Cdon AB

STO:CDON

Earnings Call Transcript 2021-Q3

[Operator]

Hello, and welcome to the CDON Audiocast with Teleconference Q3 2021. [Operator Instructions] Today, I am pleased to present Josephine Salenstedt, Chairperson of the Board; Allan Junge-Jensen, Interim CEO; and Niclas Szieger, CFO. Please go ahead.

[Josephine Eva Salenstedt, Chairman of the Board]

Hi. Welcome, everyone, to the call. I hope you're doing well. My name is Josephine Salenstedt, and I'm the Chairperson of CDON. I'm also a partner of Rite Ventures, which owns about 25% of CDON. With me on the call, I have Allan Junge-Jensen, Interim CEO since early Q3; and our CFO, Niclas Szieger. Today, I'm going to do a short introduction to our strategy and then hand over to Allan and Niclas, who will give you a deep dive into our execution results of Q3. Let's jump straight into the next slide. We have built our execution priorities around 4 pillars. First, CDON aims to become the starting point of shopping in the Nordics. Right now, a large part of our population in the Nordics are familiar with the CDON brand, but we are not yet their go to place for the shopping. However, our aim is to become a natural shopping destination for consumers, where people go in order to find and buy the products they want. Next slide, please. To do this, there's no secret sauce. We just need to offer our customers the best experience they can find online. Even though we are in year 2021, shopping online in the Nordics is often messy and time consuming. With the number of online retailers growing and the number of products available to consumers exploding, it becomes harder and harder for consumers to find the products they want and to make their purchasing decision. If you don't know for sure exactly what your search for and where to find it, you tend to start with a Google search, the opening of several windows to check out different websites and going back and forth between different pages comparing, checking specifications and reading product reviews. To some, I just think it is unworthy of our time. At CDON, we aim to eliminate all of these friction points, creating a great, seamless joyful shopping experience. Shopping research and selection tools will be the core of our offering. Our customers should be able to find the best assortment at the lowest prices, the best tools to make their shopping decision, be it reviews, product specifications data on social impact of our purchase delivery options or whatever else. Our ambition starts early in the customer journey when the customer becomes aware of the desire to look for a product and ends long after the products are delivered. However, in this quarter, our core focus has been on our on-site prepurchase experience. We set the bar high, but we start from where we are, and we are working on improvements step by step. Next slide, please. In Q2, as many of you know, we identified the structure of product data as a root cause to many of the challenges we have had with improving our own site UX and the efficiency of our traffic acquisition. We acquired a minority stake in Shopit, and the aim was to leverage their technology to step change the quality and structure of data. Both the CDON and Shopit teams have worked hard on the project and releases based on Shopit's technology is coming basically as we speak or very soon. We're excited to follow the results from this release and also to follow the coming releases of ongoing projects related to Shopit. Allan will tell you more about the road map here. Q2 has been a lot about fixing the basics and getting up to speed. And my view is that we have carved a lot more ground in relation to fixing the basics than I would have hoped for just 4 to 5 months ago, and further on this topic on the next slide. At CDON, we talk about our platform increasingly becoming a powerful sales engine for merchants, both local and international. That means providing the distribution, platform applications and services to substantially increase the merchants' revenue. The power of the platform becomes stronger for every new merchant and every new customer joining and our service layer will be developed to help the merchants leverage that to drive their sales. As the work stream of fixing the basics is going well, we can now, in parallel, invest our time and resources in developing our merchant offering and ecosystem. And as part of this work, we have in Q3 increased our M&A capabilities and are actively building an M&A pipeline. Next slide, please. We focus very hard on our core categories aiming to be in a leading position in the Nordics in these categories. We have a steady and healthy inflow of new merchants to our platform. And since Q2, we work more strategically here than before. Today, most of our merchants are 1P retailer selling other brands products using CDON as an additional sales channel to their own channels. In the future, in parallel to our current type of merchant base, we expect the part of our coming merchant base to be brand owners using our platform to communicate and sell directly to consumers as their major or only digital channel. To be relevant for larger brands, we work to develop our offer and we design our services to cater to this need as well. Next slide, please. Four, we are going to create a strong local brand. CDON is historically well known from being a reseller of CD's and books. That history has taken us to the position we have today. Tomorrow, though, we want to be a brand that is not only known but love. The CDON brand should be a brand for people to rely on and to relate to, partly because it's Nordic and to return to over and over again. Our ambition to become a preferred distribution and sales partner for strong brand owners and to build a strong consumer brand requires a leadership with deep understanding of brand development, service and product development and experience from business transformation. For this reason, next slide, please, I'm thrilled to welcome Peter Kjellberg as the CEO of CDON, starting from January 1. Peter Kjellberg comes from a background at a listed companies, Dometic and Thule, 2 companies that have undergone severe transformation and repositioning of their respective brands to a large extent driven by Peter. Both companies has also driven aggressive organic expansion alongside very active M&A agendas, both companies have created a tremendous amount of shareholder value. We have chosen to appoint Peter due to his deep experience from the commercial and strategic drivers of strong consumer brands and are building very competitive positions. We also think that Peter has an ability to drive change and performance at a high pace, which obviously is a perfect fit to our current core team and the culture we're building. Peter comes with a great vision, ability to sell his case, a track record of building teams and of getting things done. Obviously, I'm super excited and almost can't wait to have Peter on board to lead CDON from 2022 and onward. This was all for me today. Thanks a lot. And now I hand over to Allan.

[Allan Junge-Jensen]

Thank you, Josephine. Please turn to the next slide. Before I turn to the presentation, I would like to give you my assessment of the past 3 months as interim CEO for the company. First of all, I would like to thank all the fantastic employees at CDON. They are all, in my view, committed to building the starting point for shopping in the Nordics. The transformation from 1P retail to becoming a 3P marketplace has been done fast and both the technical platform and the liquidity and the number of merchants is a very good starting point to achieve success. With this in mind, we proceeded with our initiatives to grow our business, and we are happy to report double-digit growth in the third quarter of 2021. One of our main objectives in the quarter were to commence the integration of the Shopit technology, as Josephine talked about. By now, the first iteration is about to be completed, and we are expecting to see results and improved categorization and higher quality of the attributes connected to individual products. Furthermore, we conducted a directed rights issue raising approximately SEK 200 million. And lastly, we appointed Stefan Egerstad as Interim CFO as of November 1 this year. Next slide, please. During the quarter, we saw a positive trend in growth where September stood out as the month with 22% growth in GMV. This trend has continued into the first 18 days of October, where we have realized more than 40% growth in gross merchandise value. Despite the higher GMV, we are increased -- we have increased the investments and improved customer experience, which is reflected in the EBITDA development in the quarter, slightly downward. Next slide, please. Our priorities for the immediate future are to continue expanding our core categories and to continue with the integration of the Shopit technology to improve customer experience. Further, we will direct attention to our loyalty program, CDON+, which will be relaunched in the coming weeks, taking away the bonus element and concentrate fully on free shipping at a fixed price. Further, we will continue our work on improving our marketing efficiency. And lastly, we will build and execute on our M&A pipeline to strengthen the development of our marketplace, both from a technical perspective and from a consumer perspective. Next slide, please. Having a category is not necessarily the same as having everything available to offer to our consumers. We want to expand our core categories to become key categories and later on, destination categories, simply implying that eventually consumers can always find whichever item they want on the CDON marketplace. Linked to this strategy, we continue focusing on onboarding high-value merchants, which will increase the assortment in our core categories. Next slide, please. When expanding our core categories, we need to address the challenges of displaying several thousands of different and similar SKUs. The Shopit acquisition assist us in this matter. As we, in the next phases of the integration, we'll focus on the onboarding of new SKUs and grouping of the same SKUs from different merchants. This, together with the building machine learning capabilities of Shopit implies that we will become better at displaying the most relevant data for each SKU as well as optimizing our marketing efficiency in online media. To say it in short, the overall objective of Shopit is to leverage the increasing number of SKUs at CDON and at the same time, avoid future pollution of our marketplace. Next slide, please. In addition to the already known revenue streams we have, during the quarter, initiated the relaunch of CDON+ to take place in October 2021, and we have also commenced a pilot project of fulfillment by CDON where we have started out with 6 merchants. We will continue to explore the improvement of our offering to both merchants and consumers with respect to additional revenue streams as we still see great potential in creating more value to our stakeholders. Next slide, please. In line with our long-term growth, this table illustrates that we expectedly are gaining market share in the third quarter and also that we are pursuing to take market share in the coming quarter. Just to remind you, we still do expect volatility in GMV growth moving forward. However, over a longer cycle, we aim at outgrowing the market. And now to walk you through the numbers, I hand over to Niclas, our CFO.

[Niclas Szieger, Chief Financial Officer]

Thank you, Allan. Q3 was, in many ways, a turning point. We started off well, saw a slowdown end of July and August and then turned again to 22% growth in September for the Marketplace business. We still have work to be done, but at the moment, we are driving sales at a much more efficient way compared to Q2, which we can see by the 3P GMV growth, which in total amounted to 15% in the quarter. Our retail business continues to decline, mainly related to the market within the traditional media categories. As we communicated in Q2, we are working more targeted on our merchant onboarding, shifting focus from volume increase in number of merchant to a more strategic and tactical approach. For this reason, we are now focusing in on the KPI merchants that are selling instead of previously merchants that have products on the platform. This will naturally be a lower number, but it will better reflect the status of our merchant base and correlate better with the development in our GMV. Moving to next slide, please. So looking at the KPIs and some of the drivers of our business. If we start with traffic, we did see a decline of 32%. We continued to have a negative development versus last year, but the trend since Q2 is now improving. As a result of the decline in traffic, number of orders also declined with 22%. However, thanks to strong execution within other parts of our engine, we managed to increase our average order value with 34%. Moving on to next slide, please, our income statement. CDON Marketplace had a growth of 15% GMV, which resulted in a net sales of SEK 47.6 million. The reason for the lower net sales and gross profit is mainly due to a shift in product mix, which is related to a strong growth within the Consumer Electronics segment. Our other segment, CDON Retails,continues to be phased out according to plan as the majority of the volume is related to traditional media categories. EBITDA amounted to minus SEK 3.2 million. This decline is mainly driven by lower gross profit from CDON Retail and increased operating expenses related to investments in CX and our platform to build for future growth. Moving on to next slide. Our fixed assets increased to SEK 90.6 million, which is related to the investments we did in Shopit of SEK 27.1 million. Inventory continues to be reduced related to CDON Retail. In total, it now amounts to SEK 12.9 million compared to SEK 26.3 million last year. The direct share issue in Q3 increased cash with total of SEK 188.7 million, which also increased equity, which now amounts to SEK 202 million. Moving to next slide, please. The cash flow from operations during the quarter amounted to SEK 12.5 million compared to SEK 4.4 million last year. The difference versus last year is mainly related to the lower EBITDA and inventory that during last year had a positive cash flow effect of SEK 17 million compared to SEK 3 million this quarter. The investment in Shopit impacted cash flow from investing activities with SEK 27.1 million, and our investments in CapEx amounted to SEK 4.1 million compared to SEK 5 million last year. The direct share issue with net proceeds of SEK 188.7 million increased cash, which at the end of the period, amounted to SEK 186.6 million. And now I hand it back over to you, Allan.

[Allan Junge-Jensen]

Thank you, Niclas. What you should take away from today is that we are continuing our growth into the fourth quarter and that we will accelerate our on-site customer experience. We have the team in place to execute our strategy, and we will pursue all opportunities within organic as well as inorganic growth to strengthen our future offering. Thank you very much for this time. And now we open up for the Q&A session.

[Operator]

[Operator Instructions] And the first question is from Nick Fhärm, SEB Equities.

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

So my first question is actually on the trading update in terms of October actually. And my question is, now if you're right that you expect the first release is connected to Shopit on CDON's platform to be done in "October," does that mean that you've generated sort of these plus 40% growth rates in 3P GMV actually without any specific sort of impact from the Shopit technology so far or how should we read that?

[Allan Junge-Jensen]

Allan speaking here. I think that you should read it as the first part of October is growth without the Shopit technology in place. So when we communicated October, it is actually as of the past 2 days that we have released the majority of the first integration of Shopit technology.

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

Okay. Okay. Very interesting. You also write in the comments from the Board that in many aspects, Q3 was the type of quarter that you hope to be able to present on a "regular basis." What does that relate to? Is that relating to sort of the current run rate in 3P GMV growth or does that relate to the 15% generated in Q3 as a whole? Or is there any other sort of implications of that statement that you would like to convey and clarify, please?

[Josephine Eva Salenstedt, Chairman of the Board]

Josephine here. Good question. Thanks for that. Yes, what's important to us is that we improve every quarter in all aspects. And when we say that Q3 was a quarter that we hope to report many times in the future, it relates to that. We worked a lot with the team. We improved our internal processes and how we work, but we also did some really great recruitment. We also think that we have improved our growth rate from Q2 both from Q2 but also during the quarter, ending the quarter with a better momentum than we had at the first part of the quarter. And then obviously, what we are trying to accomplish is to create a great customer experience. And so it's really important that we make improvements step-by-step all the time, and we have done some improvements here and there on the customer experience during the quarter and that will continue moving forward. And then third, obviously, work with the merchant base and make sure that we continue to develop our assortment and the pricing point, so we become even more relevant to our customers from an assortment point of view.

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

Could I also ask you, when you say that you think that there is no particular reason for why you cannot have the same market share as Bol in the Netherlands, that implies a doubling of both kind of your penetration right now, is there any time line here? Is that in 2030 or in 2040 or when do you expect that picture to emerge?

[Josephine Eva Salenstedt, Chairman of the Board]

Well, we have not communicated the timeline. What we have said is that we aim to take market share at a high pace. And so yes, we'll see where that takes us.

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

Okay. Final question and then perhaps I can come back into the call with a few more later on. But my final question is, could I ask you to elaborate a bit on sort of the take rate developments in Q3, the actual underlying take rate for the marketplace and how the sales mix and other drivers probably impacted in this third quarter of 2021, please?

[Niclas Szieger, Chief Financial Officer]

Yes, Niclas here. I can start. I mean as we do say, we have seen a shift in the product mix, both during parts of Q2 and also continue in Q3. And what that means is that we have a larger share on the -- within the Consumer Electronics segment. Also, as we've talked about before or as we present as in the presentation with regards to sponsored products. And this is -- that is still a small share of our total revenue.

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

Yes. Can I just follow-up and ask you, did the take rate increase or decrease compared to Q2?

[Niclas Szieger, Chief Financial Officer]

The underlying take rate is increasing slightly.

[Operator]

The next question is from David Li, Lizard Investors.

[David Li]

Great. First question, I think I missed the part about the monthly trending on the 3P business. Can you just talk a little bit about what happened on the last sort of the monthly trending? Have we seen the traffic sort of decline already bottom or traffic is already start growing again? Maybe talk about that first, then I have a couple of follow-ups.

[Allan Junge-Jensen]

Yes, Allan here. Generally speaking, over the quarter, the upward trend is also very much related to sort of strengthening our own internal merchandising discipline towards our merchants stock availability and pricing of certain key value items.So you could say that it's a couple of factors working together: slightly upward traffic, but also internal optimization of working streams that actually pays attention to having more out of the traffic that we actually gained during the quarter.

[David Li]

Okay. And -- but in terms of -- I mean, traffic is -- because from the press release, it looks like the traffic is still down, right? Is the traffic already bought, mute, flat now year-on-year for September or October so far? Are we seeing the traffic coming back year-on-year basis? So where are we on that?

[Josephine Eva Salenstedt, Chairman of the Board]

Well, I can take it. So we still are down on our traffic compared to last year. That being said, we focus less on that comparison now internally. It's obviously a year ago. We are past COVID restrictions. The market has changed a lot. We have another platform, a new team and the new vision and clear strategy. So I don't ask the team to come back to where we are and work from there. What we need to make sure is that we get better every day from where we are today. So we have worked a lot of -- we are doing a lot of initiatives on traffic acquisition, and we have improved, I think I wrote it in the Board letter, especially in the Swedish market, now we need to do the same things in the other markets because we also have a long list of other things that we can do to improve the traffic. But then it's also about relevance of the traffic that you have to decide that the relevance of the traffic is more important than the actually quantity. So that's also one reason we are not really comparing so much to last year anymore. Our focus right now is to make sure that we find the right customers at the right cost and that the journey that they experience on our site is not only relevant to them, but also that it's a great experience and that we have the means to make them eager to come back.

[David Li]

Yes. Maybe talk about the competitive situation like where you guys are? How is Amazon? Because we saw Amazon as in Poland like just rolling out their prime membership in a few other countries, smaller countries in Europe. How are they doing in Nordic? How's the competitive landscape changed versus before? If anything significant that you guys think might be preventing you guys or I don't know, helpful? Like just maybe a little bit of color on that.

[Josephine Eva Salenstedt, Chairman of the Board]

Yes, sure. So we see some competition from Amazon, but also from others. As mentioned before, we have a lot of new players and retailers going online during the pandemic. But when I think about the competitive landscape, I also find it helpful to overview the underlying market dynamics. And there first, we had the general GDP growth. And then we have the shift from physical retail to online. And then on top of that, marketplaces are taking share from e-commerce. And Amazon entering the Nordic market is actually, in our view, helping us and driving that trend. So we see that they are there. But they are not really, at least not yet preventing us from doing what we want. They obviously have a lot of power, and they also use that power in deciding how they should treat their merchants. So when we think about how we should compete in the market, we look a lot about at other markets, local marketplaces in other markets that have grown alongside Amazon, and we follow their playbook. And we see that it's really important that we continue to develop our competitive advantage as being very local and being very much and friendly and very easy to work with. So that is what we're focusing on.

[David Li]

Okay. And maybe just talk about the Shopit opportunity because I think you guys -- it's 30% ownership right out, right? And I just want to understand like how does Shopit helping you guys driving the overall CDON platform? Or how integrated are we -- I mean how should we think about this as a combined entity or synergy going forward? Maybe just talk a little bit about that.

[Allan Junge-Jensen]

Yes, I can do that. So if you take a look at the integration, the first integration, as we talked about just now actually has a huge impact on all the navigation and the search possibilities on CDON marketplace. And next to that, when we move further on, we will also make it much easier and much faster to onboard new merchants, hundreds of thousands of SKUs in the future without compromising quality. And I think that that's actually the most important part is that we make sure that not only the existing marketplace is in a much better shape from a consumer experience point of view, but also going forward, it will be much faster, a better consumer experience without any hiccups and the pollution that I was talking about because, of course, you can imagine that if you have to do this manually, it will entail a huge amount of working hours. Besides that, from a company's point of view, for now, we own 30% of Shopit, and of course, as also mentioned, we have an option to acquire another 70% at a later stage, but that remains to be seen.

[Operator]

The next question is from Adam Wyden, ADW Capital.

[Adam David Wyden]

Hey, guys, can you hear me all right?

[Allan Junge-Jensen]

Yes.

[Adam David Wyden]

Okay. Very good. So -- yes, no, I mean, look, I think most of the people have covered most of my questions surrounding data and categorization. I think when you look back 6 months ago and the company put up suboptimal GMV growth, I think most of you guys blamed that on the platform change and kind of the migration there. I mean is it fair to say that the 40% growth that we're seeing and the growth that we're seeing now, I guess, last quarter, do you think that's more a byproduct of market trends or do you feel like you've made significant inroads in terms of your categorization and your SEO and SEM? I mean it -- for all the purposes, this is not a destination yet. So less about organic traffic and more about kind of getting the SEO and SEM right and the upside is the destination and the Amazon Prime and all that stuff, I mean, is it fair to say that these numbers in October and September are byproduct of you guys basically fixing the SEO and SEM and fixing the issues that weren't addressed earlier in the year?

[Allan Junge-Jensen]

Yes. For a start, I can say, Allan here, that it is incremental steps. So you cannot say that we are done yet. I mean we've taken a lot of initiatives, which individually actually improve our game, you can say, both from a traffic acquisition point of view, from a technology point of view. And I mean, the list, to be honest, is actually quite long in how many changes we've made during the quarter, but there's still a lot to be made. So incrementally, I would say that you're on the right track, but we are not there yet, Adam.

[Adam David Wyden]

Yes. No, of course, you're not there yet. I'm just saying like if you were to try and look at input/output, it would seem that the company was growing 40% to 50% before without kind of new product initiatives on the old platform. So now just kind of in my mind when I look at it and I say, "Okay, well, they brought on this platform, there were some things that in the transition that didn't go perfectly right," and now you've got the -- now you're kind of returning back to kind of steady-state growth kind of pre, what I would call, organic and destination initiatives, which kind of brings me to my second question, which is more for Josephine. If I think about the evolution in the last 6 months, having Eldar come back, who basically helped work on the first -- the new platform and kind of wasn't there for the transition. Now that we have Eldar back, now that we have the Shopit acquisition, it seems as if the product road map at the company is -- product road map and execution is on the product side is kind of largely defined. I look at this higher, and again, I have never spoken to Peter before, I just listened to the podcast. But it seems as if Peter's core competency is largely around branding and marketing. And I can just speak -- look, I've been to Sweden once in my life, spent some time there. But our sense of it is that the local perception of the company is quite different than the people that are actually using it. And so I guess my question really is when you look at what Peter's core competencies and strengths are, I mean, do you feel like Peter was hired a big part of his value add to the company immediately is his ability to rebrand the perception and roll out new customer experiences and kind of help touch the consumer more from a marketing and kind of customer experience side as opposed to kind of a core product side and that's because you guys feel like you kind of have the product road map intact?

[Josephine Eva Salenstedt, Chairman of the Board]

Yes. Thanks, Adam, for that question. Yes, 6 months ago, my best knowledge was that we would have -- that we would appoint a leader of CDON being more towards e-commerce and tech. But as you mentioned, since then, a lot has happened and our team as CDON has transformed. Eldar came back, Eldar, David and Linda together with Niclas and Allan have sort of turned around the trend and operation, and now we are having a very strong momentum in developing our operations and how we work and how we incrementally improve our engine. So I feel and the Board feel that we are less in need of a CEO that goes into the nitty-gritty details of the product and the development road map, exactly as you say. So we think it's better to now when we have a lot of the fixed -- of the basics fixed, and we don't need to -- we have the current team to focus on the engine. We want the leadership that can leverage that team and can leverage what they are already doing and can build on their abilities and complement their abilities. And exactly, as you say, Peter comes from a completely different type of background. He have a deep understanding of the dynamics and the decision-making around consumer brands. And that is obviously also important for our next wave of expansion of our merchant base. And he's very skilled at driving transformation processes, both internally, but also of brands and of competitive positioning and the perception of brands in the eyes of consumers. And that is what he has done. And in my opinion, he's probably at least one of the best in the Nordics are doing that. Then obviously, he's a very broad and experienced executive and leader. So he would be able to contribute everywhere, but that is where his core skill set is. And on top of that, he's very hard working -- yes. So -- and I think he -- even though he's a marketing guy, he is a marketing guy, but he's also very -- when we learn about what he has done before, he is described as a person that executes really fast and really get things done. And so we believe he will fit into the culture of our team really, really well. And I think I said that at the last call that I'm looking for a partner to us that and also for a partner to Eldar and David and Linda. And I think then we don't need more of the same. We need somebody complementing them and I think Peter will be perfect for that.

[Adam David Wyden]

Yes. I mean, look, I haven't spoken with Peter, I look forward to it. But I mean, look, obviously, at Thule, that was a brand that was known for one thing, and they were able to make it known for other things. And look, I think when you think about CDON and their journey, right, CDON was a seller of books and electronics and has transitioned into a 3P marketplace. And look, being able -- the benefit of CDON is that people do know it, but they don't know it as what it is today. And if someone can communicate a vision and communicate what it is for the consumer today, it's easier for them to get reappointed with the brand. So obviously, -- look, I'm very pleased that you're making product inroads. And obviously, as you begin to think about an iPhone app and a Prime product and that, to me, is all about packaging and marketing and figuring out how to price it and how to be competitive. And so to me, what this shows is that you guys feel quite comfortable with your technology road map, and I was very happy with my meeting with Eldar. So it seems as if you guys are, at least from our level, ready to start playing some offense and that's good. So that's it for me.

[Josephine Eva Salenstedt, Chairman of the Board]

Thanks.

[Operator]

And we do have a follow-up question from David Li, Lizard Investors.

[David Li]

Just on sort of the path, you talked about, obviously, incrementally, you guys are on the right track, there's more stuff to do. Have you guys laid out a road map on when do you feel like -- or timeline or you can think about or give us sort of category of what's left to do? What's already being done? So we can not necessarily just tracking or monitoring or anything like it, but so we think we have a better sense on when the prospective opportunity will kind of be more -- become more visible by the time when we get closer?

[Allan Junge-Jensen]

I can revolve a little bit around that. If you look at it from the category perspective, what we are doing today is that we are very much focused on gap analysis within our different core categories and not just seeking new merchants with the same SKUs, but merchants which can complement our already existing portfolio of products to make sure that we actually can broaden the assortment within the different categories. So it's not something different from the past, but it's just more attention to that we need to make sure that we can offer a full range of products within each of our core categories.

[David Li]

Okay. So that's on the merchant side, but on the traffic, on the search engine, on everything else, the speed of the website, et cetera, right? Or maybe you want a mobile app, like what are the other buckets that you think we should have? Because otherwise, we just kind of -- we don't really know, right? We just kind of follow until you report next quarter. But we just want to get a sense like what are the other kind of dominos that you guys are trying to -- or the big buckets that you guys are trying to fix?

[Allan Junge-Jensen]

Well, you could say that a lot of it has to do also with kind of the individual products that you actually are using for your SEM. Recall that sometimes you have the same SKU at different pricing communicated to the market at the same time. For us, it has a lot to do with making sure that we are able to prioritize correctly and sorting the same product with the lowest price top wise instead of in the midst of a sort of a feed that contains multiple merchants with the same SKU at different price points. So this is a part of the optimization that we are actually working on to make sure that we become more and more efficient in actually turning the paid traffic into a higher conversion and ultimately purchase.

[David Li]

Okay. Okay. Maybe...

[Josephine Eva Salenstedt, Chairman of the Board]

So was it also a broader question in there or?

[David Li]

Well, the broader question, I just want to -- I understand these are smaller little items, but like when you guys look at internally, like where are you guys through? Like on a website traffic wise, are you guys 90% done? On SCO search engine, are you guys 50% done? I just want to get -- like not a clear measurement, but a clear milestone, so we can kind of -- hopefully, if we're talking about the same issue a year from now, that's probably not good for the business, right? So maybe to give me some guidance on that, that would be great.

[Josephine Eva Salenstedt, Chairman of the Board]

Yes. We are -- in some areas, we're still at a very, very basic level. And just to give one example, the Shopit release that we are doing we actually did it yesterday and the day before, as Allan mentioned, that was to make sure that our products are actually put in the right categories so that you don't have beauty products where -- under the home electronics page and so forth. So pretty -- really, really basic stuff. And if that is where we are now, then I think there's, I would say, a limitless list of things that we can do to improve the customer experience, both in terms of navigation and in customer experience as a whole. And there's a lot to do just with Shopit, what we can do with Shopit and the way we can -- the way we can leverage the technology from Shopit in smart ways. They develop smart features on top of that product data structure with different filters and different product selection tools and so forth. And we can also use their technology and the structure of the data to improve how we work in SCO and SEM. But we haven't -- we had to start with this organization of the product data first. So we are really basic level done in terms of all the rest. As Adam mentioned, we don't have a mobile app. So there, we also we are a very early stage. We don't have -- or we are doing some pilots, but we don't really have any fulfillment solutions yet to offer our merchants or our end consumers even though we have a customer support, I think there are still -- it's still at a very, very basic level, and there are still too many customers that are not getting such an exceptional customer experience that I would like them to get.

[David Li]

Okay. Got it. And maybe talk about when this is all done, do you guys feel like you have more visibility on how you overlap with Amazon? I know some of the online guys they have -- even they don't sell through Amazon, right? They have -- there's enough intelligence, enough stuff out there that you can measure your own -- I mean, of course, Shopify is helping doing it right. But are you guys able to see we have more visibility or to your merchants to see how much overlap you have with Amazon, so you can compete more effectively with Amazon? Or maybe any color you can give us on that so we can have a better -- so we can just think better about the business.

[Allan Junge-Jensen]

Well, for one, I don't have the exact sort of matching figures in terms of related inventory in both the amazon.ac and cdon.com. But of course, there will be some overlap. But on the other hand, I think also that what was important to mention here is that sort of the Nordic sensation and feel about CDON actually also gives us an edge to particularly the Nordic merchants who, in some cases, use other marketplaces, but in many cases, they would like to be with someone like us who has a more local knowledge of the market, and therefore, it's sufficient to be on our marketplace.

[David Li]

Okay. And maybe...

[Josephine Eva Salenstedt, Chairman of the Board]

So adding to that I expect there would be merchants that are both on Amazon and CDON's platform, and then there will probably be merchants that are owned on Amazon and there will be merchant that are only on CDON depending on their preferences for how they structure their business, how much they want to invest and the margin structure and how they want their end customer experience to be. So I'm not too afraid of overlap. We just need to make sure that we have a very clear positioning in relation to them and a very clear offering both to merchants and consumers.

[Operator]

And we do have another follow-up from Nick Fhärm.

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

So just a few final questions. Starting with -- I mean, we obviously discussed plenty on sort of your new strategy in terms of approaching the number of merchants on the platform. I suppose, a change in definition, reflects your statements on trying to get the right ones rather than as many as possible. But my question is, of course, what do you think is a reasonable run rate now? Because obviously, the number of merchants will also be sort of the baseline for forecasting sort of nonmarketplace commission income, i.e., auxillary income going forward?

[Allan Junge-Jensen]

Well, I think it's difficult to speculate on a forecast in a number of merchants onboarded to our site. But what I can, though, besides looking at merchants who are actually selling on the platform, obviously, we are also looking at individual merchants from a catalog point of view, how many SKUs can each of the merchants and which are they contribute to the marketplace. So I would say that a fair notion on this topic is to evaluate us on both the number of merchants selling at CDON, but also the underlying number of SKUs available. And that together should also -- should sort of give you a flavor of how good we are at onboarding assortment to the site.

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

Okay. But would it be fair to assume that the historical run rate, which has been quite good, I have to say, in terms of the number of merchants being added to your marketplace platform with the new definition, that number is going to be slightly lower rather than slightly higher?

[Josephine Eva Salenstedt, Chairman of the Board]

Maybe. But I -- now we are in a period where we focus -- we have a lot of focus on what merchants we want to have in to make sure that we actually execute on our strategy to reach category leadership. So we really make sure that we have full assortment and great prices. It might be that we will go on doing that for a long time, but it might also be that we see that now we are ready with this phase, and now we can go back to onboarding more in a quantitative way. So that depends a bit on what we see both in our own operations, in our consumer offering and what we see in the market. So that is one thing. And then the other, I think you said that it was predicted from -- for nonmarketplace income the number of merchants, that might be or might not be. It might be that we will have service fee from merchants, but it can also be that we, in the future, would sell other services that would be more dependent on GMV or number of transactions or number of SKUs or some other driver. So that's why we are not so -- that's why we don't think it's so important to -- at this point to focus on quantity and that's why we think it's more important with quality at this point.

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

Yes. Yes. Got it. Got it. My second question would be on the operating leverage. I mean we've seen now Q4 last year was -- we saw the SG&A costs, excluding D&A, increased by about SEK 18 million; then in Q1 this year, they increased by SEK 12 million, SEK 9 million in Q2 and now SEK 5 million in Q3 year-on-year. And I was just wondering, is there any reason not to expect this trend to continue into Q4? Do you foresee any particular for whatever reason, increase in the delta in SG&A costs?

[Niclas Szieger, Chief Financial Officer]

No, I mean, as we've said here, we are investing in the organization and in the platform. And I mean, we don't really speculate on -- or comment on the future development. But you've seen a trend in the last couple of quarters on the total SG&A costs. And I mean, I don't -- short term, that trend is, I would say, fair to, yes, continue.

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

Yes, yes, right. So The increase in SG&As year-on-year will be lower just as it was in Q3, Q2 and Q1 going back 4 quarters? Is that what you're saying?

[Allan Junge-Jensen]

I think it's -- Allan here. I think it would be non prudent to speculate on this. I think that what we are trying to achieve is to have a balanced top-line growth with the underlying cost that we see fit to achieve that goal. And for whatever -- since we don't do any guidance and outlook, then I think that you can expect that there will be a correlation between the 2, and that it obviously will go up since, of course, entailing that if you need to invest in growth, it also requires more SG&A.

[Josephine Eva Salenstedt, Chairman of the Board]

Yes. I agree with that, and I can also add to, long term, we know that marketplace is a very, very scalable business model. And we are pretty early stage in adding different income streams to our take rate. But short term, we have been investing a lot in our platform and in our team, and we think that we have a window of opportunity in the market now and that is more important that we prioritize growth and that we build the capabilities that we need to really execute at a high pace. So that is what we're going to prioritize.

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

Yes, yes. No, I fully understand and appreciate that. It's just that if you do not communicate that you expect a significant increase in costs and investment-related costs in Q4, by definition, you will have to produce a very nice margin in this quarter, pretty much irrespective of the GMV developments. So that's why...

[Allan Junge-Jensen]

But in a micro scale, I think that you already sort of have the visibility between the different quarters. And as you can see from Q4 last year, you very rapidly grow into a scale benefit in that particular quarter. So of course, it is prudent to speculate that you will foresee the same kind of development from a seasonality point of view in this fourth quarter. And to be honest, I just think that, that sort of underlines Josephine's point about that there's truly some scale benefits to be acquired from growing the marketplace. In Q4 2020 will -- in the future, be a normal, let's say, Q1 or Q2 from a scaling point of view.

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

Yes. Final, final question. I wasn't aware of that. But Alibris this morning or this noon announced that they have sold Discshop to CDON Retail. And I struggle to find any information in today's disclosure on that transaction. Could you just give us, a, a slight update on sort of the financials involved; and b, how does this fit into the strategic decisions on sort of CDON Retail, which I have actually assumed to be sort of a runoff model going forward, please?

[Allan Junge-Jensen]

Yes. There are 2 good questions. First one, I think that the headline was a little bit overstated. What is actually being purchased is inventory from Alibris and then the actual url Discshop.sefi. So it's what I would call a regular in-the-market transaction. And we did it because we thought that we could improve slightly the retail business for the coming 12 months, despite the fact that it is a declining part of our operations. So it was only because we saw an opportunity in the market at a very feasible price. So actually, a short-term go-to-market purchase.

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

Right. And what are we talking about in terms of size of inventory or sales?

[Allan Junge-Jensen]

Nothing. No -- the agreement is that we cannot disclose the price, but it's very limited, I can say.

[Operator]

And we do have another question on the line from David Li, Lizard Investors.

[David Li]

No. Great, great. I just want to ask a little bit about the merchants. How are the churn in the merchants so far throughout these changes and these turnarounds? How's the churn improved or even maybe get worse? Just what are the merchants' view on the business so far given you guys going through these changes? Because I just remember because Amazon went through these changes before as well, even some of the other marketplace, how do they think about the timing of these changes? Because obviously, because of these changes, they probably can't really do as much business as they want, right? So I'm just kind of curious, what's their view on some of the changes you guys are implementing? How are they thinking about it? And that does all -- what do they think are some of the remaining items for them to feel more comfortable before they churn out?

[Allan Junge-Jensen]

Well, I cannot disclose sort of the -- any churn-related merchant numbers. But what I can say is that I think that it is, from what I know, at least from -- I don't have access to all 2,000 merchants. But from the feedback, I would say that all initiatives that we're doing are assisting our merchants in selling more. And that, to me, also proves that it is -- we are in a positive cycle here from a -- also from a flywheel perspective. I mean we need to onboard merchants which are happy with the service that we are delivering. And in turn, we are making sure that our end consumers get as good an experience as possible and then you get this positive cycle. So I think that everything we do is actually enforcing this flywheel that we are talking about. And I don't see any immediate risks neither in this quarter or also for the immediate future that anything that we do will jeopardize our relation to the merchants, if that is -- if I understood your question correctly.

[Josephine Eva Salenstedt, Chairman of the Board]

I mean what the merchant want most of all is that we helped them drive your sales. So the more we grow, the better for the merchants. So...

[Operator]

And there is another question from Adam Wyden.

[Adam David Wyden]

Yes, sorry, there was one last thing. So look, you guys were successful in raising some capital. It appears that you guys want to have some capital for some flexibility on M&A and just obviously, to have a long time horizon, if you guys want to continue to invest in marketing, in traffic acquisition this and that. So that's all good. But now you guys as I think as one of the analysts pointed out, I mean you guys have -- I mean, you guys have really -- because of your take rate, your incremental margins are quite high, right? And so when you look at Allegro and some of these other players, our take rates are higher or better or what have you and you look at the margins of those businesses, they're doing 50%, 60%. So this has the potential to have best-in-class margins. And so I think the combination of the unit economics and the fact you have cash obviously puts you guys in a good spot. But as you think about playing offense and doing M&A, obviously, these deals are going to become more expensive. And you guys didn't raise that much capital at [ SEK 500 million or SEK 455 million ] but obviously, when you think about what this company is trading at as a multiple of next year's GMV, I would suspect that it presents some difficulties in terms of buying assets that, a, move the needle; and b, are quite quality. I mean how do you guys think about kind of accelerating your kind of the right cost of capital? I mean, obviously, with Eldar back and now with Peter joining in December, I mean do you guys feel like you guys are in a position to start kind of communicating and not how about guidance, but communicating your vision for what you want the product to be and what your ambition for the asset to be is? I mean because it seems as if this is still very much an orphan asset globally. I mean there's plenty of businesses, Etsy, Red Bumble, Allegro, I mean there are plenty of assets that are out there that have some characteristics, but are more widely unknown and appreciated in the global marketplace. I mean how do you think about kind of widening your investor audience beyond Sweden, so you guys can kind of get your appropriate cost of capital?

[Josephine Eva Salenstedt, Chairman of the Board]

Right, I can take that. Yes, it's really important that we do that. So I agree with you, Adam. I think there are a lot of investors out there that would appreciate us only -- if they only knew about us. So we have a lot of work to do there. And Peter, he is a great visionary. He is great at sell in his case. And the main reason I think that is a great scale for CDON is for his ability to be able to develop a great customer experience and the destination brand and a great merchant offering. But of course, it will also be helpful when we teach the market and the investor community about CDON. And I agree with you that it's important.

[Adam David Wyden]

So is -- do you think that those efforts are going to be initiated in January? Or do you think that you guys can start kind of hitting the -- kind of expanding upon those efforts kind of between now and year-end? Because it almost kind of feels like there hasn't been a lot of -- I mean, in the absence of these conference calls, there hasn't been a lot of data or opportunities for people to kind of interface with management and the Board and kind of get an insight into how the company is thinking about them long term?

[Josephine Eva Salenstedt, Chairman of the Board]

Yes. I agree we have a lot to learn from the more American way of marketing businesses. It's a bit different here in the Nordics, but we have been very inspired by when you and the rest of the investor community that have pushed us and given us a lot of good ideas, and we are evaluating different options, and we have some work streams going on. And we let you know when we're out there.

[Adam David Wyden]

Good. Well, look, it -- I'm very, very pleased with the results. I think things are kind of going on schedule. And the only thing we have to kind of triangulate now is the company's cost of capital and at least it sounds that you guys are making efforts in that capacity. So we'll keep waiting.

[Operator]

There are no further questions at this time. I hand back to the speakers for closing remarks.

[Josephine Eva Salenstedt, Chairman of the Board]

Okay. Thanks a lot, everyone. I look forward to meet you next quarter.