, we have been optimizing all the discounts given in the markets, and the improvement has continued so far. Also, we have been adding many new merchants to our platform, especially on the non-electronics side. So throughout this time, having more non-electronics will bring more and higher margin to our platform. Thus, we will continue those actions going forward. Additionally, on the platform, not only improving margin but also on the OpEx side, we are trying to optimize all the spending and cost components to become profitable going forward. So all of our efforts will continue in the coming years.

Nilhan Onal Gökçetekin, CEO

I think the other addition I want to make, Hanzade, on the take rate is that the non-electronics take rate in the marketplace is higher. With the increase in our mix towards non-electronics, I don't think we have any value ceiling. So I think the momentum will continue in the remainder of the year and in the coming years as well.

Unidentified Analyst, Analyst

Okay. Perfect. Thank you very much.