Full Year 2019 Kogan.com Ltd Earnings Call
MELBOURNE Sep 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Kogan.com Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 12:30:00am GMT
TEXT version of Transcript
* David Matthew Shafer
Kogan.com Limited - CFO, COO & Executive Director
* Ruslan Kogan
Kogan.com Limited - Founder, CEO & Executive Director
Ruslan Kogan, Kogan.com Limited - Founder, CEO & Executive Director 
Good morning, and welcome to the Kogan.com FY '19 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 and Chief Operating Officer.
David and I are pleased to present to you Kogan.com's FY '19 full year results today. We've delivered strong growth in the business while we continue to invest in the future. We have made significant advancements in our mission to make the most in-demand products and services more affordable and accessible.
FY '19 saw us open many new distribution facilities, which ensure our customers get their products faster and cheaper. We also significantly expanded our product range and launched new business divisions to give our customers more choice. While doing this, our gross sales surpassed $0.5 billion for the first time. And while this number is relatively small compared to the size of the industries we operate in, we are very proud of the impact we're having in those industries as we drive prices down through digital efficiency. We will forever remain the customer advocate in these competitive industries.
Over the past 13 years, we have built the Kogan brand to be synonymous with value and trust, in turn, garnering a loyal customer base and allowing us to leverage the Kogan brand into a portfolio of businesses. Our diversified portfolio means we're agile and innovative, resulting in the ability to quickly respond to changing conditions in one area of our business, bolster other divisions and rapidly launch new ones.
During this financial year, we continued to invest in our core product divisions, particularly Exclusive Brands, by expanding our warehousing footprint and investing in inventory of the most in-demand products. While investing in the future, we have also taken measures to improve return on investment and efficiency in our marketing and warehousing to ensure we maintain a low cost of doing business. As you hopefully know by now, we don't stand still at Kogan.com. During FY '19, we also announced new strategic partnerships which are due to launch during the first half of FY '20, including a suite of financial products under the Kogan Money brand. I will talk more about these later on.
As you can see, Kogan.com achieved double-digit gross sales growth and double-digit gross profit growth compared to the prior year. This was achieved through Active Customer growth of 15.9% year-on-year, and there are now more than 1.6 million Active Customers in the Kogan.com community of smart shoppers. We achieved strong growth in Kogan Mobile Active Customers of 24.4% and continued investments in inventory and marketing for our product divisions. Our core product division of Exclusive Brands' year-on-year revenue growth was accelerated to 41.6%. This was achieved while cycling a period of already incredible growth last year.
Kogan Insurance is showing a strong growth trajectory. We expect Kogan Insurance to continue to scale through 2020 as we gain market share. In the latter part of the financial year, we launched Kogan Marketplace and Kogan Cars. Kogan Marketplace achieved $1.5 million of gross profit in FY '19. The launch of Kogan Marketplace is proving to be a transformational step for our company. Not only is it a strong financial contributor, it also enables us to offer more choice and competition to our customers. Kogan Money Home Loans is the first of a suite of financial products to be offered under the Kogan Money brand, including Kogan Money Super and Kogan Money Credit Cards, which are due to launch during the first half of FY '20. With each of these, we will be entering multibillion-dollar sectors with a very strong customer offer.
The Kogan.com brand and our portfolio of businesses continue to grow and strengthen as a result of the commitment and determination of our team. We work hard to ensure we get the best deals to our customers, deliver on our promises and always exceed customer expectations. Finally, today we are announcing a fully franked final dividend of $0.082 per share. This represents a full year dividend of $0.143, a 10% increase from last year.
David will take you through the detailed financials shortly, but let me first give you the highlights. The FY '19 financial year for us achieved gross sales and revenue growth of 12% and 6.4%, respectively, reflecting strong performance from our Exclusive Brands division and our new verticals in our business. For the first time, we have surpassed $0.5 billion in gross sales. We achieved a gross margin of 20.7%, which reflects an improvement in the margin compared to last year.
EBITDA of $30.1 million represents strong performance in our Exclusive Brands division and new verticals, in addition to the investments in warehousing to drive our long-term vision and improved efficiency and marketing. The charts on this page show gross sales, gross profit and EBITDA growth achieved versus the past 2 financial years. 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 continued to grow our portfolio of businesses in this 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 commission-based revenue stream and most importantly, a win for consumers who get incredible consumer 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 a more resilient business.
We're always looking for new ways to delight our customers for many years to come. We're looking to the future and seizing opportunities that fit our win-win-win philosophy. 13.5 years ago when I had the idea to start this business, I shared the idea with a few business leaders who all laughed and said that e-commerce was only for books and CDs. I then started a presale and went and maxed out a few credit cards to enable the business to be born. In a few weeks' time, I'll be tapping my Kogan Money Credit Card when making purchases.
In the past 12 months, more than 1.6 million people have transacted with our retail websites. While this is a great number and one of the most impressive in the industry, our business 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 more opportunities. We've remained 100% focused on giving the Kogan community access to products and services that are in high demand and where we can deliver value better and more efficiently than anyone else.
During the year, we won a number of prestigious awards. One of our proudest moments would have to be the securing of a three-peat of the People's Choice Award at the Australia Post Online Retail Industry Awards. This award is the most prestigious award in Australian online retail and reinforces the fact that our team is delivering what our customers want: great products and services at jaw-dropping prices. What makes this award extra special is that it is voted for by the Australian public. For us, that's the only vote that matters. There's no vote more important than the vote of our customers. More than 1,350 retailers were considered for this award and over 285,000 Aussies voted. The recognition received for offers in many more of our verticals as some of our most compelling deals in the market also reinforces the success of our strategy.
It's worth spending a moment touching upon the virtuous cycle in our business. We have continued to build our Active Customer base while achieving strong metrics on our marketing investment. The Kogan community continues to grow at a phenomenal pace. 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 offering. This then causes us to grow and gives us the commercial clout to secure a broader offer and improved pricing for the Kogan community, which then causes us to continue to build the Active Customer base who want access to these great deals.
We are always looking for new opportunities to partner with market leaders in additional verticals with more new verticals launching in FY '20 and a strong pipeline ahead of us. 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 soon to be superannuation, credit cards and energy utilities. Our focus on giving our Kogan community what they want at market-leading prices keeps them coming back which, in turn, means we can offer even better deals across a wider range of products and services.
We can see the growth achieved in Active Customers on the next page. In the 12 months to June 2019, our Active Customers increased by 15.9% to more than 1.6 million. Our customers are central to everything 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 for 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.
We have recently launched Kogan First and have several other loyalty initiatives in the pipeline. There will be focus in our business over the next few years to ensure our customers are aware of our breadth of offering, and we will be driving loyalty by creating various incentives for customers to interact with multiple businesses in our portfolio.
Turning to the next page, you can see a large proportion of our traffic continues to come from free sources. This further demonstrates the strength of the brand we've built through constantly delighting our customers. Our commitment to bring the most in-demand products and services to our Kogan community at great prices continues to resonate. We use a data-driven approach to continually improve our offering and to ensure that the right product or service is shown to the right person at the right time. This also enhances the customer's experience as we are able to personalize offers and treat every shopper as an individual.
We improved our marketing efficiency, spending $17 to acquire each new Active Customer, which is down from $24 last year. We are getting payback on our marketing spend extremely quickly. We also continue to receive a large and growing proportion of traffic from free sources with 74% of traffic being free this financial year, up from 68% last year. One of the drivers for the increase in the proportion of free traffic is the success of our proprietary algorithmic customer communication engine which drives personalized communication and targeted offers to the Kogan community.
Our Exclusive Brands product division continues to be a standout with 41.6% year-on-year revenue growth off a strong base in the prior year where we delivered 39.6% growth. 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 consumer demand that enables us to continue to invest in and expand our range, which we did this year, including into new core categories such as white goods and built-in kitchen appliances.
As you know, we make data-driven decisions backed by existing demand metrics to determine how to deploy capital on inventory. We don't use gut feel or guesses when we make decisions about selecting the right inventory to service demand. I often joke internally about us being a statistics company masquerading as a retailer. The primary skills we test for when growing our Exclusive Brands team are logical and analytical reasoning skills and Microsoft Excel data modeling skills.
As previously mentioned, we launched Kogan Marketplace during the second half of the financial year. Marketplace allows third-party sellers to connect with our extensive customer base via the Kogan.com platform. Consistently strong gross sales have been achieved in its first full quarter of operation. And so far, we have received overwhelmingly positive responses from both sellers and customers. The pipeline of sellers who are interested in joining the Kogan Marketplace is growing at an accelerating pace, and the Kogan.com team is progressively reviewing and onboarding these sellers. We have built our own proprietary platform for Marketplace, which we are continually enhancing.
I'll now hand over to David who will run you through the financial results in more detail.
David Matthew Shafer, Kogan.com Limited - CFO, COO & Executive Director 
Thank you, Ruslan. In this financial year, our diversified portfolio of businesses continue to deliver top line growth and growth in gross profit as we managed our operating costs and investments and the impact of changes in the trading environment. We achieved growth in gross sales of 12%. Overall gross sales reflects the gross transaction value of Kogan Retail, Kogan Marketplace and of the new verticals, while revenue reflects the revenue of Kogan Retail and only the commission received from the new verticals and Kogan Marketplace.
This year, our accounts reflect 2 new accounting standards: the new standard for revenue recognition, AASB 15; and the standard for leases, AASB 16. We have provided a reconciliation in Annexure 2 and Annexure 3, which shows the impact from the change in accounting standards.
Revenue growth of 6.4% was driven by growth of 41.6% in Exclusive Brands, 9.8% growth in Kogan Mobile and the launch of Kogan Marketplace. This growth was tempered by various factors, including changes in the GST law, effective on the 1st of July 2018, and the apparent GST avoidance by foreign websites. Apple sales during FY '19 also suffered a material decline year-on-year following the subdued demand for Apple products, in particular, the new iPhone.
Variable costs were primarily impacted by investment in expanding our warehousing footprint. While incurring upfront costs in expanding to 13 warehouses as at the end of the financial year, the business has started to enjoy efficiencies and expects this to continue into FY '20 and beyond.
Marketing costs reduced by 5.9% following the implementation of a new proprietary marketing bidding system that enabled more effective and targeted marketing activity. As Ruslan mentioned 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.
EBITDA grew 15.6% for a total of $30.1 million, which included $1.2 million of noncash, equity-based compensation. EBITDA was also impacted by unrealized FX losses of $0.2 million, which are noncash. 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 15.9% in the last 12 months, which is a result the team is very proud of. We define Active Customers as unique customers who have purchased from our retail channels in the last 12 months.
Exclusive Brands continued to achieve significant year-on-year revenue growth with an increase of 41.6% on financial year '18. Exclusive Brands represented 49.7% of overall gross profit in financial year '19. This growth was achieved through ongoing investments in Exclusive Brands inventory to broaden our range, including into white goods, and our ability to meet consumer demand from the growing base of Active Customers. Third-Party Brands, which is a combination of what we formerly referred to as Global Brands and Partner Brands, has collectively experienced a year-on-year decrease in revenue following the change in the GST laws and the avoidance of GST by foreign websites.
During FY '19, we launched Kogan Marketplace, which has achieved $1.5 million in commission-based revenues since commencing trade. The commission-based revenue is reflected as gross profit. The introduction of Kogan Marketplace has been hugely significant for Kogan.com. We have had overwhelmingly positive feedback from both sellers and buyers and have been onboarding sellers at a very strong pace. Importantly, the launch of Marketplace has proven to be a transformational step towards a more capital-light business as the company will become less reliant on third-party inventory to drive gross sales growth as Marketplace scales up.
Kogan Mobile continues to go from strength to strength, growing commission-based revenue by 9.8% and Active Customers by 24.4% in FY '19. Kogan Internet also grew its Active Customers by 273%, and Kogan Insurance grew its commission-based revenue by 144% during the same period. Further details of the performance of our products and business mix are shown in Annexure 1. We have gained traction in assisting our partners to engage in paid advertising, marketing and promotion on the Kogan.com platform. This demonstrates the potential of advertising and marketing promotions as a stand-alone revenue stream.
And we also invested into the future. During FY '19, the company invested in expanding its warehousing footprint to 13 fulfillment centers. While incurring upfront costs, these investments in the future have already helped provide efficiencies and provided customers with faster and cheaper delivery to more locations. We also continue to invest in our people with, as I've said before, $1.2 million of equity-based compensation being invested over the year. Most of this expense relates to equity grants that were issued around the time of our IPO. Our EBITDA before equity-based compensation was $31.3 million.
Turning to the next page, we can see the gross profit mix for the year. Most noticeable is the share of Exclusive Brands as a percentage of overall gross profit at 49.7%. When combined with Third-Party Brands and Kogan Mobile, these 3 core business units account for 91% of gross profit.
As you can see on the next page, Kogan Mobile and Kogan Internet continue to achieve growth in active customers. Kogan Mobile is a significant contributor to gross profit, as discussed previously, and the offerings continue to resonate with customers with 24.4% year-on-year Active Customer growth. Kogan Internet launched during April 2018 and is growing progressively. We expect Kogan Internet to scale throughout FY '20.
Kogan Mobile New Zealand, our partnership with Vodafone New Zealand, is expected to launch in the first half of FY '20 and we look forward to bringing great value prepaid plans to Kiwi customers. Vodafone New Zealand is the largest network operator in New Zealand, and we will be implementing some of the great lessons we've learned from Kogan Mobile's success in Australia.
Kogan Insurance encompasses our suite of insurance products which launched at various points during financial year '18. Kogan Insurance grew commission-based revenue 144% and continues to scale. We are focused on working with our partners to implement strategies to further accelerate this growth in the future.
On to the net asset summary. As at 30 June 2019, the company had cash of $27.5 million, an undrawn bank debt facility of $30 million and inventory of $75.9 million. This reflects the company's investment over the course of the financial year in inventory in order to meet consumer demand, particularly in Exclusive Brands, combined with a reduction of inventory levels over the second half, partly due to the launch of Kogan Marketplace, which does not rely on inventory-based sales.
As at the end of the financial year, more than 99% of inventory in the warehouse was less than 365 days old. This demonstrates the effectiveness of our sourcing and marketing methodologies, which means we are devoting your capital to the right product at the right time and we're selling through these products extremely quickly.
Now let's take a look at inventory turn to further demonstrate this point. As you can see from the chart, despite inventory and warehouse increasing significantly, inventory turn has remained high and has improved since FY '18. The chart demonstrates the strong sell-through rate of the inventory purchased and the effectiveness of the data-driven approach to purchasing and inventory management.
Net working capital decreased by $19.8 million in FY '19, reflecting the investment that has been made during the financial year in inventory as we expanded our warehousing footprint of 13 facilities and also in marketing to support long-term, sustainable growth. While inventory increased overall during the year, it reduced in the second half from $92.9 million at 31 December 2018 to $75.9 million at 30 June 2019.
I'll now hand back to Ruslan to discuss our outlook and some further detail on what's to come in FY '20.
Ruslan Kogan, Kogan.com Limited - Founder, CEO & Executive Director 
Thanks, David. We are excited about the opportunities ahead as we continue to grow our existing core business units and expand our portfolio. As we look to FY '20 and beyond, we expect to achieve continued brand growth, deeper market penetration in our existing portfolio businesses and to launch new portfolio businesses. FY '20 is due to see the scaling up of recently launched Kogan Marketplace and Kogan Cars as well as the introduction of Kogan Super and Kogan Money Credit Cards in addition to Kogan Energy and Kogan Mobile New Zealand.
We are always looking for new ways to grow and delight our customers. We have a strong pipeline of opportunities, the merits of which we carefully assess before progressing to ensure the best possible use of funds and resources. We have high standards. We pride ourselves on getting the best deals for our customers, our partners and our business. This is at the forefront of everything we do. Further, as these new business units scale up, it will enable a transition to a more capital-light business model.
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. We are working hard to achieve this from our existing verticals while also launching new ones, also with huge market potential. The page also illustrates the diversification of our income and the future potential.
For each new vertical, Kogan.com provides the marketing, 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 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.
In financial year '20, we expect to see the scaling up and launch of new verticals and further growth in the Active Customer base, which will drive growth in our product divisions. As we scale the new verticals, we drive further diversification of income across our portfolio, and we become a stronger business for our customers and our shareholders. During FY '20, Kogan Mobile New Zealand, Kogan Super, Kogan Money Credit Cards and Kogan Energy are due to launch. Consistent with our prior practice, the company will not be providing EBITDA guidance for FY '20.
With regard to recent trading, FY '20 has started well, with July 2019 unaudited management accounts showing year-on-year gross sales growth of 18.3%, gross profit growth of 32% and Kogan Marketplace gross sales of $7.1 million. As you can see, there is a lot to be excited about in FY '20. The Board is looking forward to the new year with confidence.
The Board was pleased to declare a fully franked final dividend of $0.082 per share, which reflects total dividends of $0.143 per share in respect of FY '19. That's up 10% from last year.
This concludes our presentation. David and I look forward to meeting with many of our shareholders over the coming days. For those of you who have questions following today's presentation, please feel free to e-mail firstname.lastname@example.org, and we will respond as soon as possible. Thank you for your interest in Kogan.com.