Earnings Call Transcript - HEPS Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Hepsiburada Conference Call and Live Webcast to present and discuss the Third Quarter 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 Mrs. Nilhan Onal Gökçetekin, CEO; Mr. Seçkin Köseoglu, Vice President of Strategic Finance; and Mrs. Helin Celikbilek, Investor Relations Director. Mrs. Celikbilek, you may now proceed.

Helin Celikbilek, Investor Relations Director

Thanks, operator. Thank you for joining us today for Hepsiburada's third quarter 2023 earnings call. I'm pleased to be joined on the call today by our CEO, Nilhan Onal Gökçetekin, and our Vice President of Strategic Finance, Seçkin Köseoglu. 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 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 press release for a presentation of the most directly comparable IFRS measures and the 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, Nihan.

Nilhan Onal Gökçetekin, CEO

Thank you, Helin. Welcome everyone, and thank you for joining us. I'm pleased to be with you today and to present our quarterly progress. In Q3, amidst continued challenging macroeconomic environment where yearly inflation scaled to 61.5%, we delivered a robust financial performance. Our GMV more than doubled by 126% growth year-on-year. Adjusted for inflation, our GMV growth remained solid at 45% year-on-year. The operational agility, afforded by our strategy, led to an outstanding performance that exceeded expectations. Our orders numbered 27 million. It was up 55% year-on-year, confirming a continuous demand for our differentiated services. With an 11.6% gross contribution margin and through frugal OpEx management, our EBITDA as percentage of GMV rose by 690 basis points year-on-year to 2.7%. Adjusting for one-time other income, our quarterly EBITDA guidance was still 2.2%. Our Hepsiburada Premium program has over 2 million members as of November-end, aligned seamlessly with our expectations. The program continues to play a pivotal role in elevating our order frequency and improving our customer retention. Overall, I am very pleased to demonstrate sustainable growth and improved profitability. Let me now take you through our delivery versus Q3 guidance. Through diligent execution, we surpassed our guidance for both GMV and EBITDA. Our GMV growth exceeded guidance by 16 percentage points. This performance was a result of our solid strategy that boosted loyalty to our platform. Furthermore, in July, the announcement of the VAT increase across all goods and services triggered a higher demand for e-commerce. Additionally, through prudent cost management, our EBITDA as a percentage of GMV reached 2.2%, adjusted for one-off income. This doubling of the upper-end of our EBITDA guidance clearly highlights our operational efficiency. The quarterly performance validates our commitment to sustainable growth and positions us favorably to achieve a positive full-year '23 EBITDA on an unadjusted basis. Hepsiburada is the key trust brand for e-commerce. In-line with our pledge to customer centricity, we announced the HepsiburadaPromise initiative as a marketing campaign. As part of this initiative, we promoted key consumer benefits that encompass next-day delivery guarantee, convenient return pick-up services from consumer doorsteps, and an assurance of authentic products. To drive higher engagement, we partnered with one of Turkiye's most confident and inspiring celebrities for this initiative. We believe this initiative addresses the primary concerns of Turkish e-commerce consumers while underscoring our commitment to meet their expectations. This commitment is clearly reflected in our KPIs. A 59% growth in order frequency and a 55% order growth prove that our consumer engagement and loyalty strategy is clearly working. In the third quarter, with over 101,000 active merchant base, our total SKU count climbed to nearly 211 million. Our merchants can now create coupons, which are a proven attraction point for customers. Self-management of campaigns, coupons, and all advertising facilities drive higher conversion to sales for our merchants. Furthermore, we advanced our operations with automated inclusion of products in the next-day delivery coverage. This benefited customers while freeing our merchants of a manual process. In our commitment to elevate the visibility and reach of our merchants, we reintroduced our advertising solutions in a more effective format this quarter. These initiatives underscore our commitment to a deeper merchant relationship as we help them grow their volume on Hepsiburada. As always, we remain focused on execution excellence, and our recent results affirm the effectiveness of our four-pillar strategy. Our strategy centers around loyalty, cultivating our sustainable differentiator, streamlining our costs, and expanding our B2B revenue in fintech and logistics. I will now provide a snapshot of our progress, highlighting our key achievements. First, our Hepsiburada Premium program is a key loyalty driver and continues to gain momentum, exceeding 2 million members by the end of November. The program's success goes beyond expansion; it significantly influences customer behavior. Premium members' monthly order frequency rose from 1.8 to 2.6 after they joined the program. This emphasizes the program's potential to position Hepsiburada as customers' go-to e-commerce platform. The program's quarterly net promoter score remained at a robust 81 points, which is 10 points above our overall NPS. We remain dedicated to keeping this program as a compelling proposition for our members. Next, let's consider our differentiator, Hepsipay. In today's economic landscape, affordability takes center stage, and our in-house fintech expertise clearly sets us apart. Leveraging our unique e-money payment services license, we offer a comprehensive suite of payments and affordability solutions. These include our prepaid card, Buy Now Pay Later solution, top-up to wallet loans, and point of sale shopping loans. A noteworthy addition is the Hepsipay prepaid cards in collaboration with Visa. We are encouraged by the demand for this card with 708,000 cards issued in just six months. Hepsipay card users can earn 3% cash back on all their online and in-store payments if they are Premium program members. A tool that customers use to top up their prepaid card is a general-purpose loan from our partner banks, which can be reached with a one-click solution from our app. This quarter, we integrated four major banks. Hepsipay wallet gives customers the freedom to spend these loans everywhere, both in physical stores and online, combined with the ease of QR payments. With our customer centricity, our commitment to delivering stronger tailored payment and affordability solutions remains firm. Additionally, during the third quarter, we observed a 5.6% penetration of total non-card affordability solutions in our GMV, up from 5% a quarter ago. Over the last 12 months, 762,000 orders came through this affordability solution. As to our BNPL solution, Hepsiburada remains the first provider in Turkish e-commerce. Since its inception, over 245,000 customers have utilized their BNPL limits. In September, during the iPhone 15 launch, we were the only platform to offer a BNPL solution for this high-value item. Moving on, our next differentiator is HepsiJet. HepsiJet's strong NPS of 86.2 in Q3 underscores its acknowledged service excellence. HepsiJet continues to invest in expanding its geographical coverage by additional municipalities, exceeding 600 municipalities covered by the end of the quarter. In Q3, HepsiJet continued its strong next-day delivery performance with an 82% ratio among our 1P orders. Out of the total parcel volume on our platform, HepsiJet delivered 67%, confirming its integral role in our delivery ecosystem. Notably, HepsiJet XLarge delivered 57% of our oversized parcels, confirming greater merchant preference for our 2-Man-Handling capability. As a result of all our actions in Q3, we saw continued progress in profitability, posting a 2.2% EBITDA as a percentage of GMV excluding the one-off item. The positive results clearly demonstrate the effectiveness of our strategy, confirming our core strength and diligent cost management. Now, let me take you through the fourth pillar of our strategy, generating B2B revenue from fintech and logistics. First, let's start with HepsiJet. We continue to expand our external customer base, adding other retailers and doubling our customer count and volume year-on-year. This confirms our ability to generate B2B revenues for the platform and showcases HepsiJet's strong momentum as an appealing logistic partner. Now, let's turn our eyes on Hepsipay's off-platform expansion, enabling a swift payment experience. Hepsipay offers a one-click checkout solution: Pay with Hepsipay to other retailers. This solution became available at the online checkout of five major Turkish retailers in Q3, as seen on the slide. Leading Turkish brands such as Karaca in home appliances, DeFacto in fashion, and Ebebek in baby products are just a few of the examples. Moreover, we also offer our lending capabilities as part of Hepsipay's one-click checkout solution. This aligns with our vision of providing fast, reliable, versatile payment and lending experiences beyond the Hepsiburada platform. Hepsipay's features expand beyond one-click checkout. The seamless use of prepaid cards for both online and in-store payments clearly diversifies our payment options for consumers. The top-up to wallet with loans enables users to top up their wallets with general-purpose loans from multiple partner banks. These funds are then available to spend anywhere that accepts QR payment, in addition to platforms with Hepsipay at their checkout. An upcoming feature is the integration of shopping malls within the Pay in Hepsipay network. Before I dive into Q4 outlook, let me take a moment to talk about our November campaign performance. Our business is characterized by strong Q4 seasonality like all other e-commerce players. We deliver a higher sales volume during the fourth quarter of the year. Our preliminary results indicate that this year we delivered yet another very strong performance in November. We doubled the GMV compared to the same period last year. The number of orders was twice that of the monthly average of the prior month in 2023. Our platform attracted almost 500 million visits, and we sold over 30 million pieces. Our affordability solutions and loyalty program were particular attraction points. A significant 46% of GMV generated through sales with credit cards came through installment sales. The most significant service in orders compared to the same period of last year were among clothing, appliances, home garden, and FMCG. We greatly welcome the consumer appreciation of our superior services, solutions, and campaigns in the busy month of November, where Hepsiburada clearly established its legendary status, which was created by us seven years ago. And now, I want to close my presentation with our guidance. With another robust Legendary November behind us, we expect to deliver solid and profitable growth in the fourth quarter. Accordingly, we expect to deliver GMV growth within a range of 93% to 95% compared to the same period last year and EBITDA as a percentage of GMV within a range of 0.5% to 1%. These figures are unadjusted for inflation. Consequently, for the full-year 2023, we expect to double our GMV year-on-year on an unadjusted basis and deliver EBITDA as a percent of GMV at 1.5%. These figures are also unadjusted for inflation. With this, I thank you for listening, and I will hand the floor to Seçkin, our new CFO, for more details on our Q3 financial performance. Following that, I'll provide my closing remarks.

Seçkin Köseoglu, CFO

Thank you, Nilhan, and welcome, everyone. It's a pleasure to meet with all of you today for the first time. As I embark on my new role as CFO, I look forward to many more such occasions. Despite the prevailing macroeconomic challenges, I am pleased to say that we continued our uptrend across all metrics during the third quarter. Unadjusted for inflation, our GMV rose 126% in Q3 on a yearly basis to TRY24.3 billion. Similarly, our IAS 29-unadjusted revenue growth was at 137% on a yearly basis. When adjusted for inflation, GMV and revenue growth were at 45% and 52%, respectively. Strong order growth coupled with a faster than inflation rise in the average order value and a strong e-commerce market growth in July on the back of a VAT rise resulted in a 126% GMV growth. The gross contribution margin came in at 11.6%, which is a 1.8 percentage point improvement on the same quarter of last year. Adjusted for inflation, this metric rose to 9.4% with a 1 percentage point improvement. Q3 was the third consecutive quarter of positive EBITDA unadjusted for inflation. Accordingly, our EBITDA as a percentage of GMV reached 2.7%, which was a 6.9 percentage point rise year-over-year. Excluding the impact of one-off income items, our EBITDA as a percentage of GMV was at 2.2%. Also, when adjusted for inflation, this metric was at 0.3% on a 6.2 percentage point improvement year-over-year. On the next slide, let's elaborate on our GMV growth performance. We achieved 45% of GMV growth through 27 million orders in Q3. This performance results from our value proposition supported by the Hepsiburada Premium loyalty program and our affordability solutions. Our digital products contributed to the order frequency of participating customer segments. However, excluding these orders, our order growth was still strong at around 18%. During the third quarter, we saw a 2.7 percentage point shift in GMV mix towards first-party sales. While we continue our growth in non-electronics, during this quarter, we also leveraged our strong first-party model to meet the demand in the electronics market. On the next slide, I will discuss our revenue and gross contribution performance. Revenue growth of around 52% was achieved mainly by a 50% rise in retail revenue and a 61% growth in marketplace revenue. Our retail and marketplace operations comprise 87% of our revenues. Our delivery service revenue, which comprises 10% of total revenue, rose 43% compared to Q3 2022. Meanwhile, other revenue, which mainly consists of our advertising services, fulfillment services, and loyalty program subscription fees, grew by 116% compared to Q3 2022. Our Q3 gross contribution margin was at 9.4%, reflecting a 1 percentage point improvement over the same quarter last year. This improvement was mainly attributable to a higher re-discount impact on cost of inventory sold due to purchases on credit, a change in the 3P GMV category mix towards higher margin products, and an increase in other revenue streams. Faster inventory turnover partially compensated for the margin deteriorating impact of significantly higher quarterly inflation that we have witnessed in Q3. Let's move on to the EBITDA performance on the next slide. Along with strong top-line growth, our focus on cost and marketing spend optimization enabled us to deliver positive EBITDA for yet another quarter. The 6.2 percentage point year-over-year improvement in EBITDA as a percentage of GMV was mainly due to a 1 percentage point rise in gross contribution margin, a 1.1 percentage point decline in advertising expenses, a 0.1 percentage point decline in shipping and packaging expenses, a 0.6% decline in payroll and outsourced staff expenses, and a 3.3% improvement in other operating expenses. OpEx as a percentage of GMV was 9.1% in this quarter, thus 5.1 percentage points lower compared to 14.2% in the third quarter of last year. Our continued efficiency in marketing spend was achieved through a focus on customer retention, loyalty strategy, data-driven marketing, and co-marketing partnerships. Next, I would like to share some insights into our cash flow dynamics. Compared to Q3 2022, our cash flow from operating activities increased by almost TRY1.4 billion to TRY2.2 billion in Q3 2023. This increase in cash flow from operating activities mainly resulted from a TRY1.1 billion improvement in EBITDA, a TRY1.2 billion decrease in changes in working capital (primarily due to an increase in BNPL receivables and an increase in inventory in anticipation of high demand in Q4), and a TRY0.7 billion increase in operating monetary gains due to inflation accounting and other items, along with a TRY0.8 billion increase due to realized FX gains. CapEx was around TRY234 million at 0.9 percentage point of GMV. Overall, our free cash flow was a positive TRY2 billion in Q3 2023. Before we end our call, I would like to pass it back to Nilhan to highlight the key takeaways from today's presentation.

Nilhan Onal Gökçetekin, CEO

Thank you, Seçkin. In Q3, we delivered strong top-line growth and EBITDA through diligent cost management, exceeding our guidance. Our IAS 29-unadjusted GMV growth marked the highest quarterly growth since our IPO. On the margin side, we improved our gross contribution margin by 1.8 percentage points and EBITDA as a percentage of GMV by 6.9 percentage points. We generated a substantial improvement in free cash flow on a yearly basis, thanks to our improvement in operating profitability. We are committed to creating long-term value for all our stakeholders and we work diligently to deliver our best possible results with our whole team. And finally, I take this opportunity to wish everyone seasonal greetings. Thank you for listening. We can now open the line for questions.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. The first question was withdrawn. Currently, there are no audio questions. We will proceed with the webcast questions from our participants. The first webcast question is from Maxim Nekrasov with Citi, asking, "What drives growth deceleration in Q4 2023 compared to the third quarter of 2023?" Thank you.

Nilhan Onal Gökçetekin, CEO

This is Nilhan speaking. We have a couple of factors. One of them is our base in Q4 '22 was extremely strong. That's the number one driver. The second driver is, in Q3, Maxim, we had a VAT change, as I explained in July. This accelerated our growth as e-commerce platforms, which we don't expect to be repeated in Q4. Lastly, with the rising interest rates, we are expecting some minor impact on demand in Turkish markets. Hence, with these three factors, our expectation is the GMV growth will slow down.

Operator, Operator

The next webcast question is from Ulle Adamson with T. Rowe Price, and I quote, "Any thoughts on possible local listings to improve the liquidity of shares?"

Nilhan Onal Gökçetekin, CEO

A possible local listing on the Istanbul Stock Exchange is one of the ideas that we always evaluate like other options. There are pros and cons that we are investigating, Ulle. As we crystallize our thinking, if there is something to share, we will obviously come back. This is one of the things we are currently looking into based on the feedback we received today.

Operator, Operator

The next webcast question is from Tim Raschuk with Frontaura Capital, and he asked if we could provide insight on September sales and how the Legendary November event compared to our expectations. Thank you.

Nilhan Onal Gökçetekin, CEO

It was almost spot on versus our expectations in November. We made a few assumptions for November growth. One of them was an increased uptake from our Premium consumers. Both our Premium membership increase and the frequency increase from Premium consumers have been in-line with our expectations. Non-electronic, new categories that we have been driving have been strong, which has also been accordance with our expectations. In terms of our marketing plan, the number of sessions we planned for Legendary November was also in-line with our expectations. I would say we invented Legendary November seven years ago, and since then we have been getting stronger in our execution. In-line with our plans, we delivered a strong November campaign.

Operator, Operator

Our next webcast question is from Christian Andrews with Frontaura Capital, and I quote, "Digital orders represented a significant portion of order growth. Could you expand on what these orders relate to and would their contribution to revenue growth be similar?"

Nilhan Onal Gökçetekin, CEO

The digital orders represent a significant portion of order growth, but in terms of GMV, it's immaterial. It's less than 0.7% of our GMV. So, we can't discuss any significant related contribution to our GMV growth. It's strategic; it drives frequency and encourages consumers to come back, creating loyalty retention. Thus, we'll continue driving that strategy.

Operator, Operator

Thank you. We also have a question from Mr. Hassan Bayahan, and I quote, "How do you invest in the U.S. cash you have? What is the return on that?"

Seçkin Köseoglu, CFO

Hi. We typically use time deposits in banks. Regarding the yield, we are close to 5% for our USD deposits.

Operator, Operator

The next question is from Mr. Maxim Nekrasov with Citi, and I quote, "What are your expectations regarding consumer demand in 2024 considering recent interest hikes?"

Nilhan Onal Gökçetekin, CEO

Our progress and results clearly demonstrate that our strategy works in 2023. As we look forward to the coming year, although the interest rate increases could diminish consumer demand and consumption can impact Turkish economic growth, we have several key initiatives reinforcing our position. I maintain our commitment to strategic priorities, affordable shopping options, benefits from the Premium program, and also e-commerce is in the best place, very suited to serving consumers in this type of environment.

Operator, Operator

Our next webcast question is a follow-up from Mr. Ulle Adamson with T. Rowe Price, and I quote, "What is the outlook for EBITDA margin in 2024? Also, where would you like to see the margin over the longer term?"

Nilhan Onal Gökçetekin, CEO

For 2024, we will discuss our guidance and expectations as part of our Q4 earnings result. What I can say is that we are extremely committed to sustainable, profitable growth. We have built a very strong initiative pipeline for 2024 and upcoming years, including the Hepsi advertising platform, non-electronics in our mix, and incremental margin from our services and B2B revenues, which will continue to enhance our margin situation. For more granular details and specific expectations, we will come back in Q4.

Operator, Operator

Thank you. Our next webcast question is from Christian Andrews with Frontaura Capital, and I quote, "Hepsi Premium reached 2 million members. Could you please speak a bit about any targets for the program? Is there a target number of members? Is this program breakeven yet on a consolidated basis?"

Nilhan Onal Gökçetekin, CEO

Regarding the Hepsiburada Premium program, we are quite optimistic about creating a great, effective program that will be appealing to our consumers. We're not chasing a specific number; we're aiming for sustainable profitability of the company and sustainable profitable growth using loyalty retention initiatives alongside the Premium program. Therefore, I'm not going to share a specific number that we are pursuing for next year, but we will continue to enhance both the benefits of the program and the number of members. In terms of premium profitability, we don't share the details for a specific consumer segment. In the future, we could consider providing different cuts of our profitability, but for now, we are only sharing a consolidated view.

Operator, Operator

Our next question is an audio question from Kilickiran Hanzade with JPMorgan. Please go ahead.

Kilickiran Hanzade, Analyst

Nilhan and Seçkin, apologies, I had a technical issue. I couldn't ask my question initially. I would like to follow up on the gross contribution margin. You have a very robust improvement here. Would it be reasonable to say that a large part of this expansion in the gross margin contribution comes from the inventory gains? Because there was very high inflation in the third quarter, and I just tried to understand whether this expansion is one-off or not. Otherwise, have you observed some structural changes in your business like a higher share of the clothing category or better take rates that may continue to support the margins moving forward? And the second question is, is it possible to provide some sort of update on the recent competition authority investigation? What is it about? And do you expect some negative results from this investigation? Thank you.

Seçkin Köseoglu, CFO

Yes, as I mentioned in my presentation, the re-discount impact on cost of inventory sold due to purchases on credit has an effect on the improvement in gross contribution. However, the key structural improvements that we are making are related to the 3P GMV category mix shifting towards higher margin products. This trend will continue in the future as well. Other revenue streams are also something we are expanding, especially our Premium fees, which is quite important for our future profitability, along with the expansion of our delivery services. So, these key structural interventions will continue in the coming quarters as well.

Nilhan Onal Gökçetekin, CEO

Let me respond to the second question regarding the competitive authority investigation. There has been an investigation in Turkey for price recommendations for merchants from e-commerce platforms. We have been one of the companies that the competition authority wanted to better understand the logic behind this. We have shared all the data we possess. This is a capability we developed recently to enhance merchants' competitiveness and ensure competitive pricing with the right ambition and materials. We feel comfortable regarding the potential outcome. In the worst-case scenario, the competition authorities could say, "We would like platforms to halt this application," but nothing beyond that. Even in the worst-case scenario, we are ready for this, but we don't anticipate negative consequences.

Kilickiran Hanzade, Analyst

Thank you very much.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time. The conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.