D-MARKET Elektronik Hizmetler ve Ticaret Anonim Sirketi (HEPS) Q3 2021 Earnings Call …

Welcome and thank you for joining Hepsiburada conference call and live webcast to present and discuss the third quarter 2021 financial results.

I’m pleased to be joined on the call today by our CEO, Murat Emirdag, and our CFO, Korhan Oz.

The earnings release has been filed with the SEC on a Form 6-K and is currently available on the SEC website and on our Investor Relations website.

Please refer to today’s earnings release as well as the Risk Factors described in the Safe Harbor slide of today’s presentation, today’s press release, the 6-K, our prospectus filed with the SEC on July 1, 2021, and other SEC filings for information about factors which could cause our actual results to differ materially from these forward-looking statements.

Before we dive into the quarterly update, some of which we shared in our pre-announcement on November 1, let me start by saying that we, the Hepsiburada team, acknowledge the concerns of the market.

With that, before passing over to Korhan for a more detailed look at our financials, let me provide some context around the third quarter.

The change was so drastic that the quarter-on-quarter market growth slowed to its lowest third quarter growth rate in the past four years in Turkey, according to Turkey Statistic Institute, TUIK, and Interbank Card Center, BKM.

Secondly, the competition further intensified in Turkey, as evidenced by the fundraising announcement of our main competitor following our IPO.

As a result, we continued to generate strong GMV growth despite significant headwinds, but this came at the cost of lowering our gross contribution margin and flat revenue growth.

And within the second half, the last four months of the year generally make approximately 40% of annual GMV due to key shopping occasions such as back to school, Legendary November shopping month and New Year’s season.

Despite these major headwinds in the third quarter, we also have posted news regarding the progress we made in multiple fronts, including as follows: Accelerating our growth drivers such as increase in customer, order frequency, merchants, and collections; strengthening our key differentiators such as NPS performance; unique services like frictionless return, merchant and customer experience; scaling our new strategic assets, including our wallet companion, HepsiPay, and our on-demand grocery delivery service, HepsiExpress, and also expanding our logistics footprint.

Ninety percent of total retail is still offline and the remaining online 10% is expected to double its penetration within total retail by 2025, offering a sizable and timely market opportunity ahead.

While increasing our active customer base, we also noted that we had successfully engaged our customers in terms of GMV per active customer across the platform as it grew by 33% year on year compared to the same period last year.

This is visible in the EBITDA as a percentage of GMV, reaching a negative 10.2% in the third quarter compared to the same period of last year, taking EBITDA to a negative 5.7% of GMV in the nine-month cumulative period in 2021.

Our investment in growth, brand, marketplace and customer experience paid off, given the strong momentum in our active customer base, order frequency, active merchant base and selection.

Active customer base grew by 26%, reaching 10.7 million in the third quarter.

As a result, our total number of SKUs more than doubled by reaching 77 million at the end of the third quarter.

As a household brand name in Turkey with 99% total awareness, we had welcomed 240 million sessions on a monthly average in the third quarter.

In addition, HepsiJet expanded its city coverage for its two-man cargo handling service called HepsiJet XL and began offering scheduled return pickup for such oversized products as well.

While we are encouraged by the strong progress in our growth drivers, we will certainly keep on differentiating with our best-in-class customer experience, powered by our robust logistics, reaching over 190,000 square meters at this point.

As such, we foresee a constructive approach with our value proposition which has helped us to significantly grow the number of active merchants.

HepsiLojistik, our fulfillment service, has increased its focus on scaling its volume from merchants on our platform.

We believe our strategic collaboration with Facebook and Google on advertising technology and solutions will contribute to the growth of the business.

With its license to operate as an open wallet, HepsiPay aspires to evolve into best-in-class payment companion, enabling frictionless experience across payment, money transfers, and other incremental fintech capabilities across online and offline worlds.

Accordingly, in November, HepsiPay agreed with Paycell, which is a fintech subsidiary of Turkey’s leading telecom operator, Turkcell, to enable direct carrier billing capability as HepsiPay wallet.

We regard HepsiExpress as a strategic asset as we believe it is well-positioned to drive surge in order frequency and new customer acquisition for the platform.

In addition to internal development, HepsiExpress expanded to over 50 retailer brands and roughly 1,950 stores, including regional retailers, as well as national retailers such as Carrefour and Sok.

And that remaining online 10% is expected to double its penetration within total retail by 2025, offering a sizable and timely market opportunity.

I want to wrap up here by reassuring you that with our strong customer and merchant base, our hybrid 1P and 3P model, our differentiated services for customers and merchants, our robust logistics network, and continued investment in technology and data science alongside the talent, and our strategic assets emerging from our ecosystems such as HepsiPay, HepsiExpress, HepsiJet, and HepsiAd, we are well-positioned to capture the business opportunity ahead.

As Murat elaborated in his section, our value proposition for our customers has been instrumental in driving our growth drivers across the number of active customers, a 26% growth, orders frequency with 21% growth, active merchants with 87% growth, and number of SKUs with more than 100% growth.

There are three factors that we need to discuss in depth to better understand the dynamics affecting our revenue and gross contribution margin in the third quarter.

Our commission rates that we charge to our merchants on the marketplace remain at around the same level in the third quarter compared to the same period last year.

The 13-percentage-point year-on-year GMV share shift from retail to marketplace in the third quarter resulted in lower revenue.

However, Q4 is not the best quarter to realize the full impact on efficiencies due to existence of peak occasions, such as the Legendary November shopping month, as well as the New Year season.

It is worth mentioning that our gross contribution margin is not a direct reflection of the commission rate, but it reflects our marketplace commission net of customer discounts.

Meanwhile, our delivery service revenue increased by 83%, driven by the rise in the number of orders and higher delivery service revenue from services provided to third parties.

In the first nine months, gross contribution grew by around 11% compared to the first nine months of 2020, with a 7.1% gross contribution margin.

0.7 percentage points rise in shipping and packing expenses, driven by the 72% increase in number of orders and around 22% rise in unit prices applied by our delivery partners.

The increase was driven by 4.5 percentage points decrease in gross contribution margin due to customer discounts, 3.9-percentage-point rise in advertising expenses, 1.2-percentage-point rise in payroll and outsource staff expenses and 0.8 percentage point rise in other opex items excluding the cost of inventory sold and depreciation and amortization.

Net cash used in operating activities increased from negative TRY 47.8 million in Q3 2020 to negative TRY 582.4 million in Q3 2021, which is mainly driven by the increase in net loss for the period.

We continued to operate with negative net working capital, which reached TRY 2.1 billion as of Q3 2021, increasing by TRY 23.4 million in Q2 2021.

And therefore, we have no plans to go to the capital markets to raise any funds in the next 18 months.

And probably if you can explain a little bit more, how does it impact the business, being specific both about online and offline players? And given that trend to capital raise was known since 2Q 2021, did you maybe react a little bit with a lag to this incremental competition and that’s why we’re seeing this incremental spend in Q3.

In terms of the competition and actually how we reacted to it, I guess it is fair to say, when actually Alibaba raised their fundraising after our IPO, that was influenced by competitive landscape in the market and also a little bit.

We increased the amount of marketing/advertising we use, but also the unit cost of marketing/advertising also went up.

This is the combination of, actually, the structure you referred to in terms of the competitive landscape and how we reacted to it, and why it was increasing the cost of marketing.

And as I explained, this is mainly driven by the discounts that are given to our customers during the intensive competition period.

For the high advertising spend, I can say, during September, as we mentioned before, we reduced our CRM spendings that are given to our customers, and we continued this reduction during October and we see some encouraging results during October.

On the liquidity for the next 18 months, yes, in our initial plans, we see that our liquidity is sufficient enough and we don’t need any liquidity for the next 18 months.

Also, like Korhan said, we have already begun tasting some efficient tools and tactics, with increasing muscle of our data science and marketing analysis.

So, basically, when I refer to our other areas that are supporting our growth, I want to emphasize the fact that we are a household brand name, 99% total awareness, we are the only one with a strong hybrid model, 1P and 3P.

And, of course, our nationwide robust logistics coupled with our assets like Pay, grocery on demand, HepsiExpress, HepsiJet, and advertising, and so on, we feel we have many levers to drive the growth across the platform, but not just marketing.

So, I think you mentioned that you’ve lowered that discounting in September and October.

Maybe I can start from maybe the last question first, which is referring to the customer behavior in terms of project frequency, if I’m not mistaken.

That is actually the way we see in terms of the overall dynamics here because the GMV per customer also increased by 33% as we saw in the numbers year over year.

As you can see from the public data from the Interbank Card Center and TUIK, Turkish Statistics Institute, there was a drastic drop in this Q3 this year, Q on Q.

In the first period, so far, at least up to this point, we can see we’ve been actually also unlocking a lot of efficiencies in our marketing practice, growth practice, and so on across the board, which is actually very encouraging.

And the second part you asked me about, actually, are we seeing any other area where you see any gap between us and competition.

In other words, actually, we are making significant progress in areas where we are differentiating from customer.

As you can see, we are already taking the actions to make sure we run and manage our marketing spend, customer discounts, and cash flow, more efficiency.

And as you can imagine, this is the quarter where the seasonality is high.

And therefore, from offline/online, it is fair to expect increased competition this quarter.

So, basically, we are trying to not just differentiate, also get more efficient and increase the gap between us and competition in our favor.

The first one is related to the fourth quarter and how is the operating environment in fourth quarter, given that the guidance indicates 18% year-on-year growth in the fourth quarter? And also, what is your initial thoughts on the growth and profitability as well as competitive environment into 2022? And for margins, more close to third quarter in the next year or you will reduce CRM expenses largely in the coming year? And my second question is also related to the first one.

So even if — from the — as e-commerce data system in Turkey exits and as year-on-year growth numbers in first half 2021 for the e-commerce market in Turkey on a year-on-year basis where the market grew by 75% year on year in first half, why has Hepsiburada GMV growth was at 60% year on year in the same period.

In terms of market share, we share your concern in terms of lack of resources that everyone can actually leverage and use because we are the only public company in Turkish market.

Maybe what we can share with you is to refer into the latest trends, is again the BKM, like the Interbank Card Center public data, which you can also access.

If you look at our GMV Q on Q, you will see almost kind of a 10% plus — 10%, let’s say, growth, which means, in this case, looking at 7% versus our 10%, it might give us some signals regarding the Q3 trend.

This is actually a very tough question because hard to understand the dynamic in the Turkish market because it could be affecting the customers behaving two different ways.

One could be that people actually see this time and shopping season as an opportunity and affordable distribution and opportunity for them, and they can also see e-commerce as a transparent platform for price comparison, selection and convenience.

When we see, at least so far, in the current dynamics, we can say what we tried to achieve in November in terms of our execution seems to resonate fairly well with our customers.

As you know, we did some sort of buy now, pay later solution with leading banks in Turkey, so people can purchase now and pay in January.

Even in the 11/11, we recorded all-time high daily orders, maybe over half a million orders to share for you guys.

This is the trends we see in terms of the first part of November, but we’re yet to see the big time in the month, which is the Legendary Friday part of the month.

So we would like to see the closure of November and December to understand if we need to make small adjustments in our plan and we will come back to you with our guidance, with our Q4 announcements.

But November and December is not the time, but we believe going forward, starting from Q1 onwards, we will be able to improve our gross contribution margin, which will help for our profitability.

So can you please also help us to understand the change in GMV per category because I’m trying to understand whether you are also cutting the take rate per category or this is stable mainly because of a shift in the GMV? And the second one is about your inventory levels.

We don’t see much increasing the capex so far.

Compared to last year, same period, our take rate, means our commission rate that we are charging to our merchants, does not change significantly.

However, there has been some shift from 1P to 3P between last year and this year, around 13 percentage points, which affected our results for the shift in those categories.

That is one of the reasons that our negative net working capital could have been higher, but only improved around TRY 30 million, TRY 40 million for the Q3 closing.

However, at the same time, we somehow paid with shorter payment terms, or even we made some advanced payments to secure those products to make them available for Q4.

Yes, we are not happy with the gross contribution margin and we believe we definitely need to increase the margin.

During Q3, we had to increase the customer discounts due to the market dynamics, as we explained.

And we made the decision to sharpen our focus on our gross contribution margin, key differentiators, and drivers of sustainable GMV growth.

Before I go there actually, Hanzade, I want to address initially — add on to Korhan’s answers for two questions specifically and then answer to your last question.

So, basically, using our 1P as the strong muscle during this period of time, despite the global supply chain challenges and also diverging and benefiting from our long-lasting strong supply relationships, we were able to actually get well prepared with our inventory and 1P.

This is exactly what you observed, right? We have a stronger 3P now, which also kind of distorts the comparison.

And as this happens, we are also expecting to continue to see more longtail products, adding more longtail merchants coming to our platform, which will inherently, by its nature, also enhance the overall mix and margin of the platform.

This means actually — now with our last-mile delivery service, they are making a difference for our merchants.

With HepsiLojistik, which is actually well-positioned to scale moving forward, our distribution service, as you remember, is also going to help our merchants save time and money and also increase the customer experience.

And also, the second part of the story, which is our customers, we also try to be their ultimate choice, right? That’s why we are also seeing a lot of actually room for that improvement as well.

With our strong brand, with our unique services, like which we discussed, like frictionless return, next day delivery, and like the XL deliveries and service and so on, with our ecosystem play, which I will also step on to shortly, all this coming together, we believe that our margin and profitability will improve over time.

And as you know, it also offers instant and slotted and now we have Migros, as I mentioned briefly in the previous section of the call.

All this together, I also want to give you maybe one kind of indication how we are seeing this business.

That’s why you will see us moving forward onwards because this is still the early phase this year to invest in that business, but moving forward, you will see us more focusing on sustainability of the model as well, and also we are very internally focused on actually perfect order success ratio.

But we believe, because of our kind of experience we can offer on our platform and because we are hopefully going to deliver strong mutual incremental growth for both sides, this is going to be kind of a sustainable long-term partnership with both sides.

And we remain confident in our market opportunity and long-term value proposition because we know the opportunity and the fundamentals of the business remain strong.

So we are committed to deliver on our drivers of sustainable growth, key differentiators, strategic assets that we discussed, and valuable services for customers and merchants with a disciplined cash management, creating long-term value for our company and shareholders.

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