Cdon AB

STO:CDON

Earnings Call Transcript 2021-Q1

[Marcus Lindqvist, President]

Hello, everyone, and a very warm welcome to our earnings call. My name is Marcus Lindqvist, and I'm the interim CEO of CDON until the 1st of May, as we yesterday announced is when our CEO, Kristoffer Väliharju, will return back to his duties. As we have many new investors with us on this call, we will start by giving you an overview of our Marketplace business and how we look at the dynamics in the market. So with that, let's jump into the presentation. Could we move to Slide 3, please. Over the last 20 years, CDON has been a pioneer within Nordic e-commerce. And over the last couple of years, we have made a transformation from a vertical e-commerce retailer to become a leading local marketplace in the Nordics. And in just 2 years, we have gone from having a 20% of our business being third-party sales to now having almost 80% of our sales coming from merchants. We have 2.3 million active consumers as customers, and more than 1,700 merchants are now live in our platform. Next slide, please. Analyst reports tells us that marketplaces have a 50% share of all e-commerce business on a global scale. But when we look at the Nordics, the marketplace economy does not account for more than low single digits, which is interesting if compared to other markets such like the U.K., Germany and the Netherlands, for example, who all are on the 30% level. In perspective, the Nordic economy is equal in size to more populated European markets. And the Nordics also have a GDP that is almost 2x the European mean. As the Nordic e-commerce market will mature, we at CDON aspire to take a leading position. Hence, we see a great opportunity to further grow as the market matures. Further, we do not believe that the Nordics will be a winner takes it all market as we can see that in most other regions, there are more than one successful marketplace. Let's move to Slide 5, please. So why do over 50% of global e-commerce business go via marketplaces? At the marketplace, customers get access to a large assortment of products. And merchants get access to new customers, and with that, they can drive their sales more efficiently. And so what we at CDON want to be is to be the starting point for shopping in the Nordics for consumers. And for merchants, we want to be the best partner to drive their sales. Let's move to Slide 6, please. So what do we mean by being a sales engine for merchants? Over the last year, we have focused on creating a good merchant offering. We have developed tools for merchants to make it easier to onboard and drive their sales. We now have tools for automatic onboarding, data insights, monitoring of pricing and content optimization. We have also invested and grown our merchant onboarding team to give an even better local support for our merchants. And as a result of this, we can now see that we have a good momentum in our onboarding team showing a steady inflow of new merchants. Let's move to Slide 7, please. Customers, on the other hand, go to CDON for our wide assortment and great prices. By shopping at CDON, the customer can choose from products from more than 1,700 merchants with 1 single checkout. But to be successful at the marketplace, you need to have an excellent experience for both the consumer as well as the merchant. And even though we have a wide assortment and great pricing, we're not happy with the customer experience that we have today. Therefore, we have started to and will continue to accelerate our focus, investments and efforts to improve our consumer experience. Next slide, please. We are still in an early phase building the best possible experience and have a lot of work cut out for us. But if we succeed, the upside, it's a very attractive position. To give you an idea of the opportunity, looking at the Netherlands, which has a similar population and culture as the Nordics, the leading marketplace Bol.com has captured approximately 20% of the market. Should CDON in the future reach a similar position as Bol.com as the market matures is equal to SEK 55 billion in GMV. So how do we get there? Let's go to Slide 9. When you're building a successful marketplace, this follows a well-known and established playbook. As you grow merchants, you increase your assortment and improve prices. And this adds to the customer experience, which in its turn drives more traffic and sales, making the marketplace more relevant for even more new merchants to join. When you get all of these 4 components of the flywheel in place, you can accelerate investments in merchant and customer acquisition and with the best possible return on investment. Let's move to the next slide. At CDON, we will always prioritize the weakest spot in our flywheel. Our current strengths are in the assortment and our broad consumer and merchant base, which creates the critical mass necessary to run the marketplace. This is also, in our view, the toughest part of the journey when you build the marketplace. CDON has achieved its critical mass over the last couple of years. And as our aspiration is to be the leading Nordic marketplace, we will now need to intensify our focus on our weakest spot, which is the customer experience. Slide 11, please. As I previously mentioned, CDON has reached a favorable position as we now have a critical mass of liquidity in our platform. Since this is now reached, we will increase our efforts to optimize our business. And coming important steps include an upgrade of our checkout and simplified navigation and categorization on the site. We expect gradual improvements in these areas, both short term and on a continuous basis, as we are establishing an organization and leadership in the business to maintain a rapid improvement in these specific areas. Part of this work is to optimize and position the organization according to our current technical development needs. For example, as our new platform allow for a higher degree of automation, we have during the quarter redesigned parts of the organization to increase our capabilities to focus on the customer experience. And as we see our customer cohorts improving, we will then gradually ramp up customer and merchant acquisition accordingly. Slide 12, please. And with that, let's look at the summary on the first quarter. During the quarter, we had the highest merchant intake ever, with more than 200 new merchants joining our platform. We could also see a continued marketplace growth, where our marketplace business in the quarter grew 25%. During the quarter, we also changed our ERP system, and I'm happy to say that this was done without any disruption to the business. We also made several investments directly linked to our efforts to improve our customer experience. On the negative side, we still do have some challenges linked to the release of our new platform back in October last year. And those were mainly related to merchandising and indexing our products in our traffic channels, which in its turn have had a negative effect on our traffic volumes during the quarter. With that, let's now jump into the financials. So Niclas, could you please go ahead?

[Niclas Szieger]

Yes. Thank you, Marcus. So let's move to Slide #13. Here, we can see the transformation that we have done in the past years. We have successfully built a marketplace with sales and number of merchants that has reached a solid liquidity. And at the meantime, we have also phased out our CDON Retail business. Looking at the quarter, we can see a continued GMV growth from CDON Marketplace of 25% and total sales amounting to SEK 380 million. In total, now 80% of our GMV comes from the Marketplace business. Moving to next slide, please, our income statement. We can see that the growth of GMV for Marketplace resulted in a net sales of SEK 41 million, an increase of 20%, and the gross profit that increased with 20% to SEK 38 million. The commission from merchants grew 29%. However, lower ads and financial income is the main reason for net sales and gross profit not growing in line with GMV. CDON Retail declined with 39%. However, we see an increased gross margin related to the remaining part of the business has a higher underlying margin structure. As a result of the rapid change in business model, total net sales declined with 29%. This also impact our gross margin as we increased high-margin third-party volumes and reduced lower-margin Retail business. This resulted in a gross margin that increased with 12.5 percentage points in the quarter and amounted to 36.5%. In the quarter, EBITDA amounted to minus SEK 9 million. We did have increased operating expenses in the quarter. This is related to further investments in new competencies but also a one-off cost related to a reorganization of SEK 1.6 million and currency effect versus last year of SEK 1.6 million. EBIT was minus SEK 14 million, which is SEK 1 million better than last year. Last year, we did do a write-down of an intangible asset of approximately SEK 7 million. Moving to next slide, please, and looking at some of the drivers of the business. Starting with traffic or number of visits, we did see a decline of 9%. We did, as mentioned before, have problems related to the platform which did impact our visits negatively. Total number of orders were flat versus last year, thus, the growth of GMV came from a higher average order value. Our customer base, as mentioned before, continues to grow. In total, now 2.3 million customers have purchased at CDON in the last 12 months. Momentum of adding new merchants is also good. We have 54% more merchants compared to Q1 2020. And in total, 212 merchants joined us in the quarter, which is all-time high. Moving to next slide and looking at the cash flow and the balance sheet. As a result of the CDON Retail business being phased out, we continue to decrease our inventory accordingly. It amounted to SEK 21 million, which is SEK 41 million lower than last year. The cash flow from operations during the seasonally weak quarter amounted to minus SEK 100 million compared to minus SEK 126 million last year. This is mainly driven by a large outflow of payables to suppliers and merchants during January coming from high season with very large volumes. In the quarter, we invested SEK 6 million in CapEx, which is about the same levels of last year, which resulted in a total cash flow of minus SEK 107 million and a cash balance of SEK 63 million, which is SEK 18 million higher than the same time last year. So with that, I hand back over to you, Marcus.

[Marcus Lindqvist, President]

Thank You, Niclas. Let's move to Slide 17, please. And so what should you take away from today's call? The Nordic marketplace opportunity is attractive, and it is up for grabs. And at the same time, we have reached the tipping point of critical mass in marketplace liquidity. We will now further accelerate our pace of development and investments, meaning that we will use the room for investments that our cash flow from operating activities allows to accelerate the pace of development. And in the near term, our focus will be on improving our customer experience. So with that, we're ready with the presentation, and we are now ready to answer any questions that you might have. Operator, do we have any questions?

[Operator]

[Operator Instructions] We have a question from the line of Nicklas Fhärm from SEB.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

My first question actually goes to the sort of advertising and service-related income. And I was just going to ask you if the 1,700-odd merchants now on the platform, are they all now paying the SEK 299 monthly subscription fee?

[Marcus Lindqvist, President]

That's a very basic question to hear. Well, I'm kind of expecting more, but yes, they are.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. Perfect. And to follow up, then I was going to ask you if you could share with us the levels of advertising and other non-sort of take rate sales in Q1, please.

[Niclas Szieger]

Yes, I mean as I did mention, the main revenues that we have there is the advertising that today is very low -- from very low levels and the financial income. That is the main too apart from the take rate and the subscription fee that we take for merchants.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes. Would it be fair to say that the actual take rate on 3P GMV was slightly lower in Q1 this year compared to Q1 last year?

[Niclas Szieger]

We don't disclose the exact take rate. But as I say, it goes 29% compared to a GMV of 25%, so yes.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

And my final question would be, when we look into the remainder of this year, do you expect to keep up sort of the growth rate in the number of merchants added to the platform in Q1 also for the remainder of 2021?

[Marcus Lindqvist, President]

It's a tough question to answer, Nicklas, but we have a good momentum and we had for quite a while now. And as Niclas also mentioned, our intake in the first quarter was kind of on a very, very high level to look at it historically. We believe we can do more, of course, but cannot really kind of disclose on what levels we will grow that during the year. But we have continued to have and see a good momentum also at the start of this quarter.

[Operator]

[Operator Instructions] We have a question from the line of Adam Wyden from ADW Capital.

[Adam David Wyden]

Congratulations. It looks like you guys are making great progress and definitely really appreciate your marketing materials and investor presentation. I think that probably covered my first question. I think you guys laid out nicely, if you guys get similar penetration in a market like Netherlands, you guys were looking at like a SEK 55 billion opportunity in terms of GMV. And obviously, as it relates to gross margin, if your take rates are better, you'll probably make even more gross profit. So that's really helpful in terms of framing the scale of the opportunity. But my question really revolves around how you get to what I would call comparable growth in the early evolution of marketplaces. I think you talked about you have these early adopters, and now you need to improve the customer experience, so you don't turn away -- you don't have merchants log on and then log off and then you never get them back. I think that was what I was interpreting through the slide. So that means that you guys want to do investment on the customer experience, which we love because, obviously, when you [ look after ] customers, they keep coming back, and basket size is up. But you still haven't really gotten your cost of capital. And I noticed you guys put on Savneet Singh as a Board nominee. And obviously, you have great experience in terms of getting the market to understand the value of this platform and raising capital around that. I mean can you talk a little bit about how you think about, what I would call, burning cash or spending money in excess of EBIT, so you can accelerate product development to kind of reinvigorate GMV growth such that we get back to like 50% to 100%? Because we read between the line, that kind of feels like you guys have -- you've hit -- not have hit a wall, but you're growing at a nice clip, but you want to make sure that you grow healthily and athletically in a way that you can serve your customer. And in order to do that, you've got to reinvest a lot more, and you don't really have -- the market has not really availed us to the opportunity of raising capital to finance this opportunity. So can you talk a little bit about that?

[Marcus Lindqvist, President]

Yes. Yes, sure. Let's try to kind of get a little bit more into that. So as we mentioned in the presentation, we will kind of increase our investments when it comes to bettering and making our customer experience better. The levers that we will kind of invest into, that will be on what we can kind of finance out of the operations. Yes, and as you know, any kind of further investment is more of a discussion for the Board and for the owners to have the AGM and so forth. So I will kind of stay out of that and kind of not speculate on that level. But the kind of cash flows, if you look at it over a cycle, actually allows us to do quite a lot if we put that money in the right place. And that's why we're trying to kind of get more of that into the customer experience, making sure that they fix some of the kind of low-hanging fruits so that the investments when we then start to kind of more drive new customers and new merchants into the site actually makes sense following kind of the development on our customer cohorts. So I cannot be more precise than that, Adam, but that's the kind of thinking around this. All right?

[Adam David Wyden]

So you guys don't plan on spending more than what you're internally generating is kind of the plan as it is today, but that's obviously subject to change?

[Marcus Lindqvist, President]

Yes. That's subject to change, but that's specifically a subject for the Board and for our shareholders to discuss. So it's nothing I want to kind of speculating what that discussion or might be discussions will eventually unfold for us. So what we can plan as a management team is what can we do with the means that we have, and that's what we're doing now.

[Adam David Wyden]

So just reading between the lines, you guys think that with the means that you have today, that you can see GMV growth go back to kind of level that we saw last year, I mean, substantially higher than where we are right now?

[Marcus Lindqvist, President]

That's kind of a timing discussion then, Adam. So what we are focusing now and what we'll focus on now is to kind of invest in our customer experience. That needs to improve. And then if it's improved, then to start to kind of more move that investment into customer acquisition. And then, of course, you should see a steady growth coming out of that investment. But it's like we're allocating at the moment more into fixing customer experience than allocating for kind of growth for the sake of growth. When we have the cohorts that we have, it doesn't really make sense to put that money into growth at the time being. And it is also always the prioritization, and priority now is to put that money and put those investments into fixing the customer experience. And then following that, we, of course, believe that we should be able to continue to grow. We have done that before, and we don't see anything hindering us to continue to do that. But we need to fix the customer experience first.

[Adam David Wyden]

Sure. Yes. No, look, the merchants grew 54%.

[Marcus Lindqvist, President]

Yes.

[Adam David Wyden]

So certainly, that is a leading indicator of future GMV growth.

[Marcus Lindqvist, President]

Yes, for sure.

[Adam David Wyden]

All right. That's for me.

[Marcus Lindqvist, President]

Thank you, Adam.

[Operator]

There are no further phone questions at this time, so I hand back to the speakers.

[Marcus Lindqvist, President]

It looks like we have a call on the chat here, right? Yes, we have incoming on the chat here, so I can read it out. So it's a question from Brad Hathaway. It is around when we expect the new platform to be optimized. And it's a very good question since we are -- we have had some issues with not the platform itself but parts of that during the quarter. And just to reiterate what has been the problem, well, one thing has been our traffic fees that has not worked the way we should like it to do. And that has had a negative effect not only on the traffic itself, and they're talking about paid traffic. It's not organic traffic but on the paid traffic. So that has caused lower-than-expected traffic as well as a little bit higher marketing cost to drive that traffic. That is something we're working very intensely to fix, and we have done a lot of progress during the quarter. We will continue to work on that. So we see that is a problem that we are on top of and that we will manage. The other part has been merchandising that has been automated on the site itself. And that merchandising has worked but not in the way we wanted it to do and in the way we wanted it to be. That's also something that we actually already addressed, and that merchandising is now working. So we see that we make a lot of progress when it comes to optimizing the platform as we go, and we are in control of what areas that needs to be fixed. But sometimes it takes a little bit longer than you would like it to do, but it is under control. It's not the entire platform, as I said, it's our traffic fees, and it's been the merchandising on the site. Any more questions on the line?

[Operator]

Yes, we do have a follow-up question from the line of Nicklas Fhärm from SEB.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

I just wanted to follow up on, I mean, I think, obviously, the questions we've discussed in particular relating to 3P GMV possibilities going forward, clearly, the most important. But here and now, I just note that in terms of costs, looking at, for example, selling to sales and admin to sales, it's obviously quite a neat year-on-year in cost ratios. And if we sort of adjust for the slight but still one-off nonrecurring item that you report in the quarter, admin us up to pretty much 20% of sales, and selling costs are at 25% of sales. And so my question is really do you think -- and I realize it relates to what you actually produce in terms of sales. But do you think there are some particular reasons for why we should expect these cost ratios to perhaps come down a bit over the coming quarters? And what would that be in more detail? Or do you think that you will have to maintain these cost ratios in 2021?

[Marcus Lindqvist, President]

When it comes to what I believe you referred to as admin costs, those costs are, of course, operations for the platform as well. It's not kind of bookkeeping. Once again, it is operations. And also, it is directly linked to our onboarding team that supports our merchants. And in those areas, we have increased our spend where you could say we have invested more when it comes to resources in order to ramp up the pace of development when it comes to customer experience. We foresee that we will continue to be on these levels or a little bit higher during the period ahead because it is an investment that we believe is really, really worth putting money into. And as we then start to kind of accelerate growth, we will see that the business will scale, which we have also shown previously. So we are increasing the costs or the cost levels in the company, but that's related to development pace and improvement of customer experience. And once we get that kind of on a higher level, we will see that the business will scale when it comes to sales to cost ratios.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

All right. So without putting words back into your mouth, but to me, it reads like we should expect somewhat continuing higher cost levels, reflecting these investments that you just laid out for this year. Is that about right?

[Marcus Lindqvist, President]

It is right, but it's also a -- there is kind of 2 sides of that. That is one thing. It's also that we are kind of redistributing resources internally so that we can move resources more into working with our customer experience. It doesn't necessarily mean when we say that we will increase our investments in customer experience, it's all new hires. It's also redistribution of the teams internally, where we really put an effort on that to kind of get that to a better or a higher level. But yes, you should read that correctly that we will be on slightly higher or higher cost levels because we need to invest in this area.

[Operator]

We have a question from the line of [ William Tarman ] from [ Foundation Partners ].

[Unknown Analyst]

Congratulations on your progress so far. I think you've laid out a very compelling vision for what this business could look like given the size of the opportunity. And it sounds like you're making all the right investments in customer experience. Could you lay out what is your vision of what great customer experience looks like? So if I'm a Nordic consumer, how should I be able to experience CDON a year from now or whatever these investments are made and bear fruit, so vis-à-vis what it looks like now?

[Marcus Lindqvist, President]

I believe that's kind of -- it's a little bit of a stepwise journey. So at the moment, we are kind of on the level where we are disappointed with our own customer experience. That means that we need to sort out categorization, navigation, search on site. We need to sort out delivery and ability to show your delivery method in the checkout. That's the kind of obvious things that we will work with near term. That, of course, will mean that a customer has a very much easier way to navigate and find products on site, which is part of the kind of first step. Looking at a little bit long term, we will continue, as we mentioned before, looking to, for example, fulfill by solutions. That is something we're looking into to making an ecosystem for our merchants and our customers around delivery times, preciseness of delivery. Those are kind of things that is a little bit long term or on the kind of on the horizon to work with. But here and now, it is the kind of in-store experience, it's the checkout, it's the delivery part that needs to be improved.

[Unknown Analyst]

Yes, that's helpful. I mean, I guess, looking at the growth you've had so far, obviously, we've had some boost from COVID, but you've still been able to grow very nicely even before these investments have borne fruit. So the CDON of today looks a lot different from the CDON of, let's say, a year ago. Should we read from that, that one would expect as the customer experience improves substantially because these are not 2 months out investments, I assume, that we could see meaningful acceleration of growth as people experience a new CDON, and then you're able to sort of really get the flywheel going with better customer experience driving conversions, as has happened everywhere around the world, where marketplaces are successful? Is that the right way to think about it sort of the next few years?

[Marcus Lindqvist, President]

Yes. Yes, I believe so. So first of all, if you have a customer experience that is below what you kind of should expect that, of course, in their sales, and it is affecting the cohorts and repurchase rate. So when we kind of sort that out during the year and the years to come because it's a never-ending kind of work, you will see repurchase rates and customer cohorts improving. And that will drive kind of sales organically. Then on top of that, it also then makes sense to invest more in customer acquisitions, which will then fuel sales even further. So this is kind of 2 way street on that.

[Unknown Analyst]

Yes. In that case, I mean it sounds like we haven't even started or barely started scratching the surface of the opportunity. So it would be a mistake and simply linearly extrapolate from today's numbers that things look like they can get much better over time as these things materialize.

[Marcus Lindqvist, President]

Yes, for sure. We see the opportunity in the market. We kind of understand and see that there is a land-grabbing opportunity to take. But we need to get our customer experience to a better level. Based on that, we can then start to be really aggressive when it comes to driving new customers and new merchants into the site. So yes, for sure, we see that opportunity.

[Unknown Analyst]

Very exciting.

[Marcus Lindqvist, President]

Thanks.

[Operator]

We have a web question from Brad Hathaway, who wonders what is your view on long-term take rate.

[Niclas Szieger]

I mean our take rates today are all we can say that we don't see any major changes from where we are today on the levels that we see. Our take rates are diverse depending on the product mix and what sort of the categories that we sell in. So I mean I would say that the fluctuations over time will more depend on which categories that we grow in. But so far, I mean the rates that -- or the levels that we see today, we don't see any major changes to that going forward.

[Operator]

And we also have an audio question from the line of Charles McDulin from Kanen Wealth.

[Charles McDulin]

Could you maybe discuss the cadence of monthly year-over-year marketplace GMV sales growth in recent months, including April? Is April similar to Q1? Is there any acceleration? And then second part of that question is, is it a goal for you guys to list in the U.S. over the long term to kind of get that cost of capital right?

[Marcus Lindqvist, President]

So on the first question, the sales over the first quarter month-on-month has been pretty stable even though we started out on a low level when we had some larger issues with our traffic channel. So that kind of implies that first part of the quarter was a little bit lower, and then the rest was kind of equal. Then when it comes to April and full, we don't really want to disclose and talk about trend into that. What I said is that our merchant onboarding team is continuing to do a good job. It's too early to kind of say on where we are in the quarter with the sales. So I'm not going to comment on that. When it comes to listing, that's, once again, something for the Board and for our shareholders to discuss, not really something that we as a management team can speculate on.

[Operator]

There are no further questions at this time, so I hand back to the speakers.

[Marcus Lindqvist, President]

Thank you, operator. Let's then end the call. I really want to thank you for your interest in CDON and for your participation in today's call and for all the interesting and very good questions that we got. We look forward to speaking and hearing from you again soon in the future. Thank you very much.