D-Market Elektronik Hizmetler ve Ticaret A.S. (HEPS) Q3 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I am Gailey, your chorus call operator. Welcome, and thank you for joining the Hepsiburada conference call and live webcast to present and discuss the third 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. [Operator Instructions] 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. Mr. Celikbilek, you may now proceed.

Thanks, Gailey. Thank you for joining us today for Hepsiburada's third quarter 2024 earnings call. I am 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 30, 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 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'd like to hand the call 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 third quarter results. First, we are very proud to share a significant milestone in our journey. This quarter marks the first time we achieved quarterly positive operating income since our IPO in our IFRS financials. This accomplishment reflects the strength of our strategy, disciplined execution and the dedication of our team. Now, let's dive into the details behind this transformative moment. We have successfully concluded another challenging quarter facing the continued macroeconomic pressures and curb purchasing power. Mostly, we delivered our GMV growth and EBITDA as a percentage of GMV guidance in the third quarter. Diligent execution during the back-to-school shopping period and the celebratory campaign for the second anniversary of our loyalty program contributed to overall year-on-year GMV growth during Q3. On a 10.3% in the third quarter, we delivered 17.4% GMV growth in the first nine months compared to the same period last year, adjusted for inflation. On the profitability side, our gross contribution margin rose to 11.3% in the first nine months, with a 1.9 percentage point improvement compared to same period last year. Our EBITDA as a percentage of GMV continued its rise, reaching 1% in the first nine months of the year adjusted for inflation. Overall, we are very pleased to have demonstrated continued sustainable growth and improved profitability in the third quarter. Let me now go into our performance during the quarter as well. Let's look at a few of our operational metrics. Our active customers grew by 233,000 customers to 12.3 million. Meanwhile, we are glad to see growing interest in our phenomenal loyalty program, which has scaled to nearly 3.7 million members by November. As Turkey's most recommended e-commerce brand, we once again scored an NPS of 75. Customers identified our speed of delivery, range of affordability and lending solutions and their trust in Hepsiburada brand as key factors in their preference for the platform. Continuing our appeal, in July ‘24, we launched our renew your mobile at your doorstep product in 81 cities across Turkey. This marked Turkey's first ever nationwide device renewal program at your home door. Its convenience was reflected in a vibrant customer satisfaction record. I am happy to note that this initiative is perfectly in step with our sustainability commitments. Returning to the third quarter KPIs, we recorded 32 million orders on a 19% year-on-year growth. Our order frequency over the past 12 months reached 10.8, up by 16%. With an active merchant base of almost 100,000, we continued to expand our selection by 33% to 280 million SKUs through the onboarding of additional brands, particularly in fashion and lifestyle categories. As I do every quarter, I would like to give a status update on our four strategic priorities to highlight our key achievements. First of all, let's consider our loyalty driver, Hepsiburada premium program. Building on its momentum, we have reached nearly 3.7 million members by November end. Driving higher engagement, premium members' monthly order frequency rose by 31% after joining the program. Premium members' higher frequency significantly contributes to our overall order growth. To mark the second anniversary of the program, we held Hepsiburada Premium Days in mid-July, offering exclusive campaigns to our premium members. The 10-day event attracted 130 million visits to the platform and 4 million products were ordered throughout. Our customer satisfaction is clear from the program's robust quarterly net promoter score of 84 points, which is 9 points above our overall NPS. We value this program for being a strong driver of frequency and catalyst for customer loyalty. Next slide, please. Let's consider another strategic priority, namely our differentiating logistic capabilities achieved through HepsiJet, both on platform and off platform customers. HepsiJet continued its penetration within our merchant base. With a 6.8% annual rise, HepsiJet delivered 74% of total parcels, especially during this quarter. It's confirming its integral role in our delivery ecosystem. Its volume expansion and oversized parcel delivery has also been super impressive. In Q3, HepsiJet XLarge delivered 69% of our oversized parcels, up by 12.4 percentage points year-on-year. HepsiJet’s strong NPS underscores its value-added service excellence and confirms our commitment to flexible and convenient delivery options. As another key strategic pillar, HepsiJet also continues its off-platform expansion and doubling its volume year-on-year. With 9.8 million parcels delivered, its off-platform volume corresponded to nearly 35% of total volume in Q3. Let's move on to our strategic priority, capitalizing on our clear differentiation through landing solutions. Our solutions include in-house buy now pay later solutions, in-house consumer finance loans, shopping loans from partner banks, and general purpose loans for shopping on our platform. This proposition is unmatched in the Turkish e-commerce sector and has increased our relevance in this challenging economic climate. The quarterly share of these solutions in GMV rose to 8.8%, up from 8.1% a quarter ago. A superior user experience is enjoyed by our platform throughout the buy journey. Hepsiburada is Turkey's largest non-bank BNPL solution provider. Our BNPL volume more than tripled year-on-year during Q3. Moreover, in-house consumer finance loans have the highest conversion rates compared to all other partner banks providing shopping loans in our platform. Our BNPL cost of risk was around 2.6% in Q3 ’24, in line with our projections and pricing assumptions. We aim to grow this business in line with profitability to claim a sizable share of Turkey's $40 billion consumer loan market. In this capacity, we will continue to leverage our solutions and those of our partner banks to grow our e-comm business. On the payment front, Hepsipay continues to increase its penetration. Hepsipay stands out in the market with its 17.6 million wallet customers storing around 21 million cards by the end of November. We are determined to scale our convenient one-click checkout solutions pay with Hepsipay among other retailers also beyond our platform. This solution is already live at 127 key retailers, doubling its total payment volume in Q3 compared to Q2. Hepsipay remains committed to becoming Turkey's go-to digital wallet in both physical and online data. Let me take a moment to talk about our November campaign performance before I dive into our Q4 guidance. Our preliminary results indicate that this year we delivered yet another strong performance in November despite all the macroeconomic challenges. We recorded the highest daily traffic in our history on Single’s Day, and our platform received 500 million visits during the month. We greatly welcome Turkish customer appreciation for our superior service and solutions and all our campaigns in the busy month of November. And now our guidance for Q4 and its implications for the full year. As we executed on our strategic priorities throughout the year, we stayed very focused on achieving sustainable growth and enhancing our profitability. Accordingly, we expect to deliver around 75% GMV growth in the full year. This is roughly 13% growth as adjusted for inflation compared to ‘23. Such growth will be the end result of our guidance of 50% to 55% GMV growth for the fourth quarter. On the margin side, our fourth quarter guidance for EBITDA as percent of GMV is 1.8% to 2%. Consequently, our full year EBITDA as percentage of GMV is expected to be around 2.2% and 2.1%. Both Q4 and fiscal year signals continued margin expansion. These figures are inadjusted for inflation. Before I hand over to Seckin, let me say a few words on Hepsiburada’s forthcoming ownership transition. As announced, Kaspi has signed an SPA with our founders and the members of Dogan family to purchase a controlling 65.4% stake in Hepsiburada. Approval from the Turkish Competition Authority was granted on November 19. The transaction awaits certain regulatory approvals and involved parties expected to be closed in early 2025. We are extremely excited about the synergies that will arise from this deal as Kaspi is the preeminent in payments, marketplace and fintech ecosystem in Kazakhstan. Our shared customer centricity and service quality orientation confirm the strong cultural fix necessary for success. We believe Kaspi’s expertise in fintech, technological capabilities and experience will be significant accelerators for us and we are now in a stronger position to remain a preferred companion in the people life. With this, I thank you so much for listening us and leave the floor to Seckin, our CFO, to provide further insights into our strong financial performance.

Thank you, Nilhan, and welcome everyone. I'm delighted to be with you today to present our third quarter results. Despite the ongoing microeconomic challenges, I'm pleased to report that we maintained a strong upward trend across all key metrics in our third quarter and nine-month results. With 10.3% GMV growth in the third quarter, our GMV rose 17.4% in the first nine months compared to the same period of last year. On the profitability side, the gross contribution margin rose to 11.3% in the first nine months with a 1.9 percentage point improvement compared to the same period of last year. Our EBITDA as a percentage of GMV continued its rise, reaching 1.2% in quarter three, and 1% in the first nine months of the year. Let's go over the details of this performance. In the third quarter, GMV growth came mainly through solid order growth and higher AOV when digital products are excluded. Fashion and lifestyle, appliances and mobile phones are the top three categories of growth. We achieved a gross contribution margin of 11.5% in Q3 2024, while our third-party logistics business was a key driver. This expansion was also supported by an easing inflationary impact on our cost of inventory sold in retail operations compared to the same period of last year. In quarter three, we reached a milestone with positive operating income EBIT of TRY32 million in the first since our IPO. Our EBITDA as a percentage of GMV continued its rise to reach 1.2%. This is a 1.3 percentage point rise year-on-year when excluding the one-off contribution from Turk Commerce towards the settlement of class action lawsuits in Q3 2023. Let's move on to the next slide to see our GMV breakdown. In quarter three, around 10% of real GMV growth came through 32 million orders and a higher average order value. This performance results from our value proposition and investment in both our selection and user experience, supported by our loyalty program and affordability solutions. Our digital products contribute to the order frequency of participating customer segments. Excluding these, our order growth was at around 5%. During quarter three, we saw a 4.9 percentage point shift towards our marketplace operations compared to quarter three last year. And our 3P operations corresponded to around 70% of our business. This shift came as a result of a 2.6 percentage point shift towards non-electronics, which is in line with our broader strategy. Let's have a look at our revenue and growth contribution dynamics. First, some color on revenues. Our revenue grew by 1.7% in quarter three, bringing our revenue growth in the first nine months to 13.5% compared to the same periods of last year. Quarter three revenue growth was mainly due to a 6% rise in 3P revenue, 47% increase in delivery service revenue, and 82% increase in other revenue. These were partially offset by the 9% decrease in our 1P revenue compared to quarter three 2023. The decline in 1P revenue was mainly due to a 4.9 percentage point shift in GMV mix towards 3P. The gross contribution margin improved by 2.1 percentage points to 11.5% in quarter three compared to quarter three, 2023. This margin improvement was mainly attributable to our strategic priority to expand our logistics and fintech services to third parties, 1P margin expansion, primarily due to the impact of higher discounts on cost of inventory sold due to purchases on credit and scaling our advertising services and our loyalty program. Let's move on to our EBITDA performance on the next slide. We recorded 1.2 percentage EBITDA as a percentage of GMV in quarter three with a 1.3 percentage point yearly improvement, excluding the one-off item from quarter three of last year. A 2.1% rise in gross contribution margin, partially offset by a 0.4 percentage point rise in payroll and outsourced staff expenses, 0.3 percentage point rise in shipping and packaging expenses and 0.1 percentage rise in advertising expenses. The rise in payroll in outsourced staff expenses came from the rise of employee number in line with our talent onboarding for our subsidiaries. The increase in shipping and packaging expenses as a percentage of GMV was mainly driven by higher parcel volume and the rise in delivery fees per unit due to the fuel price and annual minimum wage rises outpacing average inflation in quarter three compared to last year. Next, let's have a look at our cash flow dynamics. In quarter three, 2024, cash provided by operations decreased by TRY1.2 billion compared to a year ago. This decrease was mainly due to a TRY1.4 billion decrease in monetary cadence on operating activities mainly on trade payables due to lower inflation, TRY917 million decrease in realized FX gains against TRY682 million increase in the change in net working capital and the TRY376 million increase in EBITDA. With TRY359 million in CapEx, our free cash flow was around TRY1.6 billion in quarter 3, 2024. Considering the first nine months, we delivered nearly TRY2.1 billion free cash flow on our continued cash discipline. Next slide, please. We'll leave you with the following takeaway from today's presentation. In quarter three, 2024, we recorded real double-digit GMV growth. Building on our strategic priorities, we marked a milestone with positive operating income in our IFRS financials for the first time since our IPO. Supported by the 2.1 percentage point rise in gross contribution, the rise in EBITDA continued to nearly TRY508 million, corresponding to 1.2% of GMV in quarter three. Having posted solid results in the third quarter, we remain committed to growing sustainably and profitably going forward. With the expected forthcoming ownership transition to Kaspi, we are entering a new period in Hepsiburada's history. Thank you for listening. We can now open the line for questions.

[Operator Instructions] There are no audio questions at this time. I will now pass the floor to Ms. Celikbilek to read written questions. Thank you.

Thank you, Gailey. One question is on our expectations for 2025. How do you think about macro landscape and your immunity to potentially shrinking demand in Turkey?

So first of all, Helin, we should remind that Turkey is a very high potential country for e-commerce, large population with 80 million, half of them is under 24 years old, high mobility and with large interest to e-commerce. So we believe in long-term potential of the market. Next six to nine months, there will be shrinking in demand for discretionary products following the much more orthodox policy from the government. We think this is beneficial for long term in Turkey, not in short term. We have significant building blocks to really run it through this period in a healthy way. One, Hepsiburada low prices offer a great value for customers during macroeconomic challenges. Second, we have the widest options for lending services, which means that consumers in the time they need affordability, they'll get more and more. The third, our premium offers -- premium loyalty program offers a great service level for customers. So in a nutshell, yes, next six to nine months, is going to demand certain immunity from the retailers, players, but Hepsiburada, with its 75-year experience in Turkey, has seen tough times and better times, and we are ready to ride it through this period.

Thank you, Nilhan. Another question is about our loyalty program. The question asks about our long-term targets with regards to the program and its growth potential.

Perfect. So, Hepsiburada Premium program is very critical for future of Hepsiburada. Once a consumer enters this program, thanks to its amazing value proposition with free cargo, free return from your door, 3% cashback and with Warner Bros package included, and this offers great service. Consumers, when they entered this program, their frequency is increasing by 30%. And we have been, in two years, just we exceeded our two-year mark, we already reached 3.7 million. When you look into very developed e-commerce marketplaces like Allegro, Mercado, we see that almost half of their active customers is now part of their loyalty program after a decade. Hence, we should definitely aspire ourselves to get at is half of our customers. That would be our long-term objective. But the key thing is sustaining an amazing value for customers, retaining very strong NPS, keeping premium as a growth flywheel for Hepsiburada Group.

All right. Thank you for that. We have another question coming up. Gailey, will you be reading the question, please?

Yes, of course. So we have, from our webcast participant [indiscernible], can you share data on volume of transactions on Hepsi wallet and take rate on the same? Do you want me to read the rest as well?

No, we'll answer this one.

Okay, thank you.

The current transaction volume going over the wallet is basically predominantly our e-commerce volume. So based on our 30-plus-million orders over the quarters, around 85% of this volume is going towards -- through the wallet.

Thank you. The next question is from the line of [indiscernible]. Could you please clarify the 1.2% EBITDA in Q3 actually compared to 2.2% guided in September?

The difference is basically the adjusted and unadjusted numbers. We are giving guidance on unadjusted EBITDA and growth. So in terms of unadjusted EBITDA, our result is in line with the guidance that we have provided, and 1.2% is in line with the adjusted numbers in our financials.

Thank you. And the next question is from our webcast participant, [indiscernible]. Why is there no increase in active merchants for the past eight quarters in a row?

I can answer this question. So with our active merchants, we actually -- we are covering most of the high potential hero merchants in Turkey. And our success with these merchants is quite adamant in our selection results, which is increasing every quarter. So we are looking for quality of the merchants over quantity. We want to work with high potential merchants that will be active, that will delight our consumers. And we believe that over time, our active merchant base will also increase. But for now, we have been working on monetizing this merchant base with high retention, serving them with our logistics services, bringing them to our successful one-click execution as well. Last quarter, I want to give some light to our active merchant numbers, why they didn't increase. So Turkish government created the new two-factor authentication and verification mechanism. Without it, we would have seen a different number. But with this new higher bar, which was quite safe for higher security of the transactions, we have seen hold things up.

Thank you. And another question is from [indiscernible] with Digiterra. Do you think the collaboration with BluTV will be affected by Kaspi's acquisition?

So our BluTV collaboration is a very strategic and important one. As you know, recently, BluTV is acquired by Warner Bros., and we made a five-year deal with them -- exclusive deal with them in Turkey. We don't expect any negative impact deterioration. And actually, BluTV just announced transition to make this amazing content next year, and they also highlighted their partnership in this press release, and they are delighted with Hepsiburada Premium product, how it helps to acquire new customers through their [indiscernible] as well. So we are quite excited about the next transition, and we think we will continue to have the strong collaboration in the coming five years as well.

Thank you. And the next question is from the line of -- from our webcast participant, Frederick Kotek with SGCM. What are your plans to insource your fintech segment through the help of Kaspi as in stop securitizing or outsourcing to banks?

Sorry, I want to clarify what the insource means.

Let's move on to the next question while the…

Frederick answers that. Yeah.

Okay, thank you. And the next question is from [indiscernible]. The cash outflow from early collection of credit card receivables is higher than EBITDA. When do you expect EBITDA CC commissions to turn positive?

Thanks a lot for this question. Actually, as you can see, we are improving our EBITDA quarter-over-quarter. And the interest rate has increased versus last year significantly, and the credit card costs have gone up as well. But going forward, as the overall interest rates in the country are going to be decreasing gradually in line with the inflation, we will continue to increase our profitability. So this data will close, and we will definitely be having a positive EBITDA minus credit card costs in the next year.

Thank you. And from [indiscernible], what is the take rate of underlying interest rate on BNPL loans?

The BNPL loans have different annualized interest rates, depending on the number of installments. So it ranges from 80% to above 100%. But on average, we can quote around 95%, including tax.

Thank you.

I think I got the gist of the question now from Frederick as well. So first of all, our BNPL and Hepsiburada finance loan solution is done through our own P&L. This is half of our outstanding loans. And the other half which is constituted by shopping loans and GPS is coming from banks. Our current strategy is continue offering our customers this widest spectrum of services, where we will continue with general purpose loans, which we will delight them with multiple banks. It's the marketplace getting the best rate as much as we continue frictionless very strong BNPL and Hepsipay finance loan proposition. So far, this is our strategy. We don't plan any change. And obviously, if we would have new news to share with you, we would share it in the following call.

Thank you. [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

We want to thank you so much for listening and trusting Hepsiburada. We are excited about our future. And in case we don't talk before, we would like to wish you all a Merry Christmas and Happy New Year. Thank you.

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