Earnings Call Transcript - HEPS Q4 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Sabrina, your Chorus Call operator. Welcome and thank you for joining the Hepsiburada Conference Call and Live Webcast to present and discuss the Fourth Quarter and Full Year 2023 Financial Results. All participants will be in a 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, CEO; Mr. Seckin, CFO; Ms. Helin Celikbilek, Investor Relations Director. Ms. Celikbilek, you may now proceed.

Helin Celikbilek, Investor Relations Director

Thanks, operator. Thank you for joining us today for Hepsiburada's Fourth Quarter and Full Year 2023 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 May 1st, 2023, 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.

Nilhan Onal Gokcetekin, CEO

Thank you, Helin. Welcome, everyone, and thank you for joining us. I'm delighted to be with you today to present our fourth quarter and full year 2023 results. It has been over a year since I first addressed you as the CEO of Hepsiburada. At that time, I made it clear that my mandate was building Hepsiburada's profitability turnaround. Last year, we weathered a period of election-related uncertainty as well as the fallout of a tragic earthquake in February. Simultaneously, we remain in an inflationary environment, pressuring consumer purchasing power. Regardless, I am very proud to note our excellent teamwork, our focus on strategy, and meticulous execution have resulted in strong financials. Our GMV more than doubled year-on-year in '23, valuing the average inflation rate. We delivered a substantial EBITDA turnaround with the highest full-year gross contribution margin of 10.6% and diligent OpEx management. Our EBITDA as a percentage of GMV rose by 400 basis points yearly to 1.8%. With robust cash generation from operations and optimized investments, we recorded a free cash flow of around TRY3.9 billion on an adjusted-for-inflation basis. These results confirm the validity of our strategic plans and encourage us to aim higher going forward. Now let me compare our performance in Q4 and full year against our guidance. We broke our all-time high sales record during legendary November, and the high shopping trend also continued in December. This resulted in exceeding our quarterly guidance for both GMV growth and EBITDA. Consequently, our full-year results also exceeded our forecast. Our GMV growth was around 104%, exceeding our guidance by 380 basis points. Our EBITDA as a percentage of GMV turned positive at 1.8%, exceeding our guidance by 30 basis points, thus highlighting our robust growth and disciplined approach to spending. This performance marked the beginning of our profitability turnaround objective. Here are some eye-catching numbers to put consumer preference for our platform into perspective. Our platform attracted 3.9 billion visits in '23. Consumers continue to trust Hepsiburada while setting up their new home, particularly buying home appliances. To highlight a few related numbers, one out of every two dishwashers, one out of every two washing machines sold online were purchased on Hepsiburada last year. Meanwhile, Hepsiburada is also a go-to platform for consumer electronics, which was our strength from inception. In '23, two out of every five laptops and one out of every three iPhones sold online were also sold on Hepsiburada. A majority of these purchases reached their destination via our own logistics company, HepsiJet. Let me now elaborate on our achievements in '23. Early '23, we had set very clear targets for our four strategic priorities, which I will explain throughout this presentation. Fully progressed across all these KPIs reflects the dedicated performance of and strong execution by our entire team. Before we move on, I should mention the extension of our share-based incentive plan in the second half of the year. The current plan is triggered upon meeting certain vesting conditions and covers our key executives. Let's now consider some highlights of our achievements regarding our customers, merchants, business partners, and key components of our ecosystem. Let me begin with our customers, whose satisfaction is ever in our minds and is reflected in our KPIs. In '23, total orders reached 113 million, marking a 41% year-on-year growth. Additionally, a 44% growth in order frequency proved that our customer engagement and loyalty strategy are working. As the trusted e-commerce brand in Turkey, we are proud to announce our market leadership in Net Promoter Score for the second consecutive year. In line with our pledge to customer centricity, we work very hard to improve our value proposition in terms of reliability, speed, and convenience. We also raised the bar on our convenience levels across payments, delivery, and returns. Our affordability solutions are appreciated by our customers, especially in the challenging macroeconomic climate. We strive to create lasting relationships, and our strong loyalty program is the best indicator of our success in this endeavor. Hepsiburada Premium program numbers have more than tripled within a year to exceed 2.2 million. Their monthly order frequency rose by around 40% after joining the program. We noted a 270 basis points yearly improvement in the share of 10-plus frequency customers in the overall customer base in '23. This level confirms the program's potential to position Hepsiburada as Turkey's go-to e-commerce platform and underlines the strategy to grow with retention. We will continue leveraging our core strengths and prioritizing customer satisfaction going forward. Now let me elaborate on our commitment to a deeper merchant relationship. In '23, we enhanced the end-to-end solutions for our merchants, such as fulfillment, logistics, tool handling, fintech, and advertising solutions to facilitate higher conversion to sales. New tools and features such as SaaS service campaign management, coupon creation, and tailored advertising solutions now feature on our merchant app. HepsiJet's fast and reliable flexible logistics service led to greater merchant preference. With almost 102,000 active merchant base, our total SKU count climbed to nearly 230 million. This year, we onboarded 38,000 new brands on the platform, with almost half of them in fashion and beauty categories. Our new global brand and growing brand portfolio confirm our ability to unlock selection holdouts. Meanwhile, we deepened our long-lasting relationship with well-established suppliers. Thanks to these strong relations, our platform has come to respond even more comprehensively to customer needs with its wider selection and appealing campaigns. Let me now elaborate on our strategic priority for '24. Delivery of sustainable and profitable growth remains at the heart of our strategy. As confirmed by our results, the pillars of our strategy are sound. With more to be unlocked on each pillar, we aim to raise the bar in each KPI. According to '24, we remain focused on loyalty, cultivating sustainable differentiators of HepsiJet, and expanding our B2B services as a turnkey e-commerce solution partner for merchants in Turkey. In the next few slides, I'll talk more about each pillar by providing a snapshot of our achievements as well as our ambitions. We stay dedicated to growing our loyalty program's member base and keeping satisfied customers onboard with enhanced offerings and partnerships. One key initiative that I'm very excited about is our co-branded credit card with Yapı Kredi. The card provides its users with market planning benefits. Hence, we intend to focus on increasing the premium credit card user base, which will also contribute to our strong growth. Now let’s look into one of our key strategic differentiators. As a fourth runner in the Turkish logistics sector, HepsiJet delivered around 67% of total parcels on our platform. HepsiJet continued to expand the volume of its competitive oversized delivery services as well. In '23, 59% of oversized packages on the platform were delivered by HepsiJet, up by 12 percentage points year-on-year. In today's world, fast and reliable delivery is a must for typical Turkish customers. HepsiJet's 82% next-day delivery ratio among retail orders clearly reflects our commitment. '23 was the year when we expanded Jet's flexible delivery and return capabilities further, which we believe boosts our value proposition. Accordingly, Jet maintained a strong NPS underscoring its acknowledged service excellence. We will build further on HepsiJet's integral role in our logistics ecosystem and enhance the speed of delivery and customer experience. Let me move on to our next differentiator, Hepsipay, which has made a strong contribution to Hepsiburada. Leveraging our e-money and payment service licenses, we offer a comprehensive suite of payment and affordability solutions. In today's economic landscape and in the face of market expectations of potentially heightened credit availability in the second half, affordability gained significant purchase importance. Under these conditions, consumers welcomed the optionality of our affordability solutions, which include our in-house buy now, pay later solution as well as shopping loans from banks and general-purpose loans from partner banks. Our platform provides excellent user service. Within seconds, our customers can check their BNPL limits and alternative loan options from partner banks and complete their purchases instantly. The BNPL solution, our unique product in the Turkish e-commerce market, had been utilized by nearly 330,000 customers by the end of Q4. On a broader scale, the total finance transaction volume, including general-purpose loans, reached TRY6.1 billion in '23. In '24, we will further solidify our position as an e-commerce player providing the widest affordability solutions. We also recently launched HepsiFinance, our own consumer financing company, which we expect will contribute to our success. On the payment front, Hepsipay continued to improve our customer experience at the checkout during '23 with multiple additional features. We extended this solution to enable our merchants on dotcom business also at their checkout. Hepsipay is now available at the checkout of 10 major retailers. Hepsipay also aims to win additional key accounts while also launching its proposition targeted towards SMEs. The launch of Hepsipay prepaid cards in collaboration with Visa was another highlight of the year. The additional cashback benefit available is a motivator to become a premium program member. The card has reached over 1.2 million users with 1.2 million cards issued so far. On the strength of the above, Hepsipay's wallet base rose to 15 million by mid-March, following a yearly net addition of 3.3 million users in '23. In '24, Hepsipay aims to become Turkey's most used digital wallet solution in both physical and online retail. This would ultimately position Hepsipay as Turkey's leading fintech company. Let me give you an update on our strategic priority of offering our logistics services to third parties. Doing this has unlocked new revenue streams, contributed to our operational efficiency, and reinforced our position in respective sectors. Jet nearly doubled its external customer base in '23, while its third-party volume rose 1.6 times year-on-year. This confirms our ability to generate B2B revenues, showcasing HepsiJet's strong momentum as an appealing logistics partner. Overall, '23 was a year of initiatives that leveraged our strength in fintech and logistics to create a solid B2B business. The resulting numbers confirm that we are on the right path. In '24, we will continue to accelerate our focus on this business line, aiming to achieve profitability at the foundation of our strategy. A robust turnaround in EBITDA was made possible through key building blocks of optimized marketing and advertising expenses, higher gross contribution margin, process automation, and OpEx frugality. In '24, our ambition is to sustain our profitability trajectory. We believe that growing our advertising business, raising third-party revenues, achieving a higher share of margin across categories, and continuing our frugality will be instrumental in meeting this year's higher profitability target. On the next slide, I would like to deep dive into our advertising business and our ambitions. Our well-established advertising business, HepsiAd, suggests a huge opportunity to increase our share of Turkey's rapidly growing digital media market. The current uptrend of global peer performance in the advertising business suggests the potential for scaling our performance levels. HepsiAd is equipped with various formats that boost the visibility of participating merchants. Through this app, merchants reach their target audience, increase their sales while benefiting from actionable consumer analytics. Around 18,000 merchants utilized our advertising solutions last year. An increase in HepsiAd penetration and revenue per merchant will be among our key focus areas this year. Now, I'll close my presentation with our guidance. I have meticulously outlined our strategic priorities and focus areas for '24. With dedicated execution on this, our objective is to continue our GMV growth, focus on incremental revenues, and higher-margin businesses and achieve higher profitability margins in '24. Accordingly, for the first quarter of '24, we expect to deliver GMV growth around 120% compared to the same period of '23. The low base from the first quarter of '23 was mainly due to the earthquake, which had a favorable impact on this expected growth level. At the EBITDA level, we expect to deliver around 2% of GMV, and these guidance figures are adjusted for inflation. Thank you for listening. I will now hand it over to Seckin, our CFO, to provide further insights into our financial performance.

Seckin Koseoglu, CFO

Thank you, Nilhan, and welcome, everyone. I'm glad to share that we have delivered an outstanding financial performance across all metrics, both in quarter four 2023 and in full year despite all the challenges. On an unadjusted basis, GMV grew by 104% in 2023. This came through 41% order growth and 45% average order value growth. When we exclude our small-ticket digital products, the average order value growth was, in fact, 79%, outpacing the average inflation of 54% in 2023. The average order value growth is attributable mainly to a faster than inflation rise in average selling prices and a higher share of large-ticket items in electronics within our orders. On an inflation-adjusted basis, we recorded a double-digit real GMV growth of 31% in 2023 year-on-year. This resulted in 34% revenue growth, made possible through strong revenue growth of both retail and marketplace operations as well as solid growth in advertising, co-marketing revenues, and loyalty program subscriptions. With a gross contribution margin of 9.2% and disciplined OpEx management, we recorded a 0.4% EBITDA as a percentage of GMV in 2023, marking a notable 5.2 percentage points year-on-year improvement. For more details on each of these, let's move on to the next slide. First, our GMV performance. Our marketplace operations accounted for two-thirds of our business in 2023. While the share of electronics in GMV was roughly equal to last year, there was a 0.3 percentage point shift toward non-electronics in marketplace operations. Let's discuss our revenue performance. The 34% revenue growth in 2023 was achieved mainly through 27% retail and 60% marketplace operations revenue growth. Delivery service revenues contributed to the revenue growth with a 48% year-on-year increase. This was largely due to a rise in unit delivery service charges, higher parcel volume, and nearly doubling of off-platform revenues. Other revenues that include advertising services, co-marketing, and loyalty subscription altogether grew by 125% year-on-year. Now, let's elaborate on our gross contribution performance. Unadjusted for inflation, our gross contribution margin was 10.6% in 2023, representing a 1.6 percentage point year-on-year improvement. Adjusted for inflation, we recorded a solid 2.7 percentage points rise in the margin, reaching 9.2%. This was mainly attributable to a 1.3 percentage point improvement in the 1P margin due to a relatively lower inflation impact on the cost of inventory sold during the year and shorter inventory turnover days in 2023. A 0.7 percentage point increase in the 3P margin occurred as a result of margin improvement across all categories, and a 0.7 percentage point rise in the contribution from delivery service and other revenues. Let's move on to our EBITDA performance on the next slide. As highlighted, 2023 was a year of profitability turnaround for Hepsiburada. Together with strong top-line growth, our focus on cost and marketing spend optimization enabled us to deliver positive EBITDA for the full year. Unadjusted for inflation, we recorded an EBITDA of 1.8% as a percentage of GMV in 2023 with a 4.0 percentage point improvement on a yearly basis. Adjusted for inflation, our full-year EBITDA is again positive at 0.4% of GMV with a 5.2 percentage point year-on-year improvement. This was mainly through a 2.7 percentage point rise in gross contribution margin, a 1.2 percentage point decline in advertising expenses, a 0.3 percentage point decline in payroll and outsourced staff expenses, a 0.2 percentage point decline in shipping and packaging expenses, and a 0.9 percentage points decline in other OpEx items. Excluding one-off items, the year-on-year improvement in EBITDA was still strong at 4.5 percentage points for the full year in 2023. Next, let's review our cash flow dynamics. Our cash generated from operations was TRY5.0 billion in 2023, up from TRY707 million a year ago. The year-on-year increase in EBITDA accounts for more than 100% of the improvement in operating cash flow. More precisely, a TRY4.7 billion rise in EBITDA was partially offset by a TRY0.4 billion decline in change in monetary gain, working capital, and realized FX gains and losses, yielding a TRY4.3 billion improvement year-on-year. With around TRY1.1 billion CapEx, our free cash flow was around TRY3.9 billion for the full year. As I conclude my presentation, I would like to summarize the key takeaways from today's presentation. Our robust top-line growth and outstanding EBITDA performance both in the fourth quarter and full year exceeded our guidance ranges. Adjusted for inflation, we recorded double-digit real GMV growth on a year-on-year basis. Our gross contribution margin on an unadjusted basis reached 10.6%, marking the highest full year level since 2018. With this performance, we generated strong free cash flow as well. As we reflect on the good start to 2024, we are committed to building on our performance from the previous year and striving towards achieving even greater success. Thank you for listening. We can now open the line for questions.

Operator, Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session.

Seckin Koseoglu, CFO

We had a question via mail related to different interest expenses charged on purchases and credit card receivables. Basically, we do not have any lending related to our purchases. The interest on purchases refers to interest expense that is embedded in our inventory procurement that we buy on a term basis. That amount we classify from gross contribution margin to financial expenses due to IFRS 9 as a reclassification. The early collection commission is the commission that we pay to the banks for early collection of our credit card receivables. This also appears in the financial expenses section in our P&L.

Muharrem Gulsever, Analyst

Thank you very much for the presentation. I have a couple of questions, if I may. The first one is the credit card spending in Turkey is running at a really fast pace in the first quarter. So far, we have observed around 150% increase on a year-over-year basis on online credit card purchases. Your guidance was around 120% GMV growth for the first quarter. Do you think there is an upside risk to that guidance to start with? And what is the advertising budget for 2024? Thank you very much.

Seckin Koseoglu, CFO

Basically, we are estimating this 120% versus the relatively lower base in quarter one, 2023 due to the earthquake. As you pointed out, the credit card spending in the market is a little bit higher than this amount. So we may potentially see some upside, but not necessarily a very significant amount versus our guidance. Regarding our marketing expenses, we are continuing to increase our return on advertising spending for each of our channels, both for influencers and performance marketing. Therefore, we will continue to see efficiencies going forward that we experienced in 2023. We will continue to optimize our marketing spending while growing profitably.

Muharrem Gulsever, Analyst

Thank you very much.

Nilhan Onal Gokcetekin, CEO

I have one built for the credit card spending and fast penetration of e-commerce in Turkey. As you know, Turkey is a very high potential market for e-commerce penetration. Every year, there is another 15% to 20% growth in the penetration of e-commerce within total retail. One area where we will significantly gain market share is through our turnkey e-commerce solutions. With HepsiJet, we are significantly increasing our volumes from off-platform customers that I mentioned. And with our fintech solutions, we are now also providing these merchants, who are just entering e-commerce, with a one-click solution and our lending solutions at checkout. Therefore, we are celebrating the fast growth of e-commerce in Turkey.

Muharrem Gulsever, Analyst

Thank you very much. And I have another one, if I may. All other international e-commerce companies such as Jumia and other peers are trying to increase the take rate. In fact, a couple of them announced that they are increasing take rates by 200 basis points at the beginning of the year. Your largest competitor, Trendyol, its parent Alibaba, also mentioned in a conference call that they are trying to increase take rates in their international operations, which includes Trendyol. So my question is, do you observe an increase in the take rates from your peers as well as on your side since the beginning of the year? Thank you.

Nilhan Onal Gokcetekin, CEO

In terms of context from '23, our gross contribution margin improvement, which was 270 basis points, was also a result of not only the mix and an increase in delivery service revenues, but also improvements in overall take rate. As we have aspirations for increased profitability this year, we are also seeing opportunities here and will continue seeking optimal rates that will allow us to remain relevant and grow our business while optimizing for profitability.

Muharrem Gulsever, Analyst

Thank you very much. Very clear. Thank you.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time.

Helin Celikbilek, Investor Relations Director

Sorry, Sabrina. Could you please hold on? We have a question via e-mail. I'd like to read that. Please provide an update on the competitive dynamics in Turkey. Has anything changed? Which players are gaining market share versus losing? And are we expecting to see a consumer slowdown in the second half of the year?

Nilhan Onal Gokcetekin, CEO

Let me start with the second question about our high-level expectations for '24. Our progress and results clearly prove that our strategy works. Our sustainable, profitable growth will remain unchanged, and we maintain our commitment to the strategic priorities that will be relevant for Turkey in this changing macroeconomic context. We also anticipate a higher B2B revenue from HepsiJet and Hepsipay, further solidifying our position. We expect a tougher environment in the second half of the year due to tight macroprudential policies. However, our ability to build on our strong value proposition, tailored payment options, and affordability will differentiate us and continue to make us relevant for consumer demand. This macro context could also present other opportunities like lower credit card costs that further differentiate us from our competitors. As much as there is an expectation for reduced demand in overall Turkey, with a higher digital population migrating towards e-commerce, with our right to win in this macroeconomic context, we believe that we will remain relevant and strong throughout the year. This brings me to answer the first question about competitors. If we start with the macroeconomic context regarding the need for affordability, we have the widest solution in the market by far. With BNPL, shopping loans, our own consumer financing company, mix checkout, and payouts, I think these will be increasingly relevant and provide us with a competitive edge. Additionally, from a logistics standpoint, we have a very strong network that is continually adding new features for delivery services every month for our consumers. So I believe competition will remain in Turkey, but we are the local player with high agility, the widest affordability solutions, and the highest NPS, which is why I think we will continue to have a right to win in '24 in Turkey.

Operator, Operator

Ladies and gentlemen, at this time, we have another question via e-mail that asks for 2024 revenues and margins.

Seckin Koseoglu, CFO

Our progress and results clearly prove that our strategy works. Our focus on sustainable and profitable growth remains unchanged for 2024 as well. We maintain our commitment to proven strategic priorities, emphasizing precision and delivery services, affordable shopping options, and the exclusive benefits of our premium program. Additionally, the upward trajectory of our B2B revenues, as Nilhan mentioned, from HepsiAd, HepsiJet, and Hepsipay will further rise and solidify our group's position. Therefore, in 2024, we believe that we will continue to trend towards profitability just as we did in 2023.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time. Ms. Nilhan, back to you.

Nilhan Onal Gokcetekin, CEO

Thank you so much for your patience and for listening to our call. We wish you an amazing day and an amazing evening. Thank you.

Operator, Operator

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