D-Market Elektronik Hizmetler ve Ticaret A.S. (HEPS) Q2 2024 Earnings Call Transcript

D Market Elektronik Hizmetler ve Ticaret AS

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Overview

The earnings call summary presents a mixed picture. Basic Financial Performance shows modest GMV growth, yet strong margins. Product Development and Business Update are positive due to strategic initiatives and loyalty programs. Market Strategy faces challenges from competitive pressures and economic factors. Expenses and Financial Health are concerning due to high costs and negative cash flow. Shareholder Return Plan is neutral with no buyback program. The Q&A reveals cautious optimism but highlights economic and competitive pressures. Overall, the sentiment is neutral, with no major catalysts for strong price movement.

Key Financial Performance

GMV (Gross Merchandise Volume) In Q2 2024, GMV grew by 4% year-on-year, contributing to a 21.6% growth in the first half of 2024, adjusted for inflation. This growth was driven by order growth and higher VAT rates.

EBITDA as a percentage of GMV In Q2 2024, EBITDA reached 1.1% of GMV, a 0.9 percentage point increase year-on-year, excluding a one-off provision reversal from the previous year.

Gross Contribution Margin The gross contribution margin in Q2 2024 was 12%, marking a 2.6 percentage point improvement year-on-year, driven by a strategic shift towards third-party services and advertising revenue.

1P Revenue 1P revenue decreased by 13% in Q2 2024 compared to Q2 2023, primarily due to a shift in GMV mix towards 3P services.

Free Cash Flow In the first half of 2024, free cash flow was around negative TRY645 million in Q2, but the first half free cash flow was the highest since the IPO, totaling TRY472 million.

Cash Used in Operations Cash used in operations improved by TRY503 million compared to the previous year, attributed to an increase in EBITDA and a decrease in realized FX losses.

CapEx (Capital Expenditures) CapEx in Q2 2024 was TRY407 million.

Affordability Solutions Share in GMV The share of affordability solutions in GMV rose to 6.1% in Q2 2024 from 4.9% in Q1 2024, indicating a 20% increase.

Total Lending Volume Total lending volume on the platform reached TRY11.2 billion over the last 12 months, with an increase of around TRY3 billion over the last quarter.

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Operating Highlights

Hepsiburada Premium Subscribers: Hepsiburada Premium has scaled to 3 million subscribers, enhancing customer loyalty and retention.

Hepsipay Wallet Growth: Hepsipay's wallet grossed $16.7 million, covering 19.5 million store cards by end of August.

GMV Growth: In the first half of 2024, GMV doubled compared to the first half of the previous year, with a guidance of 70% to 75% growth year-on-year for Q3.

HepsiJet Off-Platform Growth: HepsiJet doubled its external customer volume year-on-year, with off-platform share rising to nearly 36%.

Order Growth: Recorded 36.7 million orders in Q2, a 33% year-on-year growth.

Free Cash Flow: Achieved the highest first half free cash flow since IPO, with TRY472 million.

Sustainability Initiatives: HepsiJet added seven electric vans to its fleet, targeting 50 by year-end.

Affordability Solutions: The share of affordability solutions in GMV rose to 6.1%, a 20% increase from the previous quarter.

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Risk or Challenges

Macroeconomic Headwinds: The company is facing ongoing macroeconomic challenges, including high inflation and interest rates, which have created a tough credit environment and impacted consumer demand.

Competitive Pressures: There is an expectation of increased competition in the second half of 2024 due to seasonal factors and higher promotional activity, which may pressure margins.

Supply Chain Challenges: Rising shipping and packaging expenses, driven by higher order volumes and delivery fees, are impacting overall costs.

Regulatory Issues: The company is managing the implications of a one-off provision reversal related to a Competition Board investigation, which may affect financial performance.

Consumer Behavior Changes: Changes in cross-border taxes may influence consumer behavior, although the immediate impact is yet to be assessed.

Funding Capacity: While the company has sufficient funding for its BNPL plans, there are ongoing considerations regarding the balance of funding capacity and potential asset-backed securities.

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Guidance & Outlook

GMV Growth: In Q3, Hepsiburada expects GMV growth within the range of 70% to 75% year-on-year, driven by strategic initiatives and positive seasonality.

EBITDA Guidance: For Q3, the company anticipates an EBITDA of around 2.2% of GMV, adjusted for inflation.

Customer Loyalty Program: Hepsiburada Premium has scaled to 3 million subscribers, contributing to higher customer loyalty and order frequency.

HepsiJet Expansion: HepsiJet delivered 73% of total parcels, with a significant increase in off-platform customer volume.

Affordability Solutions: Hepsipay's share of GMV from affordability solutions rose to 6.1%, with BNPL volume tripling year-on-year.

Sustainability Initiatives: HepsiJet added electric vans to its fleet, aiming to increase the number to 50 by year-end.

Free Cash Flow: Hepsiburada expects to return to positive free cash flow in the second half of 2024.

Revenue Drivers: The company anticipates higher revenue driven by back-to-school seasonality and growth in advertising and premium revenues.

Market Conditions: Management remains cautiously optimistic about market conditions, expecting to execute strategic initiatives effectively.

Consumer Environment: Despite a tough credit environment, Hepsiburada expects strong demand due to affordability solutions and competitive pricing.

Funding Capacity: Hepsiburada does not foresee issues with funding its BNPL plans and will initiate the second tranche of its asset-backed security program.

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Shareholder Return Plan

Free Cash Flow: In the first half of 2024, Hepsiburada delivered the highest first half free cash flow since its IPO, amounting to TRY472 million.

EBITDA Guidance: For Q3, Hepsiburada expects an EBITDA of around 2.2% of GMV, adjusted for inflation.

Buyback Program: None

Dividend Program: None

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Key Q&A

Q:Your GMV guidance implies a bigger premium to inflation in Q3 than in Q2. What's driving that?

A:There are a few drivers that is going to deliver higher growth in Q3 versus inflation. Number one is the impact of our strategic initiatives, Premium, which is driving higher loyalty, our investments with HepsiJet, which already doubled volume in off-platform, our improvements 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 a solid growth in Q3 ahead of inflation.

Q:What was the impact of the second quarter holidays on GMV?

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

Q:For the second half of 2024, would you expect to return to positive free cash flow like in 2023?

A: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.

Q:Shifting GMV towards Marketplace, 3P. Is that a seasonal shift or is it a strategy?

A: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 non-electronics is coming towards 3P because home, fashion, all this non-electronics categories has a much higher rate of marketplace in our platform. This is the strategic part. On the other side, the slowdown in electronics markets in Turkey is also bringing a higher mix shift to non-electronics almost beyond our control as well as its coming as a tailwind to our platform.

Q:As inflation subsides, how will IAS29 accounting impacts evolve as we go into 2025 on revenue, EBITDA and free cash flow specifically?

A: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 EBITDA, this is going to have a positive impact as inflation goes down, the impact on cost of inventory will decrease, 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.

Q:Could you please talk about measures being taken to address the rise in finance costs due to higher rates?

A: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 solutions, which is helping us manage the overall cost of financing and we are on a very positive plan as Nilhan explained.

Q:Can you comment on the consumer environment in Turkey?

A:There are two 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 tandem, safe to say, credit environment has been tougher, so some of the discretion in the category, we are seeing that the demand is contracting. On the flip side, there is a definitely strong interest of our solutions, which I explained in our results affordability.

Q:Can you please explain the main revenue drivers for the growth?

A:Our guidance is based on the back-to-school period where we are going to have a higher GMV and in line with that higher revenue. We expect that quarter three electronics markets will be in a much better position versus quarter two in terms of growth. And this is going to impact our 1P business.

Q:Have you detected any shift in behavior from consumers as the cross-border taxes have changed as of August 2024?

A:It 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 quarter's call.

Q:Do you see a material pressure on consumer or trading down, would you expect competition to be tougher in the second half of 2024 and '25 as a result of higher promotional activity?

A:There is 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.

Q:As a follow-up, do you expect to get to bottom line profitability in the second half?

A:It would be a little bit premature to comment on the bottom line profitability because our FX gain was the main tailwind last year. And it’s very hard to predict the dollar rate that will materialize in the market in the coming months until the end of the year.

Q:Are there any limits to funding capacity from your funding partners or balancing capacity for your affordability solutions and Hepsi funds?

A:We do not have any issues on funding our BNPL plans, definitely both from our own balance sheet and also using different instruments like asset-backed securities, and bond issues.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer to the question regarding the impact of cross-border taxes on consumer behavior, stating it was too early to comment and promising to provide insights in the next quarter's call. Additionally, there was a lack of clarity in the response about bottom line profitability, as management indicated it would be premature to comment due to uncertainties surrounding FX gains.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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