My name is Ron Bechler, and I'll be moderating the Q&A after the presentation. With me today are Ruslan Kogan, Founder, CEO, and Executive Director, and David Shafer, CFO, COO, and Executive Director. We'll commence with a short presentation of the first half results, and that will follow with Q&A. If you have any questions, please type them in the Q&A; don't raise your hand. I will cover off all the questions, and as always, questions from anonymous people won't be asked; you'll need to identify yourself. So with that, I'll commence the presentation, after which we will have the Q&A session. Thank you.
Good morning and welcome to Kogan.com's first half of FY24 results presentation. I'm Ruslan Kogan, the founder and CEO of Kogan.com, and I'm joined today by David Shafer, Kogan.com's Chief Financial Officer and Chief Operating Officer. David and I are pleased to present the group's financial and operating results for this period. Having closed off the first half of the year with a successful peak sales period, I took a moment to reflect on the transformation of our business. I have to say, it's very different to the business that was started nearly 18 years ago. We started as a 1P retailer, hustling to deliver the best possible value on the newest electronics products. The hustle and obsession with delivering great value has not changed one bit, but the business has evolved immensely.
In 2006, when the business launched, we had just a few products and the start of a loyal fanbase. Today, we source thousands of exclusive and third-party branded products and have a marketplace that complements our in-warehouse inventory with tens of millions of additional items. We have verticals that provide essential services ranging from mobile and internet services to insurance and credit cards. Because we've been able to deliver great value on the most in-demand products and services, the Kogan First loyalty program has grown in leaps and bounds. Over 466,000 subscribers currently take advantage of the fantastic exclusive deals and benefits we provide. We've referred a sales generator from our Kogan Marketplace, Verticals and Kogan First, as platform-based sales. The transformation towards a majority platform-based sales business has delivered meaningful diversification, protecting our business during challenging times and allows us to accelerate profitability in improving trading conditions.
In the past six months, we've continued to evolve, adding to our platform-based sales sources through two new avenues, which we'll cover in detail. This has been a major business transformation in the works for several years, and we're very excited by it. But it's important to remember, we're just in the first innings. Our platform-based sales deliver higher recurring revenue and greater profitability, which has accelerated our return to strength and driven a return to positive operating leverage. Our platform-based sales contribution within the Kogan.com business accounted for 63% of gross sales in the half, and we expect that to continue increasing. In line with our previously stated strategy and our focus on platform-based sales, we reduced inventory by over 30% on the prior corresponding period, which naturally led to a reduction in top-line performance.
This has allowed us to improve our quality of earnings and strategically reduce inventory levels as we transform to a more capital-light business. The success of our strategy so far has been demonstrated by our significant rebound in profitability, with gross profit increasing over 42% on the prior corresponding period, and we're starting to see that flow down to the bottom-line profitability. We concluded the half with a strong balance sheet, with healthy operating cash flows funding the continuation of our share buyback and final payment of the Mighty Ape tranches. In conjunction with our focus to improve our quality of earnings, we also delivered on operating efficiencies in the group. Operating costs across the group reduced by over 18% on the prior period as we rationalized services, existing terms of contracts, and implemented internal efficiencies.
As a result, we are starting to return to the historically strong operating leverage we had been delivering in the first 14 years of the business. We've improved our key operating metrics considerably and returned to positive EBITDA and EBIT margins this half, and we expect these margins to continue improving. A key highlight for our team has been the continuing success of Kogan First. We've been able to deliver remarkable value to our most loyal customers. The growth in the program demonstrates this. As we have been enhancing the program and delivering more and more value, we are today announcing a price revision, moving to AUD 129 for our annual membership from the April 8th. Revenue generated through the Kogan Verticals increased by over a 25% period-on-period. We continue to negotiate fantastic rates across all our essential services.
The growth, particularly in Kogan Mobile, Kogan Insurance, and Kogan Internet speaks for itself. I touched on the two new platform-based sales income streams earlier. They are the Kogan Advertising Platform and Mighty Mobile. The advertising platform allows marketplace sellers to reach more customers. The platform has already delivered AUD 1.3 million in revenue, surpassing our expectations. We've received fantastic feedback from our sellers, and we expect this to become a material contributor to the group's performance moving forward. Mighty Mobile was also launched this half. Mighty Mobile offers unlimited prepaid mobile data plans in New Zealand. The new vertical represents Mighty Ape's first vertical and is an important milestone. Mighty Ape rolled out initiatives to improve top-line profitability, resulting in gross profit improving despite top-line remaining relatively flat period-on-period.
The opening of the new Christchurch warehouse and continued investment in internal systems did see an increase in operational costs. The new Christchurch warehouse is an opportunity for improved logistics to the South Island of New Zealand and future group synergies. This slide nicely encapsulates how our transformation is starting to show in our performance. Gross profit and gross margins significantly benefited from our growing proportion of platform-based sales, as well as from improving profitability in our product divisions following the strategic optimization of inventory levels. The reduction in fixed costs has compounded the impact of increased top-line profitability, resulting in an adjusted EBITDA of AUD 1.5 million and a return to positive impact in the period. Shortly, I'll be passing you to David, who will provide you with a comprehensive review of our first half financial results. Our Kogan.com platform-based sales now represent 63% of gross sales.
These earnings drive increased profitability in the business, promote a more capital-light operation, deliver higher recurring revenue, and represent exceptional value for our customers. This shift represents a crucial transformation of our business model that has been a key to the resilience we have demonstrated over the years. While we continue to build this portfolio in Kogan.com, we're just getting started within Mighty Ape. We launched the first vertical under the Mighty Ape brand during the half, Mighty Mobile, and we envisage this will be the first of many. Replicating the Kogan.com business model across Mighty Ape will deliver significant uplift for the group over the coming years. In the 12-month period to December 31st 2023, it's humbling that we've been trusted by over 2.7 million customers across Australia and New Zealand to deliver them remarkable value. The proportion of repeat customers grew to 69% in the half.
The proportion of repeat customers speaks to the high-quality shopping experience we deliver. This period, we've successfully increased our ROI on marketing, as demonstrated by the increase in gross profit per group active customer. Our marketing spend per group active customer has also increased following the launch of our new offline marketing campaigns. The campaigns are providing new avenues to reach potential new customers and are expected to have long-term benefit for the group. Our owned and earned traffic sources remain healthy at 66% for the period. This makes it clear that our underlying marketing efficiencies are working, compounded by the benefits associated with growing our proportion of repeat customers and Kogan First subscribers. Our Kogan First loyalty program delivers exclusive benefits to our most loyal customers. We have been increasing the benefits we provide, and growth in the platform is testament to the value our subscribers are recognizing.
Our exclusive benefits include everyday discounts, free shipping, reward credits, double Qantas Points, and prize giveaways. This period, Kogan First subscribers grew by over 15% year-on-year to over 466,000 and drove over 63% of gross sales on the Kogan.com platform. We don't just deliver remarkable value through the products we sell. Since 2013, we've been partnering with industry leaders to offer some of the best deals in the market on everyday essential services. Our verticals help our customers to live their best lives. Our Kogan Verticals deliver strong cash flows with little capital investment, so the growth we have achieved this period is significant for the group. A key driver of this growth was our largest vertical, Kogan Mobile Australia, which ended the period with record subscribers. Kogan Mobile New Zealand and Kogan Insurance also achieved strong growth, and Kogan Internet returned to growth this period.
As mentioned, we have a huge opportunity ahead of us. By replicating this business model within the Mighty Ape brand, we made a start with Mighty Mobile, and we look forward to expanding that portfolio over the coming years. I will now hand over to David, who will provide a more detailed overview of the financial results.
Thank you, Ruslan, and good morning, everyone. Over a year ago, we announced that we were commencing a period of consolidation in the business. The strategy we laid out at the time was to rationalize our inventory levels, accelerate our shift towards a majority platform-based sales portfolio, and reduce operating costs with a view to delivering operating leverage in the business. As we present our first half FY24 results, I'm pleased to say we have walked the talk, delivering on all aspects of our plan, culminating in a return to strong operating leverage and profitability. I will now go through the key drivers of our group's performance in further detail. The group recorded a decline in both gross sales and revenue as we increased our focus on improving our quality of earnings through platform-based sales and carefully managed our inventory down to sustainable levels.
The focus on platform-based sales means we directed resources to growing our verticals, Kogan First, and our advertising platform. This came at the expense of top-line sales, but resulted in a much higher quality of revenue, as evidenced by the higher margins we have delivered and the recurring nature to part of that revenue. To briefly explain the difference between gross sales and revenue: gross sales reflects the total transaction value of Kogan Retail, Mighty Ape, Kogan Marketplace, Kogan Verticals, and advertising income. Revenue reflects the accounting revenue of Kogan Retail, Mighty Ape, and only the seller-based fees or commissions that we receive, that is, platform-based revenue, from Kogan Marketplace, Kogan Verticals, Kogan First, and advertising income. Gross profit of AUD 89.5 million increased more than 42% year-over-year.
This was driven by growth in Kogan First, Kogan Verticals, and improving profitability in our product division following the correction to inventory levels at the end of financial year 2023. The improvement in the quality of our earnings year-on-year is demonstrated by our gross margin expansion of 13.2 percentage points to 36.1%. As we continue to focus on our platform-based sales, we expect this margin to further increase. Group active customers totaled over 2.7 million at the end of the period. Our key focus now is introducing these millions of customers to the benefits of the Kogan First and Mighty Ape Primate loyalty programs. The programs deliver fantastic value and elevate the shopping experience on our platforms. Our product division revenue declined year-on-year following our reduction in inventory.
The reduction in inventory of more than 30% represents a realignment to current trading conditions and is also a function of our shift towards a majority platform-based sales business. While revenue declined, gross profit derived from the division improved year-on-year due to the return to normalized margins after the prior period's clearance activity having concluded. We launched our advertising platform via the Kogan Marketplace this period, and it's promising to be a significant revenue driver for the business in future years. The platform enables sellers on the Kogan Marketplace to promote their products on both the Kogan.com and Dick Smith websites, enhancing their opportunity to reach millions of customers and boost their sales. In its initial phase, the platform has generated more than AUD 1.3 million in advertising income.
We already have many improvements and new features slated for implementation that should see the platform grow significantly in future periods. The group runs two loyalty programs, Kogan First and Mighty Ape Primate. Kogan First grew to over 466,000 subscribers at the end of the period, representing 15.3% growth year-on-year. We also placed renewed focus on the Mighty Ape Primate program, which grew by approximately 50% year-on-year to over 24,000 subscribers. The Kogan First and Primate subscribers represent more loyal customers for the group and enable the business to become even less reliant on paid marketing, as subscribers are more likely to start their online shopping experience on one of our platforms rather than a third-party platform. Our Mighty Ape team has delivered on some key operational projects this period. The first is the new Christchurch warehouse and distribution center.
This facility will deliver a strategic last-mile advantage to New Zealand's South Island, allowing for quicker and more economical delivery to customers in that region. The facility also provides the potential for further group synergies with the intention of replacing some of our 3PL utilization in New Zealand with Mighty Ape warehousing. The second major project delivered this period was the launch of Mighty Mobile. The launch is significant for the group because it represents the first vertical under the Mighty Ape brand. Mighty Mobile has been launched with the same telco partner as Kogan Mobile New Zealand and is starting to see good uptake. We expect to launch further verticals through the Mighty Ape brand over the coming years. We made significant progress this period in reducing our operating costs by over 18% year-on-year.
Variable costs, which consist of warehousing and selling costs, reduced by 17.9% year-on-year. Key initiatives driving the reduction included the consolidation of our logistics network as we exited certain facilities and renegotiated terms of other locations. People costs reduced by 38% year-on-year following the vesting of executive retention options that were granted during the 2020 AGM and completion of the Mighty Ape tranche payment accruals. Other costs reduced by 10.6% year-on-year as a result of renegotiating multiple services contracts to more favorable terms and implementing internal systems improvements to deliver IT expenditure savings. All of these items we have just covered resulted in a return to strong profitability for the group, with adjusted EBITDA, adjusted EBIT, and adjusted NPAT totaling AUD 21.5 million, AUD 14 million, and AUD 10.2 million, respectively.
As flagged in our last results presentation, the large one-off non-recurring, non-cash items have now been cycled out of the business, meaning the delta, or the difference, to EBITDA, EBIT, and statutory NPAT results from the adjusted results, which are also provided in the presentation, has been largely reduced. Turning to the next slide, we can see the gross profit contribution by each business division. Kogan First is now the largest contributor to our gross profit at 25.3% and reflects subscription revenue. The result highlights the significance of the program to our business and the potential still to be tapped through the Mighty Ape Primate program. Advertising income, while only 1.7% of total gross profit at this stage, is expected to grow further as the new advertising platform further improves and gains more attention from marketplace sellers.
Mighty Ape, exclusive brands, Marketplace, and Kogan Mobile have all continued to contribute materially to the gross profit of the group. We are deeply committed to ensuring that every dollar we spend is effectively contributing to the overall results of the group. Our approach involves constant evaluation of our overheads and investments, with a relentless pursuit of enhancing efficiency. Having been through a difficult period that's been well documented, I'm very pleased to highlight our return to strong operating leverage across gross margin, delivered margin, and contribution margin, as well as EBITDA and EBIT margin. This demonstrates the strength of our business model and confirms the soundness of our strategy. Onto Mighty Ape. The revenue from Mighty Ape remained relatively flat year-on-year, while gross profit increased by 4.3%.
This difference was increased as a result of the improved private label sales through Mighty Ape, and also improved purchasing of third-party branded products and improved efficiency in last-mile delivery operations. Operating costs did increase in the period as we opened the new Christchurch warehouse and distribution center and continued to invest in improved internal systems. While these activities represent a short-term uplift in operating costs, we do expect operational efficiency to be realized in the coming periods. Onto the balance sheet. Here we see a year-on-year comparison of our balance sheet. At the end of the period, we held a substantial cash balance with no external debt. In the 12 months between balance dates, we completed the Mighty Ape tranche four payment of AUD 10.9 million, invested AUD 28 million into the share buyback program, and reduced our trade and other payables and loans and borrowings.
As discussed earlier, we significantly right-sized our inventory levels, as demonstrated here, by the reduction from AUD 98.3 million to AUD 68.3 million year-on-year. As at December 31 2023, we had AUD 58.2 million of inventory in warehouse and a further AUD 10.1 million of inventory in transit. We now consider inventory to be at the optimal level for current trading conditions. Onto the cash flow statement. Our net cash increase of AUD 17.7 million in the six-month period was driven by strong operating cash flows during the period and also reflects the AUD 10.9 million paid in respect of the Mighty Ape tranche four payment and the AUD 17.2 million invested into the share buyback program during the last half. As our profitability continues to grow, driven by our platform-based sales, we expect our operating cash flows to further increase, allowing for future investments and further strengthening of our balance sheet.
I'll now hand back to Ruslan to discuss our outlook and some further detail on the exciting things to come in the second half of FY24. Thank you.
Thanks, David. As we enter the second half of FY24, we look forward to building on the solid foundation we have laid. Consistent with prior years, we will not be providing earnings guidance. However, we will provide regular business updates throughout the year. January 2024 unaudited management accounts showed the group adjusted EBITDA of AUD 4.9 million. For the remainder of the year, we look forward to continuing to grow our platform-based sales contribution and driving improved gross margins and operating leverage. We expect the profitability of our product divisions to continue improving in line with the current trend. Having just launched the advertising platform and Mighty Mobile, we expect significant traction of both in the second half of FY24.
We look forward to welcoming more shoppers to the Kogan First program. Finally, we also anticipate maintaining our strong balance sheet. Today, we are announcing an interim dividend of AUD 0.075 per ordinary share. The interim dividend will be fully franked, and our dividend reinvestment plan will be available. Together with David on the board, I am looking forward to delivering a strong result in the second half of FY24. This concludes our presentation. We look forward to meeting with many of our shareholders over the coming days. For those of you who have any questions or are interested in hearing more, please stay with us for the Q&A. Thank you for your interest in Kogan.com.
Thank you for that presentation, Ruslan and David. We've now come to the Q&A section.
Could I please just remind people, if you have questions, please type them in the Q&A, and you'll just need to identify yourself. We've got a bunch of questions that have come in while the presentation's been going. So I might start with a few questions from Taylor Guyot from Barrenjoey. Taylor asks the following questions: To what extent has the large buildup and unwind in deferred revenue-driven January 2024 EBITDA outcome, i.e., should we annualize the January 2024 EBITDA update?
Thanks for that question, Taylor. So as is common at the end of the calendar year, we do have Boxing Day sales, much of which are dispatched in January, leading to a buildup in deferred revenue at the end of December and unwind in January.
That happens every year, so there's nothing atypical about the January result, and there's nothing else that is one-off in nature in the January result. As to whether you can annualize that result, that's a question for you as an analyst. We don't make forward-looking statements, but we would say that there is nothing one-off in nature in January.
Thanks, David. Just staying on the January 2024 result, another question from Taylor: Is gross margin for product divisions back to where they should be, or is there more room for improvement?
So Taylor will remember how our gross margins were significantly impacted in the product division during the unwind of inventory as we reduced inventory significantly from the peak COVID levels. We did bounce back in product division margins in the half. We believe we're at around the right level of margin in product divisions.
There's new ranges landing all the time. There's new products landing all the time. The excitement is returning to the website in terms of new product releases. In terms of product margins, we're at around the right level.
Great. Last two questions from Taylor. Could you please give us an idea of what Kogan First's annual renewal rate is in FY22? It was disclosed at 85%.
So we haven't disclosed the renewal rate this period, but what we would say is that overall subscription numbers have gone up by 15%, and that's also been in the context of a decline in the overall number of active customers on the website and also in the context of an increase in the cost of membership during the course of the year.
So renewal rates are healthy enough to grow by 15% in the context of a decline in overall active customers, and that should demonstrate that it is a very compelling program for consumers who do come back again and again because they get so much value out of the membership.
There was actually another question that Taylor slipped in as we're talking, so I might cover that, David, with you. And then her last question for Ruslan: Can we please have an update on the buyback? Will this be turned on again? Has it been extended?
So the buyback does not take place during blackout periods. You'll recall that the buyback was a 12-month buyback in which the company is authorized to buy up to 10% of the shares on issue. I think it expires in around mid-May.
Thanks, David.
Maybe hand across to you, Ruslan, for Taylor's last question: When do you expect sales to go back into year-on-year growth?
You would have seen from our continued disclosure to the market what the trajectory of year-on-year performance is. And obviously, we're now in a period where all of that gets much, much easier to cycle. So we don't disclose forward-looking statements, but there's enough information out there for people to form their view on that, given our historical disclosure and the year-on-year trends we've been seeing.
Thanks. We'll now turn to some questions from James Wang, and I'll stay with you, Ruslan. The first question: Kogan First is increasing membership pricing from AUD 79.99-AUD 99.99 and now AUD 129.99 in April. What is some of the additional value add you're providing to customers compared to prior to the price increase?
How do you think about your program with respect to competitor programs, and are you worried about member attrition or cancellation?
Yeah, it's a good question. And you'll see that the program has been improving over time. So it started out as a program that initially just gave free shipping on a selected range of products. Then there was free express shipping. Then there's now up to 2% credit back our Kogan First customers get on purchases. There's double Qantas points. There's giveaways. There's exclusive deals. So we have progressively and progressively improved the program, and that's in line with the price rise. Now, even with the price rise, we think it's the best value loyalty program out there and the program that delivers the most amount of value to customers. So it's different to other programs out there as well.
This is a program focused on getting real big, chunky discounts on the products that help you live your best life while delivering remarkable value. So we're talking TVs, dishwashers, air fryers, washing machines, air conditioners, and so on, with real substantial savings to Kogan First members and a really valuable program in that regard. Now, in terms of performance, the numbers speak for itself. Yes, there's been price rises in the past, and the number of Kogan First subscribers has kept growing through that. The portion of our sales generated by Kogan First members, which we disclose in our presentation as well, really speaks volumes around the loyalty of these customers. There's 466,000 Kogan First members out of roughly around 3 million active customers. So they make up, what, less than 1/6 of our active customer base and over 60% of the sales.
So the purchase behaviour of customers speaks volumes around how valuable they find the program and the value they feel it delivers.
Thanks. I might just, sorry, two more questions from James. There will be some overlap in some of the questions, so I won't repeat questions from others that we've already covered. But how would you describe the health of the ecosystem in terms of the number of sellers, suppliers, brands, SKUs, and categories as gross transaction volume has declined?
Good question. It's incredibly healthy. The business is currently a far better business than it's been at any other point in history. We are the strongest as a business right now, offering more consumer choice than ever, more competition on our platform than ever. And it's really beautiful to be able to say that in an environment where our margins are growing.
So we're able to deliver better consumer value, more competition, more choice while growing the margins of our business through the mixed shift, through the focus on a platform-based business, and through the transformation that we've undergone as a business. So very healthy from that perspective, and we're very proud. We're still very early in that journey, but very proud of what the team is achieving.
Last question from James: What type of capacity increase does the new Christchurch DC represent? Does this signal a shift in trajectory for growth of the Mighty Ape?
The intention is to get a growth driver out of the Christchurch warehouse because it does enable faster shipping of bulky items into the South Island at a lower cost. So that's a better deal for consumers.
In terms of capacity increase, it's around a 20%-30% increase in overall warehousing capacity of Mighty Ape in New Zealand. Mighty Ape's brand in New Zealand is bigger than Kogan or Dick Smith in New Zealand. It's a much-loved brand of e-commerce with a long pedigree in New Zealand, and it's all about giving more value to New Zealand consumers under that brand. We also think it will open up some synergies in the fact that Kogan and Dick Smith store quite a bit of inventory in New Zealand at third-party logistics operations, which we will migrate into Mighty Ape facilities, causing a cost saving.
Thanks, David. Couple of questions from Owen Humphries. The first question: Would you consider January a typical trading month? Were there any abnormal benefits? And can you give us a sense of what the sales growth for January was?
So there's nothing atypical in January, as previously mentioned. There's no one-offs of any nature. Like all Januaries, there is some dispatch of Boxing Day sales that are made in December but dispatched in January that occurs every year. In terms of a top-line update, we haven't provided that for January. We're focusing on underlying performance in terms of our updates, given that all of the focus in the business is on returning the business to higher quality of revenue, higher quality of earnings. You can see that strategy starting to bear fruit in terms of the profitability that we're delivering. But as mentioned in the presentation that we've just made, the migration away from product-based sales to platform-based sales does have an impact on top-line.
Thank you.
Last question from Owen: Did Kogan First membership continue to grow in January, and what are your expectations for this membership base in, say, three years?
We'll continue to update the performance of Kogan First to the market as it progresses. We've got very big expectations for the program. You'd see the trajectory of how it's gone in the past and what it's delivered for the business. We believe that reaching 1 million Kogan First subscribers is something that's reasonable within what we can see in the market. We will continue on increasing the value that our customers get and that flywheel effect that it creates to be able to reach that. The importance of Kogan First can't be understated. There's a lot of things like, yes, you've got the high level: here's the number of subscribers, here's the membership fees, here's the benefits they get.
But there's a lot of business synergies that flow on from having this incredibly valuable loyalty program as well. Some of these include things like more efficient marketing. We know that those customers come back to our site more frequently, purchase more frequently. We need to spend less money on marketing on attracting those customers. It makes it easier to plan inventory, plan promotions, plan offerings, and various other synergies that flow through to the business and the efficiencies that it creates. So yeah, 1 million Kogan First customers in the next few years is something that we're striving for.
Thanks, Ruslan. We've got a few questions from Tim Piper. So I'll cover them now. The first one's probably not one that you can answer, given that you've already said you're not providing guidance.
But Tim asks: Expectations around the first half, second half gross sales, sorry, what are your expectations around first half, second half gross sales seasonality compared to last year, which was 55-45?
Yeah. Look at our historical seasonality of the business. That's market-driven. But in terms of forecasting sales, it's not something we do.
We already covered off his second question, which related to any commentary on top-line trading in January. His third question: Has private label gross margin now fully recovered?
Private label margins are back up to their pre-COVID levels and represent strong, normalized margins following a period where we were needing to discount to reduce significantly. Having said that, there are a number of things impacting private label margins at the moment, which we expect to improve overall margin in the coming periods.
The first is prices out of the warehouses are coming down, driven by international factors. So, for instance, American buyers out of Asia are drying up, making the Australian market more important for Asian manufacturers. International sea freight has come down significantly since peak COVID levels and returns are beneath pre-COVID levels. And we are now landing new ranges of product, which we didn't do for a significant period while we were unwinding stock. So obviously, when you are importing new ranges of product, the best margin you make is your first margin. When you start to land new fresh items, that's the time when you start to make full margin on product. So the fact that we're landing new product now, the fact that our inventory holding is among the cleanest it's ever been, does bode well for private label product margins in the coming period.
Thanks, David.
Tim's last question: Reflecting on the level of offline marketing spend in the first half, what are your expectations for this spend in the second half, FY24?
Offline marketing spend. What does that mean? That's Marketing. Offline marketing spend.
Marketing spend. Yeah. Not market. Marketing spend.
Ruslan, do you want to take that?
Yeah. So can you repeat the question? Sorry, Ron.
Yeah. So the question was: In light of the level of offline marketing spend in the first half, FY24, what are your expectations for this spend in the second half?
Yeah. One thing that's constant in our business when it comes to marketing is that it's always a test and learn. You'll see us at all stages experimenting with many things, taking the ones that work, doing more of it, taking the ones that don't work, and doing less of that or stopping it altogether.
So we don't make disclosure around exactly what type of marketing we plan to do in every channel in the future. The best way to look at the business is to just look at our overall marketing spend and the performance that it's driving and attempt to model that out. But yeah, we will always be changing our marketing mix and experimenting with whatever drives the best outcomes.
Great. Thanks. So that's Tim's questions. We'll move on to Johannes Faul. He's got a few questions here. Firstly, on the GP margin outlook, is the expected improvement due to sales split, or are there other drivers?
So if you model our gross profit margins since we listed as a company in 2016 and you remove the COVID period, what you would see is an ongoing increase in gross margin from 2016 to today.
And the increase in gross margin is not driven by fatter private label margins or product margins. It's driven by this ongoing evolution or transformation of the business from being a 100% 1P retail business into a part retail, part platform-based sales business, and now a majority platform-based sales business. And what that means is that in respect of 60%+ of our sales that we deliver on Kogan.com today, we're making commission-based revenue or seller fee-based revenue or advertising income revenue or subscription fee revenue in the form of Kogan First subscriptions. Most of that revenue is 100% gross margin. So as there's ongoing mix shift in the business towards platform-based sales, you do get an increase in overall gross margins because we are evolving to be essentially software-like business. It's software-like margins.
Thanks, David.
Just staying with you on significant items, are there any equity-based compensation expenses expected in the second half? And if so, how high will they be?
So I think there's AUD 2.1 million of equity-based compensation expenses in the half just delivered, which includes the current round for both Ruslan and myself and all other staff. And that is the normalized level of equity-based compensation running through the business. The prior levels of equity-based compensation, which stem from the 2020 AGM options grant, have been fully cycled out of the business. And there's no other significant new equity-based compensation that has been awarded or is intended to be awarded.
Thanks, David. Turning to Ruslan, and I'm not sure whether you can answer this question, but Johannes's last question relates to the increase in the Kogan First fee.
How does the new Kogan First fee relate to other subscription fees of competitors like Amazon and Catch?
We think the Kogan First loyalty program stands on its own. It's completely different to those couple that you mentioned in terms of what it delivers for customers. When it comes to delivering real big savings on the important items you buy for your house, whether it be TVs, air conditioners, dishwashers, dryers, beds, desks, tables, whatever it is, there's no other program that delivers real chunky savings on each transaction like the Kogan First program, as well as then offering things like double Qantas points, 2% credit back, free delivery, giveaways, and so on. So those couple that you mentioned are probably very good loyalty programs, and they do their thing with what they do.
If you're going to compare us to someone, we're probably more of a what would Costco look like if their focus wasn't FMCG but was rather big household goods. And look at the price of the Costco executive program, which also gives cashback to customers. So from what we've seen in the past, our customers know how much value they're getting, and we're going to keep delivering that value. And we think that it's priced very competitively in the market.
Thanks, Ruslan. We'll move now to questions from Wei-Weng Chen, and we'll stay on the topic of Kogan First. Kogan First is 25% of GP. How high could that percentage get?
We don't think about that as a KPI in the business in terms of proportion of the overall pie. That's an output, not an objective.
But if you look at Costco, which Ruslan just mentioned, virtually their entire profitability is driven by the revenues from their subscription membership program. And you can pretty much backcalculate their profitability by multiplying the number of members times the subscription fee of membership. That's an interesting model. We do look up to Costco as a business. So something to think about. But in terms of overall percentage of the pie, we do not have any objectives to grow any specific business division to a certain percentage of the overall percentage of the gross profit pie.
Thanks, David. Just staying on Kogan First, would an increase in churn and therefore decrease in subscriber numbers cause a rethink of price increases, or would you consider it a net win if you've got a 30% increase but see 5% reduction in subnumbers?
I don't follow the question, but it's also
so Ruslan, I think where Wei-Weng Chen is getting to is if as a result of the price increases—excuse me. If as a result of the price increases, you see revenue go up by 30% but there's also been a 5% reduction in subscribers, do you see that as a net win?
We want to grow the subscriber base of Kogan First while continuing to deliver incredible value to the customers and continue to increase the value. So we've spoken a lot on it. We've got a lot of the details of that within the presentation of our results. But yeah, it's an important program for us, and we're going to and we're going to keep growing subscriber numbers as one of the key goals in the business.
Thanks. Can you please speak to the increase in proportion of paid traffic?
The increased proportion of owned free traffic was called out as a positive in the past. Does this mean we should think of a reversion back to paid traffic as a negative?
I think that we've disclosed that number all along, and you can see how it moves. It is one of the strong areas of our business. It's a major focus of ours, the brand that we've built and the fact that the majority of our customers come to us using our owned media, so whether it be directly to our website or using our apps or using our EDMs. Based on the various performance of the business, we could move our marketing spend on period to period. Overall, the number is showing the same structure of the business, that the majority of it comes through our owned media.
We've typically been between 60%-70% of our traffic from owned and earned media, with the remainder coming from paid. It has fluctuated over the years. And for Wei-Weng Chen, I would encourage him to look at the percentage of traffic that's coming from owned and earned media for our peers because it's something that we disclose periodically every six months, but it's something that some others don't disclose. And it's one of the underlying drivers of our profitability, and it's one of the major things that puts our business apart from a lot of our peers, the fact that we have built that brand, we have built that audience, and it's something that's an asset of the business that enables us to not have to pay for every click to our website and therefore enables us to deliver a profit.
As Wei-Weng will appreciate, if you're paying for every click to your website, if you're paying for all of your traffic, it's very difficult, almost impossible, to deliver a profit as an online retailer in this country. So it's something that we're very proud of, and it's something that is one of the major drivers of the profitability and sustainability of the business.
Thanks, David. Just on that point around the major drivers for the profitability and sustainability of the business, Wei-Weng Chen also asked a question around second half to date trading performance. With profitability being very strong, he asked about the top-line growth, which we've talked about, but he wanted to also know whether he should think of the AUD 4.9 million as driven more by operational efficiencies than anything else.
Well, we did deliver 18% improvements in operational costs year on year or period on period in the half just delivered. We have said that there are some additional efficiencies that we intend to deliver over the coming period, things like further improving our warehousing efficiency, further improving some of our software expenses, further improving some of our variable costs. But the bulk of the heavy lifting in operating cost reduction has been delivered. The incremental benefits that we stand to deliver in terms of operating cost efficiencies won't be of the scale that we've previously delivered.
Last question from Wei-Weng Chen, just on margins. Can you speak to the headwinds or tailwinds for gross margin going forward? How should we think about it, and can they expand further from here, or is it about you defending margins from here?
They will expand further from here driven by ongoing mix shift to platform-based sales and also the positive momentum in private label margins that I've just discussed in terms of the reduction in international freight, better prices from the factory door, and the landing of new ranges of product which typically have higher margin as soon as they land than existing inventory which might have been in the warehouse for a period and is sold at lower margin.
Thanks, David. Some questions from Ed Woodgate. Can you please remind us of how the unit economics or KPIs differ for Kogan First versus regular users?
Yeah. So you'll see in the presentation we give an overall customer count. So how many active customers does the group have?
And then obviously, what is the number of Kogan First customers being 466,000 out of roughly around 3 million active customers, so representing about 1/6 of customers, and that they are responsible for over 60% of the gross sales. So it's a very important metric because it shows the value that those customers are getting out of their membership, and they shop a lot more often and derive a lot of value out of it. So that's the main metric KPI that we focus on. The purpose of the program is that the customers have to love it and use it a lot.
Also, in relation to the relative benefits you talk about for Kogan First versus others, how are you able to provide savings on key products relative to Amazon? Is it because you're being more aggressive on margins, or are there other factors involved?
Yeah.
So we disclose our margins. There's all information there for people to evaluate how aggressive on margin we are. But yes, we are a value-based retailer that's built a very efficient business. There's lots and lots of benefits in the Kogan First program, and some of the chunkiest savings and the biggest discounts come from our exclusive brands. That's where we control the entire supply chain from start to finish. You can expect to see a discount of AUD 50 or even AUD 100 sometimes on a TV or a washing machine or a dryer, air conditioner, some of these big items that people purchase to live their best lives. And they're the items where customers are getting huge, huge value. And we're able to deliver it because we control the entire supply chain. There's no middlemen involved. And that's been our bread and butter for 18 years.
Thanks, Ruslan.
There are no further questions that have been submitted. So, I might, given it's now 10:55 A.M., and we've almost hit the end of the hour, maybe I'll hand back to you, Ruslan, just for a wrap-up. I mean, it was a very strong first half. So maybe if we can close out the webinar with a wrap-up from you, that would be great.
Now, I wouldn't say very strong first half, but I'd say we're starting to head in the right direction. It's obviously been a challenging period for the business over the last couple of years. We learned a very important lesson through COVID because the first half of COVID, we outplayed everyone. We had an incredible half and saw some incredible performance in that half.
Then it backfired on us because we had too much inventory, and we saw a very challenging half of COVID after that. The lesson we learned as a business is that if you try and predict what the macro environment's going to do, you're going to get it wrong 50% of the time. We then started to transform and optimize the business where now the majority of our sales are from software-like platform-based sales. We're very happy with how that transformation is going. We're starting to see some green shoots come from that transformation, and we're starting to see the business strategy starting to pay dividends. We think that the business is currently as strong as it's ever been, but we still have a lot of work ahead of us.
Exciting times ahead, Ruslan and David.
Thank you very much for your time this morning. If anyone has any other questions, please reach out to the relations@kogan.com email. Thank you very much. Have a great day, everybody. Thank you for joining us on this webinar today.
Thanks all.