D-MARKET Electronic Services & Trading Q2 2024 Earnings Call Transcript

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September 11, 2024

Key Takeaways

  • Hepsiburada doubled its 1H 2024 GMV year-over-year with 22% real growth after inflation and delivered a 2.4% EBITDA of GMV unadjusted (1.0% adjusted) despite macro headwinds.
  • Its loyalty program grew to 3 million subscribers with an NPS of 84, and premium members now shop 36% more frequently, driving higher retention and order growth.
  • The in-house logistics unit HepsiJet handled 73% of platform deliveries and 68% of oversized parcels, doubled off-platform volumes to a 36% share, and began a pilot with electric vans for sustainability.
  • Affordability solutions (in-house BNPL, partner loans and credit options) rose to 6.1% of Q2 GMV (8.1% including general loans), with BNPL volumes tripling year-over-year and cost of risk around 2.6%.
  • For Q3, management guides GMV growth of 70–75% year-over-year and an adjusted EBITDA margin of ~2.2% of GMV, anticipating back-to-school seasonality and strategic initiatives to drive performance.
AI Generated. May Contain Errors.
Earnings Conference Call
D-MARKET Electronic Services & Trading Q2 2024
00:00 / 00:00

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Hepzi Broda Conference Call and Live Webcast to present and discuss the Q2 2024 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.

Operator

At this time, I would like to turn the conference over to Ms. Ilhan Fornalte Tzedekin, CEO Mr. Cetin Kocheroglu, CFO Mrs. Helin Cielik Belek, Investor Relations Director. Ms.

Operator

Cetin Kocheroglu, CFO Ms. Helin Cielik Belek, Investor Relations Director. Ms. Cetin Kocheroglu, you may now proceed.

Speaker 1

Thanks, operator. Thank you for joining us today for Hepsiburada's 2nd quarter and first half twenty twenty four earnings call. I'm pleased to be joined on the call today by our CEO, Nihan Onal Gokcekien and our CFO, Sejkin Koye Seyova. The following discussion, including responses to your questions, reflect management's views as of today's date only. We undertake no obligation to update or revise this information except as required by law.

Speaker 1

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 ks, our Form 20 F filed with the SEC on April 30, 2024, and other SEC filings for informational 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 reconciliation. As a reminder, a replay of this call will be available on our Investor Relations website.

Speaker 1

With that, I will hand it over to our CEO, Nijan.

Speaker 2

Thank you, Elin. Welcome, everyone, and thank you for joining us. I'm delighted to be with you today to present our Q2 and first half results. We delivered another solid set of results in Q2 2024, exceeding our guidance for both GMV growth and EBITDA as percent of GMV. We got these results despite the prevailing macroeconomic headwinds.

Speaker 2

In the first half of the year, our GMV doubled compared to the first half of previous year, and our EBITDA reached 2.4% of GMV unadjusted for inflation. Adjusted for inflation, we recorded nearly 22% real GMV growth and 1% EBITDA as percent of GMV. Due to consumer demand coming forward to Q1, we are due to prudence of considering our overall first half performance. Moreover, in the 1st 6 months, we delivered the highest first half free cash flow ever since our IPO. These results confirm that, strategically speaking, we remain on the right path.

Speaker 2

Now let's look at a few of our operational metrics. With our exceptional customer experience, top notch logistics services and diverse affordability solution, our NPS metrics yet again confirmed to be Turkey's most recommended e commerce brand. Our active customer continued to increase and reached EUR 12,100,000. Customer loyalty and retention are central to our strategy, and Hepziborod Permian has played a key role in strengthening these relationships. Just 2 years after its launch, it's hugely encouraging to see that Hepziborod Permian has scaled to 3,000,000 subscriber mark.

Speaker 2

Returning to the Q2, we recorded 36,700,000 orders on 33% year on year growth. Our order frequency over last 12 months reached to 10.6%, up by 73%. With the onboarding of additional brands, particularly in the fashion and lifestyle categories, by end of the quarter, our selection on platform reached 264,000,000 SKUs. These are offered by a maximum merchant base of around 101,000. Now let me provide a snapshot of the of the quarterly progress on our 4 strategic priorities.

Speaker 2

First, let's look into our loyalty program, which is our key to win with loyalty strategy. The program's rise to 3,000,000 members is a testament to the attractiveness of the program's value proposition. Program has an NPS of 84,000,000, which is the highest among loyalty programs in Turkish e commerce, reflects the trust and appreciation of its members. Premium members tend to prefer HEPTUBURADA as their go to shopping platform. We observed that they generate 36% higher frequency after joining the program.

Speaker 2

This strongly contributes to overall order growth. Our local streaming partner, Bulu TV, was acquired by Warner Bros. Discovery in December 23. Accordingly, a broad range of best international series and shows from Warner Bros will soon be available as part of the premium program benefits, enriching the exclusive experience enjoyed by these members. We remain dedicated to retaining satisfied customers while welcoming new ones into the fall.

Speaker 2

Next slide, please. Moving on to other strategic priority, which is differentiation with our superior delivery services. Central to achieving this is our Hepzijet continued penetration on our platform. Hepzijet, which is our last mile services company, delivered 73% of total parcels dispatched during the quarter. This is up by 6.8 percentage points year on year.

Speaker 2

Its volume expansion in oversized parcel delivery is also very impressive. In Q2, 68% of all oversized parcels on Hephtebra Dagh were delivered by Hephtejet ex Large. This marked an 8.9 percentage point year on year increase. HFCS's high NPS confirms its commitment to differentiation with service excellence, a commitment fueled by flexible and convenient delivery options. Being a new generation logistics company committed to sustainable practices in a pilot project, Hestjet added 7 to 1 electric vans to its fleet in the quarter.

Speaker 2

With the target to increase this number to 50 by year end, this initiative marks a small step towards addressing the bigger environmental issue. In this context, as the 1st e commerce player to publish a sustainability report in Turkey, I'm delighted to announce that we recently published our report for 2023. Our 3rd priority is capitalizing on our clear differentiation with affordability and lending solutions. HeftyPACE comprehensive suite of payment and lending services gained further significance in a continued environment of tight liquidity debt. Our affordability solutions, which include our in house buy now, pay later solution, consumer finance loans and shopping loans from partner banks, have gained more traction.

Speaker 2

The quarterly share of these affordability solutions in GMV rose to 6.1% from 4.9% a quarter ago, which is around 20% increase. The consumer tendency to use general purpose loans for shopping on our platform has also increased. As such, including the impact of those spent in the platform, GMV penetration of our overall affordability solutions rose to 8 0.1% in Q2 from 5.8 percent a quarter ago. HEXTYBORAD is the largest non bank BNPL solution provider in Turkish market. Our BNPL volume more than tripled year on year during Q2.

Speaker 2

Our overall BNPL and shopping loans were utilized nearly 1,300,000 orders over the last 12 months. We diligently manage credit risk in our BNPF with a cost of risk around 2.6% in August. On a broader scale, over the last 12 months, total lending volume on our platform reached EUR 11,200,000,000 with an incremental of around EUR 3,000,000,000 over the last quarter. Nearly half of this volume was issued through our partner banks. Shopping related credit receivables create limited balance sheet load with average durations of 3.2 7 4.2 months of BNPAT and consumer finance loan solutions, respectively.

Speaker 2

We aim to grow this business line profitably by continuing to leverage HDPE solutions and those of our partner banks, thereby growing our e commerce business nicely. Aside from affordability aspect, hefty pay scaled up on the payment front. Its wallet paid loans to 16,700,000, covering 19,500,000 store cards by end of August. HETSI Pay further enhanced customer experience with the recently launched auto top up feature in the wallet. HETSI Pay remains committed to becoming Turkey's primary digital wallet in both physical and online retail.

Speaker 2

Our 4th key priority is offering our strongest muscles to off platform customers. And let me start with Hep C Jet. With over 9,000,000 parcels delivered, Hep C Jet doubled its external customer volume year on year. Accordingly, in Q2 2024, its off platform share rose by 11.1 percentage points year on year to nearly 36% of its total, thanks to doubling its volume with many trusting customers off platform. As an appealing logistics partner, Hepzijet continues to expand its customers portfolio through several key accounts.

Speaker 2

Next is Hepzijet's one click checkout solution, Pay with Hepzijet. We continue to expand this convenient solution to many other retailers. Hep C Pay is now integrated with 50 leading retailers of Turkey, having almost tripled its total payment volume in Q2 compared to Q1. Hesi Pay aims to continue winning key accounts by also launching its propositions in the SME market. And now I will end my part with our guidance for Q3.

Speaker 2

For the second half of the year, we remain cautiously optimistic about market conditions, and yet we are truly confident in our ability to execute on our strategic initiatives for the period ahead. Accordingly, in the Q3, we expect to deliver GMV growth within the range of 70% to 75% year on year. We continued our prudent cost management in place, and we foresee an EBITDA of around 2.2 percent of GMV. These figures I refer to are in adjusted for inflation. With this, I thank you for listening and leave the floor to Sejkina, our CFO, to provide further insights into our strong financial performance.

Speaker 3

Thank you, Michal, and welcome, everyone. I am delighted to be with you today to present our 2nd quarter and first half results. We delivered a solid performance across all metrics, both in quarter 2 and the first half in a still challenging macroeconomic environment. Here, it's worth taking a minute to recap what Nilan said regarding consumer demand dynamics of the 2 quarters of the first half, which consequently impacted our quarterly growth performance. Overall, quarter 1 consumer demand was high due to widespread expectation of price increases post March 31 local elections, which pulled consumer demand forward from April to March.

Speaker 3

Therefore, we see the merit in considering our overall first half GMV growth performance, which came in at 21.6 percent adjusted for inflation. On the profitability side, we recorded an 11.2% gross contribution margin and 1.0 percent EBITDA as a percentage of GMV in the 1st 6 months of the year. Let me now go over the details of the 2nd quarter performance. In the Q2, around 4% real GMV growth came mainly through order growth. Higher VAT rates also contributed to this growth in this year.

Speaker 3

We achieved the highest gross contribution margin since our IPO at 12% with a solid 2.6 percentage point improvement on a yearly basis in quarter 2 2024. Our EBITDA as a percentage of GMV continued its uptrend reaching 1.1% with a 0.9 percentage point rise year on year when the one off provision reversal for the Competition Board investigation concluded in July 2023 is considered. Let's move on to the next slide to look at our GMV breakdown. In quarter 2, with a 4 percentage point shift compared to quarter 2 last year, our marketplace operations corresponded to around 71% of our business. This shift came as a result of a 5.1 percentage point shift towards non electronics, which is in line with our broader strategy.

Speaker 3

Change in market dynamics with a slowdown in electronics market also has an impact in this shift. Let's have a look at our revenue and gross contribution dynamics in the next slide. While quarter 2 revenue growth was nearly flat, our revenues grew by 20.5% in the first half. Flat revenue performance in quarter 2 2024 was mainly due to a 13% decrease in our 1P revenue compared to quarter 2 2023, offset by the strong growth in our delivery service revenue and other revenue, including advertising services revenue and loyalty program revenue. The 13% decline in 1P revenue was mainly due to the 4 percentage point shift in G and A and our loyalty program were instrumental in this quarter's gross contribution margin expansion by 2.6 percentage points.

Speaker 3

Let's move on to our EBITDA performance on the next slide. We recorded 1.1% EBITDA as a percentage of GMV in quarter 2 2024 with a 0.9 percentage improvement on a yearly basis, excluding the one off item last year. This improvement was driven by a 2.6% rise in gross contribution margin, partially offset by a 0.9 percentage rise in shipping and packaging expenses, a 0.5% rise in advertising expenses and a 0.4% rise in payroll and outsourced staff expense. The increase in shipping and packaging expenses as a percentage of GMV were mainly driven by higher order volume on our platform and rising volume of HDJET 3rd party business. Rising delivery fees per unit outpacing the average inflation in quarter 2 2024 compared to quarter 2, 2023 also had an impact.

Speaker 3

Next, let's have a look at our cash flow dynamics. In quarter 2, 2024, cash used in operations improved by BRL503 1,000,000 compared to a year ago. This improvement resulted from BRL121 1,000,000 increase in EBITDA, TRY448 million decrease in realized FX losses, TRY 73 million increase in the change in operating monetary gain against TRY107 million decrease in the change in net working capital and the TRY32 million decrease in other non cash items. With TRY407 million in CapEx, our free cash flow was around negative TRY645 million in quarter 2 2024. Considering the 1st 6 months, we delivered the highest first half free cash flow since our IPO.

Speaker 3

We can move on to the next slide. And I would like to leave you with the following takeaways from today's presentation. Despite quarter 2's continued macroeconomic headwind, we achieved real GMV growth on a year on year basis, contributing to 21.6% growth in the first half. Building on our strategic priorities, we recorded the highest gross contribution margin since our IPO at 12% in quarter 2 2024. The uptrend in EBITDA continued in step with our sustained cost optimization efforts, reaching 1.1% of GMV in quarter 2 2024.

Speaker 3

Our controlled cash management enabled us to record BRL472 1,000,000 free cash flow in the first half of twenty twenty four, which marks the highest first half FCS since IPO. As we reflect good results in the first half of the year, we are committed to growing sustainably and profitably going forward. Thank you for listening. We can now open the line for questions.

Operator

Ladies and gentlemen, at this time, we will begin the question and answer session. Ladies and gentlemen, there are no audio questions at this time. We will now proceed with the written question from our webcast participants.

Speaker 1

Thanks, operator. The first question is, your GMV guidance implies a bigger premium to inflation in Q3 than in Q2. What's driving that?

Speaker 2

There are few drivers that is going to deliver higher growth in Q3 versus inflation. Number 1 is the impact of our strategic initiatives, premium, which is driving higher loyalty, our investments with Hep C Jet, which already doubled volume in off platform, our improvement in ad and premium revenues. On top of this, we are also going to get the seasonality positive seasonality impact of back to school period, and hence, we are expecting solid growth in Q3 ahead of inflation.

Speaker 1

The second question is, what was the impact of the 2nd quarter holidays on GMV?

Speaker 3

We would probably have roughly an additional 6% real growth on top of our existing growth, bringing our real growth to 10%.

Speaker 1

Thank you. 3rd question is on the seasonality of cash flow. For the second half of twenty twenty four, would you expect to return to positive free cash flow like in

Speaker 3

2023? Yes, definitely. And I'm confident that we will have a positive free cash flow on a full year basis. We will definitely continue to improve our EBITDA and manage the working capital diligently in the second half of the year. On the flip side, we had a sizable realized FX gain last year, which may not necessarily be the same this year depending on the Turkish lira devaluation.

Speaker 1

Thank you. 4th question is shifting GMV towards Marketplace 3P, is that a seasonal shift or is it strategy?

Speaker 2

We definitely have a strong strategy to improve our mix for higher non electronics, thanks to our premium and loyalty programs. Hence, this shift to nonelectronics is coming towards 3P because home, fashion, all these nonelectronic categories has a much higher rate of marketplace in our platform. This is the strategic part. On the other side, the slowdown in electronics market in Turkey is also bringing a higher mix shift to nonelectronics, almost beyond our control as well as it is coming as a tailwind to our platform.

Speaker 1

Thank you. 5th and last question in this question set is, as inflation subside, how will IAS 29 accounting impact evolve as we go into 2025 on revenue, EBITDA and free cash flow specifically?

Speaker 3

Sure. On revenue on an unadjusted basis, the growth will be lower as price increases will be lower in the market with lower inflation. But on an adjusted basis, there will be no real change on real growth. On DTA, this is going to have a positive impact. As inflation goes down, the impact on cost of inventory will decrease.

Speaker 3

So this is definitely positive. And on FCF, adjusted and unadjusted FCF will be almost the same. So it's going to have a limited impact on that. But as EBITDA improves, definitely this positive impact will impact FCF positively as well.

Speaker 1

So back to you, Mina.

Operator

Thank you. We will now move on to further written questions. The first one is from Tim Arashuk with Frontera Capital. And I quote, hi, could you please talk about measures being taken to address the rise in finance costs due to higher rates? Thanks.

Speaker 3

As interest rates have gone up and stayed the same for quite some time, we have adjusted our credit card policy, adjusting the thresholds that we give interest free installments to our consumers as one mitigating impact. We continue to increase our affordability solution, which is helping us manage the overall cost of financing, and we are on a very positive trend, as Niran explained. So we will continue to focus on these measures and make sure that credit card costs and the overall financing costs are manageable going forward.

Operator

Our next webcast question is from Maxim Leggrazov with Citi, and I quote. Thank you for the presentation. Can you comment on the consumer environment in Turkey?

Speaker 2

Absolutely. So thanks for the question. I think there are 2 parts to this question. One part is the macro environment where government has been taking actions, been very decisive to fight inflation, which has accelerated in early Q2. High interest rate environment at 50% versus last year this time was around 8.5%, created a tendency to save credit environment has been tougher.

Speaker 2

So some of the discretionary category, we are seeing that the demand is contracting. On the flip side, there is a definitely strong interest to our solutions, which I explained in our results, the affordability, our very competitive prices. And also, there is going to be seasonality impact coming with back to school in Q4, Black Friday. This is going to flourish the demand. We are also expecting innovation from recent NPI from Apple.

Speaker 2

AI innovation is also going to bring some tailwinds to our electronics market, and we expect to build still consumer demand with our strategic differentiator.

Operator

Our next welcome question comes from Hazan Bekelykiran with JPMorgan. And I quote, thank you very much for the presentation and congratulations on strong results. My question is on your guidance, which seems a bit optimistic versus the inflation and expected slowdown in the consumption. Can you please explain the main revenue drivers for the growth? And why do you think hep C may stay resilient against lower consumption across all sectors in the remainder of the year?

Operator

Thank you, Hazante.

Speaker 3

As Niran mentioned in the previous question, our guidance is based on the back to school period where we are going to have a higher GMV and in line with that, a higher revenue. We expect that the quarter 3 electronics market will be in a much better position versus quarter 2 in terms of growth. And this is going to impact our 1P business. And as 1P part of the business goes back, it's going to have a positive impact on the revenue. And definitely, our ads business will continue to flourish together with the increased trade with back to school.

Speaker 3

And on top, our premium revenues will continue to deliver as we increase our premium user base.

Operator

Our next webcast question is from Sinan Sin with Amber Road Investors. And I quote, have you detected any shifts in behavior from consumers as the cross border taxes have changed as of August 2024?

Speaker 2

Sinan, I would say this is slightly early to speak because the change has been effective end of August. So we only had few trading days, but I promise to comment on this in the next quarters' call. Obviously, I also want to underline, if anything, this would have a tailwind impact to Hepsiburada demand because we have extremely minimal global inbound share, which is around 1% of our business. So we would expect such a change to impact global competitors, which has heavily relying on imports. So this could bring a tailwind to our business, but I would like to wait and see the real impact before we give an estimation here.

Operator

The next question is a follow-up question from Maxim Lacrazo with Citi and I quote. To follow-up, do you see a material pressure on consumer or trading down? Would you expect competition to be tougher in the second half twenty twenty four and twenty twenty five as a result of higher promotional activity?

Speaker 2

So the pressure, there's definitely a pressure on the consumer because credit environment is more tough. Interest rate is still high. And number of installments available for consumers are getting more limited. So this is the headwind part of it. And in half 2, we generally expect higher competition because of the seasonality impact as well.

Speaker 2

But yet, as you can see in our forecast, our expectation in terms of our own performance, thanks to all the affordability and landing models we built, thanks to a growing share in our external platform with our logistics business And with the other strategic measures we have taken, we think we are going to deliver a strong performance in the coming months and also into next year.

Operator

The next question is a follow-up question from Tim Rachuk with Frontera Capital. My quote, as a follow-up, do you expect to get to bottom line profitability in the second half?

Speaker 3

As I mentioned before, we will definitely continue to improve our EBITDA profitability, but I think it would be a little bit premature to comment on the bottom line profitability because our FX gain was a main tailwind last year, and it's very hard to predict the dollar rate that will materialize in the coming months until the end of the year. So it would be very hard to comment on the bottom line at this point. But EBITDA will continue to improve for sure.

Operator

Our next question is a follow-up question also from Sinanci with Amber Road Investors. And I quote, are there any limits to funding capacity from your funding partners or balance sheet capacity for your Affordability Solutions and HEPC funds? Do you plan on doing further asset backed insurance insurances? Thank you.

Speaker 3

We do not have any issues on funding our BNPAS plans, definitely both from our own balance sheet and also using different instruments like asset backed securities and bond issues. We will shortly initiate the 2nd tranche of our asset backed security program, and it will continue. So as the business grows in affordability solutions, we have the right tools for funding it healthily.

Operator

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.

Speaker 2

Thank you so much for listening us. We appreciate your time and questions. Thank you.

Operator

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

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