Kogan.com Ltd (KGN) Earnings Call Transcript & Summary

Good morning, and welcome to Kogan.com's First Half FY '20 Results Presentation. I'm Ruslan Kogan, Founder and Chief Executive Officer and Executive Director of Kogan.com. Presenting with me today is David Shafer, Kogan.com's Chief Financial Officer, Chief Operating Officer and Executive Director. David and I are pleased to present Kogan.com's half year FY '20 results today. In the first half of financial year '20, we are proud to have delivered a record half in gross sales and gross profit, whilst also taking significant steps to invest in the future success of our business. During the period, we delivered on several projects, including the launch of 4 new business units, whilst also growing Kogan Marketplace and expanding our Kogan First subscriber base. We expect these new divisions to provide new ways to continue to delight our customers and further expand our loyal Kogan community. In particular, the continued growth of Kogan Marketplace has led to a transition period for the company. As we further enhance the Kogan marketplace platform, it will enable our business to achieve ongoing growth without relying on inventory and associated capital requirements and constraints. We are pleased to have shareholders and partners alike that support our strategy of investing in the long-term future of our business. We're just at the very beginning of seeing the benefits from our major investments. Our major investments in warehousing and logistics footprint infrastructure for faster delivery in the Kogan Marketplace platform for greater product range and in Kogan First for rewarding our loyal customers and more. We're just getting started, and we look forward to delighting our customers with the benefits of these strategic investments for years to come. We are proud to have achieved double-digit growth across gross sales, gross profit and adjusted EBITDA, whilst also taking significant steps to invest in the future success of our platform. Our performance resulted in record half year gross sales and gross profit. This was achieved through active customer growth of 10.2% year-on-year, and there are now almost 1.7 million active customers on the Kogan.com platform. Importantly, active customer growth across Kogan Internet, Kogan Insurance and Kogan Mobile Australia was complemented by commission-based revenue increases of 642%, 44% and 6.8%, respectively. Kogan Marketplace gross sales grew 44.6% quarter-on-quarter in the December quarter. Not only is the platform proving popular with our customers but sellers are also loving the opportunity to reach more and more customers. Marketplace sellers increased 55.2% quarter-on-quarter, with the team continuing to work through a growing backlog of sellers waiting to join our platform. This half saw the continued development of our recently launched Kogan First loyalty program. Kogan First gives members access to free shipping, upgrades to express shipping as well as exclusive deals on a large number of our products. The rapid growth of memberships during the half is demonstrating that customers are switching on to the value our loyalty program delivers. The first half of financial year '20, also saw the launch of 4 new verticals. Being Kogan Super, Kogan Mobile New Zealand, Kogan Energy and Kogan Credit Cards. These new verticals are seeing strong growth. The Kogan.com brand and our portfolio of businesses continues to grow and strengthen as a result of the commitment and determination of our team. We get the best deals for our customers, deliver on our promises and always endeavor to exceed customer expectations. Finally, today, we are announcing a fully franked interim dividend of $0.075 per share for the first half of FY '20. David will take you through the detailed financials shortly, but let me first give you the highlights. After a strong first full half contribution from the Kogan Marketplace, the company reported gross sales of $322.9 million, up 16.4% from prior year. Revenue was down on prior year due largely to the growth of Kogan Marketplace in respect of which only the selling phase are recognized as revenue. Gross profit was $49.9 million up 10.6% on prior year, which reflects an increase in gross margin of 3.3 percentage points to 22.7%. Adjusted EBITDA increased 35.2% to $18.2 million. The charts on this page illustrate gross sales, gross profit, adjusted EBITDA and NPAT growth achieved versus first half FY '19. The chart highlights an improved operating leverage position which has allowed Kogan.com to grow adjusted EBITDA at a faster rate than gross sales and gross profit. We are proud to be able to cycle strong growth in our business and continue to produce solid results for our shareholders. As I mentioned earlier, we've continued to grow our portfolio of businesses in the first half of the financial year. Our partners in our new verticals are market leaders in their industries who recognize the strength of the Kogan brand and the win-win-win proposition we offer. In each vertical we enter, we create a win for our partner by enabling them to gain new customers; a win for Kogan.com in adding an additional revenue stream; and most importantly, a win for our customers, who get incredible value through the efficiency of the model we have created. We're continually evolving the business to respond to the demands of our customers and to strengthen our competitive advantage. Our growing portfolio of businesses provides diversification of income, making us more resilient. We're always looking for new ways to delight our customers. In the past 12 months, just under 1.7 million people have transacted with our retail platform. While this is a great number, and one of the most impressive in the industry, at this stage, our platform represents only around 2% of Australian online retail trade. We're just getting started. We still believe that we've barely scratched the surface. We see many opportunities ahead. We remain 100% focused on giving the Kogan community access to products and services that are in high demand and delivering value better and more efficiently. As we just saw on the previous page, our active customers grew 10.2% year-on-year. Our customers are central to everything that we do, so we're extremely proud to have achieved consistent month-on-month growth in active customers. Additionally, our Net Promoter Score has remained consistently high, reflecting the team's hard work and commitment to delighting our customers. Our Net Promoter Score or NPS is the gold standard for measuring customer loyalty and a company's relationship with its customers. It's measured on a scale from negative 100 to positive 100. Anything above 0 is generally considered to be healthy. Kogan.com's Net Promoter Score has an average of 59.7%. This number is important to us because it shows we are delighting our customers and we know that our business will only continue to thrive if we continue to delight our customers. Our team's amazing work continues to be recognized. Backing up our 3-peat of the People's Choice Award at the 2019 Australia Post Online Retail Industry Awards and by winning more awards for Kogan Home Loans and newly launched Kogan Energy during the past 6 months. The continued recognition received for our offers in many of our new verticals are some of the most compelling deals in the market reinforces the success of our strategy. It's worth spending a moment touching upon the virtuous cycle in our business. Each step of the cycle continuously works towards our mission to make the most in-demand products and services more affordable and accessible. We have continued to build our active customer base. The Kogan.com community continues to show strong growth. Because of the trust and reach of our brand and the size of our community, we become more attractive to potential suppliers and partners. And can, in turn, continue to onboard new brands and broaden our product and services offering. This then causes us to grow and gives us commercial clout to secure a broader offer and improved pricing to the Kogan community, which then causes us to continue to build the active customer base who want access to these ever-improving deals. We consistently have more to offer our customers across many aspects of their lives, from our price leading products to mobile phone plans, holidays, insurance, Internet, home loans, cars, and now superannuation, credit cards and energy utilities. During 2020, we will further develop the Kogan Marketplace platform, enabling the rapid onboarding of new sellers and the enhancement of both the customer and seller experience. We are also due to enhance the Kogan.com loyalty program and Kogan First with a view to enhancing customer engagement and ultimately enabling our valued customers to shop more regularly with us. Turning to the next page, you can see that our brand and loyal customer base continues to drive most of our traffic. You can also see that the number of customers placing repeat orders has been consistently increasing, further demonstrating the strength of our brand. Through the success of our proprietary algorithmic marketing engine, which optimizes our appeal from millions of keywords, we improved our marketing efficiency, spending $17 to acquire new active customers, which is down from $22 last year, further reducing the cost to acquire new customers by 24.7% year-on-year. We are getting payback on our marketing spend extremely quickly. Our team not only concentrates from meeting the demand of products and services our customers want, but also on ensuring that the shopping experience we deliver is first class. During the last 12 months, we have been busy implementing a range of in-house projects, including the rollout of several new apps and integrations. All in all, we have delivered more than 15 dedicated websites and applications in just the last year, some of which you can see on this slide. All these integrates seamlessly with our product and service offerings to ensure customers are always delighted to shop with us. We are embracing machine learning and AI to ensure that our customers get the tailored shopping experience they deserve. Our proprietary algorithms and built-in AI technology mean that we are communicating the right product or service to the right person at the right time. We also utilize proprietary systems to reduce fraud and optimize marketing spend, making us a smarter and stronger business. Our Exclusive Brands product division delivered 17% revenue growth year-on-year in the first half of FY '20, coming off a strong base in the prior year, where we delivered 26.1% growth. Our growth was achieved through the growth of our brand, our customer base and development of proprietary systems and processes that enable us to quickly detect demand. With over 13 years' experience, we have built a loyal customer base that recognizes the quality and value of our Exclusive Brands. It is this strong customer demand that enables us to continue to invest in and expand our range. As you know, we make data-driven decisions backed by existing demand metrics to determine how we deploy capital on inventory. We don't use gut feel or guesses when we make decisions about selecting the right inventory to service customer demand. I often joke internally about us being a statistics business masquerading as an e-commerce platform. As mentioned previously, Kogan Marketplace customers and sellers alike are loving our new Marketplace, resulting in gross sales increasing by 44.6% quarter-on-quarter in the December quarter. Over the same period, seller numbers grew by 55.2% quarter-on-quarter. In the long term, Kogan Marketplace will create huge benefits to both our customers and our shareholders as we build one of the major e-commerce platforms in Australia and New Zealand. Kogan First grew rapidly through the period as the company invested significantly in the program. Since inception of the program, we have funded over $1 million of additional benefits to our loyal customers via free shipping, free upgrades to express shipping and exclusive discounts across a range of our products. Kogan First members buy more frequently and spend more than other customers, and building this loyal community enhances our e-commerce platform. I'll now hand over to David, who will run through the financial result in more detail.

Thank you, Ruslan. In the first half of this financial year, our diversified portfolio of businesses continued to deliver top line growth in gross sales and gross profit as we managed our operating costs and the impact of changes in our business mix. We achieved growth in gross sales of 16.4%. Our overall gross sales reflects the gross transaction value of Kogan Retail, Kogan Marketplace and of the new verticals, while revenue reflects the accounting revenue of Kogan Retail and only the seller fees received from Kogan Marketplace and commission from the new verticals. At June 30, 2019, we early adopted the new accounting standard, AASB 16 leases. The half yearly report for the 6-month ended December 31, 2018, has been restated to reflect the early adoption of the new leases accounting standard. We have provided a reconciliation in Annexure 2, which shows the impacts from the change in accounting standard. Revenue in Exclusive Brands, Kogan Internet, Kogan Insurance, Kogan Mobile Australia and advertising all grew year-on-year. This was tempered by a reduction in revenue within third party brands, partly due to the migration of some customer orders to the Kogan Marketplace, which earns seller fee-based revenue. Variable costs reflect the increase in stock holdings that has allowed us to deliver on our largest half year of gross sales and gross profit in the history of the business. Marketing costs reduced by 25.3%, continuing to reap the benefits of our proprietary marketing system, which has driven our customer acquisition cost down by 24.7% year-on-year. As Ruslan highlighted earlier, we track our return on investment on marketing spend closely. Effective targeted marketing is a key driver of growth and a core strategy of the business to grow market share and to keep a lid on costs. Contribution profit, being gross profit less variable and marketing costs, grew 27.4% year-on-year following efficiencies in marketing and logistics over the period. Adjusted EBITDA of $18.2 million reflects an increase in adjusted EBITDA margin of 2.6 percentage points to 8.4%. We believe adjusted EBITDA is a good measure of the underlying performance of the business as it removes noncash nonrecurring items like unrealized FX gains and losses and equity-based compensation. There was a range of key drivers of financial performance this half, some of which Ruslan touched on earlier, and I'll provide some additional commentary on these now. Firstly, brand growth. As Ruslan mentioned, we grew active customers by 10.2% in the last 12 months, a result our team is pretty proud of. We define active customers as unique customers who have purchased from our core retail channels in the last 12 months. We also saw the rapid growth of Kogan First memberships during this half as more and more customers recognize the significant value we are offering via the loyalty program. Exclusive Brands continued to achieve year-on-year revenue growth with an increase of 17% on the first half of financial year '19. Exclusive Brands represented 46% of overall gross profit in the half. This growth was achieved through ongoing investment in Exclusive Brands' inventory to broaden our range and meet consumer demand from the growing base of active customers. Third-party brands, which is a combination of what we formally refer to as Global Brands and Partner Brands, has collectively experienced a year-on-year decrease in revenue due to the rapid growth of Kogan Marketplace. Kogan Marketplace gross sales has increased 44.6% quarter-on-quarter, that's the December quarter on the September quarter. And the number of sellers in the platform has increased 55.2% over that time period. The platform is clearly resonating with sellers and there continues to be a long backlog of sellers ready to be onboarded. The exceptional growth of Kogan Marketplace has led to a period of transition for the business. Our proprietary marketplace platform enables the business to achieve ongoing growth without relying solely on inventory based sales. Kogan Mobile Australia grew commission-based revenues by 6.8% and customers by 5.1% in the first half of the financial year '20. Kogan Internet is racing ahead as it grew customers by 344.4% year-on-year, and Kogan Insurance grew commission-based revenue by 44% during the period. Further details of the performance of our products and business mix are shown in Annexure 1. We have continued our traction in assisting our partners to engage in paid advertising, marketing and promotion on the Kogan.com platform, increasing advertising revenue to 5.3% of total gross profit. Advertising revenue is 100% gross profit. This represents a real opportunity to become a viable growth area for the business. Our commitment to make most in-demand products and services more affordable and accessible through broadening our range to meet our broadening consumer demand has driven an increase in variable costs. But our investments and efficiencies throughout our logistics network is paying off, with variable costs growing at a slower pace to both gross sales and Exclusive Brands revenue growth. We'll also continue to invest in our people with $600,000 of equity-based compensation being invested over the half. Most of this expense relates to equity grants that were issued around the time of our IPO. Our EBITDA before equity-based compensation and unrealized FX gains and losses was $18.2 million. Over the past 3 years, we have delivered growth in gross margin, contribution margin and EBITDA margin. We continue to deliver significant projects to grow our products and services business, while maintaining a close eye on costs. Our contribution margin and adjusted EBITDA margin growth over the 4-year period reached a high of 13.8% and 8.4%, respectively, this half. We take our responsibilities to ensure every dollar that we spend is working hard for the business very seriously. We continue to review our overheads and investments, and we're always working hard to improve our efficiency. Turning to the next page, we can see the gross profit mix for the year. Exclusive Brands as a percentage of overall gross profit is 46%, and that continues to dominate. Most notably, gross profit contribution of Kogan Marketplace and advertising grew significantly to 11% and 5.3%, respectively. As you can see, Kogan Internet and Kogan Mobile continued to achieve growth in customers. Kogan Internet commission-based revenue grew 642% year-on-year, driven by the customer growth of 344.4%. We expect Kogan Internet to continue scaling in the second half of financial year '20. Kogan Mobile continues to be a significant contributor to gross profit generally. The offerings continue to resonate with customers and 5.1% growth in customer numbers was achieved throughout the period. Commission-based revenue grew 6.8% over that time. Kogan Mobile New Zealand, which is a partnership with Vodafone New Zealand, was launched in the first half of financial year '20. Vodafone New Zealand is the largest network operator in New Zealand, and we have already started implementing some of the great lessons we've learned from Kogan mobile's success in Australia. The company delivered the launch of 4 new verticals in Kogan Super, Kogan Energy, Kogan Credit Cards and Kogan Mobile New Zealand ahead of schedule. These new verticals have had strong growth during the half, and we look forward to continuing the strong momentum of these business units in the next half. Kogan Insurance, encompassing our suite of insurance products, grew commission-based revenue by 44% year-on-year, and continues to scale. We are focusing on working with our partners to implement new strategies to further accelerate this growth in the future. The business held a total of $81.6 million of inventory in warehouse at the end of the period, of which 98% was aged less than 365 days. Total inventory was $94.7 million, a small increase on the $92.9 million held at the same time last year. During the period, our right-of-use assets and corresponding lease liabilities increased under AASB 16 leases due to the favorable renegotiation of one of our warehousing arrangements. Our financial liabilities reflect the unrealized FX loss recognized against our forward contracts, which is noncash. Trade and other payables reached a seasonal high following the peak Christmas trading period as we ensured we met the demands of our customers. As at the balance date, the business had a cash balance of $34.1 million and an undrawn bank debt facility. We have managed our cash flows well over our peak trading period, growing our cash balance to $34.1 million and ending the reporting period with an undrawn bank debt facility. I'll now hand back to Ruslan to discuss our outlook and some further detail on what's to come in the second half of financial year '20. Thank you.

Thanks, David. We are excited about the opportunities ahead of us as we continue to grow our platform and expand our portfolio. In the second half of this financial year, we are expecting to continue to see brand growth, deeper market penetration, scaling of our recently launched verticals and the continued expansion of Kogan Marketplace. We are also expecting more smart shoppers to join our platform and subscribe to Kogan First, driving growth in our product divisions. Our growing portfolio of businesses provides huge opportunities for growth, as you can see from the market size data. We are proud to be partnered with industry-leading providers for our new verticals and to be able to bring more and more compelling offerings to the Kogan community. Our ambition is to achieve more than 1% market share across each new vertical, and we are working hard to achieve this on our existing verticals. There is a huge market potential for growth. This page also illustrates the diversification of our income and the future potential. For each new vertical, Kogan.com provides the marketing services, branding and customer acquisition, while our Tier 1 partners provide most of the underlying service. This setup leverages our strengths and those of our partners to benefit our customers. We are leveraging our brand and our business assets to form these partnerships, which, in turn, allows us to present our customers with great value offers in a wide array of services. Consistent with our prior practice, the company will not be providing earnings guidance for the remainder of the financial year. With regards to recent trading, January 2020 unaudited management accounts showed gross sales growth of more than 17% year-on-year. Our Board is excited about what the Kogan.com team will deliver in the second half of the year. Reflecting on dividends we have paid since IPO, we are proud to have paid more than $32 million in fully franked dividends over the past 3 years since IPO, which is more than the $32 million after offer costs that the company raised in the IPO. The Board is now pleased to declare a fully franked interim dividend of $0.075 per ordinary share in respect of the first half of FY '20. This concludes our presentation. David and I look forward to meeting with many of our shareholders over the coming days. For those of you that have any questions following today's presentation, please feel free to e-mail relations@kogancorporate.com, and we will respond as soon as possible. Thank you for your interest in Kogan.com.