Qliro AB (publ) (QLIRO) Earnings Call Transcript & Summary

Welcome to Qliro Q4 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Christoffer Rutgersson; and CFO, Robert Stambro. Please go ahead.

Hi, and welcome to our quarterly presentation for the fourth quarter 2023. I'm Christoffer Rutgersson, CEO of Qliro. And with me today, I have Robert Stambro, our Chief Financial Officer. The agenda for today is 4 topics. First, we'll run through business and strategy update. Then I will hand over to Robert to run through our financial update. We'll talk quickly about an outlook for the year and then move into Q&A. But before we move into business strategy update, I would like to ask the operator to show a quick product video to showcase what we're doing on the product development side at Qliro. [Presentation]

Great. Then we'll move into our business and strategy update. So first of all, with a focus on Payment Solutions, our mission is to deliver a world-leading experience for merchants and their customer journey. And this is something we have clarified during 2023 where Qliro is moving back to our core, focusing on the merchants, focusing on e-commerce and seeing the consumers -- as the merchants consumers, it's their customers. And this is a bit of a difference towards how we handled customers in the past with also difference versus some of our competitors. So this is a big differentiation and a solid reason for why many of the merchants that have joined Qliro during the last year have chosen us as a provider. We focus on value for merchants primarily in 3 areas. First of all, we are focusing on increasing leading checkout conversion in our e-commerce checkout. We do this through adding new payment methods, optimizing design and UX. We are optimizing fraud and scoring and optimizing kind of how each consumer get the right payment method at the right time and integrating kind of the right kind of shipping options for our merchants. In total, depending on market, we've seen an increase in conversion by 1% to 3% during the last year, which is kind of translating into additional revenue for our merchants. Secondly, we are working on upsell, which is basically enabling our merchants to add more products into the basket even after an order is confirmed in the checkout. This drives additional sales and order value for our merchants, increasing their gross profit per order. So it's a big upside for merchants typically translating into 3% to 9% additional sales for the merchants using this feature. It's especially popular with our merchants in the beauty segment, where we are quite strong, especially in Sweden, but also across the Nordics. Third, we are focusing on creating loyal consumers, both through investments in our digital experience in our app and web, but also through our support where we manage support for consumers in-house for all the Nordic markets. And we see this as a strength to keep up quality and have a strong feedback loop back to our product development teams to improve the consumer experience every month. We are reaching an all-time high in Q4 with NPS building around 40, which we are very proud about. So the focus is to kind of create an experience where consumers come back again and again and buy more at our merchants because this is extremely important to create a good consumer experience for our merchants. And I also want to talk about our investments in Qliro Unified Payments. You may have heard about it before in these calls as our Collecting PSP, but we're now packaging this under name Qliro Unified Payments. It's one of a new offering for all relevant payment methods where Qliro in the past has been very focused on our credit offerings, invoice and part payments and manage other payment methods more in a technical setup where the merchant still had their own contracts for each payment methods, which create a lot of hassle for the merchants. So we are packaging this into one simple offering where that enables our merchants to have a quicker onboarding because we can package everything in one process and one contract and kind of less contact points as we become the main contact point for the merchant for everything around kind of their payments set up. It provides less administration for the merchants, fewer payouts as we consolidate everything, which also means less reconciliation work and cost savings on the accounting side for our merchants. We also then have kind of one contract for everything and can simplify and be in better control of the pricing for all payment methods, which provides kind of more certainty for our merchants. So far, we are now processing 10% of our total Pay Now volumes in Unified Payments, and we expect this to increase during the year. We have so far signed up 4 of our top 10 merchants into Unified Payments, and we expect more to come during the year 2024. We're also focusing on adding more payment methods into this offering to create a leading offering for all of the Northern Europe, given that many of our merchants are selling across kind of the Northern Europe. With that said, let's move into some business highlights also when it comes to numbers. Looking at Q4, we see continued growth and profitability despite the decline in e-commerce market. We're growing our income with 9%, while the operating income within payments are growing 11%. Our operating cost decreased 36%. And hence, we see continued profitability in the quarter with operating profit increasing almost SEK 50 million compared to last year to SEK 2.6 million in profit for the quarter. However, we see the kind of continued challenging market development in the Nordic e-commerce sector, especially in Q4, where we saw the market in general declining 11% and our volumes declining 3%. Our assessment is that this is primarily driven by many merchants shifting to profitability and hence, focusing on reducing nonprofitable marketing spend and hence, reducing campaign activity during Black Week and Christmas sales period. We see volumes coming back to growth already in January to low kind of single-digit numbers and expect this to increase during the year. And also, we have some good news with new enterprise agreements, which laid the foundation for long-term growth in our business. We are expanding collaboration with Nelly Group, who's been a merchant at Qliro for a long time, where we now also will process additional Pay Now volumes of more than SEK 500 million. And this is included in our new Unified Payments offering. Also, we -- after the period in early 2024, we became a new payment partner for Skruvat Reservdelar and Bythjul with the total payments volume for both merchants combined expected to exceed SEK 1 billion. If you look at the full year 2023, we also see growth in profitability for the full year. Operating income grew 9%. And while we reduced our operating expense by 22%. And we adjusted for items affecting comparability, we reduced our expenses 16%, which leads to an operating profit at SEK 8.2 million for the full year and adjusted for items affecting comparability SEK 10 million for the full year or SEK 10.4 million. We reached our financial targets and the strategic milestones within Payment Solutions. We have a positive operating profit for the full year, which was a kind of ambitious target for us given where we're coming from. We are strengthening our capabilities and improved our operational excellence. We are launching payment service Unified Payments, including several new payment methods, and we are expanding in both small- and medium-sized merchants and the enterprise segment, where the number of active merchants amounting to 75 end of the quarter compared to 58 a year ago, which is an increase of roughly 13%, which we are very proud about. If we look at the strategic direction for our payment solutions that we talked about for also a couple of quarters, we are increasing our addressable market. We're coming from being strong in the enterprise segment and also launched in SME segment during the past year. We are now also planning a launching in Norway. We have a country manager signed up, and we expect the team to come in place by the second half of this year, establishing a local sales presence to address more of the local merchants. Even if we are already today active with our products and process significant volumes in Norway, we have not in the past kind of addressed local merchants in a targeted way. We are also building a great payments company by expanding our focus from only Pay Later to kind of fully unified payments, as I described before. And this will continue to be kind of a strong focus for our product development teams going forward. We are focusing on expanding with our merchants. So far, we are processing significant volumes in more than 30 markets, processing 8 different languages and expect this to increase during the year. We are trying to help our merchants grow revenue, and as I described before, primarily focusing on conversion and upsell and getting loyal consumers that come back in and kind of buy again and again at our merchants. We lead the consumers back to where they come from and not somewhere else. And last, we're working internally on ensuring we can scale up the business in a good way through investing also in internal tools, systems and processes to increase our scalability in our platform. We are proud to bring in a lot of new merchants during the last year with a few examples on this page. I already talked about a few of them, so we'll not spend more time on this here and now. But I want to talk about our leading customer experience, and the customer in this case is the consumers, where we see a positive trend on both Net Promoter Score as well as seize that customer and kind of merchant satisfaction across our support touch points. And we believe that kind of happy customers are -- will become loyal customers and returning customers, which is good for both us and our merchants. Last but not least, I also wanted to given an highlight on kind of our strategic objectives and where we're focusing on right now as a business during this year. We will focus on continue to build a profitable and scalable payments company. And first of all, that we will not sacrifice profitability for growth. Even if we -- going forward, we focus more on growth than profitability. So we are investing in kind of increasing our operational scalability to reduce the cost to serve, so we can bring in more merchants without increasing the cost as much as revenue. Secondly, we're doing quite heavy investments on the credit side to improve our credit scorecards and credit models to be able to smarter and hence, kind of reduce our credit losses over time. Third, we are focusing a lot on technology efficiency, both in renegotiating our vendors, making sure we have a scalable setup, but also given that we brought in a lot of new developers into the company during last year that we also make sure we kind of increased our kind of time to market and become efficient kind of across all our development teams. Secondly, we're focusing on scaling and kind of building revenue. We are improving our value proposition to increase our win ratio in all the different merchant dialogues that we have ongoing. We're accelerating our sales team. And as I mentioned, we are now also planning a launch with the local sales team in Norway during the second half of this year. So that is in progress. And third, we want to kind of focus on the payment solutions business to become a true payment challenger in all of Europe over time, but in the Nordics to begin with, with our kind of global capabilities. And we are, hence, focusing on improving our merchant experience. We believe a lot that kind of a good customer experience lead to that merchant recommend others, and we want to increase the number of kind of e-com ambassadors that are positive to Qliro in the ecosystem. Secondly, we are expanding our payment capabilities as mentioned. And last but not least, we are focusing on improving our consumer journey to create more loyal consumers. So with that said, I hand over the word to Robert to walk through our financial update.

Thank you, Christoffer. So Qliro has generated a profit of SEK 10.5 million, excluding items affecting comparability for the full year of 2023, meaning that the ambition to be profitable for the full year '23 stated in Q2 2022 by Qliro's Board of Directors have been fulfilled. Qliro has been profitable every quarter during '23 and Q4 was no exception in terms of growth and profitability. Let's zoom in on Q4 '24. The operating profit grew to SEK 2.6 million. Income grew with 9% primarily driven by Payment Solutions. There will be realizations of efficiencies within the profitability program, combined with tight cost control has pushed down our cost base, excluding items affecting comparability from SEK 116 million last year to SEK 74.4 million this quarter. Credit losses grew with 8%, mainly driven by the Payment segment. And this has all been achieved in a market that shows minus 11% reduction in Q4 2023 and minus 8% for the full year 2023. So to sum it up, we have reached the ambition of being profitable for the full year 2023. Income grew 9%, primarily driven by Payment Solutions, and we continue to have a tight cost control. The lower cost base in the quarter has been crucial -- and also throughout the year has been crucial to achieve our financial target of a positive operating profit for the full year. And it's thus clear that the implemented efficiencies and digitalization initiatives within that program, the profitability program, have given the intended long-term results. In addition, we continue to keep tight cost control. Having that said, Q4 cost is lower than Q1 to Q3 due to a one-off VAT effect in the quarter that contributed positive to the cost base, combined with lower variable cost, given less total payment volume and especially Pay Later volumes that decreased by 10% in the quarter compared to last year. Remember that Pay Later volume drives many of the variable costs such as [indiscernible] print. And worth to notice that we see a lower positive digit growth increase of total sales volumes in January. Depreciation increased with SEK 2 million in the quarter, given releases of investments in assets like Unified Payments affecting the quarter. With that said, the underlying cost run rate is more in line with previous quarter of the year, and we are going to invest further going forward to enhance growth. All in all, we can see that the investment in automation has given the long-term result on costs. We had somewhat lower cost in the quarter given one-offs and reduction of Pay Later volumes processed. We are going to continue to invest in growth, but not on the expense on profitability. Let's look at Payment Solutions. Payment Solutions continued to show progress in the quarter. New sales resources are starting to come up to speed. The pipeline continues to grow. The number of new merchants grew with 29% in the quarter, and we grew our merchant base with 2 additional merchants in the quarter. We expanded the cooperation with Nelly. Qliro shows good resilience in the declining e-commerce market. The total payment volume decreased by 3% compared to the market in general that decreased with 11% according to the Swedish Trade Federation's e-commerce indicator. The customer reach of Qliro continue to grow, and 5.6 million consumers have used our checkouts the last 12 months, a growth of near to 100,000 unique customers since 1 year ago. The clear shift in the consumer preferences towards BNPL volume seen throughout the year in favor of invoices continue. Invoices decreased with 15% and BNPL with 3% in the quarter. The take rate, which is the operating income divided by total payment volume from both Pay Now and Pay Later, grew from 2.4% to 2.8%. In other words, we are yielding better on every krone processed on our payment solutions platform than 1 year ago. Qliro performs well in the e-commerce market. Income growth with 11% and the growth is driven by the favorable mix shift in between invoice and BNPL volume throughout the year, combined with the adjustments made to consumer pricing during 2023. Credit losses grew with 12% in the quarter and 4% for the full year 2023. This was driven by the changed composition in between BNPL volume that requires small reservations than invoices that require less. Invoices decreased with 15% in the quarter. Apart from that, we sold off the portfolio not covered under normal SRG agreements, resulting in a movement in between reservations and realized credit losses. When looking at the segment, a couple of things worth to highlight. During the year, we launched a new strategy with a clear focus on merchants; widening focus on sales, including SME and the introduction of Unified Payments. The strategy with Unified Payments is in line with our strategy to become a true payment company. In Q2, cards were launched under the concept. And in Q3, Swish was launched, resulting in reduced administration for merchants and more unified payment methods will be included in the future. In Q4, we signed Nelly under the Unified Payments platform with -- which further proves the importance of the platform for future growth. As previously mentioned, after the quarter, we also signed Skruvat, Bythjul also under the concept of Unified Payments. It is important to understand the lag effect in income generation from onboarding and enterprise merchant to income generation. The earnings before tax effect will come gradually and with the book growth until it reach its full EBITDA potential after 3 years. Q4 is a sensitive quarter for merchants to change payment provider. Despite that, 2 new merchants choose to change to Qliro in Q4. Several merchants are in the onboarding process who intentionally waited until after the Black Friday, Christmas season for onboarding. Total payment volume decreased by 3% in the quarter due to lower campaign activity in Q4 this year compared to last year. Several of Qliro's enterprise merchants have been shifting focus from growth to profitability. This has affected volume growth, which has been apparent and that can be seen throughout 2023. And lastly, Qliro has invested a lot of time and effort during the last years into stability of our payment platform. This has been -- this has paid off and average uptime has been 99.99% over the last 2 years. So to sum it up, income grew with 11% in the quarter despite less volume processed and Unified Payment is an important enabler for customer acquisition and long-term growth going forward. Let's look at digital banking. The digital banking loan book continue to shrink in size and have lost 10% since last year. It now stands for 30% of Qliro's total loan book compared to 33% last year. The SEK 92 million reduction of the loan book since Q4 last year has not affected the operating income negatively. The increase in income margins have mitigated all of the loan book drop. Operating income was SEK 17.8 million in Q4, SEK 0.2 million higher than Q4 last year. The income margin, which measures the income of the funding cost of our loan book has at the same time increased by 110 basis points since Q4 last year from 7.9% to 9%. The reason for the increased margins are the gradual movement in the customer mix throughout the year, where we lose more low-risk customers than we attract. This has caused operating margin to go up and consequently increased credit losses. By deducting the credit loss level from operating income, we can see that the underlying risk adjusted income margin actually has improved 100 basis points from Q4 2023 -- '22, sorry. So to sum it up, digital banking is a smaller part of our balance sheet compared to 1 year ago. Improvements in income margin has mitigated the reduction of the loan book. Before I hand over to Christoffer, again, I'm just going to touch -- spend some time on capital and liquidity. Qliro has a capital headroom of 5.7% or SEK 143 million to regulatory refinement. The liquidity position is strong, which is proven by LCR of over 500% and a stable funding ratio of 126%. The lending activities are focused on the Nordic countries and funded mainly by deposits in Sweden and Germany. Lending in Norway and Denmark is financed by the swap market. And with that, I hand over the word to you again, Christoffer.

Thanks, Robert. Let's look quickly at the outlook for the year. We see a continued focus on growth and profitability initiatives within our Payment Solutions business. We are, in the near term, focusing on including Unified Payments for more merchants and intensifying sales and marketing efforts to continue to expand our merchant base in payments. We are continuing expansion both within SME and Enterprise segment. And we are currently in discussions with more new merchants than ever, some with the potential to significantly boost our total payments volume. We will continue to invest in expanding also our profitability initiatives within the Payment Solutions business to fund kind of our growth ambition. Currently, we are in process to onboard several merchants signed during the second half of 2023 that were a bit hesitant to go live during Black Week and Christmas period given that's kind of a high season for most e-commerce merchants. And last, but not least, we will increase our addressable market through opening up also sales office in Oslo in Norway and has starting to target also local merchants in Norway. Even if order today are active with our products, both from the checkout and Pay Later products in Norway, we have historically not actively addressed local-based merchants in Norway, which we will now open up for, which are -- and we already have a quite big interest and we'll come back to this in kind of coming quarters. With that said, I thank you for today and open up for questions.

[Operator Instructions] The next question comes from Ermin Keric from Carnegie.

Maybe starting on the outlook for 2024. You mentioned that you have several merchants that are signed, about to be onboarded. It seems like there's some improvement ahead in the overall e-com market momentum. How should we think about the payment volume that you're processing in 2024? Do you think it's possible to give any quantification to what growth we could expect? Can you reach double-digit growth, for instance?

We are not giving an outlook on numbers given that we're not publicly kind of reported that in our report. However, kind of talking about the market in general, we believe that many merchants focused on profitability in 2023, which in practice meant that they were also stripping out unprofitable market campaigns, optimize the product assortment, taking out low profitability products and so on. And hence, saw a reduction in overall volume, even if they may have seen kind of an increased profit as a business, [indiscernible] kind of publicly listed e-commerce merchant. And hence, we believe that the market are reaching kind of a new baseline, and we hence may see more kind of organic growth from here going forward. We also see kind of quite positive momentum in our sales, as I mentioned, which we believe will materialize during the year.

Okay. Maybe trying to follow up on it a little bit. Do you expect to see any change in the split between Pay Now, Pay Later in the checkouts that's going through Qliro or with regards to your take rate, do you expect any shift to what we're seeing currently?

In general, we see a split of 50-50 between Pay Now and Pay Later for most of our merchants. It's a bit different by market, and we expect that to be fairly stable. With that said, we also have many merchants. We have not processed all of the Pay Now volumes in the past, which we are now targeting to kind of get into kind of our Unified Payments offering. So overall, we may grow a bit quicker on Pay Now than Pay Later, but which is positive for us. First time we take a full -- more full ownership of the payment business of our merchants.

And then moving on to a different topic. There's been quite some discussion about the ability to pay among consumers. You've had one peer that's had a profit warning talking about that the ability to pay among consumers has deteriorated towards the end of the year. Have you seen anything like that in your books on the payment side or on the consumer lending side?

Not more than reported. Of course, we see kind of a slightly higher kind of credit losses in 2023 compared to 2022, but we don't see any kind of underlying kind of deteriorating trends where we are right now.

Great. You also mentioned in the CEO statement that Qliro is moving towards becoming a kind of pure-play payments company. How should we think about the Digital Banking segment with regard to that statement?

We are continually kind of evaluating kind of our strategy, of course, for all of our business. But if you look at kind of return on equity or return on capital for our different segments, we have a higher return on capital in the payments business. And we see that's where we come from as a business. We've been founded kind of by merchants for merchants, and we think that's our core. So we will continue to invest in expanding our payment business while for now keeping our loans business.

Okay. And then the last question was with regards to the higher customer satisfaction you've shown in one of the slides. Have you seen that the sales process or sales funnel has changed anything that maybe you're getting more leads from existing customers that's leading to conversion or anything like that? Or is it still too early to see anything from that improvement in customer satisfaction given spillover effects?

That's definitely kind of positively impacting our kind of new customer acquisition or new merchant acquisition. When we're talking about customer, we typically any consumer, and we're talking about merchants that's kind of the e-commerce merchants that are kind of are signing up for our service. But we see that kind of the e-commerce community is quite small in most cities, people know each other. So when you do a good job, that spreads and also the other way around. And we see a positive momentum from the merchants that we have signed up, that gives kind of new leads for new business. And I think that's why we also see a bigger pipeline now than we've seen in the past.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you for today.