Ozon Holdings PLC
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

Ladies and gentlemen, welcome to the Ozon's First Quarter 2021 Financial Results call. Before I pass the floor to Ozon's management, I would like to advise you that some of the information you will hear today may include forward-looking statements under the Private Securities Litigation Reform Act. Forward-looking statements are based on management's beliefs, assumptions, and information currently available, and are subject to known and unknown risks and uncertainties, many of which may be beyond our control. And actual results may differ materially. We encourage you to refer to the cautionary statements contained in the Company's press release issued today and SEC filings. During today's call, the company will be referring to certain non-IFRS financial measures and other metrics, reconciliations and definitions of you will find in the company's press release published today. Presentation today will be followed by a Q&A session.

[Alexander Shulgin:]

Thank you. Good morning and good afternoon everyone. Thank you for joining us today and welcome to Ozon's first quarter 2021 earnings call. Together with our CFO, Igor Gerasimov, who will make some comments on our business, on our quarterly results, and will update you on the outlook for the full-year 2021. We will try to give as much time as possible for the Q&A. We see strong performance and momentum in our business in 2021. Our results are a testimony to our commitment to our mission and strategic goal of transforming shopping experience for the Russian consumers by offering the unparalleled services to our buyers, whilst simultaneously empowering our sellers to grow and develop their businesses on our platform. In Q1, we generated GMV of RUB 74 billion, which is actually comparable in absolute terms to Q4 of last year. We are pleased with this result as typically Q4 is a much stronger quarter for consumer businesses. Our GMV growth reached 135% year-over-year, making this sixth quarter in a row with a triple-digit growth for our platform. Our offering resonates with the Russian consumers. Our buyer base 16 million, and grown by nearly 80% year-over-year, whilst our seller base also increased also increased dramatically, allowing our core growth engine, Ozon Marketplace, to further gain scale. And we expect to see accelerating flywheel effects in our business. Our assortment increased 2.5 times year-over-year, to 19 million SKUs. Coupled with speed and reliability of our delivery service and rollout of adjacent services, this means further enhancing our customer proposition. On the opposite side of the equation are our business partners, our sellers. With new toolset we develop for sellers and the new, more efficient commission structure, we see further growth in number on onboarding sellers. Our seller base nearly quadrupled compared to Q1 of 2020. For our platform to perform and to meet expectations of our buyers and sellers we need a well-calibrated logistics and fulfillment infrastructure. As part of our strategy, we aim to become closer to our buyers and provide fast and reliable logistics and fulfillment services to our sellers, both in metropolitan areas and in the regions of Russia. In order to do that, we continue to expand our fulfillment and logistics infrastructure. Our fulfillment footprint reached 250,000 square meters, and number of our offline pickup locations reached 12,000 across Russia in Q1, 2021. We were able to deliver 98% of parcels on time, which is a further improvement from 95% during the high season of Q4 2020, which enhances customer experience.

[Igor Gerasimov:]

Thank you, Alexander. Good afternoon, everyone. As Alexander already highlighted we have the strong supply and performance in Q1 with GMV reaching 135% year-over-year. Now, I would like to take you through how the operating expenses evolved and the drivers for this. Overall in the first quarter, we expanded fulfillments and sorting centers in the regions which requires not only capital, but also additional operating expenses related to additional personnel, bills, and rents. In addition, a large share of operating cost growth is associated with the cost of strengthening our IT infrastructure and central office team in order to facilitate platform growth and product development. To scale our business, we need highly qualified software developers and other IT specialists. Our investment into IT talent is reflected into year-over-year increase in the technology and content expense line. If I take it line by line and go for the remaining key expense items which are fulfillment and delivery and GMV, general and administrative expense increased the most by 130% year-over-year growing almost in line with the GMV. We perceive this increase as an investment into acquisition of talented employees which we require in order to accelerate development of our platform.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. And your first question is from the line of Vyacheslav Degtyarev from Goldman Sachs. Please go ahead.

[Vyacheslav Degtyarev:]

Yes, thank you very much for the call. Couple of questions, firstly, can you comment on the progression of the GMV growth performance throughout the month? How soft was the deceleration in April-May, and maybe the performance by month throughout Q1, what was the strongest month during the first quarter? And secondly, on the cost side, so basically all cost items improved as a percentage of GMV on a year-over-year basis in Q1, except for the G&A costs. Would you expect the same trajectory to continue throughout the year? Thank you.

[Alexander Shulgin:]

Vyacheslav, thank you for the questions. So, now, as you probable remember, in Russia, lockdown measures were introduced in late March and therefore -- and they were lifted by the end of June 2021, largely across most of the Russian regions. Therefore, this time period definitely, yes, it creates the toughest comps throughout the year. And therefore, given that the growth was almost -- was nearing 200% year-over-year, on the year-over-year basis it's natural to expect some sort of deceleration. However, if we're looking on the two-year CAGR in terms of the GMV growth we see that the situation is largely stable, and performance is in line with our expectations. Therefore, while on year-over-year terms the performance might vary because of the base effect, taking into account the two-year CAGR growth rate it should be largely in line with the trends which we have observed previously in 2021. Speaking about the cost performance as a percentage of GMV, going forward for some cost lines, we still will be experiencing a negative pressure from the openings of the new infrastructure objects, as well as additional hiring in personnel. However, we aim to maintain, I mean, robust cost relative GMV, and definitely on year-over-year basis, and especially speaking about the full-year, an improvement should be able in many of the cost lines. However, I mean definitely would not provide any guidance on EBITDA, and -- but we remain focused on the cost discipline.

[Vyacheslav Degtyarev:]

Okay, thank you very much.

[Operator:]

Thank you. Your next question is from the line of Elena Jouronova from JPMorgan. Please go ahead.

[Elena Jouronova:]

Yes, hi. Good day, congratulations for good results. I have a few questions, first and foremost on delivery and fulfillment costs. When do you think they should speak as percentage of GMV for online, and why?

[Igor Gerasimov:]

I guess as a percentage -- thank you, Elena, it's Igor. I guess as a percentage picture varies this year, and going forward. While the infrastructure ramps up, we'll be observing a gradual improvement.

[Elena Jouronova:]

Understood. And how does in principle, how does the rising order frequency change your outlook for profitability?

[Igor Gerasimov:]

Increase in order frequency will definitely be beneficial for us, and therefore while optically our AV might be reducing, because the purchases are becoming more frequent, and number of items in an order is lower following economics is neutral, but our cohort performance and retention is way better. Therefore in the long-term it should be beneficial for the company.

[Elena Jouronova:]

So, basically even though this means pressure on your delivery costs, I mean the more frequent number of orders, but you see much in that…

[Igor Gerasimov:]

No, no, it doesn't fit professional delivery costs, and this progression is completely in line with our expectations, and therefore the guidance which we have communicated to you already factors the same. Therefore, from our standpoint, this is just a natural reflection of the fact that people are becoming more frequent shoppers on Ozon, and that's it. So therefore, there shouldn't be any negative implications from the economic standpoint.

[Elena Jouronova:]

Can you share with us how frequently your customers shop with you on average? I don't know number of orders per year or per quarter, what are the latest numbers?

[Igor Gerasimov:]

In Q1, it's roughly 5.9 orders on the annualized basis. Therefore it's an increase from the fourth quarter last year. And this is also a reflection of the fact that people are using more of our own pick-up points and personal offers, which we actually wanted them to use more, because we're opening those objects quite rapidly right now, as you can see in our press release, and therefore it also leads to faster infrastructure. And for people -- just I mean a natural way of consumption. Therefore, it's also beneficial for our cohorts, as you could have seen in our presentation.

[Elena Jouronova:]

And just a small follow-up, so you're saying about 5.9 orders per customer on an annual basis?

[Igor Gerasimov:]

Yes.

[Elena Jouronova:]

[Alexander Shulgin:]

Yes. Hi, Elena. In theory, the long-term target would be definitely in mid to high-teens longer term, that's for sure. I mean that's something which is already a reality in most of countries. And that's something that we would like to achieve. What we understand is that 5.9 is average. That also includes new customers, right, which just joined the platform. For those who are with us on for more than one year, this number would be already above 1.5 times higher. So, that's -- however we're quite happy with our corporate performance. I think it's on the slide six. So, that's -- you can see that every new cohort is better than the previous one, and it actually continues developing rapidly. So, we're quite happy. So, this 5.9 is actually already -- it's always difficult to calculate, it's just a matter of time for new cohorts to mature, even if the older cohorts do not improve.

[Elena Jouronova:]

Okay, understood. I think among those of your more frequent shoppers who shop 365 days a year. And the final ones for me would be on --

[Alexander Shulgin:]

What's your frequency, Elena? Might be you can provide some estimates.

[Elena Jouronova:]

I'm telling you it's 365 days a year; sometimes every day and sometimes twice a day. So, I'm like, you can tell that this is the potential. So, the final one for me would be on take rate dynamics. How should we think about this for the rest of 2021? I mean, remaining quarters, should we expect the take rates go down further as merchants kind of adjust to your new commission structure or maybe that's the pressure though there?

[Alexander Shulgin:]

So, yes, as you know, we've done some changes since February. So, basically this result actually factoring some of the changes the input -- you know, versus Q4. We do not want to give any guidance, any promises here, but we just did -- we just made these changes in February. We still digesting them together with sellers, what we clearly see is that we see some response from sellers. So we saw our seller bases increasing rapidly. We see in particular by good response in terms of number of actives. So our goal to increase the assortment, it's -- we see it goes in the right direction. And we've also started seeing much better interest in our original infrastructures, because we -- you can now actually optimize some of the -- some of your costs if you bring that equity to the local fulfillment center. So having said that, so technically, you might see some reduction there, but it will be a clear reduction of cost as well, right. So for example, if today -- if you sell from Moscow to Yekaterinburg, you will sell a little pay for transportation activities. So, our report includes the part of the database, what you would see right in reports, and so it's growing some gross profit, and it also will be some cost there. If they bring directly to Yekaterinburg and sale in -- the order grows from Yekaterinburg. They will not pay for transportation. They will not pay us right there. So visually take rate was below, but costs will below as well. So this is something that might happen apart from that we kind of do. We're not working to, so that there are no big thoughts about changing commissions. So, we need to digest these commissions and to develop ancillary -- ancillary revenue, which is advertising services, where we're doing a lot today, and also cross-dock services, so you can actually pay us, and we bring this original fulfillment centers. So that's also important service costs. So to cut it shortly, I guess we just -- they just in this commission's the input they have and opposite on the ancillary part.

[Elena Jouronova:]

Okay, thank you. And if I may, actually one more question, because the working capital dynamics are very volatile, and I do understand why this has been a source of cash outflow for Ozone in Q1. But in principal, has there been any underlying change with -- how fast you pay the merchants?

[Alexander Shulgin:]

No, I mean, nothing was changed, it was completely impact. So I mean, this will be a complex answer, but I'll try to keep it concise. So in 2020, the picture was distorted a bit by the COVID impacts, especially in the beginning of 2020 was distorted by the lagging impacts of the price revolution, which we decided to undertake in 2019. Therefore, the way we'll look at it is to combine the performance across several quarter, say if you're to look at the working capital dynamics for fourth quarter 2019 and first quarter 2020 together and compare it with the performance for the fourth quarter 2020 with the first quarter of 2021, you'll actually see that the dynamics is healthy. And therefore, it's better than it used to be over the comparable time period. But this segregation would allow you to I mean, avoid this impact which were ride between different processes.

[Elena Jouronova:]

Okay, thank you very much.

[Igor Gerasimov:]

Yes, I will touch briefly. I think, yes, the only way we used this first-half versus first-half basis, because effectively we remember very well it's last month -- last weeks of March was a huge surge in GMV and in 1P as well. And you just got -- it's just like -- a little bit like a small new year within the year. And you can see that second quarter last year in terms of operating cash flow was not -- actually not good at all versus the first quarter, right. It's just the simplest of the surge in sales in March and we paid for these sales in the second quarter.

[Elena Jouronova:]

Yes. Understood, thank you.

[Operator:]

Thank you. And your next quest is from the line of Ivan Kim of Xtellus Capital. Please go ahead.

[Ivan Kim:]

Yes. Good afternoon. Can I just have three questions please? Firstly, on your share of delivers next day, so how is that progressing and how it compares maybe with the fourth quarter or a year ago? Secondly, as you reduced the threshold order for -- well, the threshold or value for free quarter delivery, what happens with the share of quarter delivery in total now in the first quarter versus last year, let's say? And then lastly, shall we expect G&A expenses growth ahead of January for the rest of the year. So is it something reasonable to issue? Thank you.

[Igor Gerasimov:]

Okay. So, I will begin, and maybe Daniil and Alexander can follow-up. On the share of next day still remains at roughly a one third of total orders because those changes some of that faster implement, and therefore nothing which has material -- nothing which is materially different versus the fourth quarter of last year. On the threshold for AV, so it resulted in a small up tick in -- into the share of courier delivery I mean but at the same time we've been opening quite a lot of the pickup points. Therefore, it's hard to say what effects ultimately was as strongest on the blended basis. But as of now, the share of deliveries for parcel lockers and pickup points spent over 80%. But going forward we were yet to see how this will play out. Just as a reminder, I mean, our delivery channels are structured in a way that it makes it kind of being -- agnostic. Therefore it doesn't matter much for us whether customer gives goods for courier delivery or whether customer gives goods for parcel lockers pickup points because the cost and the respective commissions are structured in a way to make it largely neutral for the bottom line. G&A expense for the year, I mean, that was from annual guidance, but I can only say that in 2021, we are investing into talent acquisition and therefore the pace of G&A cost line growth will probably remain somewhat elevated, but I mean where I'm not sure yet whether they will be coupled with the G&A growth or not still, I mean, definitely is just an investment and definitely -- and it's quickly ramping up for this impact wouldn't be noticeable in the first quarters of 2022 and by the end of 2021 overall.

[Ivan Kim:]

Great. Thank you for that figure.

[Alexander Shulgin:]

So I think I said that one of the reasons behind new commission that we implemented in Q1 was to incentivize sellers to give the inventory in across regions, which will both improve speed of delivery as well as reduce cost of potential GMV. Obviously it takes time to communicate and like change the way how sellers makes decision because there is some inertia in what the puzzle, but I think eventually these new commissions will have positive impact, both on speed of delivery, which is very important for us and also on costs.

[Ivan Kim:]

Great. Thank you very much for this. And maybe the last one on Ozon Express. So, what was issue there, you said before growth and revenue in GMV, so do you see similar trends this quarter and have you been opening more of that source? Thank you.

[Alexander Shulgin:]

The business has very high growth rate, from a very low base of last year, we plan to open substantial number of stores in this year, and we're performing accordingly.

[Ivan Kim:]

Okay, great. Thank you.

[Operator:]

Thank you. Your next question is from the line of Maria Sukhanova of BCS. Please go ahead.

[Maria Sukhanova:]

Yes, hi, everyone. I've got two questions. The first one on the inflation of your Financial Services into the customer base and to merchant base, so you do tell us how many Ozon cards that are active, but maybe if you could tell us what percentage of this is bought on installment. And also as merchants, if you could tell us probably what percentage of merchants uses your income in financial services and similar question with that retirement, so what is concentration of your advertising services into your merchants?

[Alexander Shulgin:]

Okay, so the dollar penetration of Fintech services blending together with the payments goes to roughly 10% of the GMV already. So it's pretty significant. Obviously, most part of that is attributable to payment services, because this is a way more scalable product offerings, but lending vertical is gradually taken up to remind you, it was just I mean MVP at the end of the year, and over the course of first quarter, it has already been able to get a couple of percentage points of GMV which is I mean, very fast, which means very fast getting from a very, very small base. Before going forward, we're pretty confident in that our Fintech initiatives could go by way bigger share as a percentage of our own GMV.

[Maria Sukhanova:]

And advertising please?

[Alexander Shulgin:]

Advertising is increasing as a percentage of GMV gradually, obviously is very far from realizing its long-term potential, which should be somewhere close to mid single-digits as a percentage of GMV. In advertising, I mean you obviously need to mind that it's impacted by the trade marketing, which largely I think mostly attributable to gross profit and alternative back margin in the way, but the thing I'm talking about and the thing we're on which Daniil and his team are focused mostly is development of the advertising engine in marketplace, but the service which our sellers will be using, and as of now it's still very far from its long-term potential as I've mentioned.

[Maria Sukhanova:]

Understood, thank you very much.

[Operator:]

There are no further questions at this time. Please continue. As there are no further questions, let me hand back to the presenters for closing remarks.

[Alexander Shulgin:]

We want to thank everyone for joining us on this quarterly call and for your questions today. To sum up, we're very pleased with the progress we have made to-date with growth in Q1 over last year. The core engine of our business is our marketplace firing on all cylinders. So, as of Q1 2021, the growth potential moves in our 3P and warranty business models. We've seen strong demand for our services from commercial consumers. Our customer base is growing fast and we're encouraged by our customers. We continue to focus on getting our business and expand our portfolio business as well as additional costs, which is complementary to our core business. We look forward to updating you and our progress we're making out in Q2 earnings call in August. Thank you and have a good afternoon.

[Operator:]

That concludes the presentation. You may disconnect.