Cettire Limited (CTT) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining today's Full Year 2023 Results Call for Cettire. My name is Sam Wells from NWR Communications. And joining me today from the company is Founder and Chief Executive Officer, Dean Mintz, as well as Chief Financial Officer, Tim Hume. Both Dean and Tim will spend some time reviewing the FY '23 results released to the ASX this morning, including some notable financial and operational highlights. Following their comments, we will have some time for questions at the end of the call. [Operator Instructions] Thanks again, and I'll now pass it over to Dean. Dean, please go ahead.

Thanks, Sam. Good morning, everyone, and thank you for taking the time to join Cettire's results briefing for FY '23. I'm joined here today by our Chief Financial Officer, Tim Hume, and it's our pleasure to present to you our results for the full year. Before we start, I'd like to call your attention to the disclaimer statements in our results presentation released to ASX. That disclaimer statement also applies to this investor call. Turning now to Slide 3. At our FY '22 results a year ago, we set out a clear strategy to maximize profitable revenue growth while self-funding. I'm pleased to report that in FY '23, Cettire has delivered exceptional top line growth, profitability and substantial cash generation. Compared with FY '22, gross revenue increased 87% to $539.2 million and sales revenue increased 98% to $416.2 million. I'm particularly pleased that we've been able to maintain strong growth rates through the year, even as we've adjusted quickly to announce certain and volatile external environment. Execution against cost optimization initiatives we outlined a year ago has contributed to a significant improvement in our unit economics and overall profitability. Delivered margin came in at 23%, whilst paid customer acquisition as a percentage of sales came in at 8%. To put things another way, our revenue increased by 98% year-on-year, but our total marketing expenses decreased by 15%. Adjusted EBITDA was $29.3 million, representing 7% of sales. This compares with an adjusted EBITDA loss of $21.5 million in the same period last year. We generated $36.5 million in operating cash flow in the year with a closing cash balance of more than $46 million, around double where we closed FY '22. Cettire has a unique business model operating in a very attractive and large global market. The profitability and cash generation, whilst continuing our rapid growth trajectory, highlight some of the key differentiating factors of our business. Notably, the luxury market is enormous and in the early stages of moving online. We are well positioned to continue to benefit from the secular growth as online continues to grow its share of the market. We don't hold any inventory which enables us to offer a vast range in a highly capital-efficient way, whilst insulating the business from inventory risk. We have a very attractive unit economics with higher order values, higher margins and higher order frequency. We're able to operate with an extremely lean fixed cost structure enabled by our proprietary technology, which is automated key workflows in the business. We remain committed to scaling as quickly as we can in a sustainable way, and we continue to believe we are very early in our growth journey. With the momentum we have, we are very excited about FY '24. As you can see on Slide 4, FY '23 has been a year of execution, and this set of results shows that we have delivered. Tim will talk you through the numbers in more detail shortly. But in summary, we've been able to deliver substantial unit cost reductions in fulfillment and optimized our marketing investment across channels and geographies. The revenue profile demonstrates that we have been able to optimize profitability without really compromising our growth. A key part of this has been our customer base, which continues to demonstrate attractive loyalty characteristics. Repeat customer revenue increased at twice the rate of new customer revenue, driven by growing frequency and higher AOVs. We also continue to experience a healthy demand environment across our footprint, which support our new customer acquisition. Active customers increased by 63% to around 423,000 at period end. Notably, we saw an acceleration in active customer growth through the second half of the year. In Q4, we achieved a record number of net customer adds driven by enhanced retention. On the supply side of the platform, we have demonstrated further significant growth since our last update in February. We are now aggregating around $2 billion of luxury inventory across many suppliers. We've also broadened our direct brand partnerships, which includes our recently announced partnership with Zegna, which we're excited about. We've also continued our localization efforts enabled by the new store front. This is already demonstrating the results with the geographic broadening of our traffic and revenue base. We have now launched 6 multi-language sites, including Chinese, Japanese and Spanish, and we are seeing excellent early response to these customer experience improvements. Much of our localization efforts are focused on the Chinese market. Due to the scale and significance of the opportunity, we have taken a disciplined approach to set up our Chinese business, doing so in a way that affords Cettire the greatest optionality around market entry. We are well advanced in our preparations for China market entry, which remains a very attractive market opportunity and offers significant incremental growth potential. In terms of developing organizational capacity and capability, we've made further significant progress with the build-out of our engineering team. Our profitability and cash generation in the period has left us with an enhanced cash balance, which provides ample flexibility for growth. Turning to Slide 5. You can see this year is, in many respects, a continuation of the journey that we have been on since inception. I designed the business to be highly efficient and scalable, leveraging a very high degree of automation. The result of this is a business that was profitable and cash generative since inception, even whilst maintaining rapid growth rates. When I look around -- across the other software and technology-enabled businesses, Cettire stands out for its ability to consistently grow at a rapid pace whilst achieving attractive levels of profitability and capital efficiency. The business continues to grow as we -- continues to get stronger as we grow. Slide 6 sets out our strategic priorities, which have not changed. We're in the early stages of [seeing a flywheel] business. On the demand side, we have a large addressable markets, which are benefiting from secular growth as luxury shifts to online. Within this, we have multiple layers of growth. There remains a huge opportunity to grow penetration in our 3 established markets where we have effectively been operating with a localized proposition for several years now. The second layer opportunity is our emerging markets, which is our current focus of our localization initiatives. Our proprietary storefront software enables us to localize our proposition in each of these 50 markets in a scalable way. The third layer includes new geographies and new verticals, for example, China. Whilst we're excited about these adjacent opportunities, the biggest driver of our growth in the near term will be the markets where we have already set up and operational. On Slide 7, you can see the breadth of our growth, which is very encouraging. We continue to experience very promising growth rates in our emerging markets, where we saw a year-on-year increase of 140% in gross revenues. This demonstrates the effectiveness of our localization strategy. We're starting to see good momentum in conversion rates in these markets as we grow our business yet from a standing start. Where we have launched a local language feature, we have observed a very strong initial response. Japan and Mexico, for example, have been particularly encouraging. Emerging markets have now reached the scale where the growth is reshaping the group. They accounted for 27% of gross revenues in the year, up from 21% in FY '22. We exited the year with these markets run rating greater than 30% share of gross revenues. It is reasonable to expect a further reshaping of our geographic revenue mix as our presence in these markets continues to scale. That said, established markets remain a huge opportunity. We're still early in the journey in these markets. The U.S., in particular, has been highly resilient for us with the growth rate in this market in line with the group during FY '23. I'll now hand you over to Tim to walk you through the key financial aspects of the FY '23 results.

Thanks, Dean. Slide 9 shows you the continued exceptional growth in our customer acquisition. We remain very focused on driving new customer adds at this stage in our life cycle. We've grown our active customer base by 63% over the year. If you recall the corresponding growth rate at the April trading update was 47%. So we have continued to see an acceleration in growth here driven by improved retention. In Q4, we added more than 72,000 active customers, which is a new quarterly record for the business. As Dean mentioned, we've achieved this continued rapid growth, even though our marketing investments have decreased by 15% year-on-year. Repeat customers continue to represent an increasing proportion of our gross revenues with 58% from repeat customers, up from 50% in FY '22. This group also continues to spend materially more pro rata than first-time customers, driven by basket size. Turning to Slide 10. You can see how the customer loyalty and frequency dynamics are playing out over time. Once customers are introduced to the platform, not only do they retransact, but we tend to see growing frequency over time. You can observe this in the growth in orders per active customer. When you combine higher AOV for repeat customers and increasing order frequency, this has translated into continued growth in gross revenue per customer over time. And we've been able to maintain this growth, even though we've been adding active customers on a very steep trajectory. It's very pleasing to see this as it really highlights the long-term value in our proposition and validates our strategy. Moving to Slide 11. At our full year results last year, we discussed a series of initiatives to drive improvements in some of our variable costs. Through successful implementation of these initiatives, we've been able to drive significantly enhanced unit economics. Delivered margin per active customer increased by 57% year-on-year to $226. On the marketing side, we moderated overall investment but also reshaped our channel and geographic mix. Together, this has resulted in a significant improvement in our CAC, which decreased by around 30% year-on-year to $96. This improvement in our unit economics, combined with revenue growth and our lean operating cost model was the key driver of our profitability in the period. Turning to the P&L on Slide 12. Cettire's rapid growth continued in FY '23. We delivered record sales revenue of $416 million, an increase of 98% year-on-year, which is an outstanding result and reflects the strength of our strategy to grow customers, increase repeat purchases and grow wallet share. The returns rate reduced to 22.8%, having previously been in the mid- to high 20%. The reduction was supported by the amendments to our returns policy implemented towards the back end of FY '22. Delivered margin increased by 156% year-on-year to $95.6 million. This represents 23% of sales. As I mentioned on the prior slide, this was driven primarily by a reduction in fulfillment cost per order. Delivered margin was further supplemented by the increase in average order value to $747 during the period. Now as we've discussed through the presentation, our marketing costs reduced materially during the year. Paid acquisition represented 8% of sales. This compares with 14.9% of sales in the prior year. We have also made adjustments in our investment mix across geography and channel to prioritize nearer-term paybacks. Brand investments reduced to $3.3 million from $11.8 million in the same period last year. The result of this was a substantial improvement in profitability, with Cettire delivering adjusted EBITDA of $29.3 million in the period, at 7% margin. Net profit after tax was $16 million. Looking at the balance sheet on Slide 13. We closed the period with more than $46 million in cash and 0 financial debt. We believe this is sufficient to support our continued strong growth with current operating settings. The growth in cash balance reflects the operating profitability of the business, further supported by a favorable working capital cycle. We continue to invest in our technology platform to develop new capabilities and reinforce our competitive advantage. We've also commenced share purchases by the Employee Benefit Trust during the year. This is designed to offset potential dilution from share-based payments. I'll now hand you back to Dean.

Thanks, Tim. Moving now to our trading update and outlook on Slide 15. We continue to experience a healthy demand environment across our geographic footprint. The structural shift of luxury spend online also provides ongoing addressable market benefits. In light of this, our positive trading momentum has continued into early FY '24 with all our key markets performing strongly. In the month of July, we experienced a further acceleration in active customer growth to 67% year-on-year. We saw an increase in sales revenue of approximately 120% year-on-year. We also maintained positive adjusted EBITDA during the month. We continue to operate the business to maximize profitable revenue growth whilst also self-funding. That concludes the presentation. I'll now open up the line for questions.

Great. Thanks, Dean. [Operator Instructions] And we've got a couple of questions coming in. So we'll kick things off here. First question, really strong growth in emerging markets and established markets. The U.S. is your biggest market. We're getting a few questions here. Can you just [Technical Difficulty] to how that's performing?

Sure. As you said, the U.S. is our largest market, it continues to perform strongly, and we continue to see very strong demand there. The growth rate through the year was in line with the group, and the strength has made [ effect ]. We're still really early in penetrating the U.S. market, so it makes it a huge opportunity for us.

Great. And on the emerging markets, are there any that you'd like to specifically call out as performing strongly?

Okay. A key part of our strategy is to localize our proposition in our emerging markets. These remain relatively new opportunities for us. So we're really pleased with the results we're seeing so far. Emerging markets, as I mentioned, were up 140% year on year. The key development this year was the release of local language features in 6 markets. We're seeing a very strong response to this -- both in terms of conversion rate and revenue growth. Japan and Mexico are 2 that I'd like to call out as particularly encouraging.

Okay. Great. Thanks. And as you shift focus throughout the year and then we look at China specifically, we're getting a number of questions here. Can you give us any more update? Do you need a local partner in that market, et cetera?

Yes. We haven't provided a precise date for China, but we've made really a lot of progress in terms of preparing for the entry. We're spending time to do things properly, particularly on the technology side as there's some China-specific aspects to [ be tested ]. At the same time, the business itself is growing extremely quickly without China. So that provides us more flexibility around launch in China in terms of timing.

Yes, I might just add. Sorry, Dean. Sorry, I'll jump in when you finish.

Yes. Look, I said we just want to make sure we do this right, given the size of the opportunity here. Go on, Tim.

Yes. So I think part of the question was about around partnering, okay? So we already -- we have a partnership with JD.com, okay? So that's something that we're very excited about in terms of -- JD is a phenomenal local partner, a huge platform within China. And so, that's something we're focused on as being a key part of our entry and operation in that market. But I think the other point here is that, the relationship that we have with JD is not exclusive, right? So I think you should view JD as part of our entry, but we're also thinking about other ways in which we can explore the China opportunity for multiple channels over time.

Great. The results look really strong, well done. Cash flow growth year-on-year, but noticed a step-up in receivables. Can you just elaborate on that? And likewise, what's the planned use for the built-up cash?

I think that's probably one for me, Sam. So look, I think the question was around cash and, probably more specifically, receivables, if I have understood correct, Sam. I think -- we have seen an increase in receivables in the second half, right? So what's happening here is, we have had a one-off impact in the second half, where we have some funds that are due from suppliers. Okay. As Dean mentioned, we've seen significant growth in our supply chain during the second half. We're now aggregating around $2 billion in inventory. And so, we've made some temporary amendments to payment terms for a select number of new suppliers to support the huge growth in supply. So this has resulted in some receivables from suppliers. Look, we expect this to unwind pretty quickly. And also, the payment terms with the suppliers I mentioned will normalize in the next few months, okay? So I think there's a one-off element there, Sam, which I think is possibly where the question is coming from. Yes?

Okay. Great. A couple of questions from Ari at Barrenjoey just asking how you think about EBITDA margins in FY '24. Likewise, the growth cadence was over 100% in July. Would you expect this to continue?

Yes. Thanks, Ari, for the question. So I think this is really around how fast are we going to grow and how much profit are we going to make, if I understand correct. Ari, as you know, we haven't provided guidance either at the revenue level or earnings level. That said, look, I think the business can continue to grow very strongly, right? In July, we grew -- July '23, the growth rate that we've achieved is around 120% year-on-year. Okay? And the organic runway in the business is very long, okay? So we think without providing precise guidance, we do believe we can continue to grow strongly. And as we did during FY '23, we'll continue to update shareholders through the course of the year in terms of our progress, okay? On the profitability side, I think the business has demonstrated really since inception that it can grow quickly but also profitably, right? We're operating the business right now to be EBITDA positive, right? So we're very focused on profitable growth. We're looking to maximize the revenue potential of the business within those guardrails of profitable growth. But as I said, we haven't provided the EBITDA guidance, but it's pretty clear from how we performed in FY '23 that the business, when operated in a certain way, can generate meaningful amounts of profitability, and we're not looking to change how we're operating, okay, in '24 versus '23.

Great job on cost control as you expand. There are a few questions around employee numbers. Do you expect a step up employee costs at some point in the near future, particularly if you continue on this growth trajectory?

That one is probably for me, too, Dean. Look, the business is growing extremely quickly, as you can see. I think we will continue to support that growth with growth in headcount to service the demand, okay? So I think you'll see growth in headcount from a customer service perspective. I think as we -- as the business grows, you will also see us invest in other support areas of the business across the commercial side; clearly, on the technology side, given how central is differentiation; and other supporting functions. So I think it's natural that as we scale, you'll see some investment in headcount to support that growth. I think Cettire is always going to be a lean business, right, just given the levels of how it's being designed and the levels of automation that we operate with. So I think you'll see some investment in headcount as we scale, but we continue to expect revenue to grow faster than our operating costs. Okay?

Great. A couple of questions on marketing spend, including from [ Chami at Bell Potter ]. Can you provide further color on your expectations on marketing spend into FY '24, perhaps elaborating on brand and channel spend? And how might you expect this to change entering into China [Technical Difficulty]?

Do you want to take that one, Tim?

So thanks for the question, Sam. So look, we -- I think in FY '23, I think one of the things that you can see in our numbers is that, we grew extremely quickly whilst moderating our spend, okay, on the marketing side. So I think it's reasonable that we'll continue to invest from a marketing perspective at similar levels to where we -- in FY '24, we'll invest at similar levels to where we were in FY '23, okay? And we think that we can continue to grow strongly at that level of investment. Okay? The brand investment in FY '23, we spent just north of $3 million. This is a significant decrease on FY '22. I think the brand investment, by its nature, will be relatively lumpy for us over time, right? At this point, Sam, there's no kind of large lumpiness that I can point to into this expected in FY '24, okay? So I think in broad-brush terms, I think you can expect our brand investment to be similar in the current year versus -- or in FY '24 versus what we've done. And then from a broader channel point, we're still primarily focused on our primary pay channels, right, which are working with part of Google Search and also the affiliate channel. So we'll be focused in those 2 channels as well from a paid acquisition perspective.

Alex Mees at Morgans asking, what can you do to encourage further growth in repeat customer purchase activity?

Sam, I think we're still quite early in terms of initiatives like that would involve us proactively harnessing the existing base that we have. So things like loyalty programs and VIP programs are something that is pretty common in the industry, but we haven't really gone down that path yet. So I think we're still pretty early, and there's a lot of headroom to really further grow [ this section ].

Okay. Great. Ben Gilbert at Jarden asking, how is the performance of the app and the new customer platform? And what percentage of growth is coming via up sales, if you can disclose that?

I think from a user engagement perspective, the app is performing exceptionally strongly. Pretty much since the launch of it, it has had -- it's outperformed on most key metrics, higher AOV, higher levels of engagement anyway that you measure it, whether it's conversion rates or other related metrics. We haven't disclosed a percentage of revenue. But I consider it to be very strong and particularly that we haven't proactively marketed that. So everything has been entirely organic.

A couple of questions on brand partnerships. How many brands do you have on the platform direct? How are these discussions progressing? And then did this contribute to the growth in -- I think you quoted in the presentation, $2 billion in available inventory on the platform?

Look, obviously, brand partnerships are supportive to grow our available inventory, which is now, as we said, around $2 billion. It's a massive number. We have many different active conversations with brands at the moment. And we're -- but I'm not able to disclose any more than -- other than those that are already announced.

Okay. A couple of questions on customer acquisition costs. Do you aim to reduce cash further in FY '24? Or is your excellent FY '23 result a reasonable assumption going forward?

Well, I think, in general, as I said, we're trying to find -- we're essentially trying to find a good balance between growth and profitability. So we're going to continue to work under that same guise and target profitable revenue growth. I don't know if there's anything else you'd like to add, Tim?

Yes. I think we’re within a range where we're sort of comfortable with where the acquisition cost is today, right? We're -- in broad terms, we're largely recovering that investment on the first purchase, okay? And so, I think for now, we're not specifically solving for that in terms of the framework. But that's kind of how things are playing out at the moment. And at the moment, we think, to Dean's point, we can balance strong growth and profit at that level of investment at the customer level. So I think for now it's reasonable that we'll be around that level within a margin of safety. But I think, as I said, we're comfortable with that level.

Okay. Great. Returns rates, you talked about a reduction here. Is there anything you can do to drive further reductions going forward?

I think that -- I think what we're focused on with returns is -- look, I think the level of returns that we have right now is very reasonable and I think, by and large, comparing to other online fashion players, generally considered to be quite low. But at the same time, for us, when we think about returns, what we're really focusing on is the user experience. And we've constantly been driving continued technology improvements to enhance the customer experience from a return perspective.

Great. A few more questions on localization. Outside of China, would you be able to talk a little bit about which geographies you're focused on next in terms of some of these localization efforts?

Look, there is a long list. I think some of the Middle Eastern countries are particularly interesting. But there's quite a bit more complexity over there to really do that properly.

Okay. Great. Probably just time for one more question. Just on capital allocation. We've obviously talked about the growing cash balance. Would Cettire be open to pay in a dividend at any time in the future?

Look, we haven't ruled anything in or out at this stage, okay? We've got a capital-light business. We're growing very quickly organically and we're profitable. So if this trend continues, I think you'll see a very strong cash generation over the coming months and years. And I think if we’re having -- if we're getting these kinds of questions and we're having a discussion around what to do with excess capital, then that's a good thing -- a good place to be, I should say. So I think even when we get there, it would be a matter for the Board to discuss.

Okay. Thanks, Tim. Thanks, Dean. If you guys have any further comments or closing comments, I'm happy to let you do so. Otherwise, we'll wrap it up there.

No, thanks, Sam.

Okay. Guys, thanks very much for joining today's FY '23 earnings call with Cettire. That concludes our Q&A session and it concludes the end of the call. Have a great day. Thank you.