Cettire Limited (CTT) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining today's first half FY '24 results call for Cettire. My name is Sam Wells from NWR, and I'm pleased to have joining me today, Cettire's Founder and CEO, Dean Mintz; as well as Chief Financial Officer, Tim Hume. Both Dean and Tim will spend some time reviewing the first half results released to the ASX this morning, including some notable financial and operational highlight. 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 H1 FY '24. 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 half year. Before we start, I'd like to call your attention to the disclaimer statement in our results presentation released to the ASX. That disclaimer statement also applies to this investor call. Turning now to Slide 3. I'm very pleased to share that Cettire has delivered an exceptional set of results. I believe this to be our strongest print since our IPO in December 2020. Cettire has delivered exceptional top line growth, profitability and substantial cash generation, and we continue to see very strong momentum across our footprint. Compared with H1 FY '23, gross revenue increased 90% to $460.5 million and sales revenue increased 89% to $354.3 million. Importantly, we've been able to maintain strong growth rates, whilst also cycling increasingly challenging comparables. With our focus on profitable growth and strong execution, we delivered adjusted EBITDA of $26.1 million, representing 7.4% of sales. This compares with adjusted EBITDA of $16.7 million in the same period last year. Further, we generated $65 million in operating cash flow in the half, with a closing net cash balance of around $100 million, more than double where we were in June. This provides us with excellent flexibility to capitalize on growth opportunities, whilst also exploring capital management initiatives. Cettire has a unique business model operating in a very attractive, large global market. Longer term, we continue to see a huge opportunity for Cettire. 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. This provides us with a real tailwind. We are a leading global luxury platform. We are profitable. We have strong unit economics and extremely competitive cost structure, and we have a commercial proposition, which is clearly resonating with both the supply and demand sides of our platform. 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 the second half of FY '24 and beyond. Turning now to Slide 4. It has been a further half 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 have observed broad-based growth across our footprint in both established and emerging markets. All our key markets are performing strongly. The business ended the calendar year on a high note with growth accelerating from mid-October into the calendar year-end, reflecting the strength of our execution through the important promotional period. The revenue profile also demonstrates that we have not really had to compromise on growth in order to drive sustained profitability. The attractive loyalty characteristics of our customer base, combined with the company's strong financial position, continue to provide us with confidence to invest in the pursuit of our global growth. In this half, we have leaned a bit more into our marketing investment. This was a deliberate strategy to be a bit more aggressive to capitalize on our market momentum. We achieved a significant milestone during the period with active customers surpassing 500,000 for the first time, to close the half at around 576,000. Again, we have observed an acceleration in the growth rate through the course of the half, in part due to the success of our marketing, but also due to a material improvement in our 12-month retention rate versus the same period last year. On the supply side of the platform, we have demonstrated further significant growth since our last update in August. We are now aggregating more than $2 billion of luxury inventory across many suppliers. We have a strong pipeline of potential new supplier as we continue to penetrate the supply chain, and we also hope to launch [indiscernible] in the not-too-distant future. Localization remains a key strategic priority for us. During H1, our operational focus was scaling the localization features deployed in FY '23, including multi-language and localized payment options. Primarily, this has included optimizing our marketing investment and approaching the emerging markets. China, of course, remains a focus of our localization. I'm pleased to share today that as a part of our China strategy, we are seeking to launch a direct channel into the market, in addition to our platform opportunity with JD.com. As mentioned in previous comments, the key question we are working through is, what is the ideal launch window? Our profitability and cash generation in the period has left us with an enhanced cash balance of around $100 million, which provides flexibility to capitalize on growth opportunities and explore capital management initiatives. On Slides 5 and 6, you can see this half year is, in many respects, a continuation of the journey that we have been on since inception. The business continues to get stronger as we grow and our strategic priorities have not changed. 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 138% in gross revenues. This demonstrates the effectiveness of our localization strategy. We continue to experience good momentum in conversion rates in these markets as we grow our business here from a standing start. While many of our emerging markets are performing extremely well, we've particularly seen strong growth rates in markets like Japan, where we have launched local language features. Emerging markets have now reached a scale where the growth is reshaping the group, accounting for 31% of gross revenues in the half, up from 25% in the same period 1 year ago. It's 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 with Cettire growing 74% year-on-year in its established markets. During the period, the strongest performing of our established markets was the U.K. I'll now hand you on to Tim to walk you through the key financial aspects of the H1 FY '24 results.

Thanks, Dean. Slide 9 shows you the continued exceptional growth in customer acquisition. We remain focused on driving new customer adds at this stage in our life cycle. We've grown our active customer base by 83% over the year. Now if you recall, the corresponding growth rate at our trading update back in October was 69%. So we have continued to see an acceleration here driven by improved retention metrics and record gross ads. In Q2, we added around 90,000 net new active customers, which is a new quarterly record for the business. Repeat customers continue to represent an increasing proportion of our gross revenues, with 58% of gross revenue coming from repeat customers in the half, up from 56% in the same period last year. We've seen a bit of a mix shift in the last few months towards new customers, driven by the sheer volume of new customer adds. Repeat customers continue to spend materially more per order than first-time customers, driven by basket size. On Slide 10, you can see how the customer loyalty and frequency dynamics are playing out over time. Once customers are introduced to the Cettire 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. Now when you combine higher AOV for repeat customers and increasing order frequency, this translated into continued growth in revenue per customer over time. We've been able to maintain this growth, even though we've been adding customers on a very steep trajectory. And this is very pleasing for us to see as it really highlights the long-term position in our platform. On Slide 11, you can see our unit economics remain strong. Now if you take a 12-month -- the last 12-month view, which aligns with our definition of active customers, CAC has been relatively stable and margin per active customer has improved. And focusing on the first half of '24, as Dean mentioned, we were a bit more ambitious with our marketing during the half compared with the same period last year. We also placed a greater emphasis on traffic quality or higher converting traffic over traffic volume, resulting in revenue growing faster than overall traffic volume. In the first half, we also saw a slightly higher CAC at $115. We also saw a corresponding increase in our AOV during the period, enabling a continuation of our strong returns on investment. Overall, returns in the half remained healthy. Turning to Slide 12, which shows the P&L or key points from the P&L. You can see Cettire's rapid growth continued in the first half of '24. We delivered sales revenue of $354.3 million, an increase of 89% year-on-year. Returns rate was relatively stable year-on-year at around 23%. [ Delivered ] margin increased by 75% to $82.8 million, around 23.2% of sales. We experienced an increase in our fulfillment costs as a proportion of sales revenue. This is partly impacted by a stronger euro FX rate versus the Aussie dollar. Now, as we foreshadowed at our trading update in October, our marketing investment increased during the half. Paid acquisition represented 8.9% of sales. This compares with 7.9% of sales in the same period last year. The increased marketing reflects a deliberate strategy to market more aggressively to capitalize on our strong financial position and our market momentum. Brand investments remained relatively modest at $2.6 million compared with $1.5 million in the same period 1 year ago. The result of this was sustained profitability with Cettire delivering adjusted EBITDA of $26.1 million in the half, a 7.4% margin. Net profit after tax was $12.8 million, although the cash impact of any tax expense on the P&L is mitigated by the utilization of the deferred tax assets on our balance sheet. The P&L tax expense is impacted by intangibles, amortization and unrealized FX losses, which are both nondeductible for tax purposes. Looking at the balance sheet on Slide 13. We closed the period with around $100 million in cash and no 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 our favorable working capital cycle. We continue to invest in our technology platform to develop new capabilities and reinforce our competitive advantage. Capitalized investments decreased as a proportion of sales to 2.1% in the half compared with 2.6% in the same period last year. 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. Our positive trading momentum has continued into early H2 FY '24 with all our key markets performing strongly. Gross revenue increased by around 80% in January. 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 will now open up the line for questions.

Thanks, Dean. Just as a reminder to the audience, we are taking written submitted questions only via the Q&A function. We have received a lot of questions. So as I mentioned at the outset of the call, we may combine a few on the same or similar topic. There were a few pre-submitted questions, so I'll kick off with them. Looks like an acceleration of sales from mid-October through the balance of the quarter. What drove that?

Look, ultimately, this is a consequence of very strong execution. I think during the period, we had a great selection of inventory. Our tech platform has continued to develop, and we were able to offer just a better user experience for our customers and our suppliers. On the marketing side, we were very focused. There's actually quite a bit of complexity on the marketing and promotion side in Q4, and we navigated that very well. Overall, we executed strongly. It was really a coordinated effort from the whole company. And this was also supplemented by additional marketing investment compared to the previous year, where I think we underinvested a bit.

Next question on China. You've hinted to this in the past. Any updates you'd like to provide?

Yes. As I mentioned earlier in the call, we are now focused on finding the most appropriate launch date. So China is something we remain very excited about. And it's about finding the right time, which is imminent. I think the other important piece of news that we announced today is that we'll be launching our [ own ] direct channel into China. And this will be in addition to our relationship with JD.com. So we've really spent a lot of time setting things up right. We have multiple channels into the market, and we're very close from a timing perspective.

On receivables. The last result, there was a meaningful increase in receivables. That looks to have unwound entirely during this half. Can you please elaborate on this?

Tim, you want to take that?

Yes, it's probably for me. Thanks, Sam. Look, we said at the full year results that -- at the time, we had an amount on balance sheet that was receivable from suppliers. We said at the time that we did not expect this to be a discussion point going forward. And the short answer is, it's not. So the receivable you're referring to has fully unwound and being converted to cash. So you'll actually see on the balance sheet that the receivables balance has decreased compared with June, even though our sales have clearly got a lot of momentum.

Turning to the U.S. market, how is the U.S. market performing?

Yes, the U.S. market continues to perform very strongly off a higher base. We're still very early in terms of penetrating the U.S. market. We're seeing very strong retention from active customers in that market, and it's also a very strong market in terms of AOV. So that's all very encouraging. I think it's natural that as the base grows in the U.S., then the rate of growth will probably come down over time. But interestingly, I mean, we had some numbers in the release today around January trading. We continue to show very strong growth across the business in January. And I think it's worth calling out that we've seen a bit of a reacceleration in the growth rate in the U.S. in the month. So the U.S. continues to perform very strong.

And a few questions -- or many questions coming through. The first from Chami at Bell Potter. Could you please elaborate on some of the features on where -- on both web and mobile, and any early customer responses?

Yes. I think the reality is, as I mentioned earlier, the strong performance that we had was a consequence of really high-quality execution. And so, this is a consequence of many things. So I don't particularly have some killer feature to talk about, because everything we've done has been continuously iterated many, many times, whether it is about the returns process for our customers, right, which has undergone numerous updates, whether it's about improvements to our logistics platform, which has allowed our suppliers to ship faster to our customers, or whether it's about user experience on the site, make search. All of this has gone -- undergone continued and iterative improvement, and the progress over the [ half year ] has been tremendous. And actually, if you look at it over a slightly longer time horizon like 1 year or 2, we're very advance compared to where we were not so long ago. So that's the more important point to think about.

I'm getting a lot of questions on the competitive landscape, both from a supply and customer perspective. But how much of the boost are you getting from issues with Farfetch? And what do you think Cettire has done differently [ than ] Farfetch in terms of the overall proposition?

Look, I mean, we've had continued strong reception from the supply chain, but that has been a -- that's been happening for some time now. Over the course of the last few years, the engagement and the reception that we've had from the supply chain has continued to evolve as our suppliers look for diversification. So I think that the -- I think, really it's sort of -- more of the same for us. Ultimately, we're most focused on ourself and on executing our own strategy, and that's where our priorities really lie.

And maybe a follow-on to that from [ Julian ] at [ Evanson Partners ]. Given you have plenty of access to inventory, the main break on growth is the rate of customer adds. Given the attractive CAC metrics, what is the scope to push even harder?

I think that we've been continuously trying to find the right balance to -- between growth and profitability. And I think that's something we've done well, and you see that reflected in the results that we've had today, where we grew very, very quickly off a higher base, generate a lot of cash, and we're heavily profitable. The reality is there is potential scope to grow faster, but we've been good at finding the right balance.

Yes. And Julian, we've talked in the past about marketing investment in the 8% to 10% of sales range. And we're not -- there's no change to that set of parameters at the moment. So I think over time, we may move up and down within that range. But for now, I think that's -- to Dean's point on balance, that's -- you can see from this result that we can -- there's a huge amount of wood to chop and drive growth within that investment envelope.

Next question from [ Julian ]. Churns look to a drop to below 30%. Do you expect any further falls going forward?

Do you want to talk to that…?

So I don't know so much about the number that you've got there, [ Julian ], but I think it is worth noting that we have seen a significant improvement in retention over the last 12 months, right -- in a 12-month retention rate that is. So we've seen a very significant improvement there. That is certainly been very helpful. When you look at the growth profile of our active customer base, we've had -- we've reported the growth rate of active customers at quite a number of intervals over the last 12, 18 months. And certainly, since -- around about this time last year, we've seen a big acceleration in that growth rate in active customers. And a big driver of that is retention rate improvement. What's driving the retention improvement? Underlyingly, the product and customer experience is improving, per the comments Dean made. And keep in mind as well that the platform today, we're aggregating more than $2 billion in inventory. 1 year ago, that corresponding number was around about $1 billion. So in that dimension, you could say the product is twice as good today as it was 12 months ago, all right? So that's very supportive of driving reengagement from our customers once we onboard them.

Questions from Aryan at Barrenjoey. You grew 80% or -- over 80% in [indiscernible], similar to Q2 FY '24. Is there any reason why this growth can't continue for the rest of the second half of this financial year?

I think, look, it's clear from the first half performance and what we shared on January that there continues to be a lot of momentum in the business. So we're pretty certainly quite optimistic about the outlook at this point. I think it's the business -- everything is in place for the business to continue to grow strongly for the rest of this fiscal year. I don't know, Aryan, if we can hold that rate for the balance of the half. I think things always get more challenging as you continue to cycle larger and larger bases, okay. So there's a kind of law of large numbers effect there. So we'll have to wait and see precisely what's possible, but we're certainly pretty confident about that.

Next question from Aryan. How should we think about the EBITDA margins in FY '24 and FY '25?

[ Ary ], we -- as you know, we don't provide guidance either at the revenue or the EBITDA level. But I think the kind of -- the key inputs in terms of the arithmetic on the business, right -- So in this half, we've had a delivered margin of around 23%. We've generally been at that -- around about that level, if you look back at the history, okay? And we've talked about investing in marketing in the 8% to 10% range, okay? So I think they're 2 very important inputs in terms of arriving at the near-term EBITDA margin outlook. And I think certainly, you'll be able to see in the numbers in this half, in particular, that there's clearly some operating leverage coming through on the operating cost side of the business. So that's obviously constructive as well on the margin outlook. But we're -- to come back to Dean's comments, we're trying to get the right balance here between growing as quickly as we can, but also generating good profits, okay? And so, we're not prioritizing harvesting the business for margin at this point.

Last question from Aryan, and we have multiple questions on this topic. But can you give some color on what capital management may look like? Does this also consider M&A? And is there any color on timing -- I'm sorry, one final please, how do you prioritize these capital management decisions?

I'm happy to take that one, Dean.

Yes, you can take it.

Sure. So look, it's a good place to be in as a business, to be able to talk about what [ should ] be doing with a large cash balance, with our shareholder base. So I think the fact that this is -- a discussion point of this results says a lot about not just the inherent performance of the business, but we're feeling good about the outlook, okay? We have a business which is inherently capital-light, okay? So we can fund our growth within the -- at the current settings in a self-sustainable manner. So it's certainly a good development that we're able to talk about, things like capital management initiatives with our shareholder base. In terms of quantum and shape, I think it's a bit too early to say, right? We'll be engaging with the Board over the next time period to be working through with more precision, what things might look like. But at this stage, to the specific -- I think there was a specific part of the question there on M&A. I think M&A is something that we're not sort of -- we will be opportunistic about. It's not the top priority for us given we have a vast organic runway, but it's not something that where we have a point of principle. Again, so we're open-minded about that. But as I said, we also have a business which is inherently capital-light, and given our profitability, that places us in a good place to be considering what to do with any capital over and above the business need.

Wei-Weng from RBC is asking, you flagged the increase in marketing and therefore, CAC in the first half. Does the expectation for CAC continue to rise?

Do you want to take that, Tim?

I don't know that we can say, Wei-Weng, that CAC will necessarily increase, okay? I think what you will see is -- we've talked about the overall investment envelope, okay? So I think we're focused on investing at that overall level. We have -- in this most recent half, we placed more emphasis in our marketing on traffic quality. Okay? So -- or higher converting traffic, if you will. And I think associated with that, we also saw a meaningful uptick in our average order value, right? We're nudging $800 in terms of order value in this half. So I think CAC is -- as a metric, it's going to go up and down over time. We're not solving for a specific number. But I think the ability to have -- to generate higher AOVs also enables us to pay a higher CAC and still generate very, very strong returns.

Next question from [ James Biznet ] Unified Capital Partners. Great to see the cash generation in large balance, given the likely cash built into the December month. Can you give us an idea of how cash is at the end of January, [ please ]?

I don't think that's a number that's disclosed in our release, James. But I would say that the cash in the business through the course of the year, it moves up and down with the seasonality, okay? And generally, where we see the cash peaks are in the November, December time frame and then again around May and June, okay. So cash will move up and down through the course of the year, and we'll have those 2 seasonal peaks, which corresponds with the seasonal peak in revenue as well.

Next thanks to the next question from [ Sam Haddad ] at Petra. Conversion is obviously lifting in your emerging markets. Can you give us a sense of the further upside still at hand in conversion to get this through established market conversion levels?

Look, there's still a long way to go. You have to bear in mind that our -- we've been operating in our sort of core markets since launch. And really, our emerging markets are years behind. And conversion is something that it builds up in time, right? It's also -- it's -- in some regards, also it's a consequence of the mix of our customers being new customers and returning. So I think as we continue to penetrate these markets, that conversion will naturally grow. And we are in very, very early days. So there's still material headroom there.

Just another question from Sam regarding China. Is there any further needed in terms to get approvals or getting the platform ready? Or are you simply now just waiting for the right time to launch?

Yes. Now it's about timing. I think that -- just bear in mind, we've just come out of Q4, and everyone knows how important that is in the fashion calendar. The strong result that we have here today was a consequence, as I mentioned a few times, of very laser-focused execution. And so we'll be deliberate about our timing into China. But yes, we are almost there.

And the last question from Sam. I think a relationship update. Any other details on how that's progressing, please?

Yes. Things move pretty slowly in luxury, but I think both sides are working hard to get operational. This has been a big effort from both companies, to get sort of to where we are now, and it's something that we'll be able to launch with -- pretty soon.

And just the last question for today's Q&A session. It looks like the frequency of returning customers increased materially in the half. Can you confirm this is the case? And is this a trend you expect to continue as users become more familiar with the Cettire platform?

Look, I don't think -- we haven't disclosed specific repeat customer frequency metrics. We have a metric in the investor presentation, which shows the orders per active customer, which kind of can give you a sense of how things are progressing. What I would say is generally, over the course of the last few years, we've seen continued growth in frequency from repeat customers. And we are obviously hoping to continue to grow that metric, but it's not something that we disclose externally.

Thank you very much. That concludes our Q&A session and brings us to the end of today's first half FY '24 earnings call for Cettire. Thank you very much for joining, and have a great day. Goodbye.