ABOUT YOU Holding SE (YOU) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of About You. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Frank Bohme, who will lead you through this conference. Please go ahead.

Thanks for the intro, and good morning to everyone also from my side, and welcome to our full year 2023/2024 results presentation. Today's conference call will be hosted by Hannes Wiese, Co-Founder and Co-CEO of About You. Hannes will walk you through our full year results in just a second. The corresponding slides to this presentation have been published on our IR website under the Publications section this morning. After his presentation, Hannes will be happy to answer your questions. And with this, I hand it over to you, Hannes.

Yes. Thanks, Frank, and good morning to everyone also from my side. Today, we are following our usual agenda. But since this is our full year release, we are starting with a more comprehensive business update, including customer cohort developments, initiatives to unlock the next growth wave for commerce, further disclosure on the New SCAYLE tech entity along with an overview of the strategic priorities for this business. In our financial section in turn, we'll focus on discussing our Q4 results and operating performance. We'll provide our new guidance for FY '24/'25 in the outlook section, and we'll discuss our midterm ambitions. And we'll close this call as usual with Q&A. Let me directly jump into the business update, starting on Page 4 with the key takeaways of the financial year '23/'24. Despite a more challenging market environment than anticipated at the beginning of the past financial year, we achieved our guidance with top line growth of 1.6% year-over-year and a positive adjusted EBITDA of EUR 3.2 million. From increase in our adjusted EBITDA margin of 740 basis points year-on-year is the result of significant improvements in all cost lines as targeted at the beginning of FY '23/'24. All our segments reported an increase in profitability for the year. And thus, the adjusted EBITDA margin increased by 210 basis points year-on-year and in ROE and TME, we recorded margin uplift of more than 1,000 basis points year-on-year. We have generated a positive IFRS free cash flow of EUR 9 million, driven by the significantly improved EBITDA and measures to optimize working capital and CapEx. We are also making strong progress in our strategic growth initiatives around commerce and scale. All these results are visible already today, underpinned by a growth acceleration in Q4 '23/'24 and a good start into the new fiscal year. For '24/'25 we are guiding for revenue growth in a range of 1% to 10%. The midpoint of this range reflects recent growth levels and hence, an acceleration in top line growth for the full year. We also target further improvement in profitability. Adjusted EBITDA is expected in the range of EUR 10 million to EUR 30 million. On the one hand, this reflects expected operating leverage and a continued strong execution on our efficiency measures. On the other hand, we also plan for increased investments into the business to accelerate revenue growth to double-digit territory again in FY '25/'26. Let's start with a recap of our performance in the past financial year versus our initial expectations on Page 5. We achieved each target we set for ourselves in FY '23/'24. And that is despite the market environment being more challenging than we had anticipated at the beginning of the year. Our #1 priority was to reach adjusted EBITDA breakeven. And we achieved this target despite the top line coming in at the lower end of the guided range. And it was reduced as expected and net working capital turned negative again as we've successfully improved inventories and other net working capital drivers. Let's now click on our path to profitability on Page 6. In our Q3 '22/'23 results in January last year, we outlined a margin bridge to achieve the adjusted EBITDA breakeven in FY '23/'24. This is shown as an excerpt on the left-hand side of this chart. Now looking back at the actual FY '23/'24 results on the right, we have delivered exactly what we have promised. The largest driver of the adjusted EBITDA margin increase was the reduction in marketing costs, followed by lower fulfillment costs and the gross margin increase. This shows the strong control we have over our cost lines and the strong commitment to our set priorities. On to Page 7 to analyze our customer cohort performance for the full year. Let's start with the revenues of our financial year cohort on the left-hand side. While our older cohorts remain above pre-COVID levels, we see declining revenues in all cohorts year-over-year. This is the result of the challenging market conditions as well as new economics and profitability measures, which affect the frequency of existing customers in FY '23/'24. Further, our decision to shorten the breakeven targets for new customers as well as the reduction in market entry and scaling campaigns has also resulted in lower revenues from new customers versus the prior years. At the same time, however, our profitability measures also help us to increase the proportion of profitable customers across all cohorts as illustrated by the chart on the right-hand side. There is healthy underlying growth with our existing profitable customers and an improved hit rate for new customers to become profitable. This also makes us very confident that the current rebasing of the top line will lead to sustainable, profitable long-term growth for our commerce business. In addition to reaching adjusted EBITDA breakeven, we have recently achieved another great milestone. On May 4, 2024, About You turned 10 years old. And this, we want to celebrate. Our anniversary is fully being accompanied by broad media campaigns, on-site promotions as well as raffles and lotteries. These create further positive impulses on customer engagement and revenues. So they tuned over the next stage and make sure to regularly check out our About You app. As usual, with the full year release, we also want to update you on our priorities and new initiatives for the current financial year. These are outlined for the commerce business on Slide 9. In FY '23/'24, we were clearly focusing on our adjusted EBITDA breakeven target. Now for FY '24/'25, next to the ongoing execution of our efficiency measures, strategic growth initiatives are being re-prioritized. That is, as we expect the more supportive market environment in the future, and we want to ensure that we have the right propositions in place to deliver a further acceleration of our profitable growth in the midterm. For commerce, we want to fully embrace the huge market opportunities we see. And our ambition here is to build the most complete fashion platform for our European consumers. This is tackled by 3 key growth initiatives: a, customer engagement drivers; b, fashion assortment expansion and c, operating model extension. So let's double click on each of these initiatives for a second. Starting with customer engagement drivers on Page 10. We believe that the technological advances we see, especially around AI will redefine the way we engage our customers, and we want to be at the forefront of this. For About You, we have defined 4 key areas to fully explore these new engagement opportunities. First, personalized access, meaning given our customers new and alternative ways to discover fashion in a typical About You style. Implemented, for instance, with our AI-based personal shopping assistant, MAYA, which is currently live in beta phase in DACH. Our new 3D size and fit features to match and visualize the customer-specific fit of the product. The second area is in which content where we want to drive inspiration and discovery to a new level and [indiscernible] by Gen AI and our proprietary content technologies. This will not only significantly enrich user experience in the About You app. Gen AI also becomes an obvious efficiency driver here with significant savings potentials in content production and delivery. Third area, smart promotions. This is about leveraging our proprietary technologies to make price incentives more personalized and effective in both onset and offset promotions. Thus we are now scaling our personalized coupons and campaigns. These target specific customers and customer groups rather than offering flat discounts on About You. With that, we can increase targeted engagement, create a more coherent price image and improve margins for About You. The fourth key area is gamification. We are embedding small games and reward mechanisms into the About You experience with the goal to drive customer engagement and loyalty. All realized examples include individual coupon collection mechanisms like our slot machine. Over the course of '24/'25, these will be complemented with a rich set of games and features to enable our customers to earn and burn rewards on About You. Next to engagement features, we also want to grow our offering considerably. So let's move on to Slide 11 to discuss this. When we think about complete fashion assortment for our target customers today, we think about 3 types of products. Firstly, our branded fashion core consisting of more than 4,000 international and local top brands already today, and we've still plenty of room to grow. Secondly, our exclusive labels, that is our celebrity brands and own labels, which add uniqueness and influence dynamics to our offering. And thirdly, manufacturer sites, meaning fresh and in-demand shapes coming directly from the supplier on to the About You platform and hence, increasing newness and breadth of the offering. Now on manufacturer styles. We see a big opportunity here to make our fashion offering more complete from a consumer perspective. And we will implement new processes to scale this in FY '24/'25. We are thinking in 3 directions here. Own label injections where proven suppliers can iterate fast capsules under our existing own labels. This is supported by a fast testing production and replenishment system. Further, About You enabled cross-border processes, where we, together with partners manage the e-com processes of international manufacturers to enable them to sell on About You. And lastly, manufacturer-to-consumer models, where capable suppliers can sell in-demand items directly to consumers on About You. Leveraging manufacturer side is early stage for us, but we expect to see tangible results already in FY '24/'25. Throughout this process, we will make sure that our offering here is tailored to the needs of our European consumers and is up to our high quality ESG standards. That is also a key differentiator versus international competitors, to deliver on our promise to combine the best of the fashion universe on About You. Now on to the third commerce growth initiative kicked off in FY '24/'25, our operating model extension as illustrated on Slide 12. So our current 3P models where About You is the seller of record to the consumer, we plan to also enable the traditional marketplace model, where the partner can be sell off record for both FbAY and Drop Shipping. Rationale here is to grow our 3P GMV shares that is to better export growth opportunities with sellers, especially in the mid and long tail. Further, we want to give key brand partners the opportunity to extend their own D2C businesses on the About You platform, including consistent pricing and communication. We also believe that we can improve seller engagement, especially around media and promotional levers, which will be supported by advanced tooling in the seller center. Lastly, this will also support some of our manufacturing initiatives on the platform with increased ease of sales managing products and orders. Model attention will have implications also from an accounting perspective as only the commission and breaded services are recognized as revenue. However, as the go-live is not planned before the second half of FY '24/'25, we do not expect an attributable impact in this financial year. Now let's move on to B2B and take a closer look at our TME revenue streams in FY '23/'24, as shown on Page 13. Following the spin-off of SCAYLE tech into a separate legal entity, we will now also present figures for the new SCAYLE GMBH separately. In FY '23/'24, the new SCAYLE GMBH has generated EUR 47 million in largely recurring revenues, translating into EUR 25 million adjusted EBITDA. Media added ebbing streams of our SCAYLE clients, which were formally shown as part of SCAYLE, are from now on marketed and presented as part of About You commerce related services. It is to better account for the new legal entity setup and to increase transparency on the value creation of the respective entities. Let's have a click on the new SCAYLE GMBH for a second, starting on Page 14. As you can see on the left-hand side, we have grown the external transaction volume powered by SCAYLE considerably to EUR 3.8 billion in FY '23/'24. That was achieved against a challenging market backdrop. Growth was hence largely driven by the go-live of new clients, visible also in the increasing number of online stores powered by SCAYLE, reaching 200 shops at the end of the past financial year. Now let's look at further key metrics for the new SCAYLE GMBH in '23/'24. We continue to have 0 churn from existing customers, and this produced an industry-leading average of EUR 1.8 million in annual recurring revenue or ARR per client per year. Rather here is our strong product and continued focus on large enterprise clients. It is also reflected in an 80% win rate in pitches for these large enterprise deals. Following the spin off of SCAYLE tech, the new entities revenue streams also largely consists of SaaS licensing fees. This leads to an ARR share of around 80% on the total EUR 47 million in revenues in FY '23/'24. And on the ARR, we continue to generate gross margins of more than 80%. The strong increase in transaction volume translates into an ARR growth of more than 30% year-on-year. And given the high margin nature of these revenues, we recorded an adjusted EBITDA margin of more than 50% for the new SCAYLE GMBH in FY '23/'24. Let's now move on to Slide 15 to take a look at further achievements of SCAYLE in the past financial year. Starting with the performance of our growing international sales organization indicated by a selection of new client wins shown on the left-hand side. In total, we have contracted an additional EUR 50 million in ARR in FY '23/'24, which will be rolled out over the next year. Including the existing base, the total contracted ARR now amounts to more than EUR 50 million for SCAYLE, giving us high visibility on near-term growth prospects. Next to these good metrics, we are also proud of the many operational achievements outlined on the right-hand side of this chart. Most notably, we see very positive developments in the structure of new client wins. A clearly growing share of new international clients as well as new clients from non-fashion verticals, we see very strong proof points for our SCAYLE growth strategy. That's a good segue to Slide 16, outlining the key priorities of our growth strategy for SCAYLE in FY '24/'25. Firstly, we want to scale new geographies. We've established a new SCAYLE Inc. with a local team in the U.S. And we're doubling down our -- on our international rollout with double-digit mean investments into marketing sales and product for our international markets in FY '24/'25. Secondly, we want to grow the GMV of our existing SCAYLE customers by empowering them with our significantly improved core feature set. This goal should also be supported by improving market conditions, which we expect for many of our clients. Thirdly, we want to expand our SaaS product even further and capitalize on our strong road map, meaning leveraging new propositions, improved channel and vertical integrations as well as advanced AI features. While we have about additional disclosure on the New SCAYLE entity today, including a brief product and strategy update, there is certainly a lot more to discuss. This would however not fit into today's full year release of the group. Hence, to provide more disclosure on the new SCAYLE entity to show the many product use piece and to discuss our strategy in more detail, we will host a separate SCAYLE event in autumn this year. We will provide further details on the event over the next months. Moving on to the financial update, where we will focus on our performance in Q4. Starting with our top line on Page 19 and our group revenues on the left-hand side. Revenues increased by 5.2% to EUR 437 million in Q4. This marked a clear acceleration in revenue growth compared to the first 9 months of '23/'24. Let's now that a closer look at our segments, turning to our top line dynamics in Q4. Starting with DACH, where revenues increased by 4.4% in the fourth quarter. This development was driven by the German market, where consumer sentiment improved slightly from a low base, and our revenue comps were relatively low for the quarter. [indiscernible] was also supported by a slight step-up in marketing to expect growth opportunities. In the rest of Europe segment, revenue increased by 2.4%. The Growth was mostly driven by the CEE region, supported by ongoing improvements in consumer sentiment in key markets. In the Nordic and Southern European markets, we again observed a relatively broad range of growth rates due to different impacts of efficiency measures on country level. Moving on to our TME segment. Revenue declined slightly by 2.6% in the fourth quarter, which you hear is similar as in previous quarters. We see growth in higher-margin revenue streams, such as SCAYLE's return tech revenues or media services visibility auctioning. On the other hand, lower margin revenue streams, such as implementation and production services are declining and some loss-making revenue streams have been eliminated. The overall muted revenue growth for TME but positive mix effects within. Let's move on to our customer engagement metrics in the commerce segment, shown on Page 20. The number of active customers declined slightly by 3.2% to EUR 12.3 million in the last 12 months. As discussed in the business update section, this decrease is broadly in line with expectations, and it is primarily driven by the shortening of breakeven targets for newly acquired customers and the measures introduced to increase the profitability of existing customers. Average order frequency per active customer was relatively muted at 3.1 transactions per active customer over the last 12 months. It can be attributed mainly to the challenging market conditions as well as new economic measures introduced to increase the profitability of existing customers. The average order value, however, increased by 5.8% year-on-year to EUR 58 per order in the last 12 months. The increase is largely due to our unit economic measures as well as higher RRPs and lower discount levels. With that, let's move on to our bottom line on Page 21, starting on the left-hand side of this chart, which shows our group adjusted EBITDA. As expected, our adjusted EBITDA margin showed another improvement of 360 basis points year-on-year and reached a negative 1.8% in the fourth quarter of '23/'24. Margin declined versus Q3 is driven by the seasonality of the business with softer revenues in Q4 compared to Q3 and lower price and margin levels driven by the end of season sale. Let's take a closer look at the key EBITDA drivers from a segment perspective. In our DACH business, profitability declined by 100 basis points year-on-year, reaching an adjusted EBITDA margin of 2.5% in Q4. The decline was the result of a deliberate step-up in marketing cost to expect growth opportunities while order economics continued to improve. Moving on to our ROE segment, where we increased our adjusted EBITDA margin significantly by 1,090 basis points year-on-year. The main drivers for the improvement were an improving gross margin due to lower discounts as well as the non-recurrence of onetime costs related to the rollout of the European distribution network. On B2B, the margin in our TME segment remains on a high level of 25.7% in Q4 plus 26.5% last year. While we continue to see positive mix effects within TME, which also moderately increased growth investments into SCAYLE and other B2B business lines, which have offset some of these profitability gains. Let's now move on to Page 22 and take a closer look at the key cost lines of the group. Starting with the gross margin, which increased by 530 basis points to 39.3% from admittedly low levels in Q4 last year. The increase was mainly driven by a lower need for clearance given an improved inventory position at About You and a reduced promotional intensity in the fashion industry more broadly. The increased share of high-margin tech and media revenues in the TME segment further supported the gross margin increase. Next, our fulfillment cost ratio, which declined by 40 basis points to 24.6% in Q4. The decrease was primarily attributable to the absence of onetime costs relating to the rollout of our European distribution network. Further, our measures to improve the economics and softening inflationary dynamics helped us to realize these efficiency gains. Let's move on to our marketing costs, which increased by 250 basis points to 11.8% in Q4. The increase is largely driven by higher customer lifetime value projections on the back of improving unit economics. This raises our ability to spend on new customers at a given breakeven period reflected in a step-up in marketing costs year-on-year. Lastly, our admin and other cost ratio declined by 40 basis points to 4.6%. The decline is largely due to operating leverage as well as continued efficiency measures. All these factors combined resulted in the increase of our group adjusted EBITDA margin by 360 basis points to a negative 1.8% margin in Q4 '23/'24. And most importantly, we've reached our full year breakeven goal with a positive adjusted EBITDA margin in FY '23/'24. Let's now take a look at our cash flow drivers on Page 23. Our net working capital improved significantly year-over-year ended at a negative EUR 16.9 million at the end of Q4 '23/'24. This is a decrease of almost EUR 60 million versus last year, which largely results from a reduction in own stock inventories. CapEx amounted to EUR 7.7 million in the fourth quarter, which is another significant reduction versus last year levels. The decline is partly due to an improved outlook for loan finance influence rents and incubators as well as the corresponding decisions to reduce the new lending to these entities. Moving on to our cash position for FY '23/'24 on Page 24. Let us first look at our operating cash flow, which is at a positive EUR 47.8 million in FY '23/'24. Development largely results from the positive EBITDA as well as a decline in net working capital, as discussed on the previous slide. Investing cash flow is at EUR 38.8 million, and hence, our IFRS free cash flow turns positive for the year, reaching EUR 9 million in FY '23/'24. Financing cash flow is at a negative EUR 49.9 million, largely driven by payments for leasing agreements relating to our logistics network. And we ended FY '23/'24 with a cash and equivalents balance of EUR 163.9 million. The cash position in combination with the undrawn backup loan facility of up to EUR 97.5 million creates a comfortable liquidity position for us and enables us to flexibly develop the business going forward. Let us now move on to the final section of the presentation, the financial outlook. Starting with our FY '24/'25 guidance on Page 26. Our top line guidance for this year is reflecting an expected acceleration in revenue growth translating into a growth range of 1% to 10%. The midpoint of this guidance reflects the growth levels seen in Q4 '23/'24 and is also in line with our current trading in Q1. We've seen around mid-single-digit growth rates in March and April. We're not facing relatively tough comps in May, but we remain very confident that current growth rates continue throughout the financial year '24/'25. As discussed in the business update and financial section, we are selectively driving up investments into the business, laying the foundation for a return to double-digit growth in FY '25/'26. We expect further improvement in profitability in FY '24/'25. The improvement is also somewhat limited by these investments. We hence expect adjusted EBITDA for the year in a range between EUR 10 million to EUR 30 million. There's also the different cost lines to unpack this range a bit. Starting with the gross margin, where we expect an uplift from revenue mix effects and continuously easing discount pressure. On the fulfillment cost to revenue ratio, we expect a moderate decline as inflationary dynamics soften and measures to improve unit economics show full effect. Marketing cost revenue ratio is expected to increase as improved customer lifetime projections give room to increase spending, and we will invest in growth initiatives for both commerce and scale. Lastly, for the admin cost to revenue ratio, we expect a slight improvement driven by operating leverage. Let's move on to cash flow drivers, starting with CapEx, which is expected to be around EUR 30 million to EUR 50 million in FY '24/'25 and hence, in a similar range as in FY '23/'24. Our net working capital is expected to remain in negative territory as we do not expect any major swings compared to levels seen at the end of FY '23/'24. Let's now move on to Page 27 to discuss our midterm expectations. Starting with the top line. We expect channel shift tailwinds to return, creating a long runway for growth in a recovering online fashion market. Ecological advances will continue to favor the bigger platforms, and we've shown in the past that our capabilities enable us to grow clearly above market. On top of this, we expect our new growth initiatives in both B2C and B2B to create further impulses for top line growth. Based on these drivers, it is our clear ambition to return to double-digit growth latest in FY '25/'26. Moving on to our bottom line, where we expect further significant improvements in adjusted EBITDA and free cash flow also for the medium term. That is, as the expected acceleration in revenue growth creates operating leverage. We also expect positive revenue mix effects on profitability driven, for instance, by SCAYLE and media services. And lastly, we will continue to execute on our efficiency measures. This will give room for investments into the business while still showing strong bottom line improvement. Thanks for joining us on this journey to accelerate top line growth and boost profitability. Now looking forward to answering your questions. So moderator, handing it back to you.

[Operator Instructions] The first question comes from the line of Yashraj Rajani, UBS.

I have 2 questions, please. So the first one is just would love to have some color on trading by markets, right? So in Q4 and in trading to Q1, were there any markets that are standing out? Or were there any markets that you think are particularly weak and going into the rest of the year? I mean, is there any particular market that you're excited about? So that's my first question. And then the second question is on the cohort economics. So I think Slide 7 is very helpful, and thank you for putting that in the deck. But just wanted to check that if you look at FY '23/'24, there's still a few customers that happen to be unprofitable, right? So going forward, I mean, how do we think about those unprofitable customers. Do you expect that in '24/'25, you'll see attrition of some of those unprofitable customers, which will be more than offset by new customers? Or just generally, how else you think about your customer KPIs.

Yes, sure. Many thanks for the questions. Starting with the first one on trading by market. What we've seen in Q4 '23/'24 and also in the start in the new financial year is Germany standing out as a positive, I think, driven by, on the one hand side, relatively low comps on our end, but also improving customer sentiment from a low base. And next to Germany, also some of our CEE markets saw very strong performances, I think also here driven by improving consumer sentiment as inflation is coming down and so forth. Now for the full year, I think we also remain very positive on these 2. So Germany probably showing healthy growth rates on a relatively soft comp base from last year. And also in CEE, we expect the positive momentum to continue. And on the cohorts and the share of unprofitable customer and how to manage this going forward. I mean, I think there will always be a certain share of unprofitable customers, which are new and/or yet to be transitioned to become profitable. So how do we want to go about this? I mean we're targeting these unprofitable customers on the one hand side with specific unique economic measures and, of course, also CRM to try to engage more profitable customers and unprofitable customers. And we also expect a further improvement in the share in '24/'25. This also relates to this rebasing effect that we mentioned and then to have an even healthier customer base towards the end of '24/'25 to then healthy growth from -- in '25/'26 onwards.