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Edited Transcript of KGN.AX earnings conference call or presentation 21-Feb-19 11:30pm GMT

Half Year 2019 Kogan.com Ltd Earnings Call

MELBOURNE Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Kogan.com Ltd earnings conference call or presentation Thursday, February 21, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Matthew Shafer

Kogan.com Limited - CFO, COO & Executive Director

* Ruslan Kogan

Kogan.com Limited - Founder, CEO & Executive Director

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Presentation

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Ruslan Kogan, Kogan.com Limited - Founder, CEO & Executive Director [1]

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Good morning, and welcome to the Kogan.com First Half 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 Kogan.com's half year results today. We're proud to have delivered strong growth in the business as we continue to invest in the future. At Kogan.com, we've built a portfolio of businesses that leverages the Kogan brand and trust that we've built with customers over the last 13 years. Our portfolio strategy provides diversification of income, making us a more resilient business. We're agile and innovative, meaning we can respond quickly to changing conditions in one area of our business, bolster other divisions and rapidly launch new ones.

Over the first half of this financial year, we continued to invest in our core product divisions made up of Exclusive Brands and Partner Brands, through expanding our warehousing footprint, increasing marketing and taking inventory of the most in-demand products. We also grew Kogan Mobile Active Customers significantly in a competitive telco landscape.

While investing in the future, we have also taken measures to improve return on investments and efficiency in our marketing and warehousing to ensure we maintain a low cost of doing business. We achieved record trading in the peak Christmas period, with the iconic Black Friday and Boxing Day sales both producing record days in the history of our business.

As you hopefully know by now, we don't stand still at Kogan.com. During the first half of FY '19, we also announced new strategic partnerships, which are due to launch during 2019, including a suite of products under the Kogan Money brand. I will talk about these in more detail later.

As you can see, in the first half, Kogan.com achieved double-digit top line growth and growth in gross profit versus the same period in the prior year. This was achieved through Active Customer growth of 32.2% year-on-year. And there are now more than 1.5 million Active Customers in the Kogan.com community. We achieved strong growth in Kogan Mobile Active Customers and continued investments in inventory and marketing.

Our core product divisions of Exclusive Brands and Partner Brands achieved year-on-year revenue growth of 26.1% and 96.5%, respectively. This was achieved while cycling a strong base and already incredible growth. Kogan Insurance is showing a strong growth trajectory. We expect Kogan Insurance to continue to scale through 2019 as we gain market share.

In the latter part of the half, we launched Kogan Money Home Loans, the first of a suite of products to be offered under the Kogan Money brand, including Kogan Money Super and Kogan Money credit cards, which are due to launch during 2019. With each of these, we intend to be tackling multi-billion-dollar sectors with a low-cost offer that customers love.

The Kogan.com brand and 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 for our customers, deliver on our promises and always exceed customer expectations. David will take you through the detailed financials shortly, but let me give you the highlights.

The first half of financial year '19 saw us achieve gross transaction value and revenue growth of 12.9% and 10.6%, respectively, reflecting strong performance from core product divisions and New Verticals. Gross margin of 19.5% reflects a small improvement in margin compared to last year. EBITDA of $13.3 million represents a strong half in our core products divisions and New Verticals, in addition to our investments in marketing and warehousing to drive our long-term vision.

The charts on this page show the revenue and gross profit growth achieved versus first half financial year '18 levels despite coming off such a strong base. First half financial year '19 EBITDA of $13.3 million reflects investments made in our expanding warehousing footprint and marketing. These are investments in the future of the business from which we're already experiencing efficiencies and expect will support further growth in 2019 and beyond.

As I mentioned earlier, we've continued to grow our portfolio of businesses in the first half. 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. 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.

In the past 12 months, more than 1.5 million people have transacted with our retail websites. We still believe that we've barely scratched the surface. Our e-commerce revenue is around 2% of the Australian online retail market. We see many more opportunities. We remain 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.

It's worth spending a moment touching upon the virtual cycle in our business. We have continued to build our Active Customer base while achieving strong metrics in our marketing investment. The Kogan community is growing fast. Because of the size of that community, we've become more attractive to potential suppliers and partners and can, in turn, continue to onboard new brands and broaden our product offering. This, in turn, causes us to grow and give us the commercial clout to secure a broader selection and improved pricing for the Kogan community, which then causes us to continue to build an 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 2019 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 and soon-to-be superannuation and credit cards. 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. This virtuous cycle is not new to our business. It's been a cornerstone of Kogan.com and has been part of our business since day 1.

We can see the growth achieved in Active Customers on the next page. In the 12 months to December 2018, Active Customers increased by 32.2%, to more than 1.5 million. An Active Customer is someone who has transacted with our retail websites in the prior 12 months. 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 our 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 59.9. This number is important to us because it shows we are delighting our customers, and we know that the only way this business will continue to thrive is if we continue to delight our customers.

Turning to the next page. You can see a large proportion of our traffic continues to come from 3 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 with Aussies. 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 customers 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 continue to invest further in marketing, earning $55 of gross profit per Active Customer per year off a marketing spend of $22 per new customer. We are getting payback on our marketing spend extremely quickly.

If we look at annual gross sales per customer, there is a slight decrease, primarily driven by a reduction in high-value Apple sales and the introduction of a long tail of low-value products on to the website. Actual orders shipped continues to grow.

Our Exclusive Brands product division continues to be a standout, with 26.1% year-on-year revenue growth off a strong base in the prior year. With over 12 years' experience, we have built a loyal customer base that recognizes the quality and value of our Exclusive Brands products. It is this strong consumer 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. In the first half, we invested in inventory to service demand and achieved record trading during the peak Christmas period.

I'll now hand over to David, who will run you through the financial result in more detail.

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David Matthew Shafer, Kogan.com Limited - CFO, COO & Executive Director [2]

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Thank you, Ruslan. In the first half of this financial year, our diversified portfolio of businesses continued 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 GTV of 12.9%. GTV reflects the gross sales of Kogan retail and the gross transaction value of New Verticals. Revenue from our New Verticals is recognized on a commission basis, in line with the applicable accounting standards.

Speaking of accounting standards. This first half reflects the new standard for revenue recognition, AASB 15. We have provided a reconciliation in annexure 2, which shows the impact of -- on revenue, gross profit and EBITDA in 1H FY '19 of this change in revenue recognition.

Revenue growth of 10.6% was driven by growth of 26.1% in Exclusive Brands and 96.5% in Partner Brands. Growth in the first half was tempered by various factors, including changes in the GST law effective on the 1st of July, apparent GST avoidance by foreign websites and subdued demand for Apple products.

Variable costs were primarily impacted by investments in expanding our warehousing footprint. The expansion of our warehousing facilities involved some up-front costs. However, we started to see efficiencies in the second quarter, as you will see later in the presentation.

Marketing costs grew by 22.1% over the half, following an improvement in ROI and efficiency over the half. As Ruslan mentioned earlier, we track our return on investment on marketing closely. Effective, targeted marketing is a key driver of growth and a core strategy of the business to grow market share.

EBITDA was impacted by growth in operating costs and investments in marketing and warehousing during the period, which we believe will provide benefits over the long term. There were a range of key drivers of financial performance in 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 our Active Customers by 32.2% 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.

Continued investment and expansion of our product offering. Exclusive Brands continued to achieve significant year-on-year revenue growth, with an increase of 26.1% on the first half financial year '18. Exclusive Brands represented 50.9% of overall gross profit in the first half of financial year '19. This growth was achieved through ongoing investment 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.

The half also saw the company continue to reap the rewards of investment in our Partner Brands Product Division. Partner Brands achieved year-on-year growth of 96.5% and represented 27.2% of overall gross profit. The team is consistently onboarding new and market-leading brands to bring our customers the most in-demand products, further demonstrating the strength of our proposition as a partner for leading brands and distributors. Also, various brands that were previously part of the Global Brands product division transferred to the Partner Brands Product Division during the period.

Global Brands, our internationally sourced third-party brand product division, has experienced a year-on-year decrease in revenue, following the change to the GST laws and the apparent avoidance of GST by foreign websites. Also, various brands have moved from Global Brands to our Partner Brands Product Division, which impacts the comparative growth rate.

Finally, subdued demand of new-release Apple products impacted overall revenue growth in the business.

Broadening and growing our services offering. We are always working with our partners in our New Verticals to bring best-in-market offers to our customers. In the first half, Kogan Mobile continued to achieve strong growth in Active Customers. We provided attractive promotional introductory offers which impacted ARPU over the period. As promotional offers apply for a limited time period, we expect to increase ARPU progressively as customers roll off their promotional plans and on to everyday plans. Additionally, Kogan Internet and Kogan Insurance continue to grow in Active Customers, and we expect this to continue through the second half and beyond.

During the first half, the company invested in expanding its warehousing footprint, which involved some up-front costs. This investment in the future of the business is already providing benefits and is expected to provide ongoing efficiencies in the second half and beyond, in addition to enhancements to the customer service experience in certain geographic areas.

If we turn to the next page, we can see the gross profit mix for the half. Most noticeable is the increase in Exclusive Brands and Partner Brands as a percentage of overall gross profit to 50.9% and 27.2%, respectively. When combined with Kogan Mobile, these 3 core business units account for 90.1% of gross profit.

On to the next page. As you can see, Kogan Mobile and Kogan Internet continued 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 75% year-on-year Active Customer growth.

Kogan Internet launched during April 2018 and is growing progressively. We expect Kogan Internet to scale throughout 2019.

Kogan Mobile New Zealand, our partnership with Vodafone New Zealand, is expected to launch in 2019, and we look forward to bringing great value prepaid mobile plans to Kiwi customers.

On to the next page. Kogan Insurance encompasses our suite of insurance products which launched at various points during financial year '18. Kogan Insurance continues to scale, and we are focused on working with our partners to implement strategies to further accelerate this growth in the second half of this financial year and beyond.

As mentioned earlier in this presentation, during the half, we made investments in the future, specifically through expanding our warehouse footprint and investing in marketing. Operating costs in the second quarter represented 12.9% of revenue compared to 15.1% in the first quarter. This demonstrates that some costs are not ongoing and also the successful implementation of various efficiency measures in the second quarter. We take our responsibilities to ensure every dollar we spend is working hard for the business very seriously. We periodically review our overheads and investments, and we're always working hard to improve this efficiency.

As at the 31st of December 2018, the company had cash of $15.5 million, reflecting the investments in inventory in order to support growth of Exclusive Brands and Partner Brands. The company ended the half with inventories of $92.9 million, comprising $71.1 million of inventory in the warehouse and $21.8 million of inventory in transit.

As at the 31st of December 2018, 92.3% of inventory in the warehouse was less than 120 days old, and more than 99.5% was less than 365 days old. This demonstrates the effectiveness of our sourcing and marketing methodologies, which mean we are devoting your capital to the right product at the right time, and we're selling through these products extremely quickly.

Let's take a look at inventory turns that further demonstrate this point. As can be seen in the chart, despite a significant increase in inventory in warehouse, inventory turn has been broadly stable, demonstrating the strong sell-through rate of the inventory purchased and the effectiveness of the data-driven approach to purchasing and inventory management. As discussed earlier, the company invested in inventory during the half to respond to consumer demand and drive the revenue growth of 26.1% in Exclusive Brands and 96.5% in Partner Brands. The operating cash flow before capital expenditure reflects the investments made in inventory during the period to support this growth.

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 '19.

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Ruslan Kogan, Kogan.com Limited - Founder, CEO & Executive Director [3]

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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 the second half of FY '19 and beyond, we expect to achieve continued brand growth, deeper market penetration in our existing portfolio of businesses and to launch new portfolio businesses. 2019 is due to see the launch of Kogan Money Super and Kogan Money Credit Cards in addition to Kogan Mobile New Zealand. Additionally, 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, and this is at the forefront of everything we do. 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 New Verticals and to be able to bring more and more compelling offerings to the Kogan community. As we have said previously, our ambition is to achieve more than 1% market share across each New Vertical. We are working hard to achieve this on our existing verticals whilst also launching new ones, also with huge market potential.

This 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 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 compelling offers in a wide array of services.

In the second half of financial year '19, 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 more resilient business for our customers and our shareholders.

During 2019, Kogan Mobile New Zealand, Kogan Money Super and Kogan Money Credit Cards are due to launch, with, in one instance, significant upfront incentives due on launch.

Consistent with our prior practice, the board will not be providing EBITDA guidance for FY '19. With regard to recent trading, the second half has started well, with January unaudited management accounts showing year-on-year revenue growth of 13.1%, gross profit growth of 19.9% and operating cost growth of 7.3%.

As you can see, there is a lot to be excited about in 2019. The board is looking forward to the current half with confidence. The board was pleased to declare a fully franked interim dividend of $0.061 per share, with a payment date of the 8th of May 2019.

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 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.