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

Good morning, and welcome to the Kogan.com FY '20 Results Presentation. I'm Ruslan Kogan, Founder and CEO 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 full year FY '20 results today. The second half of FY '20 was an extremely turbulent and challenging period for the world, the country and the company. We have built a diversified, resilient business over many years, which has enabled us to help Australians in their time of need. In the midst of the crisis, our teams mobilized all our resources to ensure our supply chains remained open, our logistics operations continued functioning and in-demand products remained available for speedy delivery. There is a retail revolution taking place as more and more shoppers learn about the benefits of e-commerce. We're seeing record numbers of first-time customers who then go on to make repeat purchases at a 40% faster pace than previously. For us, this is a very exciting consumer behavior trend that shows that once customers learn about online shopping, they change their ongoing behavior. Once someone discovers the benefits of online shopping, I struggle to see why they would ever go back to the old way of doing things. After almost 15 years of preparation, the revolution occurring in retail represents a significant opportunity for Kogan.com. During FY '20, we also delivered the acquisition and integration of Matt Blatt, one of the pioneers of online furniture retail in Australia. The new Matt Blatt was operating within 24 hours of signing the deal, and there are now more products available to Matt Blatt customers than ever before in its near 40-year history. The Kogan Marketplace was a standout performer during the year, exceeding all our expectations and providing our customers with more choice than ever. Importantly, the emergence of Kogan Marketplace has made the company even more scalable by enabling us to grow infinitely without the corresponding investment in inventory. This means customers can now access more products than ever before. We believe this is only the beginning of this retail revolution, and we look forward to delighting our customers with benefits of these strategic investments for years to come. Our businesses thrive through adversity as years of preparation met opportunity this financial year, resulting in our largest ever growth in gross sales, gross profit and adjusted EBITDA. We achieved this all while heavily investing in our platform and growing active customers, which is expected to have ongoing long-term benefits because these new active customers will continue repurchasing. Active customers grew 35.7% to just under 2.2 million customers. This equates to 574,000 incremental active customers. And the percentage of new customers who placed a repeat order within 1 month of their first order grew by more than 40% in the second half of FY '20 compared to the prior corresponding period. This demonstrates that the newly acquired customers are embracing e-commerce more than ever before. The Kogan Marketplace was a standout performer during the year, exceeding all our expectations, increasing its gross sales by 71.2% in the second half of FY '20 compared to the first half of the financial year. That's 71.2% half-on-half growth. Our product divisions achieved year-on-year growth with Exclusive Brands revenue increasing 26.4% on FY '19 and gross profit growth of 43.7%, contributing 51.3% of overall gross profit in FY '20. As you will see later on, this growth accelerated through the period and was achieved through ongoing investments in Exclusive Brands inventory to broaden our range and meet customer demand from the growing base of active customers. Third-Party Brands returned to growth in gross profit, delivering an increase of 3.3% on FY '19 through improved product selection and sourcing. The Kogan First community of members grew exceptionally during the second half. And importantly, these loyal members, on average, purchase much more often, demonstrating loyalty to the platform and also demonstrating the significant savings available through the loyalty program. The Kogan.com platform 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 final dividend of $0.135 per share for the second half of FY '20, which reflects a total dividend of $0.21 per share in respect of FY '20. David will take you through the detailed financials shortly, but let me first give you the highlights. After a strong first year contribution from the Kogan Marketplace, the company reported gross sales of $768.9 million, up 39.3% on the prior year. Revenue was $497.9 million, gross profit of $126.5 million and adjusted EBITDA of $49.7 million. Each exceeded the prior year by 13.5%, 39.6% and 57.6%, respectively. Growth in gross sales, gross profit, adjusted EBITDA and net profit after tax accelerated in the second half of the year. The chart on this page illustrates gross sales, gross profit, adjusted EBITDA and net profit after tax growth achieved versus the prior corresponding periods, FY '19 and FY '18. The charts highlight an improved operating leverage position over many years, 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 throughout the financial year. Our partners in our New Verticals launched in the first half of FY '20 are market leaders in their industries who recognize the strength of the Kogan.com platform and the win-win-win proposition we offer. 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 to get incredible value through the efficiency of the model we have created. We're continually evolving as a 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 a more resilient business. We're always looking for new ways to delight our customers. In the past 12 months, just under 2.2 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 3% of Australian online retail trade. We're just getting started. We still believe that we've barely scratched the surface. We've seen many more opportunities. 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 I mentioned, we also acquired Matt Blatt in the second half of the financial year, growing our stable of iconic retail channels to now include Dick Smith, Matt Blatt and Kogan.com. As we just saw on the previous page, our active customers grew 35.7% year-on-year. Our customers are central to everything we do, and 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. A 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 58.5. 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 three-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 our recently launched Kogan Energy, Kogan Mobile and Kogan Internet during the past 12 months. The continued recognition received for offers in many of our New Verticals as some of the most compelling deals in the market reinforces the success of our strategy and why it resonates with customers. 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 community continues its strong growth. Because of the thrust and reach of our platform and the size of our community, we become more attractive to potential suppliers, marketplace sellers and partners. And in turn, continue to onboard new brands, new sellers and broaden our product offering. This then causes us to grow and gives us the commercial clout to secure a broader offer and improve pricing for 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 our superannuation credit cards and energy utilities. Moving into FY '21. We will further scale the Kogan Marketplace platform, enhancing the rapid onboarding of new sellers, which will improve both the customer and seller experience. We are also due to enhance the Kogan.com loyalty program and Kogan First with a view of enhancing customer engagement and ultimately enabling our valued customers to shop more regularly with us and save more. Turning to the next page. You can see that our loyal customer base are choosing Kogan.com time and time again. The second half of the year has seen rapid growth in repeat orders, and importantly, the growth of new customer repeat orders. This shows the percentage of customers who place a repeat order within 1 month of their first order. This stat grew by more than 40% in the second half of financial year '20 compared to the prior corresponding period, further demonstrating the acceptance of e-commerce by the cohorts of new customers. Importantly, the rapid acceleration of new customer acquisition occurred in the latter part of the financial year, and we expect that these customers will continue to purchase throughout their first year of shopping at Kogan.com, providing a strong tailwind of average gross sales per customer next year. You can see that our platform and loyal customer base continue to drive most of our traffic. We have invested heavily in our platform and growing active customers in the second half of the year, recording our largest marketing spend ever in FY '20. As a result, the proportion of traffic from paid sources grew this year, but still reflects less than 30% of traffic. Also as mentioned, the majority of newly acquired customers started shopping in the second half of the year, meaning that we can't see the full benefit of annual gross profit per customer as many of these customers have only been shopping for a short while. We expect to have ongoing long-term benefits as new active customers continue repurchasing. As mentioned previously, the Kogan Marketplace was a standout performer during the year, exceeding all of our expectations and increasing its gross sales by 71.2% in the second half of FY '20 compared to the first half of FY '20. We have broadened the product range available on Kogan.com to millions of items, making Kogan.com more relevant to more consumers at more times during the year. Importantly, the emergence of Kogan Marketplace has made the company even more scalable by enabling us to grow infinitely without the ongoing investments in inventory. In the long term, the 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. Our Exclusive Brands product division delivered 34.1% revenue growth year-on-year in the second half of FY '20. This growth was achieved through the growth of our platform, our large active customer base and development of proprietary systems and processes that enable us to quickly detect changing consumer demand and then move quickly to service that demand. With almost 15 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 our long-term shareholders know, we make data-driven decisions backed by existing demand metrics to determine how we deploy your capital on inventory. We don't use gut feel or guesses when we make decisions about selecting the right inventory to service customer demand. We often joke internally about being a statistics business masquerading as an e-commerce company. The Kogan First community of members grew exceptionally during the second half. And importantly, these loyal members, on average, purchase much more than nonmembers, demonstrating loyalty to the platform and also demonstrating the significant savings available through the loyalty program. Our team not only concentrates from meeting the demand of products and services our customers want but also 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. Most notably, our team delivered the new and specifically curated website for Matt Blatt, which went live within 24 hours of signing the deal. And Matt Blatt's online retail operations are now the largest they have ever been in the history of the brand. We use machine learning and AI at Kogan 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 customer at the right time. We also utilize proprietary systems to reduce fraud and optimize marketing spend, making us smarter and stronger as a business. And this leads to the best deals for our customers. I'll now hand over to David, who will run you through the financial results in more detail.

Thank you, Ruslan. Through the challenging trading conditions in the second half of the financial year, our diversified portfolio of businesses has risen to the occasion to deliver our largest gross sales and gross profit ever in FY '20. We achieved growth in gross sales of 39.3%. Overall gross sales reflects the gross transaction value of Kogan Retail, Kogan Marketplace and of the New Verticals. Revenue reflects the accounting revenue of Kogan Retail and only the seller fees received from Kogan Marketplace and commission from the New Verticals. Revenue in Exclusive Brands and Kogan Marketplace increased 26.4% and 768.4% year-on-year, respectively. Kogan Internet, Kogan Insurance, Kogan First and advertising income all grew year-on-year. Third-Party Brands revenue stabilized in the second half. Variable costs reflects the increased volume in transactions and stockholdings that has allowed the business to deliver its largest gross sales and gross profit ever. Marketing costs reflect the strategic investment in marketing and has delivered active customer growth of 35.7% since financial year '19, equating to 574,000 incremental customers. Effective targeted marketing is a key driver of growth and a core strategy of the business to grow market share. Contribution profit, being gross profit less variable and marketing costs, grew 46.4% year-on-year, thanks to the investment made in brand, technology and supply chain. EBITDA of $46.5 million reflects an increase in EBITDA margin of 2.5 percentage points to 9.3%. EBITDA was impacted by unrealized FX losses of $1.4 million, which are noncash. Adjusted EBITDA excludes these unrealized FX gains and losses, also equity-based compensation and nonrecurring items, such as the provision for penalties and costs related to the ACCC matter. Adjusted EBITDA grew to $49.7 million. Gross sales growth accelerated through the half. Our diversified supply chain and business preparation over many years enabled us to meet growing consumer demand and insulated us from many challenges to the supply chain over the period. Gross margin increased by 5.5 percentage points to 27.5% as a result of the growth in commission-based or seller fee-based revenue across the New Verticals and Kogan Marketplace. Gross margin within Exclusive Brands and Third-Party Brands also increased year-on-year. Gross margin also improved in the second half compared to the prior half, which was driven by the expansion in the product margins across the business. People costs includes a provision of $900,000 for short-term incentive bonus payments to the management team in respect of the financial year '20 outperformance. EBITDA of $29.8 million in the second half reflects an increase in EBITDA margin of 2.7 percentage points to 10.7%. EBITDA was also impacted in the second half by unrealized FX losses of $600,000, which are noncash and $700,000 of provisions for penalties and costs. Adjusted EBITDA grew to $31.5 million in the second half, an increase of 74.1% on the prior equivalent half of the second half '19. Notwithstanding the significant investment in marketing, the business was able to further improve operating leverage in the second half due to the strong repeat purchasing behavior from our new active customers. There were a range of key drivers of financial performance this year, 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 35.7% in the last 12 months. And that is a result the team is very proud of. We define active customers as unique customers who have purchased from our core retail channels in the last 12 months. Kogan First memberships scaled significantly during FY '20 as more and more customers recognized the significant value we are offering via our loyalty program. The business strategically increased its marketing activities in order to grow active customers. The significant investment to grow our brand and our active customer base had an immediate impact on the growth in active customers and is expected to have ongoing long-term benefits to the business as these new active customers continue repurchasing. Exclusive Brands continued to achieve year-on-year revenue growth with an increase of 26.4% on FY '19. Exclusive Brands also achieved gross profit growth of 43.7%, resulting in an overall contribution of 51.3% to overall gross profit in FY '20. This was achieved through ongoing investment in Exclusive Brands inventory to broaden our range and meet the growing demand from our large and growing base of active customers. Third-Party Brands return to gross profit growth throughout FY '20. They delivered a 3.3% increase in gross profit on FY '19 as a result of improved product selection and sourcing. Importantly, the performance of both Exclusive Brands and Third-Party Brands improved through financial year '20 with a strong acceleration in the second half. The success of Kogan Marketplace has resulted in gross sales increasing by 71.2% in the second half compared to the first half of FY '20. The platform continues to resonate 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. We are continually improving our proprietary marketplace platform, which enables the business to achieve ongoing growth without the corresponding investment in inventory. Kogan Mobile performed relatively in line with FY '19, contributing over 10% of total gross profit. And we also set up a solid foundation for growth of Kogan Mobile in New Zealand in FY '21. Kogan Internet customers grew 90.9% year-on-year, resulting in commission-based revenue increasing by 144.9% over the same time period. And Kogan Insurance grew commission-based revenues by 36% year-on-year. Further details of the performance of our product and business mix are shown in Annexure 1. Variable costs predominantly consist of warehousing and selling costs, like merchant fees. The increase in these costs is largely driven by growing volumes of transactions and stockholdings that has allowed the business to deliver its largest gross sales and gross profit ever. We are continuing to invest in our people with the STI referred to earlier, and also long-term incentives remain in place and people costs have increased year-on-year partly as a result. The majority of equity-based compensation was issued in the period surrounding the IPO. Over the past 4 years, we have delivered growth in gross margin, contribution margin, EBITDA margin and adjusted EBITDA margin. We continue to deliver significant projects to grow our business, to grow products, to grow services and all of our offerings while heavily investing in our brands. There were significant improvements across the majority of operating leverage ratios, notably gross margin and delivered margin, which reached a high of 25.4% and 21.4%, respectively, over the period. We take our responsibilities to ensure every dollar we spend is working hard for the business very seriously. We continue to review overheads and investments, and we're always working hard to improve this efficiency. When we conceive of our growth plans for the business, we focus on scalable projects that leverage the assets we have already built. And when we invest in building new assets, we track the return on our investment very carefully. 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 51.3%. And it continues to be the largest contributor to overall gross profit. Kogan Marketplace is now a material contributor as you can see in this pie chart. As you can see, Kogan Internet and Kogan Mobile continued to achieve growth in customers. Kogan Internet commission-based revenue grew 144.9% year-on-year, driven by strong customer growth. We expect Kogan Internet to continue scaling in financial year '21. Kogan Mobile Australia continues to contribute significantly to gross profit. The business is continuing to work on our new offerings to reinvigorate our growth trajectory in FY '21 and beyond, including in rolling out new plans. Kogan Mobile New Zealand, in partnership with Vodafone New Zealand, was launched during the first half of FY '20. Vodafone New Zealand is New Zealand's largest mobile network operator. In the first half of the financial year, 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 year, and we look forward to continuing strong momentum of these business units well into the future. Kogan Insurance, encompassing our suite of insurance products, grew commission-based revenue by 36% year-on-year and continues to scale. We are working with our partners to implement strategies to further accelerate this growth into the future. On to the net assets. Cash balance at 30 June 2020 was $146.7 million and is inclusive of the proceeds of the $100 million placement that we conducted late in the financial year but excludes the $20 million share purchase plan, which was completed in July. The business held a total of $80.4 million of inventory in warehouse at the end of the period, of which more than 99% was aged less than 365 days. Total inventory was $112.9 million, an increase of $37 million held at the same time last year. Our financial liabilities reflects the unrealized FX loss recognized against our forward contracts, which is noncash. As previously mentioned, we purchased the intellectual property of Matt Blatt during the year, largely comprising of trademarks, domain names, customer brand and other IP-related matters. This has been capitalized within our intangible assets balance at a value of $4 million and will be amortized in accordance with our company policy. Trade and other payables reached a high following the largest trading period in the history of the business as we ensured we met the demands of our customers. As at the balance date, the business had an undrawn bank debt facility. The business generated almost $46 million of cash flow from operations in FY '20. This is the ultimate demonstration of the scalability in our business and the operating leverage inherent in our diversified portfolio of divisions. I'll now hand back to Ruslan to discuss our outlook and some further detail on what's to come in financial year '21.

Thanks, David. We are excited about the opportunities ahead as we continue to grow our platform and expand our portfolio. Our growing portfolio of businesses provides huge opportunity 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 platform 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. Kogan Marketplace is a relatively new entrant to this slide, and we anticipate being in a position to add an additional tick next to Kogan Marketplace in the not-too-distant future. As we look to FY '21, we expect that FY '21 will see further growth in Exclusive Brands, the scaling up of Kogan Marketplace and New Verticals and further growth in their active customer base. Consistent with prior years, the company will not be providing earnings guidance for FY '21. However, the company will provide regular business updates during the period. With regards to recent trading, July 2020 unaudited management accounts showed gross sales and gross profit growth of more than 110% and 160% year-on-year and an adjusted EBITDA of more than $10 million. Our Board is looking forward to the new year with confidence. As announced earlier in this presentation, the Board has declared a fully franked final dividend of $0.135 per share, which reflects total dividends of $0.21 per share in respect of FY '20. This concludes our presentation. David and I look forward to meeting many of our shareholders over the coming days. For those of you who have any questions following today's presentation, please feel free to e-mail [email protected], and we will respond as soon as possible. Thank you for your interest in Kogan.com.