Allegro.eu SA

WSE:ALE

Earnings Call Transcript 2020-Q3

[François Nuyts, executive]

[Audio Gap]

was close to PLN 1 billion, PLN 928.7 million, growing at 50% year-on-year and growing at 51% year-on-year from the 9 months trading. Adjusted EBITDA reflecting the investments at 26.7% year-on-year and 27.5% trailing 12 months.

Our CapEx to revenue, 6.1% for the trailing 12 months. And obviously, our investments in driving continued improvement in speed and predictability of delivery is still ahead of us. We're trialing software, and the code dev team is working out of the current fulfillment center that we have for 1P and next to Warsaw to develop the software for the next larger fulfillment network.

In terms of guidance, I'll let Jon take us through in a couple of minutes. So here, I'm not going to cover the key results in detail. We wanted to have it as a placeholder here for you to have easy access to them. But overall, a strong quarter, linked to continually -- continued strong execution across the teams in the business.

So hard to talk about anything at the moment. We start talking about COVID. So Poland is experiencing a stronger COVID-19 wave than in Q2. You can see it's the red line on the left part of the screen, where you see the first wave was reasonably well contained, let's pull it that way, in Poland.

The second wave is to the right part of the graph, it's a little bit worse, quite a bit worse. And as a result, nonessential stores, shopping malls and retail parks are closed from 7th November to 27th, but we're looking ahead as to reopening, which is quite great.

In terms of teams, everybody has moved to a working for home, except for logistics. And we've done a number of audits across both office and logistics to make sure we reduce the risk to a maximum. They start with obligatory home office to reduce the spread across the teams. And again, what is quite impressive and quite warming is that, to say, the level of engagement we see continued from the team, all the way from the recruitment, on-boarding to launching new projects and new process across the company.

So talking a little bit about key business developments during Q3. So if you recall, in Q2, with that first wave of COVID, we did a lot of initiatives around CSR, notably providing SMART! for free to anybody in Poland that wanted to use it. So we transitioned in Q3 back to the normal paid subscription program for SMART!.

And what we saw is a number of the people that trialed it during the free period. And there was no strings attached. It wasn't a free trial with, as we said, engagement to subscribe it later. But despite this, we saw that a number of these people that tried it actually started using it post that free period. So we see the SMART! membership growing quite strongly.

We continue to develop. So we're mostly a third-party platform and marketplace. But we continue to create tools that help us get the same kind of benefits that consumers would expect from a 1P or 3P platform, but under a third-party umbrella. And a good example of that is our ability to drive price promotion and shopping events and driving a strong pricing and promotional activities. And SMART! Week in late September was a great example of that, where we managed to do 3x more GMV than last year, again, mostly on the 3P basis.

In terms of delivery, which continues to be one of our key area of development, we signed a 7 long-term deal -- 7-year long-term deal with InPost, not only to secure, we say, volume and price, but also to work on innovative products [ basing ] with them to our customers. The delivery promise, so you know that innovative part on Allegro, where, in most cases, we don't touch the product, right? It's a [ sellers ] product, but we're able to give a very accredited promise to the consumer, very much as if we were a 1P player.

So we rolled this out throughout the shopping path, and you can now shop and select new offers and new product based on when you will get it. And as I said earlier, we're also continuing to develop our fulfilled by products through the new distribution center that is under development near Warsaw. And for that, we use our 1P fulfillment center that we already have for quite a few years.

In terms of selection and price, we continue to make it easier and easier for sellers to join the platform. And that sellers, if you recall, about 2 years ago, even 1 year ago, most of our sellers -- about all of our sellers were Polish sellers. We made it much easier for foreign sellers, whether European or non-European, to join the platform, and we see how that's speeding up the seller acquisition. And what that contributes, obviously, is more choice to the consumer and also more and more competitive prices on that long tail.

So merchants and selection continue to grow. We also transitioned back to our 14-day standard for SME payments. As you recall, during the peak of the pandemic in Q2, we extended the payment terms to also make it easier on the seller base to weather through that period.

On Allegro Pay, as I mentioned during our IPO, we're still in the pilot phase all the way through Q4. The early feedback from customers, it's so simple to use, are quite amazing. The -- also the collection cycles, which have started, are showing good trend on repayments, which is obviously a key part. But at this stage, we're not including it either in our guidance. We'll do this sometime in early next year when we're done with the pilot phase.

Moving to Page 8, and that's it. Over to Jon. Jon, it's all yours.

[Jonathan Eastick, executive]

Okay. Thanks a lot, François. Yes, good morning, everybody. Thank you for joining us today. It's great to reconnect with a lot of you after the summer. So I'll take you now through the financial slides.

We'll start off with a couple of the key KPIs that contribute -- or are behind the GMV results. First of all, in terms of active buyers, we actually had a very solid Q3, with another 300,000 active buyers added, ending with 12.6 million active buyers on a last 12-month basis. Obviously, there was a bit of a surge in that growth during the Q2 lockdown, where we had 5.2% growth in the quarter. And it's great to see that we went back to our normal trend. We didn't see any kind of hangover from the acceleration in Q2. So that was very solid.

I think the biggest story is more on the GMV buyer. And there, you can see, we're always now at PLN 2,500 annually per buyer. We went up 28.6% year-on-year on that metric, a further 7% growth during the quarter.

Now that's reflecting a couple of things. One thing that François just mentioned already, the strong surge in our SMART! subscriptions as customers have taken out subscriptions after the lockdown, on the one hand. Secondly, that extra demand that everyone has been speculating about, the so-called stickiness effect in e-commerce, it is visible in our Q3 numbers, and it's come through a bit stronger than we were originally forecasting it. That's one of the reasons why the GMV forecast is moving up, right, I should say, guidance is moving up today.

So when you put the 2 together, we get to our GMV position. So we recorded PLN 8.3 billion of GMV on the marketplace in the third quarter. So that's 48.7% year-on-year growth. It's roughly twice the rate that we were growing without the COVID tailwinds up until Q1 of this year. Obviously, on the other hand, as -- through the summer, there weren't really any significant retail affecting lockdown measures in place. That's a quarterly result that is completely without that tailwind from the retail lockdown. So I think it's a really, really solid result.

You can also see there that for the 9 months, we were at PLN 24.3 billion, 52% growth for the full nine months. And I think it's also worth noting that the growth in the purchasing is coming both on SMART! customers and equally on the non-SMART! contingent in our buyer base, both accelerating their growth trend on purchases quite evenly.

So how does that then feed through into our revenue? We had 49.7% revenue growth to just under PLN 930 million in the third quarter. We're at 51% still for the 9-month period, just under PLN 2.7 billion. The growth has moved slightly ahead of the GMV growth as we were flagging to our objectives. So after that debt that we had in Q2, because of the impacts of the lockdown and because of the discounts we were giving on certain aspects of our take rate policy, we were actually having revenue growth slower than in GMV. That's split back around now, which is good to see.

And on the right-hand side there, you can see the quarterly trend in the numbers, which might be useful for anyone trying to build analytical models. And you can also see that our advertising business has moved up nicely, 8.4% of revenue compared to, what, 7.8% of revenue a year ago in Q3.

So a couple of other ways of looking at the revenue. No surprises there. On the left-hand side, the growth in the marketplace for revenue from GMV, plus the advertising revenue were the main growth drivers on the revenue line. And there you see on the right-hand side, the confirmation of the stabilization in our take rates, moving back up on to the trend, with a very slight gradual increase in take rate at 9.4% for Q3.

Moving to the cost of sales side, so the expenses side of things. Cost of sales moved up to 27% of revenue in the third quarter, up from 23% a quarter earlier when we were in the lockdown phase. This is mostly a story around the cost of -- or the net cost of delivery associated with SMART!, as you can see immediately from the graphic.

The customers that have subscribed to SMART! during the third quarter is obviously a major component of driving the increase in net cost. It's also worth noting, though, that the absolute volumes are growing even faster than you see here. We actually have a 17.4% fall in the unit cost per package subsidy that we recorded during the third quarter when you compare that back to the year early.

On the SG&A side, we've got the opposite trend. So the overall margin is pretty flat, 33% in Q2 as a percentage of revenue, dropped down to 29%. A couple of factors here.

One of the main ones is that, as you'll recall, where we weren't charging either the buyer or the merchants for the free SMART! that we were giving out during the lockdown in Q2, those costs of delivery dropped into marketing expense rather than higher up in the P&L in the -- above gross margin. That was about PLN 80 million in Q2, and that almost disappeared in Q3 as a marketing expense.

So that explains most of the reduction in marketing spend. You also see a pretty nice reduction in cost of staff, which is obviously a leverage effect on the GMV and the ramp.

Putting that all together then, the adjusted EBITDA, as François mentioned earlier, for Q3, was PLN 408.5 million, a 26.7% growth. For the 9 months, slightly higher at 27.5% growth at PLN 1.217 million.

I'm also pleased to note that the GMV to -- adjusted EBITDA-to-GMV trend ticked back up from 4.8% to 4.9%. Even -- and I think that's a good result, and it's mainly driven behind the higher take rate and the increase in the share of advertising as we've been flagging during the IPO. So that's a good result.

Okay. Now obviously, you will have noticed, and we did flag that there would be significant one-off expenses recorded in the third quarter. And that's what you see here on this slide, that PLN 408.5 million of adjusted EBITDA, drops down to PLN 284.7 million when we take into account all the EBITDA adjustments. And then there's also the refinancing-related adjustments down in net financial result.

Just a little bit of background on this. As you'll recall, the pricing of the IPO took place right at the end of September. The actual trading started on the 12th of October. The refinancing took place on the 14th of October.

From an accounting perspective, all the work on the IPO essentially was done by the end of September. So all the costs related to that have been picked up during the third quarter. There's just a little bit still to come regarding discretionary fees on the primary issue that we did during -- in October, effectively.

On the financing expenses, we took the final decisions that we would refinance during September. And that meant that we had to write off all the costs that would have been amortized over the life of the previous loan that we had, which I think was through to 2024.

So those are non -- mostly noncash charge in that position #4 there, in that PLN 158 million of refinancing costs. So when you back all of that out, if you look at point #6 there, the adjusted net profit, excluding those items, was about PLN 147 million, 95% up on a year ago.

In terms of capital expenditure, quite a quiet quarter, PLN 47 million of expense in the quarter, 5% of revenue. Usually, Q4 is a little bit stronger than that. The fulfillment projects that we're working on that François was mentioning, those are really still ahead of us in terms of CapEx expenditure. They're really a 2021 item as we were setting back from the [ summer ].

Okay then, a quick look at our situation after the refinancing here on the next slide. We finished the quarter, obviously, still with the old loans in place. So in the middle column there, you can see we had leverage of 3.4x as of 30th of September. We've then calculated for you the pro forma impact of taking, first of all, the PLN 1 billion of primary that we raised during the IPO; and then, secondly, reducing the debt balance down to the new facilities level of PLN 5.5 billion. When you reflect all of that, we're down to 2.9x leverage, which I think is a good level. It puts us well on track to be under 3 -- well under 3 at the end of the year.

I think the other thing that's worth noting is our total debt service cost for the next 12 months, we estimate at about PLN 190 million. No, we don't have it. It's a bullet loan, so we don't have any amortization to fund. And that difference versus the PLN 700 million that went out in the 12 months to September 20 translates into a lot of extra cash that gives us a lot more financial flexibility to invest in things like Allegro Pay in the short term.

Okay. And then that brings us on to our guidance, which we've updated in a couple of points as a result of the performance in the last -- both in the third quarter and over the first part of the fourth quarter. First of all, we moved our GMV guidance up from the mid-40s that we were projecting during the summer, now to the low 50s for the full 2020. That's coming from a couple of effects.

First of all, as I mentioned, the stickiness, the SMART! subscription effects were a bit stronger than we were expecting in Q3, and that's fed through into Q4. Then on top of that, we have the much more severe effects of the lockdown that we weren't expecting to happen when we gave the guidance in the summer. So that's feeding through into a stronger Q4.

On the other hand, we're being a little bit careful about December. As François mentioned, the shops are reopening on the weekend. They'll be opening right away through to Christmas, for sure, hopefully longer. And that should translate into a slightly lower growth rate in the second half in December than we've seen over the last few weeks.

All of that, ex from GMV, feeds through basically as an operating leverage effect into a higher adjusted EBITDA. So we've moved the guidance up there to mid-20% range. The other elements of the guidance are fully unchanged.

Okay. So with that, I'm going to hand it back to François to quickly summarize.

[François Nuyts, executive]

Thank you, Jon, and quickly is the word. So in a very quick summary and maybe starting with team and safety. Within this challenging home environment and COVID, obviously, our team continue to keep our employee base safe. And for that, we move to working for home, and we're also driving a number of engagement programs to keep the nimbleness and the activity and engagement that our teams show at all times in driving new project and innovation. And that continues to be quite impressive.

Obviously, that allows us to keep on improving what we call the retail-led basic -- retail basic, right, the choice of products we offer. So the number of offers and products continue to grow at accelerated speed, the pricing, the competitiveness and the delivery experience.

Overall, SMART! is growing rapidly. The take rates have stabilized after all the initiatives we did in Q2 to give some and make sure that it helps sellers during that period. Allegro Pay trial is ongoing and going well. And the fulfillment project is gaining traction from recruitment to software development. All in all, that is driving Q3 strong results and the 2020 raised expectations that Jon talked about.

Without further ado, that leaves us with plenty of time for questions. So Michal, if you could help us facilitate this, and if you can take the presentation off so we can -- thanks.

[Michal Kuzawinski, executive]

[Operator Instructions] And in the meantime, the first questions come from Lisa. Lisa Yang?

[Lisa Yang, analyst]

[Technical Difficulty]

[François Nuyts, executive]

Try to unmute, I guess.

[Lisa Yang, analyst]

Yes, I was just trying to unmute. Sorry about that. Maybe as the first question, I was wondering if you can comment on the GMV trend you've seen so far in Q4, I mean, especially in the light of the more severe lockdown. And I appreciate that the big trading period is still ahead. And also, could you maybe share some early thoughts into how we should think about the growth in 2021, given recent developments? That's the first question.

And the second question is on competition. Could you maybe comment on the latest competitive developments you've seen in Poland and how Allegro plans to react to Amazon potentially becoming more active?

[François Nuyts, executive]

You take 1 and 2, and I'll take the third?

[Jonathan Eastick, executive]

First, the market. It sounds good. Okay. So the first question was regarding what we've been seeing in the fourth quarter into the GMV. So as I was saying, we were somewhat taken by surprise that this second wave of COVID was going to be as strong as it was. As you saw, the first wave was very, very well contained in Poland.

But Central Europe, unfortunately, has seen a much stronger second wave. So that hadn't been factored in. And what we've seen is that the strong performance, the strong stickiness effect, the impact of SMART! has continued into the fourth quarter.

And then from about the middle of -- well, early October, really, we started to see an extra tailwind coming because of this lockdown. And that's culminated, unfortunately, with the government leading to close again the off-line retail during, more or less, 4 weeks of November.

December, we're being a little bit more conservative because the shops are going to be allowed to be open. So we'd expect probably to drop back more a little bit lower than we've been seeing during November in terms of growth. So that's why the guidance has landed where it's landed.

When it comes to 2021, it's still a bit early. We'll share our guidance most likely at the time of the full year reporting, which would be early in March. At the moment, we're still in the planning phase. And as soon as -- it's actually a very difficult year to plan.

The great news is that these vaccines are starting to come through. But it still means it's very difficult to really see how much COVID impact we need to factor in for next year and when things are actually going to get better. So it's quite a difficult thing to forecast at this moment in time.

[François Nuyts, executive]

And on the -- on your competitive question, so we've continued to grow faster than the e-commerce segment. And as you probably recall, the penetration of e-commerce in Poland is still quite below what it is in the rest of Western Europe, let alone China. It's about half, for example, of what it was in the U.K. before COVID and about 1/3 of what it is in China. So there is a lot of headroom to continue to grow e-commerce, whether additional competitors come to market.

Now to your specific question on Amazon, as you know, they're present for several years now in Poland. They have a German-translated website, with all the European selection. They have fulfillment centers, from which they deliver fast to customer. They have a customer service center in Polish.

So when I get asked from time to time when would they launch, it's a bit of a elusive question. Don't get me wrong. I'm sure there will be a PR moment at some stage, where they bring your shell around what they already have and call it .pl, but that's more a question for them on what. But all of the components, they mostly have. They're missing that shell and missing also a local prime program. They already have a video, Prime Video, in the country.

So in short, that leaves us, I think, the company to look at what do we do and how do we keep on improving our own levers. And as you know, on selection, we're very competitive. We have over 100 millions of offers. We have very low price, and we have all the Polish brands because we're 20 years in country, Polish law of low price. And a number of the pricing in Poland is actually quite a bit lower than in the rest of Europe, which leaves us in a very good position.

And also, we pay sellers very fast, right? They actually get paid first, and we get paid later, which means we have a lot of those very large retailers that provide unique selection and unique price across the categories. The large, medium or hard work that you don't tend to see on 1P plus 3P platform for plenty of reasons.

And then we keep on driving our own innovation around delivery and all. Allegro Pay is a great example. To make sure customers, when they shop on Allegro, they love it, and they come back. And it's where the numbers, in terms of GMV per active buyers, even after the Q2 lockdown, is still growing up. It's quite a good indication. The number of SMART! customers that accelerates is quite a good indication. But as an e-tech company, we're working hard to keep on delivering their trust and what they need.

[Michal Kuzawinski, executive]

Thank you, Lisa. Andy Ross?

[Andrew Ross, analyst]

Right. Can you hear me okay?

[Michal Kuzawinski, executive]

Yes. Thank you.

[François Nuyts, executive]

We can.

[Andrew Ross, analyst]

Great. I've got 3, please. First one is about lockers. There's been a couple of press articles suggesting that you guys are maybe thinking about rolling out some of your own lockers. So is there anything to that at all? And can you just update us on what your locker strategy is? Is it just about imposed or is there more to it? That's the first question.

Second one is on take rate. I think in the IPO, you talked about a 9.5% take rate for the year. It's gone up a bit sequentially in Q3, but perhaps not as much as I would have thought, given that guidance. So can you just talk a bit around the dynamics about that take rate in the second half?

And then the third question is on the regulatory investigations for -- or study, that's a bit of the way that was launched on -- around the IPO. Is there any update on that?

[François Nuyts, executive]

Sure. I'll start with lockers. You take, take rate, then I'll go back to regulatory. So in terms of lockers, if you recall, during the IPO, we said, "Hey, we're a consumer most -- consumer- and seller-facing business." And where selection, pricing, speed, quality, predictability and cost of delivery matters, and we managed to do this in -- mostly in an asset-light model.

But we earmarked some CapEx because we know in some areas we do need to roll out CapEx, too, for delivery. The easiest example is when we acquire, for example, Chinese selection. When we want that Chinese selection to be 1 day, 2 day away from the customer, we need to provide -- fulfilled by type of services, and we're -- that's why we're investing in fulfillment.

Part of that CapEx, it also includes, indeed, some lockers rollout. So the first part here is, obviously, we have a great relationship with InPost. We have a 7-year contract that commits some volume commitments, some predictability and pricing for both parties, some development of new products jointly, and we expect that relationship to keep on developing.

But at the same time, it doesn't prevent us from trialing, how do you say, new products on our end to make sure we keep an edge in terms of how we deliver to consumers. And that's what we do. So you'll see fulfill, fulfill by lockers. And we're also working on a number of other pilots and trials to make sure we're at the forefront of innovation as to how we deliver to customers at the end of the day, which is, whether it's third-party or one of the customers really do not care what he expect as the delivery from Allegro, whichever mean used is second to none.

On the second one, take rate, yes?

[Jonathan Eastick, executive]

Take rate, yes, absolutely. Yes, so roughly right. So the take rate, as I said, moved up from 8.9% in Q2 to 9.4%. We were flagging that the take rate would move up maybe a little bit farther than that, as you said, Andrew.

Basically, what we did implement was expanding the success fee to cover delivery fees paid by the customers. And that's an additional incentive for merchants to either offer delivery for free themselves, or even more likely to switch into becoming SMART! merchants, so that then the success being multiplied by 0% fee is no extra cost for them. And that's implemented and had an impact on -- an upward impact on the take rate.

We were also looking at increasing co-financing for SMART! and a couple of other increases. But we decided to be -- partly because of the -- or mainly because of the lockdown, really, that we would delay those changes until early next year. They've been announced. They should implement early in -- or right at the beginning of Q1.

So there is a slight delay in what we were originally planning to do at the time of the IPO. It's mainly because of that lockdown situation. We didn't want to put the price up right at this moment in time.

[François Nuyts, executive]

Yes. It's the lockdown and the phasing early in the year. It's also, as we're a marketplace, keeping the trust of our sellers is of paramount importance. Q4 is such a big quarter that you don't want to change, in any way, the rules of the games and the conditions upon which they conduct their business during the biggest quarter of the year. We want as much predictability for them.

On the regulatory, so I always love to cover, first, the shared principle we have with the regulator. We're an extremely consumer-centric and seller-centric organization. So we shared the same goal than regulators, which means to make sure that it's a fair, predictable and, how do you say, enabler of growth for all parties.

So the regulator keeps, how do you say, asked question, as you raised. We keep on fully collaborating. We have provided our [ best round ] of answers a few weeks ago. And we believe we're fully compliant with all regulations. But again, we're fully happy to collaborate with them and answer any question they have. It's part of doing business and being a successful marketplace.

[Michal Kuzawinski, executive]

Is it all clear, Andy? I guess so.

[François Nuyts, executive]

How -- given the setup of raising hands, unmuting, muting, if you ask for confirmation, it's probably a little bit clunky in terms of technological setup.

[Michal Kuzawinski, executive]

I agree. Cesar Tiron?

[Cesar Tiron, analyst]

Yes. I have 2. The first one, can you please share with us any material changes to this new contract, which is signed with InPost? Or does that differ from the previous one? Remind us how much of your GMV goes through InPost if you dispose it? And especially give the scope to decrease further the cost of delivery on the back of that new contract or not?

And then the second question is really on Allegro Pay. If you can share again what is your ambition again beyond consumer financing? I mean do you see that becoming a, really, wallet for off-line payments as well?

[François Nuyts, executive]

Sure. And sure, on -- so starting with InPost, so it's a 7-year looking-forward contract that aims to provide, again, volume and price visibility for both parties, so we can continue to invest and improve consumer experience. And it includes also some co-development of unique innovative product.

In terms of the details of the commercial contract, I'm afraid I cannot go into that also because it will be more interesting for other people. So I think I'll stop there. But yes, in terms of -- it does provide visibility, obviously, on one of the costs of SMART!, which is the shipping cost, which is reflected in the guidance that Jon provided and the guidance that Jon will update early next year.

In terms of Allegro Pay, I would say 2 things. The ambition is huge. But when you're just launching a product, and you're beta testing it, it also pays to be humble, right? So the level of simplification we did in terms of consumer experience, by bringing, if you recall, we acquired that team called FinAi about 9 months ago now?

[Jonathan Eastick, executive]

Yes.

[François Nuyts, executive]

They integrated amazingly into Allegro. They're a fully-fledged Allegro team. And what they brought was threefold: credit scoring capability, they already have that; working backward UX design, meaning the ability not to be constrained by the sum of the constraints when you design a product, but really by designing something, hey, this is what it should look like back to the consumer; and then working between the technology, the regulatory and the number of other constraints like you'll be able to deliver it.

So if you come and you're one of the Allegro Pay trialists or eligible customer, it should be amazingly simple. You come, you have a banner that says you want to start using Allegro Pay, PLN 4,000, it's about $1,000, click here. You get a text on your mobile to confirm. You enter that code and off you go. That simple.

Versus the previous product that we had at that different platform, [indiscernible], which was kind of 11 or 13 fields and -- to fill in and then a bit of time to wait and maybe you could use it or not. And they're still working through a long list of improvements.

So we're going to get that product and make sure it works, it works very well. And then, again, sometime early next year, we'll come back and include it in the guidance and keep on rolling out.

[Michal Kuzawinski, executive]

Yes. I think part of the question is about the longer-term ambitions around Allegro fund [ midterm ].

[François Nuyts, executive]

But, as I say, if you fund at the same time, we want to be humble. We're just trialing the first product. The feedback is great. But the team pose to a successful launch, and then we'll take the great capabilities they have in terms of, again, UX working backwards, credit scoring, hiring absolutely amazing product and tech people.

And that gives us plenty of opportunities to go -- to roll out more products in consumer finance and actually also on the seller and merchant finance and other streams. When you have a team such as this one, that is so good in product developments and managing the metrics of that business, it's a great seed to do other things. But first, it pays to be humble. Let's get that product to work extremely well.

[Michal Kuzawinski, executive]

Thanks you, Cesar. Miriam?

[Miriam Adisa, analyst]

Okay. Can you hear me?

[Michal Kuzawinski, executive]

Yes.

[François Nuyts, executive]

We can.

[Miriam Adisa, analyst]

Just 2 questions from me. Firstly, just on the net cost of delivery. I think in the release, you mentioned that you've seen this big reduction in the cost of the shipped packages. And you mentioned that this was partially driven by the co-financing from sellers. But I think earlier, you said that you had delayed that. So I just wanted to sort of marry the 2 things together.

And then just on the strategy around co-financing, how should we think about the ambition there? Or perhaps if you have any targets in terms of sort of GMV that you think could be financed by sellers over time and what sort of savings that could bring?

And then just, generally, if you could give an update on perhaps the share of next-day delivery, same-day delivery, where you are with that, particularly after the -- your partnership with InPost?

[François Nuyts, executive]

Sure. You take the first and the third one, and I take the middle one? No, if you take the first one?

[Jonathan Eastick, executive]

The first 2 parts around cost of delivery, and you take the InPost.

[François Nuyts, executive]

What about you start, and I continue?

[Jonathan Eastick, executive]

Okay. Yes. So the first question relates to basically the difference between the cost -- net cost of delivery in Q3 last year and net cost of delivery in Q3 this year, where we see a drop per package of just over 17%.

So if you go back to last year, there was no co-financing whatsoever. Earlier in this year, during the first half of this year, we introduced co-financing in relation to SMART!, but only for certain channels, in particular, for courier deliveries. So the lockers and the pickup points were not covered by this co-financing requirement. But that was enough to have this positive impact on the 17% on the net cost, together with a couple -- well, together with certain incremental savings on particular contracts because we're constantly negotiating contracts with the delivery companies. Obviously, the volumes are going up, and we've got a lot of leverage to get the cost down. So that explains the 17%.

When I was talking about co-financing early next year, sorry for confusing you, I was talking about what we just announced, which covers lockers. But that's been -- it's not being implemented right now. We've given the merchants warning that, that will be coming at the beginning of next year.

It's also very important to point out that in connection with the co-financing payments, we're also offering the chance of a rebate for the merchants if they're able to deliver next day. So we're trying to incentivize them to find every possible measure that they can take to increase the share of next day. If they do next-day delivery, they'll get a rebate on those fleets.

[François Nuyts, executive]

Yes. And obviously, we launched co-financing on courier now a few months ago, so you can see that impact flowing between the P&L already.

[Jonathan Eastick, executive]

That's right.

[François Nuyts, executive]

And I love the idea that Jon just summarized. So indeed, we're launching co-financing on lockers, notably, but we're also incentivizing and giving money back for sellers to -- that deliver next day.

Again, this is the continued rollout, which was the third part of the question, in terms of should we deliver predictably to the consumers? So you have -- 2 years ago, if you came to Allegro, you normally got your package fast, right? And you usually got it in a 1 day, 2 day in most of the cases. But we didn't tell you about it.

So as a consumer, when you click on that purchase button, you never knew is, in x percent of the case, we're going to get it in a couple of days or sometime much later. There was some indication, but it was not very clear.

Over the last -- so we started launching delivery experience on this -- promise in Q2. During Q3, you can see that this is all the way through the shopping path. So as you browse Allegro, whether you're on a -- the product page or an offer page, you're doing search, you can filter based on when you will receive the products. And the team only -- keep on improving this.

As always, when you're a marketplace of that scale, parts of the improvements is just by flagging the data, right? By flagging the data, consumer browse more on when they get the product. As a result, it incentivize the seller to behave in a certain way. And hence, you get a flywheel effect, and we see that working quite well.

And on top of it, you increase the speed at which that flywheel works, that's why we announced that we would give some of the shipping co-financing back to seller if they deliver the next day. Then obviously, to this, we'll add fulfillment by Allegro, which will serve to close additional selection to same day and next day. So whilst we don't share the number of -- the percentage number of same-day, next-day and 2-day delivery, those are progressing across.

Michal, you unmute yourself.

[Michal Kuzawinski, executive]

Yes. Catherine O'Neill?

[Catherine O'Neill, analyst]

I've just got a couple of questions. One is on SMART!. I don't know if you could talk about maybe where the penetration level is or at least sort of what you're seeing in terms of the cohort behavior?

And then to your comments about the stickiness being sort of better than you expected with SMART!, do you have any plans for more promotions to push that harder if you are seeing increased stickiness, which is driving growth?

And then the other question is back to sort of Allegro Pay or financing. I just want to check, in terms of what you're testing at the moment, is it very much on the consumer side? Or is it on the merchant credit side as well? And if it's not on the merchant side yet, I just wondered if you could give us any sense of when that might follow?

[François Nuyts, executive]

Right. I'll start and then I'll pitch you up. So on SMART!, as you can see, and I think I mentioned it earlier, during Q2, we provided SMART! for quite a while. We expanded it 3x for free to anybody that wanted it in Poland. And what we saw when we stopped this, when the wave of COVID has subsided in Q2, is the number of people that tried SMART! wanted to keep it. So we see, obviously, an accelerated penetration of SMART! in the population, which is great.

You also see earlier in the deck in that, what is it, trailing 12 months spend per active buyers that people, even after the lockdown of COVID, so when there is back competition, you see an increase in the trailing 12 months of GMV per buyer, which is partially driven by SMART!, right? When you become a SMART! customers, your propensity to shop more on the platform is significant.

In terms of what are we doing on SMART! to keep on driving adoption and usage. So first, right back to the flywheel effect, anything we do on the core retail basics, so when we add seller, we had selection, we had -- we improved price, we improved delivery. All of those contribute to making SMART! a greater program and more attractive.

As I was mentioning, the price promotion, for example, exclusive to SMART! so SMART! Week was threefold year-on-year. So our ability to, again, drive additional benefit for SMART! is one component, obviously, which is a little bit lower than expected is via our eBilet exclusive ticketing concert, for obvious reasons. It's not the best time to go to a crowded concert, but we're expecting sometime next year that this will come back, will be able to enter our lives and go back to concerts again, and that will be an additional flywheel to the SMART! program.

Maybe one last thing. We also did a price promotion. We moved it for, I think, a couple of weeks, was it from PLN 49 lot to PLN 39?

[Michal Kuzawinski, executive]

That's right.

[Jonathan Eastick, executive]

The annual subscription.

[François Nuyts, executive]

The annual subscription. So that's from $10 -- a little bit over $10 to $8. And again, the price sensitivity of Polish consumers never cease to amaze me. It's quite the low price of SMART! is so attractive. And we saw, as you said, an accelerated interest and, well, we'll look at doing those type of customer acquisitions initiative. Allegro Pay?

[Jonathan Eastick, executive]

And then Allegro Pay and merchant perspective.

[François Nuyts, executive]

Allegro Pay and merchant perspective. So a little bit what I said before, right, it pays to be humble. We just launched Allegro Pay. We're trialing it. We see the customer-facing results, both in terms of the NPS, the Net Promoter Score and the usability and overall feedback and the repayments, which is important, are working well. And we'll update this in some time early next year.

The team needs to roll out that product and roll it well. But yes, the type of credit scoring algorithm, UX design skills that we acquired that developed this team are applicable also on the merchant side. And over time, we'll look at it. But at the moment, basically, humble. And the consumer side is so -- such a lever that we want to execute that extremely well.

[Jonathan Eastick, executive]

So I'd just point out, we do have a portfolio of merchant products already on the platform, that they are provided together with partners. As was the case previously, on the consumer side, we only had partner-driven products where we weren't lending our own money. On the merchant side, as François said, we may pivot to lending our own money in the future. But first, we focus on Allegro Pay for consumers.

[Michal Kuzawinski, executive]

Michal Potyra?

[Michal Potyra, analyst]

It's Michal Potyra from UBS. I have 2, actually. The first one is about your EBITDA guidance. It's not 100% clear to me, this mid-20% year-over-year growth. Is it for the full year? Or is it for the second half of the year, please?

And the second question, I know this topic was discussed, but I'm wondering if you can give us a little bit more color on the impact of delivery co-financing on your net delivery cost in 2021, please?

[François Nuyts, executive]

Both for you, Jon.

[Jonathan Eastick, executive]

Yes, sure. Yes, the first one. Sorry if that isn't completely clear. We were guiding relative to 2019 EBITDA growth when we did the -- when we gave the guidance during the IPO process. We simplified it here today, and we've switched to just forecasting through to the end of the year, yes? So basically, we ended the 9 months with -- I think it was 27% EBITDA growth. We're forecasting that we'll be just a little below that mid-20s for the full year.

One thing that you -- as you haven't seen our quarterly trends, you haven't had the opportunity to dig deeply into those. We've shared the quarterly numbers with you today. They're on the results center.

You'll probably notice there that the -- generally, the take rate in Q4 is a little bit lower than it is in the middle part of the year. And that's because when there's that peak in demand that you get in the fourth quarter, the fixed components of the take rate related to promotion, they tend -- the merchants tend to spend less because the demand is there anyway. And that feeds into a slightly lower take rate. That, in turn, then feeds through into a slightly lower margin when you get in the early part of the year.

[François Nuyts, executive]

It's a seasonal effect.

[Jonathan Eastick, executive]

Yes, exactly. Then the second part of the question, yes, I mean, that co-financing across lockers as well as courier. Courier, as I mentioned, has been in place since the first half of the year. We're going to introduce co-financing on lockers as well. So the merchants who are really enjoying the demand benefits that SMART! has brought to them will be contributing to the result.

On the other hand, as I mentioned, we're going to be giving back quite a lot of that money for the merchants who are able to ensure that they deliver next day. And we're hoping that, that's going to have positive impact on the percentage of next-day delivery.

So it's a little bit difficult to predict right now how much impact that's going to have next year. We were planning to do this anyway. So you shouldn't interpret it as being some major lever versus the 2021 outlook that we already have in record from the IPO. We'll come back and update with the guidance probably with the March results or the March call about the full year results. Hopefully that answers it.

Michal, next question?

[Michal Kuzawinski, executive]

Here we go. Pawel Szpigiel?

[Pawel Szpigiel, analyst]

This is Pawel Szpigiel from mBank Securities. I would ask 4 questions. The first would be about the GMV growth. Could you please give me the breakdown of the GMV growth into paid traffic and organic traffic? In the past -- I mean in the past, I saw that GMV growth in rate from the paid traffic was far much higher than the organic one. Just want to know, do you think this trend will continue?

The second question is about the SMART! users. You are not publishing the numbers of them at the end of third quarter. I wonder why. Could you give us a little bit of background here? Is that number going to increase in a rapid pace like in the past still? What is your ambition here? Could you please give me some guidance here? I would appreciate.

And the third and the fourth question is about net cost of delivery that were discussed today already. But I wonder, because you report that the net cost of delivery per shipped package fell by 70% year-on-year in the third quarter. I would ask here, does your past decision of the introduction of co-financing of couriers delivered by the sellers affect the decrease?

And the last question, I mean, looking at the net cost of deliveries, for me, they actually exploded. It drives some questions about the organization of current logistic network that you have in Allegro. Do you wonder how to mitigate this increase in the long term? And in the long term, I mean, after 2021, for that couple of years.

[François Nuyts, executive]

Okay. That's -- so GMV growth, tackle. I'll take SMART!. Net cost of delivery, you take. And then the fourth one, we'll see.

[Jonathan Eastick, executive]

Yes. Okay. Okay, so on the share of paid versus nonpaid, this is not a KPI that we're intending to be disclosing quarter-after-quarter. There was nothing unusual in the third quarter there. So you should just -- if you're trying to model that, you should just assume that the trends continue.

[François Nuyts, executive]

We continue to invest on an ROI basis, notably on PPC, yes? On SMART! users, you asked a question on regarding why we don't share it, and then another one, a follow-up on ambition. The why, it's quite simple, right? And it's around -- we're very metrics organization, meaning on a weekly basis, we look at -- I see margin on the call. So that creates the report, I don't know, 300, 400 metrics. Because we break down our business with actually controllable levers that the teams then drive.

And why we don't share all of those, including SMART!, it's obviously because there would be a very specific interest of competitors. So when doing these calls with you, we need to, how do you say, walk a fine line between sharing as much information that is helpful, and it helps you in creating your view of the business and your analysis, whilst sharing as little that competitors would be interested in and would read too easily.

In terms -- and I do apologize, it's by definition, how do you say, an imperfect line that -- yes. On the ambition, the ambition here, the value of SMART! is so great to consumer, right? You do 1 shipment, if you're the monthly program, at PLN 8.99, and it pretty much already pays back. If you're a yearly user at PLN 49, you need to do 4, 5 transactions a year and you're really saving money. So every call should be, as far as I'm concerned, it should be a SMART! user.

There was a question earlier in terms of what are we doing to improve SMART! And I realized also, I forgot one part, that we did launch recently. When you're a SMART! user, you get much better benefits in terms of Allegro Pay, right? A regular Allegro Pay users get a 1-month deferred. When you're a SMART! user, it's exactly 3x split.

So we'll continue to do this, these kind of innovations that make SMART!, how do you say, an absolutely, unavoidable, a compelling proposition to Polish consumers. And what we see, again, when they try it, they stick with it and they tell -- not only do they stick with it, but they tell their cousins, family and third-degree cousins that they should be using it. So we see a great penetration of SMART!. But we launched it a year, 2 years ago now, 2 years ago? So it's still quite early in the process. It's great. It's -- there was this third question.

[Jonathan Eastick, executive]

On the cost of delivery and [ the trend ].

[François Nuyts, executive]

Yes, please.

[Jonathan Eastick, executive]

Yes. So on the cost of delivery, I think we were asking whether the co-financing is contributing to that drop in the net cost of delivery. It's a big component of the decrease of 17% between Q3 last year and Q3 this year. It's because there was no co-financing whatsoever last year.

Since H1, there's been co-financing on courier, which you see in the Q3 results. And starting from next year, it will be across most of the channels, particularly lockers in courier, there will be co-financing. So that will have a positive impact.

Coming back to this question about the numbers of SMART! Obviously, because you can see there the cost of delivery, that's a bit of a proxy for how fast the SMART! numbers may be going up here. So we think that's enough information, taking into account we were keeping things that way from competition in terms of information.

Yes. The final question I think was about margins and what we're doing to offset the impact of SMART! as the penetration grows over time. There's a number of things which we believe will start to level off the, let's say, the gradual drag that SMART! brings on the EBITDA margin.

First one is rapid growth in advertising, which is very high-margin business. And as we grow the marketplace, we create inventory, which we can then sell as advertising. So that business just gets bigger and bigger.

Secondly, gradual increase in take rate. Take rate includes all of the different monetization levers such as co-finance, not just purely the success fees. And yes, so when you take those things into consideration, plus as we push towards things like faster delivery that drive the amount of business on the marketplace, driving more success fee, et cetera, et cetera, all of those things contribute to leveling off the drag in the margin over time.

So that's why, when you look at our IPO guidance for the medium term, we're predicting that the adjusted EBITDA to GMV ratio to stabilize when you look out 2, 3 years from now.

[François Nuyts, executive]

And that's before any financial revenue.

[Jonathan Eastick, executive]

Is that -- yes. It's a good point. It's a good point that François just made. That we haven't yet obviously increased in the Allegro Pay impact into our guidance for the future years.

[François Nuyts, executive]

Michal?

[Michal Kuzawinski, executive]

Yes. The last question comes from Lukasz Wachelko.

[Lukasz Wachelko, analyst]

[Technical Difficulty]

[François Nuyts, executive]

Hello, Lukasz?

[Michal Kuzawinski, executive]

Can you hear us, Lukasz?

[François Nuyts, executive]

Lukasz?

[Michal Kuzawinski, executive]

Okay. That concludes the Q&A session.

[Lukasz Wachelko, analyst]

Hello, can you hear me?

[Michal Kuzawinski, executive]

Oh no.

[François Nuyts, executive]

Yes. Yes, Lukasz.

[Lukasz Wachelko, analyst]

Hello?

[Michal Kuzawinski, executive]

Hello?

[Lukasz Wachelko, analyst]

Okay. Excuse me. It's too complicated for me. Sorry.

I have 2. First, on the take rate. You said that because of the COVID pandemic and the lockdowns still delayed some projects to increase the take rate. So what kind of a take rate growth should we expect to be postponed in the next year? Was it like 10 basis points or 20 basis points? That's the first one.

And the second one is on the guidance. As I understand, you basically say that for the fourth quarter, EBITDA, on adjusted level, will grow by 20%, so just like it did in 2019. Given that you said that October was very strong, and November, we're currently seeing the Black Week and strong numbers expected on that. Would I be very wrong expecting that, roughly, this close to 30% growth of EBITDA adjusted was sustained over October and November, which means that, basically, your guidance implies totally flat EBITDA for December? That's just doing my math.

[Jonathan Eastick, executive]

Okay. I was just listening to that piece, just remind me what the first question?

[François Nuyts, executive]

The first question was on take rate and how do we see progression of take rate over time? Yes.

[Jonathan Eastick, executive]

That's right. Yes. Yes, I must admit, I don't have a figure in my mind right now for that increase in take rate next year. As I said, we will be coming back with comprehensive guidance update for 2021, certainly no later than when we announced the results in March next year. That's probably the right order of magnitude that you were calling out there, right, 10 to 20 basis points over the course of next year. As I said, we're really helping a lot of those co-financing increases will actually go back to the merchants because they move the dial in terms of the next day and, therefore, enjoy the rebates.

[François Nuyts, executive]

The feel the growth of the business. Yes?

[Jonathan Eastick, executive]

Exactly. Yes. And then the second question, on the EBITDA. I think I was alluding earlier that what you actually see at the end of the year, with the very high demand that comes with Christmas, is that the take rate tends to drop a little bit. And that, therefore, feeds through into a slightly lower margin, although, obviously, absolute numbers are big in the fourth quarter because of the absolute level of GMV.

So these are the new things for you to absorb into your models because it's your first chance to see actually quarterly data. But I think you're a little high with your analysis. Michal and the team will be there to help you refine your assumptions.

[Michal Kuzawinski, executive]

Yes. Thank you, Lukasz. And unfortunately, our time is running out. So we will cover any follow-ups offline.

[François Nuyts, executive]

Michal, thank you for facilitating. Lisa, thank you for the intro. And to all of you, hopefully, at some stage, we have seen in person despite the fact that Zoom is somewhat defective. But much appreciated, and have a great holiday season.

[Jonathan Eastick, executive]

Thank you, everyone.