eBay Inc. (EBAY) CEO Jamie Iannone Presents at Goldman Sachs Annual Global Retailing Conference (Transcript)


eBay Inc. (NASDAQ:EBAY) Goldman Sachs Annual Global Retailing Conference September 10, 2020 4:10 PM ET

Company Participants

Jamie Iannone – Chief Executive Officer

Conference Call Participants

Heath Terry – Goldman Sachs

Heath Terry

Great. Thank you all for joining us. My name is Heath Terry. I cover the Internet sector for Goldman Sachs. Really excited to have with us today the team from eBay, Jamie Iannone the CEO of eBay; and Joe Billante, Head of Investor Relations.

Jamie thanks so much for taking the time to be with us. I know this is an incredibly time for — incredibly busy time for eBay. So thank you. Jamie I think you’re on mute.

Jamie Iannone

There we go. Thanks for having me and I’m excited to be here.

Question-and-Answer Session

Q – Heath Terry

Yeah. No, thank you. So Jamie, obviously, everyone knows eBay everybody here that’s watching. But maybe just to set the stage what drew you to the opportunity to lead the company?

Jamie Iannone

Yeah. I spent eight years at eBay earlier in my career. And all my favorite e-commerce purchases were on eBay. The company has such a special purpose and mission and values. And the opportunity to be away from eBay and spend 20 years with different leading omni-channel retailers, really thought that I could come back and help put eBay in the right direction. I was excited by the progress that have been made in a lot of areas. But I also thought there were areas that I thought eBay wasn’t headed in the right direction and I thought I could come back and really get us back to the core of what’s special. But since I’ve been back it’s been really true. The passion of the employees, the purpose and the mission and the values, what we’re able to do for customers during this COVID time period and the fact that we create economic opportunity for all. It was just a dream job to come lead eBay.

Heath Terry

Yeah. What would you say is the most meaningful thing that you have learned in the time that you have been back that an outsider wouldn’t necessarily know about the company?

Jamie Iannone

Yeah, a couple. One I’d say is I’ve been really pleased with how passionate the community is. eBay has been really unique and that it has amazing organic traffic, longstanding customer relationships especially with its sellers. There’s amazing cross-border trade business. And to watch and see how that’s evolved since I’ve been gone has been great to see and how the purpose and the mission and the values of the company still ring true has been great.

I’d say the really pleasant thing for me is to see the progress that we have on managed payments and to see where that stands. I think that’s going to be a real game changer for the business. So really excited to come back in and see the progress and how sellers and buyers feel about it.

Heath Terry

Yeah. So a lot to kind of dig into there, but just to go back to the beginning of that. When you were considering the opportunity before joining what was your vision for eBay? And to the extent that no plan survives first contact how has that evolved since you’ve gotten into the company?

Jamie Iannone

Well, when I first started thinking about joining, it was pre-COVID. So, obviously, a lot has changed since that time period but the long-term thesis that I thought coming in is still true. And that’s that I think there’s an opportunity for a tech-led reimagination of eBay and specifically focused on three areas. One is defending the core and being the best absolute marketplace for buyers and sellers. And that boils down to two areas. One is really focusing on our vertical experiences and looking end-to-end at every single vertical that we have on the site and saying what creates the best experience for buyers and sellers. And I can talk later about one of the things we just launched in that area. And the second key component is our consumer selling and really going after consumer selling. So those are big opportunities to defend our core.

The second big bucket for us is really being the seller platform of choice. Really making sure that sellers want to grow their business with us leaning into things like our storage business and being the — that absolute platform and best partner for our sellers.

And then third is on buyers, not just focusing on acquiring buyers, but how do we turn buyers into longstanding enthusiasts, building trusted relationships with them and really helping them grow and develop on the platform. So we think with those three key tenets of this tech-led reimagination, lots of opportunity. Obviously there’s a big TAM in going after our core business.

Heath Terry

Sure. I think that TAM is obviously one of the things that everybody focuses on. And, obviously, the last few months have changed a lot. But prior to March eBay was a company that was struggling to grow in a sector that was growing. That TAM that you talked about what — how important is growth to you and growing with e-commerce to your vision for eBay? And what’s your strategy for growth if that’s a big part of it?

Jamie Iannone

Yeah. So a couple of things. One is we’re going to be pivoting from a real strong focus on new in season to a focus on non-new in season. We think that’s a $500 billion market with significant growth. And if you look at the categories on eBay, we’re low single-digits, high double-digits penetration. And so there’s lots of opportunity and lots of growth. It’s where eBay has a right to play and a right to win. We have great longstanding seller relationships. We have buyer enthusiasts on the platform and a really compelling value proposition with a lot of growth. So that refocusing back to the core I think is part of driving that growth.

The second key piece of that is really going after the consumer seller and bringing unique inventory on the platform. That obviously helps attract buyers. But when a seller — sorry, when a buyer sells on the platform Heath, they become twice as valuable as a buyer on the platform. So it has a certain flywheel effect on the business.

We’ll still offer new non in-season products. You’ll still be able to buy them on the site. But our focus will be, how do we go after used, vintage and minus one that bucket of opportunity that’s really unique to eBay where we see a significant TAM and growth potential.

Heath Terry

No that certainly makes sense. When you look, sort of, at this COVID environment that we’re in how does it and the eventual return to whatever normal is going to look like impact that growth strategy?

Jamie Iannone

Yes. I would say a couple of things. One is that, we acquired 8 million new buyers in Q2 and that’s more than the last six quarters combined. And so that’s an opportunity for us to really go after and lean into those buyers. So we’ve been doing things with our marketing like leaning into app downloads. The majority of our buying actually happens via the app. We’ve made significant progress in our app. We launched a new dark mode which people have thought was fantastic and really driving things like how do we recover from a bad buyer experience, how do we get buyers to buy in the second category. So leaning into those.

What we saw over the course of the quarter was buyer started buying the things they needed for this pandemic. So the — face masks, hand sanitizer and that type of thing. Then they started buying things that they need to shelter in place at home. So home fitness equipment, office equipment those types of purchases. But then we saw it really across the board — really buying in just about every category.

And an example was I was at the dentist two weeks ago and he said I’ve been using eBay because this time has given me a chance to restore my 1988 truck and I bought a new mud flap for the truck. And now eBay is sending me all these other parts that are interesting to restore my truck. And I’ve just found this newfound passion. And so we’ve seen really an explosion across the board and we’ve been leaning in with our marketing, with various consumer-selling promotions things like the app downloads to really help drive that retention across the business.

Heath Terry

Yes. So that touches on something else that I wanted to ask about. I think it’s something investors always kind of come to us with — is this question of like what the profile of an eBay buyer is, and obviously now you’ve got 8 million new ones to be able to look at. But what verticals do they buy? What does the frequency look like, the price point — how do they differ from maybe the average e-commerce buyer that most people might have in mind?

Jamie Iannone

Yeah, well with 182 million buyers, I would say, it’s no one-size-fits-all.

Heath Terry

Yeah.

Jamie Iannone

We have every type of buyer from someone who’s an infrequent buyer to a real enthusiast to people who send me e-mails because they wake-up every morning with a cup of coffee and eBay and that’s how they start their day. So I’d say a couple of things. One is that, eBay has amazing organic traffic. So 80% of the buyers that we get on the site come to us directly just typing on ebay.com. And the others come via either free or paid channels pretty evenly. So a huge amount of our business is actually just people that are in love with the brand that are visiting us.

And in terms of buyers what we see and what we focus on is what are the things that we know drive incremental retention and then to ultimately become real enthusiasts on the platforms. And there’s a couple of things that really stand out. One is getting them to buy in multiple categories across the site really helps. And so we know if we acquire a buyer in this category here’s the best next category to get them to purchase in.

And what you’re going to see from us is using new technologies and AI to get even better at that level of personalization. We also see that buyers who sell become twice as valuable as buyers. So you’ll see a lot of times us promoting the opportunity to sell not only for the inventory, but also just because having played both sides of the marketplace they become a more valuable buyer to us.

And what we did in the quarter is really lean in to performance marketing in the channels we have available to us. It was a really great time during the COVID time period because our unique distribution model meant that we had inventory all over the globe and no single point of failure. And so we were able to really be there for our buyers. Our sellers really stepped up to make sure that buyers could get what they needed over the course of the quarter.

And then finally I’d just say that buyers who get the app who are getting involved in watch or safe searches and engage more end up being higher lifetime value buyers. So a lot of the marketing that we’re focused on is how do we move people up those cohort curves and really drive their retention. But some of those are the key factors that drive buyers on the platform.

Heath Terry

Yes. No, that all makes sense. To look at the other side of it, when you look at the sellers on the platform obviously, I would imagine the answer is similar. You’ve got such a broad base from individual sellers to really higher profile large volume sellers. But curious sort of how you think about that mix and how that has evolved over the course of the pandemic and who you’re really kind of targeting as you look to grow the business?

Jamie Iannone

Yes. So look one of the reasons I came back to eBay Heath was our sellers, listening to their stories of how they got started on the platform and business. I was talking to a seller out of the U.K. who said, during the last financial crisis his family would take plants to garden shows. And they — garden shows all kind of folded up. And so they’re like what are we going to do? And he started selling plants on eBay. Now he has a huge business in the U.K. selling plants through eBay and that’s the family business.

And so on the B2C side, it’s stories all over the board of stories like that of people that have built a business on eBay or have taken a business that was off-line and moved it online with eBay. And one of the great things for our sellers is, we give them access to 182 million buyers, so you can come on and immediately have a velocity.

With the new Promoted Listings product that we launched it’s even easier now to get exposure because you can use that to get an immediate exposure. But for sellers, we’ve always been about economic opportunity for all. So a small seller could sell right alongside a large seller.

The other thing I’d say though that’s been a big shift for us since I’ve been back is really getting us focused on our acquisition efforts for sellers on that consumer seller or that C2C business. I think over the years hasn’t been as an important of a priority and we’re really making that a key priority.

One is, making the selling and listing flow a whole lot easier. So as you register and as you sell how do we make that as simple as possible? And now with the integration of managed payments you don’t actually have to go set up a separate account to get paid. So that’s a real benefit for our sellers as well is that, just one simple process.

But a C2C seller because they’re not trying to manage a P&L they generally are just going for price realization, we had the opportunity to get really interesting inventory that we otherwise wouldn’t have on the platform especially as we focus on non-new in-season.

And then second as I talked about a couple of times they just become much more valuable in the ecosystem overall. You think about an opportunity like managed payments and when I sell on the platform now I can immediately reinvest those proceeds back into buying. It’s all really seamless. And that’s really one of the benefits of kind of making this whole process easier and eliminating some of the friction.

Heath Terry

Yes. And so for those sellers besides obviously the typical seller these days has a lot of options in front of them a growing list of options even. Besides giving them access to hundreds of billions of dollars of buyer demand how does eBay differentiate itself with sellers? What’s important to them that you fulfill?

Jamie Iannone

Yes. So I’d say a couple of things. One is you saw us launch campaigns over this time of the global pandemic in all of our major markets. We ran like an up and running campaign in the U.S. that was really focused on these people — these sellers that are challenged off-line, how to bring them online and get them up and running?

So we had learning. We had helped to bring them on to the platform. We gave them a basic store for free as part of the program and we invested over $100 million globally in creating this opportunity for sellers to come on to eBay.

But the second thing we’re really focused on is, how do we help them with their economics and driving velocity? So we have a pretty simple economic model. We have obviously our base take rate. We have Promoted Listings now. It’s an optional opportunity to drive more velocity and to get more exposure.

And then third is now with managed payments, it’s kind of one integrated take rate fee. And we manage all that together. And for the most part our sellers are actually going to see, lower fees on the platform by bringing this all together. So it not only gives us a huge financial benefit to do payments, but it’s great for our sellers as well.

And then over time, we’re going to — continuing to build new tools and capabilities to drive more velocity. So as an example, we just launched eBay stores into mobile and so an opportunity to give them more exposure onto their store platform and drive growth there. We do a lot of things to take their listings and put them out there on the worldwide web, to drive traffic in, all part of, kind of the take rate and the things that we do.

So really being that I talked upfront about being the seller partner of choice, it’s really about all the tools and capabilities we’re putting in place to drive a lot of traffic, to give them the tools on the platform to be really successful. And grow their business just like that plant seller did on eBay.

Heath Terry

Sure. Sure. So obviously, you’ve touched on payments a couple of times here. And it’s clearly a huge priority for the company. One, that’s probably gotten bigger, is GMV growth has accelerated. You inherited the company’s guidance for $2 billion in revenue and $500 million in EBITDA, from bringing payments in-house. I guess, how do you feel about the payments opportunity generally and those financial goals more specifically?

Jamie Iannone

Really excited. So I inherited that goal, but I’m really excited by it, because I think it’s such a big opportunity for us. So, first off we’re on track for the goal that we talked about, of $2 billion in revenue, and $500 million in operating income in 2022. So it’s great kind of financially for the business. But I think even more importantly is the, friction that it takes out of the experience on the site. And what that means for us for the long-term.

So thinking about as a buyer, I had to go up and set up a separate account. And manage kind of two different areas to see what was going on with my eBay transactions. Now that’s all going to be in one area, plus a buyer is going to have more choice of payment types. They’ll of course continue to have PayPal. PayPal is going to continue to be a key partner of ours. But they’ll have Google Pay, Apple Pa, obviously tons of other instruments with credit card debit et cetera.

And then from the selling side, the ability to manage their whole business in one place is a game changer. In fact as you know, we’ve had sellers on the platform for a while and the sellers that have been on payments, have given us really great feedback. And for sellers on eBay change is not always a good thing.

And so to hear the positive feedback coming in has been really, really great for us. And what they’re saying is it’s easier to manage their overall business. And they like the seamlessness of a single take rate. And so, — and frankly a lot of them — the majority of them are actually saving fees overall. So that’s been fantastic.

But the last thing I’d say Heath is that, it gives us the opportunity to do more. When you think about now having an integrated wallet and an integrated payments experience, there’s more seller services that we can offer to open up more capabilities, for our sellers by managing those payments.

And a small example of that is, using proceeds that you sell to buy or doing fee netting on the platform or other services that we make available to help them grow their business and run their business, because that’s now managed in a single place. So really excited by the traction, really excited by the early feedback from buyers and the sellers and excited for what it means for our future as well.

Heath Terry

Understandable. Promoted Listings similarly has been sized as a $1 billion opportunity, I think at least for you. One that other, marketplaces have obviously built into multibillion-dollar businesses. How do you view asking sellers to pay more to promote their listings? And how big of an opportunity is that for eBay, as you think more broadly about advertising on the platform?

Jamie Iannone

Yeah. So we think of it as sellers have the option to do it. And they can use it to drive velocity. So we see it as another tool and capability to provide to them, to really manage their business how they want to. And I think what’s been great to see the launch with Promoted Listings and where it stands is that, I think we do all of that with really enhancing and not degrading the buyer experience.

And I think we found the right balance of how to do that. So we’ve committed to $800 million for the year in that business. It obviously moves and grows with volume. In Q2, it was over $200 million. So a significant opportunity for us, but we also believe that there is more potential. So that we believe we can drive more adoption, more conversion and each quarter we’re launching new tools and capabilities that make it easier for our sellers to use things like Promoted Listings. In fact, we’re trying to give them more data in general. So we launched some new capabilities this past quarter in Terapeak that gives them real-time pricing information. So they’re able to use things like Promoted Listings, combined with these new tools that we’re giving in Seller Hub to just manage their business more effectively, drive velocity where they want to drive to. And we think there’s still a lot of opportunity left in the Promoted Listings business.

Heath Terry

Yeah. Understandable. You’ve talked a couple of times about some of the technology priorities that you’ve got. You mentioned, AI is one of them. Obviously, technology investment has been a priority at varying levels for eBay for a long time. How do you size the right level of investment in technology for eBay? Is there a level that you should be pushing to where that technology investment can really drive growth for you and become profitable in the near term?

Jamie Iannone

We’re looking at it in three different ways. One is our – just enabling our core technology to allow us to innovate faster. So that’s getting off of legacy technology. That’s been well underway since before I arrived. But we actually use some of the tailwinds that we’ve had from this year to actually accelerate that and move faster of getting off of some of the legacy technology to just allow us to innovate faster, and I’m really happy with the progress there.

The second big level of investment or area is the opportunity to extend the things that are working. So payments is a great example. It’s been a two-year journey of investing in this technology, but it’s right on track with what we expect it to be. And it’s all next-gen really amazing technology as is our Promoted Listings technology. So investing in these areas that create kind of new business opportunities for us is the second.

And then the third one is really one of those next-gen capabilities that can really change the game. And sometimes, they’re small things, like dark mode was a small investment, but the Gen Z community actually loves it. And the percentage of people that are using it has been pretty significant. Another one has been QR codes, a very small technology investment, but it makes the local pickup experience on eBay much easier, because the buyer and seller can transact in the background pretty seamlessly.

Using computer vision for things like image cleanup, but now in a flash you can actually have a much better picture on the site. So you’re going to see us investing more in next-gen capabilities, and those are just tiny examples, but more in next-gen capabilities to really delight the customer.

Another big technology area of investment for us Heath is going to be on the marketing tech stack. So I think that, we have the opportunity to really use these next-gen technologies to build a much more customized experience with our customers. The majority of our shopping actually happens on the app, and so our ability to do really unique experiences really tailored experiences, I think is another key opportunity for us. But look, we see this as a multi-year journey, but one where we’re going to have wins along the way to really help drive the experience in a different way.

Heath Terry

Yeah. Jamie you mentioned that marketing tech stack. I mean, obviously you come from a background where you spend a lot of time with membership organizations and driving incremental revenue streams for really big businesses already. When you look at the economics of selling on eBay, how do you feel about the take rate that eBay earns for its role? What do you think about the opportunities to sort of create incremental revenue streams on top of the platform?

Jamie Iannone

Yeah. So I think Promoted Listings is a good example of an opportunity to create a new revenue stream. Obviously, payments is a new opportunity for us. And off of that, I think we can build additional services. But I think look our goal is to have the best economics for a – for our seller overall. And we think we do that by driving a lot of demand and driving a lot of growth. And then these other tools and third-party services, allow us to modify the take rate as appropriate.

Let me just give you an example of where we’re really enhancing the experience in a different way. It was something that we announced this week, which is how we’re changing the experience in our watches category. So if you look at watches, obviously, really important for a high selling price item to have more trust and more authentication built into the platform.

So what we launched is that for every watch over $2,000 we’re going to be authenticating that through a third-party intermediary, before it goes to the buyer. And then for everything over $10,000 we’re actually be doing that via an escrow service in partnership with Escrow.com.

In addition, we’re launching a new product in discovery and browse experience in watches to really help that enthusiast. And when I talk about turning buyers into enthusiasts, watches is an example category of where that happens in a big way on the platform. And so, when you look at it there, it’s a big win for buyers, because they know that they’re getting the product that was in the description. It’s been authenticated and that allows a higher selling price on the platform and more trust and more value that eBay is providing as part of that process.

At the same time, it actually protects the seller, because we actually intermediate the return as well, to make sure that the product is not coming back as an empty box or something, where there’s going to be a dispute or claim. And then, with the new product experience, really driven for watches, it’s just creating a much better experience of shopping.

And so, when I talked about that first priority for us of defending our core and going after real verticals where there’s an opportunity, think of that as an example of what you’re going to see from eBay over the coming years, which is really looking and being customer-obsessed with the end-to-end experience and saying, what do we build to make sure that we’re creating the best experience.

And these are — don’t think of these as like different experiences, like, we’re not going to build 30 different eBay Motors. These are horizontal capabilities that we’re building across the platform that allow us to compete better in verticals, especially as we focus on that non-new in-season and that big TAM that we’re going after. But I think, it’s a good example of the changes we’re seeing and the customer obsession that we’re focusing the team on.

Heath Terry

Yes. No, that makes sense. You struck a very big deal in Classifieds right after joining — maybe not the one everybody was expecting with eBay still maintaining a very large equity stake in the business in the Classifieds business. Why was that the right move for eBay? And what are your future plans in Classifieds with that stake look like?

Jamie Iannone

Yes. So, look, first with the creation of this new business Adevinta, we’re really excited, because it creates the number one online classifieds business in the world. When you look at the assets that eBay had in its Classifieds business, plus Adevinta, they’re really complementary when you think about geographies, when you think about the power of real estate and motors and key verticals in the Classifieds business, we see that bringing them together, creates a lot of opportunity. Not only the synergies that Adevinta has talked about on the cost side, but also just on the revenue side and potential of the new combined entity.

We think it’s great for shareholders, because it created some short-term cash for the business, as well as gives us option value in the long-term for that business. When you look at the change in price of the Adevinta stock price, I think, you’ll see that it represents the industrial logic in the deal and why we think it makes sense.

The other key piece for the organization at eBay is it allows us to focus our day-to-day in our core marketplace business. So, now, with StubHub sold off and the Adevinta deal, it really allows us to focus on this core vision and this core strategy. When you think about all of our technology resources and all of the management time being focused on marketplaces where we see there’s a lot of enormous untapped potential.

Heath Terry

Yes. Now, it’s going to be fascinating to watch. I mean, obviously, most of the last few years for eBay have been focused on divestitures, is your path to creating a better eBay, what role will M&A have?

Jamie Iannone

Yes. As we look forward to the business, we plan to be disciplined capital allocators, just like we have been. So, balancing growth and balancing margin with the commitments that we’ve made there. As we think about M&A, we’ll look in — we’re open to opportunistically looking at M&A that makes sense with this strategy.

Obviously, it would have to be asset-light and consistent with our model. But we’ll continue to look at that. But we’re committed to being disciplined capital allocators. We’re committed to our dividend. We believe in the share buybacks. We still think the stock is undervalued. And we’ll be opportunistic to look at opportunities in M&A.

Heath Terry

Yes. One of the parts of e-commerce, obviously, that’s been under kind of a microscope, especially over the last few weeks or few months now, has been fulfillment, as we’ve seen, particularly, the third-party networks stretched beyond their limit. What role do you see fulfillment playing in eBay’s future, especially as platforms like FedEx and UPS talk about surcharges during the holiday season? What do you need to do to be able to support your buyers and sellers in that kind of environment?

Jamie Iannone

Yes. So, look, we spend a lot of time with our sellers. And some of my favorite time is getting out there and meeting with them. And in this COVID world, we’ve been doing it all virtually, but just as impactful. And what they’re telling us is that, they don’t really need us to run their warehouses, and for eBay to build up a huge warehouse network. What they’re really focused on is, how do we help them with their overall logistics and transportation. How do we integrate it better into the platform, give more confirmation to buyers about the arrival of the items, and just make it overall easier for them.

So, this past week or two, we announced a deal with UPS, where we’re giving them sellers. We’re passing on incredible savings to our sellers of being able to work with UPS on the platform, where we’ve integrated the whole process, integrated shipping labels, integrated tracking. And so, now our sellers in the U.S. have multiple choices between USPS and FedEx and UPS, all at very attractive rates. And that’s the type of innovation that they want to see from us is how to help that overall process better, how to give them tools and capabilities to make logistics easier.

Now, there are certain cases where we do invest in a partnership or a relationship to help drive fulfillment for our sellers. A lot of that has to do with cross-border trade business where forward deploying the inventory just makes the whole process much more seamless, provides a lot more certainty and confirmation and tracking. And so, those are cases where we have invested in our partnerships with WINIT and SpeedPAK and other ones that we’re doing to help drive that business where it is really critical. But on a purely domestic basis, that’s been less of a need for our sellers.

Heath Terry

Great. No, really, really appreciate that. Obviously, one area that I think is worth just touching on is how you view the competitive landscape for eBay. I mean, in an e-commerce environment that’s increasingly getting as crowded as we see globally, where does eBay fit?

Jamie Iannone

Yeah. So, there’s a couple of things, I’d say is. One is I think over the past few years we’ve seen the growth of niche competitors in specific verticals. And I think what that’s showing us is just how much TAM and opportunity is out there for us to go grab and be part of eBay. And so, a big part of why I talked about our vertical strategy and really building these great end-to-end experiences is really making sure that eBay is the number one destination for all of those categories across the web.

The second thing I’d say is that part of our focus for our non-new in-season is because we really feel like there’s a unique right to win in that category. And it’s just such a big TAM where there’s enormous potential, and we’re still such small market share that we see a lot of growth left in that opportunity. And it’s unique to eBay because of the unique C2C selling components that we have on the platform, because of the enthusiast nature of the platform, frankly because of the flexibility of the formats as an example.

When I was — when I left the company, obviously fixed price have grown a lot. But now, we have — best offer is a very heavily used feature across the site. We’ve introduced seller-initiated offers, so sellers are actually going out to buyers and making offers and we continue to build new capabilities into that type of format. That’s doing $1 billion already of GMV just in this format. So, we see this really unique opportunity in the core categories and these verticals that are really at the core of eBay with this big TAM, and that’s where we’re focused.

I think the competition makes us stronger. We’ve been really obsessed with the customer, and all the key pieces of the journey along the way taking friction out of the business. And that’s why we’re launching the things like managed payments and the investment in the tech-led reimagination is really to make sure that they have the absolute best experience on eBay.

Heath Terry

Yes. One market in particular, where eBay has invested heavily over the years is Korea, where competition continues to intensify with just so much venture capital going into the companies there. How would you describe the state of things in Korea? And what’s your strategy for eBay there?

Jamie Iannone

Yes. Korea is obviously a competitive market and it’s slightly different where they have a strong 1P business there in Korea. And what I would say is that it has been competitive. You see, competitors investing a lot to drive growth with what we believe is probably not a profitable thing for them to do. And we run two profitable businesses in Korea with Gmarket and IAC.

So we’re really focused on the things that we do really well there, driving the platform both the 1P and the 3P business in Korea. Also we have some different techniques for loyalty there. We have a Smile Club, which drives loyalty. We get free shipping. They get dedicated customer service. And so we’re really leaning into our playbook in that market and doing the right things to drive growth there.

Heath Terry

Yes. So we have gotten a few questions from investors in over the webcast. I think you’ve answered many of them. But one that I thought was worth asking, what lessons and successes from running SamsClub.com can you apply to eBay? And in particular, is there anything from the physical world innovations like self-checkout or in-store pickup that might be applicable to your vision for eBay?

Jamie Iannone

Yes. When I look at the experiences there, the first thing I’ll touch on is I feel like I’ve led a tech-led reimagination a couple of times in my career and it’s been really successful. So the first thing I’d say is that, if we look at the things that we did there, where the membership process took 20 minutes to sign up and we said, how do we think about this in a completely different way and get it to under two minutes to do. We’re going to make a significant transformation and obviously the metrics kind of followed from a membership standpoint.

When I look at eBay, I feel like we have the same type of opportunity here. So if I look at the existing selling process today Heath, I think it’s just too cumbersome. And we have the opportunity to not try to make it incrementally better but how do we use computer vision and next-gen technologies and AI to really simplify that down to a 30-second selling experience on the site.

And you see the steps we’re making, like managed payments is a key part of trying to get that to be a 30-second or two-minute listing flow, because we can really shrink down the information that we need and use technology to get there. And with managed payments, I don’t have to go set up a separate account to do that.

I think as you look at apps like Scan & Go and we say, how do we put more capabilities in the hands of our – in that case in the hands of customers. That’s how I think about being the seller platform of choice. How do we take our tools and capabilities, give more data to our sellers.

You and I talked at the beginning of this conversation about marketing and the opportunity that we have there. I think we have the opportunity to involve our sellers in creating next-gen marketing capabilities for us on the platform. And that’s why I’m excited by investing our dollars in technology there is that those can be really game changing. And that’s what I’ve seen in the physical and the retail world and I think the same thing we can bring over to us at eBay.

The last thing I’d say is just I’m trying to bring a real customer obsession to the organization. Every interaction that we have with sellers, every interaction that we have with buyers, how do we make sure that we’re really fulfilling their ultimate needs in the platform, how do we give them the best and simplest and most seamless experience, that’s our focus.

Heath Terry

Great, Jamie. Thanks so much for taking the time to join us. Really can’t wait to see how all of this works out for you and the team at eBay. Joe, as well, thanks for joining us and we certainly look forward to staying in touch with you on all this.

Jamie Iannone

Thanks, Heath. Thanks for having us.





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Ulta Beauty, Inc. (ULTA) CEO Mary Dillon Presents at Goldman Sachs 27th Annual Global Retailing Conference (Transcript)


Ulta Beauty, Inc (NASDAQ:ULTA) Goldman Sachs 27th Annual Global Retailing Conference September 10, 2020 4:10 PM ET

Company Participants

Mary Dillon – CEO

Dave Kimbell – President

Scott Settersten – CFO

Conference Call Participants

Kate McShane – Goldman Sachs

Kate McShane

Good afternoon, everyone. Thank you for joining us for the last session of the day. It’s Ulta Beauty and it’s a perfect time for this presentation. We’re very happy to be hosting the management team from Ulta at our fireside chat. Ulta is the largest U.S. beauty retailer offering more than 25,000 products across cosmetics, fragrance, skin care products, hair care products and salon services. They operate over 1,200 stores across the U.S. and generate a revenue of around $7 billion.

Today, we’re very happy to have Mary Dillon, who is Chief Executive Officer of Ulta and has been in the leadership role since June 2013. We also have with us Scott Settersten, Chief Financial Officer, Treasurer and Assistant Secretary at Ulta. And I also welcome Dave Kimbell, President at Ulta Beauty. He was previously Chief Merchandising and Marketing Officer. Mary, Scott and Dave, thank you so much for joining us today.

Mary, I’ll turn it over to you for some prepared comments.

Mary Dillon

Thank you, Kate. It’s great to be here. Last but not least, here we go, Ulta Beauty. I just wanted to just make a couple of comments before we start, and then obviously open it up to the Q&A. I guess just to give you an overview — everybody, an overview of how we’re looking at things today. So obviously we just reported our second quarter results recently, and frankly, we’re pretty proud of the progress that we’re making.

Total comp sales were down 27% for the quarter. The trend did improve significantly as we reopened stores. And as we said on the earnings call, sales trends continue to improve, in fact, in August the first two weeks — three weeks of August comps were down in the mid-single-digit range. So, we’re not providing a more of a business update today, but I just want to reiterate, we’re encouraged by those trends and the positive demand signals that we’ve been seeing from our guests.

That said, we do remain, I guess I’d say cautious about demand for the second half as a lot of things to navigate a lot of uncertainties. So whether it’s virus resurgence, economic uncertainty, ongoing other social political issues that are happening in the country, we think that means there’s some uncertainty about demand. So we’re sort of planning for that. I’d say in addition, we also plan to continue to refine our promotional strategies. I talked about this a bit on our call. So we’re using this opportunity to look at eliminating or reducing promotions that have a lower return, but increase our focus on more targeted and strategic events. So our goal then and that is to improve overall profitability and just ensure that we’re well-positioned for growth in 2021.

But as our store fleets are opening, our trends are improving, we’ve certainly been also putting our attention on how do we strengthen our business in this new normal and setting a foundation for profitable growth in ’21 and beyond. And so there’s 5 strategic priorities I talked about on the call, but I’ll reiterate at a high level. But I think of them as sort of an evolution of strategic priorities we already have, but a holding in, given the new context that we’re operating in with the COVID situation. So first of all, obviously, it’s going to be an increasingly omnichannel world. And so we’re working on strategies to make sure that we win as an omnichannel retailer. Secondly, experience and discovery, critical to the beauty category. We already were reimagining, and of course, now reimagining that more aggressively in this environment. Third, accelerating our efforts in the fastest-growing categories like skin care, hair care and wellness. Fourth, leveraging insights from our Ultamate Rewards Program to deepen our guest engagement, to drive increased spend per member and drive new guests into the program. And in fitness, we continue to adjust to new cost pressures like channel mix and PPE. We’re looking at how we can drive holistic cost optimization but also continue to invest in capabilities and opportunities that are required for us to drive future success.

So I would just say at a high level, near-term environment, a little dynamic, a little fluid, right? But I’m really confident that our team will continue to navigate the challenges successfully. And I should reiterate, we also feel very confident about longer term the growth opportunity for the beauty category and for Ulta Beauty. We have a strongly differentiated business model, and we’re actively investing to expand our brand leadership, and I remain really confident that we’re going to be able to continue to innovate and invest in the ways that will drive market share growth and drive profitable growth.

So with that, Kate, I’ll turn it over to you for questions. Thank you.

Question-and-Answer Session

Q – Kate McShane

Great. Thanks so much, Mary. The first question, Mary, I’ll direct your way. You touched upon it briefly in your prepared comments, but we wondered if you could discuss a little bit more your same-store sales expectations for the back half. Just given that Q3 is starting at — or running at negative mid-single-digits, do you think there’s any conservatism built in your expectations for the double-digit comp declines that you’ve guided for the back half of the year?

Mary Dillon

Well, we’ll see, I guess. I mean, we’re trying to call it as best we can. As I mentioned, I think being cautious probably makes sense right now. As I said on the earnings call, feel positive. We do feel positive about the signals that we’re seeing from guests, particularly in July and August. Beauty enthusiasts have remained engaged in the category. And as more stores reopen, we’re seeing people feel more comfortable returning to a retail environment. And now that all of our stores, mostly all of our stores are open, we’re going back to more normal operational processes like merchandise resets assortments, newness introductions. August was our member appreciation month, which is a marketing event that was designed to bring new members, bring — welcome our members back.

But despite that, I’d say we think it’s going to take time to fully return to pre-COVID levels given just the likely disruptions in everyday life. And so, it’s not any signs of concern that — we don’t see any signs that are concerning us in our business. It’s more about how does anybody predict in a pandemic historic time what the macroeconomic environment will be and what impact that has on consumer behavior.

So, yes, I’d also say that the signals of demand are strong. We like that. But you certainly could see, we saw week-to-week disruptions or market-to-market disruption where there are flare-ups in the virus and whatnot. So I think it’s smart to just say, okay, be measured and somewhat cautious about it because things are a little bit unpredictable. In addition, the holiday season is going to be quite different. And so we know that — for example, we’re not going to be open on Thanksgiving Day. We know that there’s not going to be long lines of people waiting — coming into stores or outside of stores, right? So we have to think about how do we set up holiday differently as well. I’m confident that we’ve got the right strategies in place to do that. But I would say all those would kind of say to us let’s plan for the best — let’s plan to be cautious but also have the opportunity to really make sure that we drive the market share growth and strong results that we hope to.

The other thing I’d say, I said this upfront is that we do have an opportunity to be less promotional, and I think we’re leading the thinking on that as well. That’s a smaller part of, I guess, the way we think about the comps for the second half. We’ve got a lot of tools in our toolkit, but I think using this time to kind of be more strategic about how we use those tools, but also aggressive at holiday. So again, let me be clear. We’re going to — we think we have planned holiday really well, but just expect consumer behavior to be somewhat different, even though we’ll continue to be a great holiday gift-giving kind of a retailer in category.

So I guess that’s sort of the way that we think about it is, nobody can really exactly plan what’s going to happen here. But as each week goes by and as we get through each quarter, we’ll continue to update our view of that.

Kate McShane

Okay. I wondered if we could switch gears a little bit to innovation. And that was something pre-pandemic that I think was on people’s minds, just given some of the malaise that we were seeing in the makeup category. But you’ve seen a lot of innovation in skin care and hair care during that time. So I wondered if, Dave, you could talk a little bit about areas where you are seeing newness. Is it only in product? Or are you seeing newness in innovation, in price points and digital capabilities? And what are your conversations with vendors currently suggesting?

Dave Kimbell

Yes. Thanks, Kate. Innovation, as you suggested, is a really important part of our category. Newness has historically been a key driver in growth and a key aspect of our beauty enthusiasts, delight about the beauty category, discovery and exploring new products, finding new ways and new solutions. And so, it does play a really critical role, and 2020 has been disrupted. And in many cases, brands, particularly makeup, but across the board, brands, just as they saw what was unfolding earlier this year, decided to push back some key innovation into 2021, which I think was the smart thing for their business and gives them a chance to get things more stabilized and drive innovation. So we do see some things coming in 2021.

Having said that, there is innovation. This is not like we’re totally devoid of innovation this year. There’s been some really good innovation across the portfolio, and we’re excited about it. I think, yes, you mentioned skin care, hair care. In both of those categories, we’ve been seeing innovation across different forms and functions within that, whether it’s in retinol or serums or vitamin C or mask aids, so we’re seeing that. But also several new brands have entered into the Ulta assortment, most recently, Beekman 1802, L’Occitane, GLAMGLOW. Ordinary is performing very well. On the mass side, you have a question about price points. e.l.f. has expanded into skin care, and that’s a strong addition. So across all price points and different segments of skin, we’re seeing strong innovation that’s connecting with our guests.

Hair, equally, I think, as strong in many ways. In particular, our textured hair business, Pattern by Tracee Ellis Ross was a brand we added late last year. We brought in styling into that this year. That’s been a big success. So textured hair innovation, also Kreyol Essence is another brand and others, in expanding in the textured hair space has been a big role for innovation.

Fragrance, interestingly enough, took — was slow at the beginning of the shutdown but is actually strengthening. We’ve seen some nice innovation in that from big established brands like YSL but also newness from Ariana Grande and others to drive business.

Makeup, though, has — that’s where we probably saw the most shifting around in timing. But where we have seen innovation has been both new brands. We just launched KVD Vegan Beauty, which is the first brand in the Kendo portfolio that we’ll be launching at Ulta — that has launched at Ulta, and we’re early in that, but off to a good performance there. Laura Mercier, Thrive, Pixi, others, new brands are driving new engagement. And then specific innovation in subcategories of makeup, in particular around eye, so mascara, brow, some cool innovation that’s leaning into where consumers are today and where they’re focused on their makeup looks. So makeup, innovation was absolutely disrupted, but we’ve seen some good pockets that give us encouragement about consumers’ engagement, and then we’re anticipating even more innovation coming through, some through the rest of this year, but certainly as we get into next year as our brands’ plans get stabilized and rolled out.

Kate McShane

I wondered if we could talk a little bit more about skin care and hair care since they have been very strong. And then during the pandemic, I think they’ve gotten even stronger. I wondered if you could discuss your efforts in terms of balancing the portfolio between makeup and these two other categories. How should we think about the productivity of the box with enhanced focus on these categories? And the last question within this is, we’ve always understood gross margin dollars were lower for these categories than makeup. So how do you balance some of the pressure that may come along with the stronger hair care and skin care categories?

Dave Kimbell

Really important question and one that we’re spending a lot of time thinking about is just how we manage our portfolio. One of the great strengths of Ulta Beauty has been from the very beginning, 30 years ago, this idea of all things beauty all in one place, which means across all price points from prestige and strength in all categories, strong, growing share in makeup and skin care and hair care and fragrance and bath and accessories and tools really strength across the entire portfolio allows us to flex as consumer trends evolve, whether it’s across price points or across categories or both. And so, we have that ability, and we have been flexing to your suggestion.

Having said that, first, I’d start with just saying that makeup, we still have a lot of confidence in the future of makeup as much as it’s been challenged for a little while now. And COVID certainly added more complexity to that. As we look out over the next few years, we think makeup has a good future. And so, it’s not like we see a long-term — or we’re giving up on makeup. We see a lot of opportunity. We’ll continue to emphasize and bring newness and new brands and try to maximize that opportunity and prepare for what we believe will be a turnaround in the trend on that business going forward.

But in the now, in the current moment, we are seeing strength in skin care. And so, we’re flexing all aspects of that business — of our go-to-market strategy from our marketing to our flex space in stores, promo tables and ADDE chairs and in caps to the actual space as we bring in some of the new brands that I just mentioned, our digital assets and — are emphasizing skin care and hair care. So we are already emphasizing — and pre-COVID — are certainly doing more emphasizing skin care more and imagine doing more of that into next year, including more space to make room for more brands and more emphasis throughout our — all aspects of our go-to-market strategy, including store space.

Specifically about margin, I guess what I’d say is you think about our three biggest categories, makeup, skin care and hair. Hair has been our strongest, highest margin category for quite a while. And so, that — as we see that growth, that certainly is accretive to the total store and has been that way. Historically, skin care has been a little bit less than — from a margin rate standpoint than makeup. But as we’ve seen this trend coming over the last couple of years, our merchant team has been working hard to close that gap to renegotiate, bring in new brands, restructure terms and reimagine the assortment. And actually, we have closed that gap. So today, when we look at margin rate across makeup and skin care, they’re essentially the same. And certainly, there’s fluctuation within brands and subsegments, but in totality, makeup and skin care. So the shift to skin care is actually not — there’s not a margin — headwinds associated with that. Actually, those have turned out to be about the same. So it gives us the flexibility to not have to try to manage a margin risk. At the same time, we’re maximizing the opportunity given to us.

Kate McShane

Mary, I’m going to skip over to the market share gain question that we have, since we just talked a little bit about the makeup cycle with Dave. As we think about the evolution of the competitive landscape in the aftermath of the pandemic, can you discuss your thoughts on potential market share gains, especially considering the challenges the department stores are going through and other large prestige vendors talking about closing their freestanding stores? On the other hand, you have — we’ve had Target at the conference today. We had Costco at the conference today. Both who discussed trends and strength in beauty. So if you could maybe walk us through how you’re thinking about locking that tightrope over the next few months and the year might be helpful?

Mary Dillon

Yes. Well, it’s not a new tightrope, and I’d say it’s one that actually we’ve proven we can walk pretty well. And it’s really about just understanding who you are and what differentiates us in our business model but continuing to understand the competitive tailwinds and headwinds. And flex as we need. So I’m confident we’re going to — we position ourselves as a leader in the industry. We still really actually have a very small share of this very large fragmented beauty category. We’re continuing to gain share through the pandemic in prestige. And I believe we’re going to continue to be ultimately a share gainer. We know we can do that.

So I’d say stepping back, we’ve always competed with everybody who plays in beauty and there’s everybody plays in beauty, right? So we compete with department stores, with the mass players, even grocery stores, direct-to-consumer, e-commerce only, other specialty retailers. So we’ve long had a very aggressive, I’d say, and diverse competitive set. Our strength is that we do things that nobody else does. We bring together all the categories of beauty, all the price points in one place. We add services on top of that. Our real estate positioning is strong, our e-commerce capability. And now omnichannel capability, we think is quite strong, and our loyalty program kind of really brings it all together in a way that incents our guests to spend their net dollars with us versus fragmented dollars.

And lastly, I’d say we’ve built a brand around the Ulta Beauty retail brand that is known and loved. I mean, we’re the number one brand with teams, not just the brand name, but shopping at Ulta Beauty. And teams are obviously an important part of the cohort. We’re very strong with the Latin community, which is also a large and growing share of the beauty market. And so I think we’ve positioned ourselves well. So as I said, we will continue to gain share. We’ve been gaining share in prestige throughout the pandemic. So that’s good. And I think we’ve positioned ourselves well to understand how to take advantage of what’s happening in the department store world.

Certainly, for some period of time, our mass competitors were open and our stores were closed. So that makes logical sense that they probably had some share gain, but we see that coming back. We’ve got a lot of exclusive brands that only are sold at Ulta Beauty in that space. And I would just say that when you think about it from a digital perspective and our brand partners, they certainly are rethinking their ways that they sell for sure. And we are a very important portion I think of their future growth. And so continuing to partner with us on all things digital and physical is a place that we know we’re going to continue to partner well and drive market share gains.

The last thing I’ll say is that the Ulta Beauty enthusiasts, which is the largest segment of the beauty market, that’s shopper, they don’t really just go one place to shop. They really — they don’t buy just one brand. They love the assortment and the plethora of options that they have in Ulta Beauty. And so for our brand partners, being part of that digital ecosystem, as well as our ecosystem, is important as well. So I think we’re well-positioned to continue to find market share gains even in this changing environment.

Kate McShane

Scott, if I could throw a question your way on real estate. I wondered if you could discuss your view on unit growth opportunity in a post-COVID world. You reiterated recently that 1,500 to 1,700 store target is still the target but that you’re deciding where within that target is right for Ulta. Do you see more opportunity or better opportunity as you see some of the disruption happening in real estate? And given the fact that maybe a good amount of capacity is likely to be available, could that 1,500 to 1,700 store number be bigger?

Scott Settersten

Yes. So while the e-commerce digital channel has been capturing all the headlines these days, and I guess rightly so under the circumstances, we have for a long time and continue to believe that brick-and-mortar is going to continue to play a really critical role, especially in light of an omnichannel shopping environment, right, which is what most consumers expect these days to get a great guest experience, whether it’s in-store or online, and that’s what we’ve been focused on for a long period of time.

Our loyalty data tell us clearly that even our best omnichannel shoppers, I mean primarily the majority of their transactions are in the store, right? The brick-and-mortar fleet is still a very important part of our overall growth strategy. We mentioned to investors earlier this year that while we’ve always been careful and thoughtful about square footage growth and where we’re placing stores and trying to make sure that we navigate that line between the overbuild and underbuild as thoughtfully as we can, that we did undertake kind of a wakeboard exercise earlier this year, again, seeing what happened with the e-commerce penetration and believing a lot of that’s going to be sticky, right? While we’ve been planning for some of that for some time now, the scale, right, the step-up is more significant than we would have anticipated at this point in time.

So the team has been doing great work, and it’s not a completed project. I mean, this is something that we’re going to have to analyze and go deep on the data probably for years to come, right, to continue to monitor and manage this. But based on what the work that’s been done so far, we still feel very confident in that range, 1,500 to 1,700 stores. Again, it’s purposely kind of a wide range, right? We don’t know the crystal ball, and any one number in that range is any better than any other at this point in time, but still feel good with the range overall.

So having said that, there’s a lot of disruption, right, right now out there on the retail landscape in the retail universe. So we think it’s smart to be cautious in the foreseeable future. So we have toggled back on the number of new stores this year. It’s 30 for 2020 as our target. And again, we said for next year, it’s probably going to be at least that many, maybe a few more, but we think it’s smart to go slow, be careful. There’s a lot of stores going dark. So there’s co-tenancy issues and centers where we’re already located that present the risk. Potentially, there’s going to be centers, good strong centers that we haven’t been able to get into in the past for one reason or another, right? Our retailers aren’t in a hurry to exit the strongest centers. So we see opportunity there, of course, to continue to build out our fleet and plan to have even stronger stores and better centers over the longer term while also taking advantage of situations now with the disruption to go back and look at economic terms with our landlords, right, and make sure — again, it’s not us versus them kind of situation. We needed to put together because we want our stores to be in productive centers. So it doesn’t necessarily do us any good to have a rock bottom rental rate if the rest of the center is struggling, right? So I think we have the right strategy in place, and we’re navigating through that in a very thoughtful and planful manner and are very optimistic about the opportunities on both sides, having stronger stores and better centers and being able to improve the economics over the long-term.

Kate McShane

And along with that, you mentioned e-commerce. I know you’ve had a lot of success in leveraging your digital presence while your stores were closed. And it seems like that might be an opportunity that you can lean into a little bit more in the future. This question has come up with you, Scott, before, in terms of the channel shift implications for gross margin. And I think historically, you’ve noted a range, but now that’s been thrown out the window, I think, just with the strength of the channel. So when it comes to the pressure on the gross margin from being more digital, how do you mitigate some of these margin headwinds?

Scott Settersten

Yes. So it’s important, again, to remind everyone, it’s not an either/or kind of decision tree here that we’re dealing with, right? This is an omnichannel model. And so e-commerce plays an important role, along with the brick-and-mortar fleet of stores that we have. So again, we’ve made no secret of the fact that the e-commerce channel on a gross margin line, it’s a tougher business for us, right? And it’s primarily driven by — it’s naturally a more promotional part of the business. It just — it’s not the number of promotions we offer to those guests versus the store guests. They’re the same. We offer the same promotion to everybody when we do it. It’s just that it tends to overindex online, right? It’s easier. You’ve got an e-mail delivered that motivated you to shop with us on the app or on our website. And so, you can see what the offer is, and it’s just easier for people to engage with that or go out some place and find a coupon on another website. I mean, we all know what they are or to use loyalty points, right? Again, as you’re checking out, we serve up all that information to our guests directly. So it just naturally kind of fits into that profile.

So what are we doing for self-help? There’s a lot we can do there. And part of it is things we’ve already taken actions on, like to focus offering in our store, which was live only late last year, to remind folks. And then we quickly pivoted to the curbside offering, right? And we’ve said, those transactions are less dilutive on the margin line than a typical to the front door kind of delivery order because of the shipping costs, right, the third-party shipping costs. And again, I’m sure most people are aware of upward cost pressure there, right, that are being passed on to all retailers, not just Ulta. So we’re thinking about how do we leverage this curbside offering to make sure mitigate those headwinds as best we can, along with expanding our capabilities, so ship from store is something else we tested last year. And now we were going to expand later in 2020. And again, that’s part and parcel of getting closer to the end customer and taken some of that third-party last mile delivery part out of the equation.

Our fast fulfillment center strategy is another piece of this. So these are investments we’re making upfront. But the Jacksonville fast fulfillment center — again, we pulled it up into 2020, partly for capacity considerations, right? Again, e-commerce is kind of off the charts growth. Holiday is going to be different. It’s going to be a heavier lift there. So we need that capacity in place. But again, that’s strategically put into a marketplace, a geography in the U.S., that’s super important, tons of customers for us there in Florida and the Southeast U.S. So that’s going to help mitigate some of those shipping headwinds as well. So those are a couple of things that we’re doing in — what I would call in the digital e-commerce channel specifically, but we’re thinking broader than that, right? So there’s other places for us to look to help try to mitigate some of those headwinds in the SG&A line.

Again, some of those we’ve already discussed with investors around rethinking some of our services management structure in the store that we think is an efficiency, and will deliver a better guest experience over the longer term, thinking about how we bring back our store associates, right, and matching them up with sales volumes now, we think is a lever. Again, in the short-term, that will be helpful to us. But we’re also thinking broader terms. So the discounting promotion thing we talked about earlier, that’s an element we’ve been focused on for a long time and one where we’ve seen — even in the midst of the COVID crisis, we’ve made some good inroads in, right, just being more methodical and disciplined around the level and amount of promotion that we do in the business. We’ve seen some good results there earlier this year. And we think that’s a lever for the future as well that can help.

SG&A is always a focus area for all investors. And so again, for us — in Mary’s opening remarks, she used the word holistic. So again, this is something we’ve been thinking about for a couple of years now, right, under our EFG initiative, efficiencies for growth, thinking about what kind of cost we can take out of the business to help support some of the investments, we think we need to make for the future. The COVID crisis just brought a new sense of urgency, I would say to that. And so we’ve cut a lot of costs, a lot of overhead costs out of the business during the course of 2020, and that will continue the rest of the way into the second half of the year. And it just brings to light other opportunities that maybe we didn’t look hard enough at in the past. And so we’re looking at everything with a fresh set of eyes as we think about 2021 and the years following that, seeing how this ladders out. So there’ll be more to share. There’s more decisions to make as we frame up 2021, and we’ll be there to talk more about that, provide more color as we get further down the path here this year.

Kate McShane

So the last few questions we want to sneak in here before we let you guys go, the four questions we’re asking every management team. The first one is on taxes. If taxes were to go up next year, would you pull back on investments?

Scott Settersten

So we’re fortunate to have a great healthy business that creates really strong cash flows. When we think about investment decisions, they’re really focused on driving top-line, capturing market share and then capturing operating efficiencies for the business for the long-term. So the tax rate doesn’t really play an important role in the decision-making process. So again, we’re always aware of it. We’re thinking about the cash implications of it, but it doesn’t really affect our core investment decision.

Kate McShane

And my second question, Scott, I know you just went through a lot of puts and takes in your last answer with gross margins and SG&A. But do you expect margins to be higher or lower in calendar ’21 versus 2019?

Scott Settersten

Yes. We appreciate the question. We know it’s top of mind for everyone. It’s too early really to make the call on that one at any specific level. There’s a lot of unknowns, uncertainties at this point in time, including what the back half of 2020 is going to look like, right, with a very uncertain holiday. So again, when we feel like we’ve got some of our questions answered in a clear, more transparent insight into sales trends, we’ll be more comfortable with investors about what they are likely.

Kate McShane

We also asked a question about we do have more — fewer stores in ’21 versus ’19. We already kind of went through that. I think the answer is more.

Scott Settersten

Yes.

Kate McShane

And the last question is on pricing power. Do you expect pricing power to be stronger or weaker in the future than what you’ve seen in the past?

Dave Kimbell

Yes, I’ll take that. And I guess I’d say we feel like we came into this with a fair amount of pricing power, as the largest beauty retailer, a lot of strength, a lot of growth. We felt like we had a strong amount of influence across the category, and we don’t see that changing. The competitive environment will change. Some of our competitors are struggling through this. Others have gotten stronger through it. But net-net, we feel like we’re going to continue to be a leader and feel confident with our position in the marketplace going forward.

Kate McShane

Great. Thank you. We just have a couple of minutes left. If anyone would like to ask a question, you have the capability of just typing in your question on the webcast, and I can read it to the management team. We’ll just wait 1 minute to see if anyone queues up for a question. I guess while we wait, in case there are any questions, Mary, I wanted to know if you would be able to predict any post vaccine makeup fashion trends.

Mary Dillon

Post vaccine, makeup fashion trends. Well, I’ve been doing some research in like the last pandemic to see what the fashion trends were then. It’s kind of interesting. You go back in women’s wear daily and see women wearing very fancy hats with very fancy coverings on their face, veils and other kinds of mass and people are buying a lot of blankets, I understand back then. But I would say, I mean, one thing for sure, I’d say post vaccine, people are going to be like ready to party like it’s 1999. At least I will be. So I think getting out doing social events, which I think bodes really well for more makeup wearing, right? Certainly, I imagine what will be big and all the kind of, I think, excitement around being able to do that. I think trends around wellness and self-care are here to make that. So I think skin care — once you start those routines, you don’t stop those. And type of exposure — girls — people, boys and girls alike are starting that much earlier than people my generation did. So I think that will continue. But I think there’s a lot of — it could bode well for makeup when people are back together again.

Kate McShane

Absolutely. And it doesn’t look like we have any questions from the audience. So I’ve kind of bumping up against 4:50 here. I will say thank you. Thank you for your time. Thanks, Dave, Scott and Mary for joining us. And thank you to everybody who listened in.

Scott Settersten

You’re welcome.

Mary Dillon

Thanks so much.

Dave Kimbell

Thanks, Kate. Appreciate it.

Kate McShane

Bye, bye.

Dave Kimbell

Bye.





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The Home Depot, Inc. (HD) CEO Craig Menear Presents at Goldman Sachs 27th Annual Global Retailing Virtual Conference Call Transcript


The Home Depot, Inc. (NYSE:HD) Goldman Sachs 27th Annual Global Retailing Virtual Conference September 10, 2020 11:40 AM ET

Corporate Participants

Craig Menear – Chief Executive Officer

Ted Decker – EVP Merchandising

Conference Call Participants

Kate McShane – Goldman Sachs

Kate McShane

Everyone thank you for joining us for our Virtual Lunch Presentation. My name is Kate McShane, I’m the hardline, broadline analyst here at Goldman Sachs. It’s my pleasure today to introduce the members of the management team from the Home Depot.

Home Depot reported second quarter results recently with comps up over 23% with broad based strength throughout the quarter, all month for over 20% in every region comps double-digit and strong demand was carried through to the first two weeks of August with comps still at similar levels, 13 of 14 merchandise departments posted double-digit comps with DIY still outperforming but Pro accelerating meaningfully versus Q1.

We’re very happy to introduce Craig Menear, CEO of the Home Depot, and Ted Decker, EVP of Merchandising. We’re also joined by Isabel Janci, VP and Treasurer, as well as Tim Walsh and Lyndsey Burton from the Investor Relations team.

Craig and Ted, thank you so much for joining us today.

Craig Menear

Glad to be here and thank you.

Kate McShane

If we could maybe just level set and talk about the navigation of the current environments. As I mentioned in the opening comments, Home Depot sales grew over $7 billion in one quarter or 23%. And just keeping pace with that level of demand seems very, very tough and unprecedented. So I was hoping you could talk a little bit about how the company has navigated through some of the uncertainty over the last six months, I pivoted to meet this demand and what are some of the bigger challenges you’ve overcome?

Craig Menear

Sure. So, Kate, thank you again for having us.

To the point to grow $7 billion in the quarter was an interesting feat when you hit $9 billion for the year and we started our thought process around 2020. We thought for the year we grow somewhere in the 4 billion-ish range. So it is certainly presented its challenges. And then you layer COVID on top of that, and no doubt it put pressure in places.

So when you think about the important elements is, the complexity that it put into the supply chain pushing that kind of incremental volume through the supply chain. Taking that all the way back into the vendor community by the way, so there were raw material planning, efforts that needed to happen. Certainly that has presented challenges. We’d like to be in a better in-stock position than we are today. We’re down year-over-year. But we’re gaining ground on that and improving as we sit here today.

I think, when you think about the tremendous growth in the digital space, having the flexibility to be able to adjust to handle that kind of volume, particularly the volume we’re seeing not only through the stores with [indiscernible] but direct to customer having the flexibility to adjust and deal with that volume was pretty important as well. We did that by shifting a fulfillment center that we had opened in the Chicago area that was going to be a market delivery center in a matter of couple weeks we converted that temporarily to a direct fulfillment center, shipping product direct to customers from our dot com business so that we could support the triple-digit growth.

Kate McShane

Okay. Thank you for that. And I guess within the last six months, we saw a real change in dynamic with regards to the DIY customer for a long time we thought about the Pro customer as the bigger driver of growth for the home improvement industry. But this year, DIY is kind of leading the charge. And while some of this DIY might be driven primarily by people being home more, it does raise the question about whether we’re going to see a new level of engagement with that customer. And whether taking on a project here and there during this time is sticky, and that will be behavior that you see for a longer period of time. So how are you thinking about the activity longer term from the DIY shopper? And is there any category maybe you were under invested that you can lean into a little bit more to take advantage of a longer term trends?

Craig Menear

Sure. I think I’d start with the Pro customers always an important customer at the Home Depot. But we never lose sight of the fact that we have $60 billion-ish DIY business that has been pretty important to the company for its 41 year existence. And so we’re excited about seeing the engagement of the DIY customer in our space. And over the years, I’ve been asked a lot about what does this look like and the mix look like long-term at the Home Depot with all this focused on the Pro customer? And my answer to that always is that today we have kind of a 55, 45 DIY mix. And at the end of the day, if we end up with an 80:20 Pro, we haven’t really done our job because we want to grow the DIY business at the same time, we’re growing the Pro business and that’s been our focus all along.

So we’re super excited to see the engagement from the DIY customer. I think that customers spend a lot of time around their home, they see a lot of things that they want to do. And at the same time, there’s more wear and tear in the home. Our customers tell us from surveys that home is never more important than it is today. And so, we’re super excited about the opportunity that we see today. Ted, I don’t know, if you want to comment on some of the categories.

Ted Decker

Yes. So that the DIY business is clearly led over these past several months with COVID and really all categories across the store have seen tremendous growth as we reported. In Q2, we had double-digit growth and 13 of our 14 departments as you said in bath is just shy of double digits. So the installation business has been — are slower performing we’re starting to see that comeback as customers get more comfortable having people in their home in our pros and permitting and the like to do larger installed businesses.

But you talked about the engagement that we’ve seen with the DIY customer and that is clearly a focus of ours to track that engagement and maintain that engagement into the future. There’s so many good things going on in our segment with the DIY customer engaging. You’ve heard us talk a lot about Pro over the years and the things we’re doing with Pro but as Craig just said, DIY is a hallmark of the company and still the majority of sales and we need to keep that business growing and the engagement we’re seeing with DIY customers and with the engagement and interconnected in digital, it’s allowing us to know that customer better than we have in the past, we’ve always known our Pro customer with much fewer number of customers driving that 45-odd percent of our Pro business we have field sales, we have a Pro loyalty program and lots of ways with that Pro customer. But the DIY customer had traditionally been sort of a mass anonymous. But with the advent of interconnected and digital, we have a lot more signals now that we can start to know the customer to a much greater extent.

So we’ve been working a lot on personalization in audiences so if we might not know you to the end individual certainly know you as a segment in an engagement model, if you’re engaging garden department more or you’re painting or you’re more of an interior project and decor [indiscernible] customer. Then we can get our whole marketing message in our whole product in a way going. New product as you enter our sites and engage with the Home Depot. There’s just vast opportunity with COVID increase that engagement.

So as we build out abilities to track engagement, we’d like to see new customers, we’d like to see customers talk about in a shopping one aisle over, they shop in two aisles over. For the engagement projects, how many items for basket per transaction are they purchasing at Home Depot? We’d like to and our now increasingly capable of tracking their use of the capabilities we’re building out.

One of the big strategic reasons behind our change and our marketing tagline to how do doers get more done. Home Depot has always been known for product authority and know-how. So we helped a generation of — at the time baby boomers engaged in DIY and gained that confidence of that first project, the second project, increasing the scope of what type of project they were working on. But now as we build out more capabilities digitally, we wanted to signal that with how doers get more done. So we have our app. And we have planning tools, and we have project tools and calculators and way finding, so you can pinpoint exactly where in the store your product is located or buy online pick up in-store, buy online deliver from store, buy online have the product put in a locker for pickup. So all these capabilities that we are building, we are also able to attract the engagement levels.

And as you can imagine, as people start to engage with more capabilities as they start to shop one and two aisles over as they start to gain the same confidence of the newer DIY-er, that is the millennials launched on their journey. We’re starting to see that same behavior as the baby boomer back 30 and 40 years ago, and as they engage their spend and share wallet, goes up with a Home Depot. So huge opportunity, as you said with this new — great number of customers and their increased engagement with the Home Depot.

Kate McShane

Helpful. Thank you. I wanted to ask, just in the same context of category drivers before the pandemic, you had cited quite often the amount of innovation that was coming through your different merchandising categories. And just with such a wide assortment of SKUs that you carry, it’s a little tough for us to totally, fully appreciate, I think how much innovation really is taking place. So I wondered if you could maybe talk a little bit more recently about some of the innovation that you’re seeing from your vendors? What new trends do you think can emerge post the last six months in terms of what you’ve seen demand for innovation? And I assume innovation means people are trading up, so if you can comment on that as well.

Craig Menear

Let me make one comment around innovation in general and then I’ll give it to Ted to give you the specifics. So when you think about innovation, what the merchants are focused at Home Depot, it is how do you bring product to market that makes it easier for the consumer to be able to do a project and/or how do you bring product to market that allows the Pro to be more efficient. It gives them confidence and no callbacks. And that innovation is hugely important in the business.

Ted Decker

So in product authority is what we stand for in merchandising at Home Depot and innovation is the hallmark of that. So we’re working with our supplier partners, customer back deep into their product development of what should we be focused on in innovation, and it really goes across the whole store. You’ve heard us talk a lot lately about cordless battery technology in power tools that is now exploding in outdoor power equipment. So categories that were exclusively gas for decades and decades are quickly shifting to cordless technology, the lineup of products that we have coming in our outdoor, we have great product now but the lineup of product that we have coming in the spring of 2021, what you are going to be able to do in terms of size of job and run time and power of cordless technology and outdoor power equipment is incredible.

But this type of innovation is really across the store. I mean, it goes on through building materials into core categories, certainly appliances, we just I mean something you might not get that excited about. But we do at Home Depot, we just reset our entire grout bay. And we have an exclusive relationship with custom building products, which is by far the largest share in the category and they’ve just come up with an incredible array of floor levelers large format tile, quick adhesion, grouts that are NC approved for dust emissions which is required for nursing homes and hospitals. Pre-mixed grout for either a quick job for a DIY-er or making a job easier for a pro. We have color consistency, all at great value. So we just finished resetting our entire grout in tile set material bay over the last several weeks, the performance is incredible.

So again, something you wouldn’t think a lot about innovation in tile set material but it really is remarkable for all the new products that came in that reset.

Kate McShane

Thank you. One question that we got a little bit before the pandemic but certainly has become more prevalent is the changing in migration or population, and you’re seeing big cities like New York City and San Francisco being impacted by people moving to the suburbs or just moving away. But I was wondering what you were seeing in your business currently, I know there was some dynamic in the first quarter, it seems even out in the second quarter, but longer term, how do you think about some of these population trends and how your stores are positioned in urban versus suburban markets?

Craig Menear

So I’d say first comment would be we’re actually thrilled with our overall footprint that we have throughout the country. It’s interesting, because there’s a lot of talk and a lot of dynamics. Now, it takes me back to 2015 and earlier, when there is a lot of conversation around the fact that gosh, the whole millennial generation, everybody is going to move to inner cities and the millennials, we’re never going to own anything, they are only going to rent, they would never have a car, they would never have a tool. That’s what we heard through all of this. And our research that we did — deep research in 2015 indicated that that none of that was actually — actual based on the research that we had with the millennial generation, and that they would, in fact, act the same way other generations had. It was just a delayed cycle. And we’re actually seeing that play out, by the way.

So as the millennial generation got married. kids come along, you need more space, they moved from the city centers to a more suburban environment and they need more space, it’s more affordable. We’re actually really pleased with the overall footprint and we think that that plays out pretty much the same going forward. Will there be movement from the city centers? Of course, that’s what our research said was going to happen in 2015. And so, when you think about what we’re doing right now, we’ve actually been able to finally after sometimes a decade long effort to secure new sites in urban centers to take pressure off a really high volume stores, we’ve been able to open a few of those and we’ll continue to look for those kind of opportunities. But migration is something that we’ve always deal with and that we always will, footprints accordingly in given markets, when you see migration happening, whether that’s interesting, that’s just part of what you have to do as a retailer.

Kate McShane

Craig. I think, we lost your sound.

Craig Menear

Can you hear me?

Kate McShane

I can hear you now.

Craig Menear

Okay. Kate, the last comment I was making was migration and making sure that you’re covering footprints with stores where it needs to be is something that you always deal with as a retailer.

Right, again, opening stores to try to take pressure off a high volume and big urban markets or doing in-fills in a suburban market that might be growing more rapidly today than what it was 10 years ago. Those are things that you just naturally do as retailers.

Kate McShane

Okay. Thank you for that. Really if I could pivot to the competitive landscape, just given the fragmentation of the home improvement market, it is difficult to have a sense of exactly what’s happening with independence and smaller players. We wondered if you can give us a sense on how the pandemic maybe has affected some of the smaller players? Is it something in which you maybe saw an opportunity for more consolidation and now you’ve had almost a second breath of life because demand has been so strong for home improvement and how do you think about that longer term?

Craig Menear

Two comments there. We’ve shared in the past that when you aggregate up independence, in pretty much any category that we play in, they own the lion’s share of the market. And so that’s always an opportunity and part of what we’re investing and to create this interconnected experience, hopefully will give us an edge to be able to gain share and grow faster than the market.

Second comment that I have is, look when you look at independence and independence that came through 2008, 2009, 2010. Right? Those are really good business operators, people that survived that environment, people that will survive this COVID environment are really good operators that you have to gain a lot of respect for. And so there’s always going to be independence and competition. But we’re investing to position the Home Depot to grow faster than the market, in any environment that we get thrown into, whether it’s good or whether it’s bad, and that’s really what we’re trying to get done.

Kate McShane

And then if I could ask about pricing and promotions. I’m sorry, Craig, if I’m talking over you, there’s just a little bit of a delay. I’m sorry.

Craig Menear

No, you’re fine.

Kate McShane

Okay. If I could ask you about pricing and promotions, if demand remains very strong, is there a possibility that you could see a further pullback on promotions in the back half of the year?

Craig Menear

Well, that’s something that, we have tried to approach the business from an everyday low price approach. Events have always been part of how you drive excitement and I’ll let Ted address that. Yes, there’s definitely changes.

Ted Decker

Yes. So again, we always strive to be everyday low price. We do have events to create excitement, it’s as much to them as whether it’s our spring sets and patio set. That’s — is our decorative holiday or our gifts center and a lot of our tool categories. So it’s as much to bring the excitement of the product in new product innovation to life, but certainly we have special buys where we work with our supplier partners to bring in product. Specific to that event and specifically sharper prices, we try as much as possible not to simply have a lot of percent offs to signal under our categories such as appliances that is hard to get away from a percent off game. But we are always looking to move our events more product centric and excitement and seasonal relevance centric than percent off. And what this environment has really forced us to do are a number of things, because we’re trying to put safety first and foremost and encourage social distancing in our store, we’ve tried to limit the amount of product we’re putting down in the walkways of the store.

So we work with our supplier partners to really focus on key items larger and deeper, buys that get you even better values on key products, leveraging our end caps in our swing areas more than the race track of our store and by winnowing down the number of SKUs that’s allowed us to do that to promote social distancing and safety.

The other thing we’re doing is, we’re expanding the timeframe. So you think of a Black Friday, well, we are not as big traditionally, as a Black Friday player. As some other retailers we’ve built up quite amount of business and foot traffic and excitement around Black Friday. We’ll try to limit that single day focus and you’ll see us having that product and those values over a much longer period of time. There’ll be a few things that we do on Black Friday but things like have to come to the store this specific period of time, very short quantities. We just think today that might not be as responsible from a safety perspective as it could be. So we’ll still have events, we’ll still have great innovative product, we will still have great values, they’ll just be shown over a longer period of time and an opportunity to really leverage their interconnected experience. So all these are available online as well for ship to home or buy online and pick up in store. So we’ll have events just slightly different going forward.

Kate McShane

And when it does come to holiday and positioning around holiday, as we kind of emerged from the March and April timeframe, was that enough time to pivot or to chase some inventory for categories in which you think will be more important for holiday as it became more clear that people wouldn’t be travelling, maybe staying home, maybe focused more on home decor?

Craig Menear

One of the learnings we’ve had over the years from storm situations, in the earlier days, we used to think about — if a storm hit in a particular area that we would go in and extract like holiday decor from those markets. Thinking that the customer that’s not where their mindset was going to be and what we learned over the years is, actually it’s exactly where their head is, they want some form of normalcy in their life. And so they actually fully focus in that area. So we didn’t really pull back our thought process around the events in Q4 as it relates to holiday because we suspected that the customer would react in the same way that they do in a storm situation and that they want that kind of normalcy overall. So we’re prepared for the fourth quarter holiday events.

Kate McShane

Okay. Thank you. And I’m just going to pivot my questions to cost, you’re still in the midst of a multiyear investment plan. And we’re just wondering if this year’s surge in activity led to any big changes in the timing of what you’ll be rolling out with regards to your supply chain investments or your store remodel investments, et cetera?

Craig Menear

So the first comment, I have Kate is that, when you step back and you think about what transpired this year, and the work that we’re doing, there’s nothing that happened this year that would cause us to say we need to invest more than we had originally planned to invest. So there’s no change from that standpoint. What did happen is, as we pivoted and stopped some things that were happening in-store, because of all of that was happening, with our associates, we didn’t want to drive more people into the stores to do resets, transform front ends and so on.

We are looking at what portions of that we can begin again in the back half of the year. And so we’ll try to get some of that work done in the back half of the year, but some of that may actually end up rolling into 2021. We’ll see how much we can get done here this year, but kind of worst case scenario, it’s possible that 21 because of what we might have to push might look similar to 2020 from our capital investment standpoint, but it won’t be a dramatic shift.

Kate McShane

Thank you. And when it comes to the COVID related costs, if we think about the costs that you’ll be having in the first half of ’21. It seems like aside from cleaning costs, maybe a lot of what’s associated with the higher cost has been wages and bonuses. So even if demand throw next year as it was this year, it seems like you can grow EBIT, just given the amount of cost that likely will fall off. Is that a fair way to think about 21 without going, getting into the nitty-gritty of what you think demand would be, but just with regards to cost, it does seem like there might be some flexibility there.

Craig Menear

I think when you think about the incremental cost that we’ve incurred this year, I think there’s a couple ways to think about it. Right now, we’re continuing at this point, with our weekly bonuses for our associates, we feel that’s appropriate given everything they’re going through right now. There are the market dynamics, obviously, will determine where we’re at. We will remain competitive on a market-by-market basis. That’s how we’ve always approached our business in terms of our wages with associates. So we’ll continue to do that even after this whole COVID situation hopefully resolves itself.

As it relates to the other operational cost, we had an incremental costs that took place in Q2 because we made a decision in the quarter that we were going to require mass for all of our associates and all of our customers. Clearly, we will bring down that cost as we’ve gotten more efficient at purchasing mass and how we distribute mass. And so that will come down. The incremental costs that we saw in the second quarter also as a result of significant increase in U.S. volume at 25% comps, $7 billion worth of growth that flows, that cost will flow based on the volume that we do, because we have to have associates appropriate to the volume that we’re incurring.

So you can you can think about some of the operational costs coming down. Ultimately, I can’t imagine, the U.S. population run around with mass all the time, when we get a vaccine or we get this virus under control, totally, that costs will ultimately go away. And then what portion of the associate cost stays will be driven by the competitive market dynamics that we play against, and we do that all the time anyways.

Kate McShane

Okay. Thank you. I haven’t specifically asked about the Pro, which I should have asked a little bit earlier. So I want to make sure I get a question in on that you’ve been investing in the Pro experience for a very long time, as you mentioned earlier, enhanced delivery, credit, rentals, exclusives and then of course, all the investments that you’re making in the supply chain. We’re wondering if you can update us on a few of the enhancements that have recently gone live this year, what you’re most excited about heading into next year for the Pro?

Craig Menear

Sure. Obviously, the Pro is an important customer and we are to your point, investing in an ecosystem that encompasses a wide variety of capabilities, whether that’s product, brand, credit, delivery, all rental — tool rental, all of that as an important element of driving the Pro business. We’re really excited about the capabilities that we’re building out around delivery for our Pro customer and particularly in the flatbed network that will allow us to deliver big and bulky type products for our Pro customers. That will also take pressure off of our stores, the intent there is to relieve pressure from our stores. If you walked our stores, any at morning at six o’clock, you’d see lots of deliveries lined up in the aisles of the store, which is a great for the Pro’s are actually stopping in those aisles during that morning so that the flatbed delivery network that we’re building out, will give us the capability to remove that pressure from the stores to be much more efficient and to be able to open up capacity for delivery and begin to narrow down on windows to get to specific time slots for our Pro’s. That’s the work that we’re doing over time.

So we’re super excited about that. We’ve got a couple of these facilities up and running. There will be more coming towards the latter part of this year and then you’ll see an expansion in the next year. We’re kind of — Kate, we’re following the same pattern that we did when we build out the RDC network, kind of go slow at first, make sure that you have all the elements of it put in place that are operating efficiently. And then you increase the expansion of that on a more rapid basis as you move through the years. And that’s really what we’re doing, so really excited about that.

We’re excited about, the capabilities in connecting the Pro to the digital world as well. We’re seeing increased adoption there we on-boarded, the million or so Pro’s that we told you we were going to do into the digital capabilities. The engagement that we’re seeing there with Pro’s that as they get more familiar with the capabilities, that where you continue to enhance, we love the growth that we’re seeing with those Pro customers and their engagement in the digital world.

So, really we’re excited about the opportunities we have with a Pro customer. And the ability that we have to grow with the Pro and the more plan purchase element of their business, an area that we hadn’t really penetrated all that strongly. Because, it was largely done from a store base footprint, and the new supply chain capabilities give us a much greater opportunity to be able to play in that more plan, purchase element of the larger purposes. So super excited about that opportunity.

Kate McShane

Thank you. We are asking all the companies that are presenting at the conference for questions, and some are a little forward-looking, so you might not be able to expressly the answer them but your view would be helpful. Nice.

Question-and-Answer Session

Q – Kate McShane

The first question we’re asking is, if taxes were to go up next year, would you pull back on any of your investments?

Craig Menear

No. We will continue to do what’s necessary. Our approach to how we use our capital doesn’t change. We’re going to start with investing what we need to invest in position, the Home Depot to win in the marketplace on an ongoing basis. That’s just what we do. And we even talked about the fact that during the downturn of 7, 8, 9, we invested through that downturn, and that played to our advantage, right way. We’re investing through COVID. That’s going to play to our advantage. So now we would not pull back on investment that’s necessary to position the business.

Kate McShane

Okay. The next question, and again, we talked about this a little bit, but when it comes to margins, Calendar 21 do you expect them to be higher or lower than 2019?

Craig Menear

I think the answer there is to go back to what we shared with everybody at the investor conference in December, right? Through the investments that we’re making in the business, we want to position the Home Depot to be able to gain share faster in the market to be able to outgrow the market, no matter what the environment is. And if we can accomplish that, we then deliver incremental profit dollar growth. And that’s really what we’re focused on.

You don’t take rate to the bank, you take dollars to the bank. So if we can grow incremental profit dollars, that really is we know, we can then flow that through to the bottom-line for our shareholders. And that’s really what we’re focused on. If you think about areas that we’ve invested in the business and appliances comes to mind, right? We’ve put a lot of investment in the business in appliances over the past 10 years, we have grown incremental share in a huge way in that space, and now have a multi billion dollar business in appliances. That, obviously is a category that puts rate pressure on us from a margin standpoint, but the incremental gross margin dollars and then operating profit dollars that we gain way offsets the pressure that we see from a mix standpoint, on rate. And that I think is exactly the kind of investments that you want us doing as an investor in Home Depot so that we can deliver great returns and great return on invested capital as well. And so that’s really what our focus is overall rate will fall or rate falls. Our job is to deliver incremental off margin dollars so that we can deliver for our shareholders on the bottom-line.

Kate McShane

Thank you. The third question, which is not really applicable to Home Depot, but I’ll just ask it, do you expect to have more or fewer stores in ’21 versus 2019? Or is it the same?

Craig Menear

We expect to have a few more modest, right? Our store expansion has been very, very modest over the past, I don’t know 10 years plus, we open a handful of stores or two, three stores a year, maybe as many as five depending on the given year. Most of those have been in Mexico. But in recent years, the last couple of years, we’ve been able to actually open some stores in the U.S. where we’ve been working on filling opportunities it goes to one of your earlier questions about how are you — you think about migrations and that’s something that we’re always working on.

And, we’ve opened a handful of U.S. stores to fill-in market opportunities that we’ve seen come up and we’ll continue to do that we continue to evaluate that on an ongoing basis. So, handful of stores, probably the incremental over the next couple years.

Kate McShane

Okay, thank you. And the last and fourth question is, with regards to pricing power, do you expect pricing power to be stronger or weaker going forward?

Craig Menear

I’d say Home Depot uses its size and scale to leverage its pricing power. So that’s something that we do on a consistent basis.

Kate McShane

Okay, great. I’m going to check in with the audience to see if they have any questions. For those who are listening on the webcast, there is a ask a question box where you can type in your question and I’ll be able to read it to Craig and Ted. The first question I see here is, do you have any thoughts on catering to Home Builders?

Craig Menear

No. I mean, we’re really not set up for new construction. That’s not — we have Home Builders that shop at the Home Depot. But that is not what we are really set up to do. We really don’t cater to new construction. We couldn’t put together a lumber package to save our life. That’s just not our forte. We don’t have the space in our stores to be able to do that. That’s just not who we are.

Kate McShane

Okay. The next question touches upon something we talked about with regards to inventory. The question is, are there any areas that are more affected by inventory or lower levels of inventory now than others? And just how do you — how did the inventory challenges that are being created by the new normal volumes of high speed delivery? How are you addressing them?

Craig Menear

Sure. Yes. When you push an incremental 7 billion through in a quarter there’s definitely create some challenges. There’s no doubt about it. And Ted, if you want to share some of the categories.

Ted Decker

Yes. I would say every category was impacted, some worse than others. I think our two ends of the building were probably the most impacted with lumber and pressure treated with a huge spike in demand there and then in our garden, consumer and the cleaning products. Those were probably the two most impacted. But really every category participated in that 25% growth in Q2. In our year-over-year in-stock rates are down in virtually every category.

I can say them now with deep collaboration with our internal Home Depot supply chain team and with our supplier partners; we’re seeing improvement across the board. And we’re seeing accelerating improvement across the board. So lumber prices up about 150 plus percent is helping in the loss of supply and demand on lumber, but things like paper products and cleaning which you didn’t see at any retailer for weeks on end, you’re seeing paper products start to show up. And so across the board, we’re seeing pretty meaningful improvement and the worst of that imbalance is supply and demand as fortunately past us.

Kate McShane

Thank you. Another question that was just asked, is there a way to quantify the impact from the recent hurricanes and the fires that — can you quantify the impact of recent hurricanes and fires have had on the business?

Craig Menear

Yes. No, I actually don’t have numbers on that. Fortunately, where the hurricane actually came in was a much less dense population than what it could have been. And that doesn’t help the folks in Lake Charles, who are — pretty much took a direct hit. But it really was fortunate that it wasn’t in a very dense populated area. If it could have gone into Houston or gone into even New Orleans, it would have been much more significant. Probably the way the teams reacted, responding to continue to react and respond to the community needs, but it’s not a huge adjustment at this point.

And then in fires, right now in a scenario where they’re still going strong, there’s really not a ton of activity that happens in this stage of the game. And they’re just really — it’s a scary environment because when you’re in an environment like that where fires happen, it’s fueled by the Santa Ana winds, they spread so quickly, there’s multiple fires going. It’s just a really scary situation for the folks that are in those communities for our associates. Unfortunately, we’ve had associates who have lost their homes. And our Home Refund is stepping in to try to help those associates, which we will do but why it’s a tough, scary environment, but not at this stage of the game there’s really not a big impact financially on the business.

Kate McShane

Okay. Thank you. And the last question we’ll take from the audience is just how do you see the competitive landscape changing? We talked about independence before, but one of your larger competitors has been working to improve its operations. And so when it comes to the Pro’s, specifically, how are you continuing to execute and outpace your closest competitor?

Craig Menear

The thing for us that’s really, really important is clearly we have to be aware of what’s happening in the market around us, but the most important element for us is to stay focused on our customer and our customer needs. And to be in tune with the customer understand what their needs are and make sure that we’re addressing those. And if we do those things, we will continue to grow faster than the market the same way we did in the second quarter. And that’s really our focus overall, understand the customer, understand their needs, how do we help them run a better business when it comes to our Pro customers, make them more efficient and more effective in what they do every single day and then for our DIY customers to be there for their needs. And to help them get proper projects done whether that’s through know-how with our associates, through know-how that we have on homedepot.com or whether it’s a great innovative product that we bring to market that makes it simpler for them to do the projects. That’s really what our focus is overall.

Kate McShane

Okay. And with that, I want to thank you for joining us today and for all your time.

Craig Menear

Thank you, Kate. I appreciate it very much. Thank you for having us.

Kate McShane

Nice to see you.

Craig Menear

Good to see you as well. Take care. Thank you.

Ted Decker

Thank you.





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Midatech Pharma plc (MTP) CEO Craig Cook on Q2 2020 Results – Earnings Call Transcript


Midatech Pharma plc (NASDAQ:MTP) Q2 2020 Earnings Conference Call September 10, 2020 9:00 AM ET

Company Participants

Tim Sparey – Chief Business Officer

Stephen Stamp – COO & CFO

Conference Call Participants

Tim Sparey

Good afternoon from Cardiff and welcome to the Midatech Pharma 2020 Interim Results Presentation.

With me is Stephen Stamp; COO and CFO of the company who will run through the presentation. At the end of the presentation there will be a question-and-answer session. We’ve already received some questions, but if you would like to submit a question, please do click on the bottom link at the bottom of your screen at any time and those questions will be fed through to us. We’ll endeavor to get through as many as we can, but apologies in advance if we do run out of time.

And with that, I’ll now hand over to Stephen, who will take you through the presentation. Stephen?

Stephen Stamp

Thank you, Tim and good afternoon, everybody in the UK and good morning to those joining from the US. I am Stephen Stamp, CEO and CFO of Midatech and if you want to put a face to a name, I am in the middle of slide two surrounded by the brains of the organization.

I have a dozen or so of slide today up which as Tim said would be happy any questions you may have submitted. Moving on to slide three, I should like to take this slide as read if I may, but I would encourage you to refer to our public findings both on the London Stock Exchange RNS in the UK and on SECs Edgar in the United States.

So starting the presentation really on slide four, I would say that the first half of this year and year-to-date has been quite busy for the company and if I had to probably describe it as transitional a somewhat overused word, but I think actually appropriate for this company at this time. We’ve achieved some critical milestones which I’ll review when we get on to the R&D [ph] slides, but most noticeable in the first half was the initiation by the board of a strategic review. That strategic review was triggered by a couple of things; one being the collapse in the capital markets in mid-February and alongside of that, the withdrawal of a perspective licensee that we had lined up for our project MTD201.

Those two things as I said over the strategic review and that review immediately resulted in a couple of things. First of all the termination of further in-house of MTD201, there was no way we could see ourselves raising the $30 million or so in where we needed to complete that program. Alongside of that we closed our operations in Bilbao. That actually was pretty must dedicate to the manufacture of MTD201 and we made 47 of our 66 employees redundant. That’s over two thirds of the company.

The cost of that program was a onetime £1.8 million in cash, but it did result in a monthly reduction in cash outflow of about £0.5 million. So a payback in less than four months.

At the same time since strategic review, we appointed a boutique investment bank called Noble, to look at all the company’s options including possibly a sale of assets, the sale of technologies and even a sale of the whole company and we tested that with something called a formal sale process under the takeover code to see if there was anybody out there who was willing to pay a quick premium for the company and return value to shareholders.

As it turned out and I think possibly because of COVID and the inability to due diligence and the like, we didn’t receive any credible offers for the company and in fact, the formal sale process ended up becoming quite some hindrance to the company because we couldn’t sell assets and we couldn’t raise money because under the takeover code, those were deemed to be frustrating actions.

So in the absence of any formal office, we terminated the formal sale process in July, although we are still considering expressions of interest in certain individual assets of the company. However, while all that process was going on, we managed to pretty much half the burn rate and we realigned our strategy and we landed two industry collaborations and as a result of that, we were able to raise £5.75 million in a UK placing in July and from my perspective, that was the first fund raised of some time on which the company’s been able to raise money and what I’d call normal terms, that being a sensible discount with zero warrants and bringing in institutional investors. So overall I think it was a good outcome of that whole process.

Moving on to slide five and let’s talk a little bit here about our realigned strategy. The core of the realigned strategy is focused on Q-Sphera. Q-Sphera is our PLGA-based technology, which prints using print heads, normal print heads, encapsulated drugs in a biocompatible and biodegradable micro state here and the ejection of a Q-Sphera product then forms a depot inside the body, which releases drug with predictable kinetics over an extended period and we can tune that product to perhaps really store up to six months.

So the strategy of the Q-Sphera comprises two complementary elements with a common goal and that common goal is to license Q-Sphera products to Pharma in return for multimillion dollar milestones and royalties in due course that being after proof of concept. So how are we going about it, well we’re developing a balanced portfolio of internal programs and formulation development collaborations with Pharma. So why are we doing it in a balanced way?

Well for internal programs, we’re in charge of the timelines but we need to find potential licensees and create an option to generate some milestones and royalties we’re looking for. With external programs, clearly we’re working on the customer’s API, so we had already made licensee, it’s clearly obviously bought into the program. However, he’s in charge of the timelines rather than us and to trying to keep a balance risk and reward.

So how are we going about this? We take our internal candidates to formation developments and something called in vitro solutions and these are laboratory tests to estimate the rate at which the drug releases — would release in the body and then having established that and optimize the candidness, we’ll then take the product through something called IND enabling animal toxic studies. So these are just to demonstrate that the products are safe enough to be tested in humans.

And we’ve been doing [ph] before we could seek a licensee so that we have pretty much full proof of concept for the licensee then to take the product on into human clinical trials. And since the beginning of April, which is the start of the strategic review and mid-July when we signed our second collaboration, we signed two collaborations in that period in only 3.5 months and I have to tell you I was astounded and pleased by that. That is lightning speed for a biotech company.

So the first of our collaborations is with a very large Indian company called Dr. Reddy’s and the second is with an EU affiliate of a global pharma company who name we can’t release just yet. In both cases, we’re being paid to develop Q-Sphera formulations of their proprietary compounds. The partners will then undertake the pre-IND enabling studies and will have an option to enter into licenses to access our Q-Sphera IP.

A key component and frankly change to the strategy is that Midatech itself will no longer undertake human clinical studies, unless they are paid for in full either by the collaborator or by [indiscernible]. Together with the collaborations covering the direct costs and contributing to overhead, it means our realigned strategy requires less cash and is less resource intensive for Midatech and in my view more appropriate to company of our size and reach. It also means we can work on many more things at the same time more shots on goal, something I’ll come back to.

Moving on now if I may to slide six and the result of that realigned strategy is that we have a much different looking R&D looking portfolio and one of my favorite expressions with multiple shots on goal as illustrated here. Six months ago, I must tell you the company was pretty much exclusively working on MTD201. Now we have nine molecules covering 11 indications in the pipeline, much more diversification and in my opinion a better risk allocation.

So moving on to Slide 7, looking at the Q-Sphera pipeline in some detail, there are seven programs in all. Notice that one of the collaborate has already exercised his option on a second molecule. So the three of the seven are now partnered. One of the molecules we’re working on is MTD215, which is a monoclonal antibody. We are describing this as investigational and I just want to issue a word of caution around this monoclonal antibody.

Monoclonal antibodies are very large molecule proteins and many of the latest generation medicines all of those with a generic name ending in MAB, are monoclonal antibodies and as far as we know, there have been no approved long-acting formulations of monoclonal antibodies or large molecule proteins and the reason for that is because these molecules are extremely delicate and they’re easily denatured in manufacture.

Our process, the printing process is relatively benign process in terms of shear forces, heat consultants and we have some of the track record, particularly with MTD201, which is a peptide of developing Q-Sphera formulation of peptide and small proteins. We’re now taking it for the next level with large proteins and investigating the feasibility of encapsulating a monoclonal antibody.

If we are successful and emphasize if, this would be a world’s first, but I must caution you there are significant challenges ahead. The goal is to make Q-Sphera small molecules into a self-sustaining business through collaboration and licensing. Proteins would be upside or be it a lot of upside.

So lastly a word on MTD201 on to slide eight if I may. This program remains available for licensing, although we are not investing in it anymore. In January of this year, we announced the results of our second Phase I study of MTD201 and we were able to demonstrate similar blood plasma levels of intramuscular, which is the blue line on this chart compared with subcutaneous, the green line on this chart, administration of the product and why is that important?

Well subcutaneous administration means that at least in theory the product could be self-administered by a patient at home rather than having to visit outpatients or the doctor’s century and that takes cost out of the system and taking cost out of the system is very important to payers as you can imagine. So these get our product improved, not only have other clinical benefit, but you also have to be shown to be taking cost out of the system.

Across several in vitro studies and two Phase I studies of which this is the second, MTD201 has demonstrated that Q-Sphera products offer advantages as listed on the right here for patients, physicians and payers including as I list simpler reconstitution, improved injectability, minimal burst release, predictable kinetics, lower cost of goods and now with this latest study, subcutaneous administration.

So let’s move on to our second clinical program and that is MTX110 on slide nine please. MTX110 is a combination of a proven chemotherapeutic called Panobinostat and our solubilizing technology called MidaSolve. Now soluble Panobinostat, is delivered direct to tumor via a series of microcatheters as illustrated on the right here under slight pressure using a so-called convection enhanced delivery system or CED system.

So there is a port on the side of the child’s head. The drug is injected and is delivered to the tumor by the catheter. We’re developing MTX110 initially for DIPG, Diffuse Intrinsic Pontine Glioma, which is an intractable pediatric cancer with about nine months average survival and no effective product treatments.

We’re expecting the ongoing Phase I safety and tolerability study at UCSF to reported few weeks. And for that study to confirm those for Phase II. Our plans for Phase II at Kinderspital, Zurich are well advanced and the expected endpoints of that study will be the survival of 12 of 19 patients at 12 months because this is an orphan indication and because there are no other current treatments, we will approach the regulators assuming we get a successful signal at the end of the Phase II study to discuss potential early approval of this product.

But we’ll see, but as with Q-Sphera MTX110 also offers multiple shots on goal. So while DIPG is an often indication offers the fastest route to $100 million market, we’re also examining medulloblastoma which is another form of pediatric brain cancer with a similar sized market and we have some preclinical work going on in glioblastoma multiforme or GBM, which is an adult form of brain cancer, and a much larger $3 billion to $5 billion market.

Now, having said all of that, I must tell you, we are proceeding here with caution. You might recall that Secura Bio, the owner of panobinostat, the active ingredient here has in our view wrongly terminated our license to that product. So we would either need to resolve the situation with Secura Bio or delay the launch until the relevant patents have expired and that could be potentially two to three years.

More of that when we have some resolution to the Secura Bio. So moving now to Slide 10 in the financials, there was no material revenues booked from latest Q-Sphera collaborations in the first half of 2020. And the first half results were heavily impacted by the strategic review including a non-cash impairment charge you see here of £11.59 million as a result of the state of cessation of MTD201. So pulling out those sort of one-off numbers on Slide 11, please.

The first half included a number of one-time costs and charges including in R&D, redundancy costs, resulting from the closure of Spain and a few heads in the U.K. of £0.88 million. The write down of the Spanish assets, some of which returned to the U.K. but others will be sold in auction of £0.55 million offset by a credit because stock options were lapsed of £0.35 million and in R&D excuse me in administrative costs, we had one-time items of £350,000 associated with the repayments of Spanish government loans, including penalties, some U.K. redundancy costs of £70,000, and legal and professional costs of £510,000 some of which were due to the restructuring and some which were due to an aborted financing in February of this year as a result of this market crash, which in turn triggered the strategic view.

So stripping those one-time items out, actually the operating loss was not too dissimilar from the first half of last year, and in the second half will be lower again because of the closure of Spain.

So moving on one more Slide to 12 and looking a little bit at liquidity. At the half year, we had net cash of £3.59 million. We hadn’t at that point paid back all of the Spanish loans. So having done that, and there’s some Spain in cash, there will be a net outflow in cash of £0.6 million in the second half.

We have the proceeds from the July placing, which were net £5.28 million coming in. And then we have some warrant exercises of $1.25 million — and $1.02 million, £0.83 million in August, so we had a pro forma net cash position of £9.7 million the half year because we’ve burned a little bit of that two months of that since then. But our projection is that that cash runway takes us well into the fourth quarter of 2021.

So we are as well financed as we have been for quite some time now. So we have pretty good reasons given the traction we’re beginning to see with our Q-Sphera realigned strategy and a decent runway to look forward to the future with confidence.

So with that point, I’ll hand back to Tim for questions please.

Question-and-Answer Session

Q – Unidentified Analyst

Thank you very much, Stephen. We have received a number of questions from people who are participating in addition to the ones that I mentioned, we received ahead of the event. But if anybody does have any further questions, please do feel free to use the Submit question button. And those will be fed through to us. I will do my best to work through these. They’re obviously by definition, not in any particular order.

But we will look to try and answer everything that that has been submitted. There are a couple of common themes Stephen coming through. One of them is regard to timetables and do you have any expected or aspirational timelines to see either the existing collaborations come up, convert to formal development partnerships, and any idea that you can give listeners as to when they might be concluded their initial evaluation stages and moving on further?

Stephen Stamp

Right, thank you, Tim. So, as I don’t repeat myself, but one of the downsides maybe the only downside actually of a collaborative deal as opposed to the internal program is that the partner is more or less in charge of the timetable. It is the partner that will be doing the pre-IND enabling studies. And really, until you’ve done those and know that you have a product that is going to perform in the body as you would hope you will, according to target product profile, and there are no toxicology issues, which you wouldn’t expect but you have to prove it.

You haven’t really achieved proof of concept. And until you achieve proof of concept, you’re unlikely to get a multimillion dollar license fee out of a partner. So having said all of that, our target is to land our first licence fee in the first quarter of next year.

Unidentified Analyst

Okay, thank you. You’ve mentioned obviously the relationship and the situation with Secura Bio. Obviously, there’s very limited that we can say at this stage. But we have had a couple of questions. Is there any further update that you can give? Is there a formal process in train with them? Or is it just a wait and see?

Stephen Stamp

So one of the options available to the company is to go to court and seek a declaratory judgment and have the license reinstated, if we win. We’re advised that will take two possibly three years and cost $2 million, possibly $4 million. It seems like a heavy price to win something that already belongs to you. So we’re not persuaded that is the best use of the company’s funds. So we will prefer a negotiated settlement if possible. We have invited Secura Bio to reconsider, they have chosen not to do that. So our options are becoming more limited to be honest.

Having said all of that, the license agreement attaching to MTX110 by the panobinostat license is not particularly favorable to the company. And we could make an argument that actually the product is economically more valuable without the license, but it would mean delaying launch until the patents that expired. So, those are the sort of options that we’re weighing up now. In the meantime, we’re able to proceed with the program because we were using panobinostat for research purposes.

Unidentified Analyst

Thank you. Another theme that’s come through in a number of questions is regarding the future of MTD201. Really, you’ve mentioned that partnerships are very much something that’s being looked at. But is it an asset that the company will consider selling if the right offer was available?

Stephen Stamp

Absolutely. So, MTD201 whilst we felt to get a licensee for it, as of yet anyway, it hasn’t been a complete failure, because it has served a very useful purpose for demonstrating the characteristics and opportunities the Q-Sphera technology offers in humans, and that frankly is invaluable and without those data, I don’t believe we’d have a cat and hills chance of getting a licensee for any of these other molecules that are working on because it very much is a proof-of-concept, proof-of-principle.

So the short answer is yes, we would be very interested if somebody came forward with MTD201. But at this time, I don’t think it’s good use of the company’s energy and resources to focus on that, we’re better focusing on the newer opportunities, particularly the API’s that have come to us asking us to work on their programs.

Unidentified Analyst

Thank you. We’ve also had a couple of questions on strategy and what you’ve outlined in the presentation earlier. One, viewers made the comment that might take history of changing direction. Can you now confirm that this is the long-term strategy for the company? And if that is the case, why didn’t pursue this sort of collaboration early partnering type strategy before now?

Stephen Stamp

Yes, so I personally, I wasn’t part of some of those earlier forays that the company made. So I can’t talk exactly what the thinking behind that was, I think but potentially the company was looking to products that were closest to market which is an understandable aspiration and put all its efforts and energies and resources behind those products. The problem is that the closer you are to market in terms of Phase II, Phase III, the bigger the costs, and while these programs were going through the clinic, so the value of the company was declining and it became more and more difficult to raise the quantum of funds that you would need to get the product over the line.

And then the pulling out of the licensee of MTD201, frankly was the final straw. So in my view, given this current size of the company and the access to resources that it has, this is probably the only feasible strategy. By that I mean, not doing clinical trials and partnering early that the company could pursue at this time. Having said that, if we’re successful enough, when we get enough of these things over the line, and we get enough licenses and we get enough milestones, we could afford to start reaching further down the clinical path again and capturing more of the value. But as of today, this is the strategy and this is for the long-term, yes.

Unidentified Analyst

Thank you. And a related question obviously, with the closure of Bilbao, how does the company plan to manufacture Q-Sphera products going forward?

Stephen Stamp

That’s an extremely good question. So the listeners will understand that Q-Sphera is a unique manufacturing process, which is what makes it so valuable and so differentiated from the traditional methods of PLGA manufacturing. So you can’t go along to a CMO and say, print these tablet or make these tablets for me, all the technology, the knowhow is inside Midatech.

So we’re in the process of lining-up some partnership agreements with well, that’d be one in the end but we’re talking to several CMOs, whereby we can take the smallest scale equipment that we salvage from Bilbao, we need to add one or two pieces to it and install that inside a CMO which will have GMP capability such that we can manufacture at least clinical trial scale and then it will be the partner that will take on the scale up to commercial manufacturing.

Unidentified Analyst

Okay, thank you. One about the listings. Does the company intend to keep both the AIM and Nasdaq listings?

Stephen Stamp

Yes, we do.

Unidentified Analyst

Okay, thank you. It’s very clear. And we’ve had a few other questions coming that are not really don’t fall under the previous sort of headings, but I’ll just read them out in order. Emergex appears to be well funded and they’re making progress with the T-cell vaccine development program. What are the implications for the MidaCore platform of this?

Stephen Stamp

So Emergex is a private company, and as a private company, they don’t have to disclose exactly what they’re up to and what they’re doing. I understand that they’re making good progress and they have a license to some of our gold-nanoparticle patents. There are very smart people in Emergex, some of whom were inventors in that whole gold-nanoparticle technology. So in some senses, they are the best people to take that technology forward.

The license agreement that we have with them is a sort of traditional structure involves development milestones at certain stages and then back end royalties. So we’re hopeful that they will be successful in what they do.

Unidentified Analyst

Absolutely. Thank you. And one thing that has been mentioned in recent announcements is the situation with the EU regarding SME status, is there any update you can provide on that?

Stephen Stamp

So the last submission we made to the EU was on the 1 of July, and we haven’t heard back for them despite a number of prompts on our side. It is I have to tell you it’s quite frustrating Tim that Midatech isn’t an SME by European definition. So I think the SME rules were put in place to prevent giant companies say Pfizer setting up a company subsidiary calling itself an SME and getting a grant.

And that’s understandable. On a particular date in 2019, CMS as a result of a license agreement that was put in place in February 2019 owned more than 50%, 51% in fact of Midatech and because of that, the European Union by the way, they’re now down to 17%. But because of that the EU is choosing to regard CMS as a linked enterprise and therefore Midatech is part of the ex-CMS group. And therefore they’re looking at the whole of CMS, which has got 2,000 employees and billions of dollars of revenue as part of the Midatech Group which is frankly ridiculous.

And that that’s our frustration. So we’re trying to persuade them to look through the black and whites of the rules and see the substance over the form here, but we’re still waiting.

Unidentified Analyst

Thank you. One listeners has commented that Midatech is a complex vehicle to analyze. Maybe just wondering if any of the company’s advisors or any independent third-party had put together an assessment of the value of the group post the strategic review. And if not, are you anticipating anything maybe published in the coming months?

Stephen Stamp

Yes, I’m not sure I would agree with the complex, well so we’re certainly simpler than we were. As it happens, there have been two brokers today, one from each of our joint brokers, one of them pope has put together actually quite interesting valuation model. And they valued the company in three parts. One part is the Q-Sphera platform where they’ve sort of taken a shot at what a pro forma Q-Sphera product, and its revenues might look like. And then they’ve assumed I think there are going to be five of those over five years. And they’ve applied percentages of success to those various programs.

And then they’ve separately valued MTX110. And then they’ve also knocked-off the sort of present value of the overhead and SG&A costs and come out with a valuation of about £65 million. So I would commend your readers to take a look at that because that sort of breaks the company up into nice manageable chunks and is pretty transparent some of the valuation.

Unidentified Analyst

Thank you, very helpful. Well that concludes the questions that I’ve received to-date. If anybody does have a final question, you’ve got a few more seconds to submit it. And thank you very much, Stephen for that very insightful looking to the current situation of Midatech.

Stephen Stamp

Thanks, Tim and thanks everybody for joining.





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DocuSign, Inc. (DOCU) CEO Dan Springer Presents at D.A. Davidson 19th Annual Software & Internet Conference (Transcript)


DocuSign, Inc. (NASDAQ:DOCU) D.A. Davidson 19th Annual Software & Internet Conference September 9, 2020 5:45 PM ET

Company Participants

Dan Springer – CEO

Conference Call Participants

Rishi Jaluria – D.A. Davidson

Rishi Jaluria

Alright. Good afternoon, everyone. Let’s go ahead and get started. Last one of the day. Hopefully everyone had a productive day. My name is Rishi Jaluria. I cover software here at D.A. Davidson. I’m delighted to have with me DocuSign’s CEO, Dan Springer. Any investors that want to ask Dan question, please submit it through the chat function at the bottom, and I’m going to continue to monitor that as it goes on or feel free to e-mail me directly at rjulia@dadco.com R-J-A-L-U-R-I-A@dadco.com.

With that, Dan, thank you for joining us and I’m not sure if this beard is a new quarantine look, I’m a big fan.

Dan Springer

It is. Thank you for having me. And we’ll see how it goes. There’s been some debate back and forth about whether it’s time to lose the beard. It’s been about three months in the making.

Question-and-Answer Session

Q – Rishi Jaluria

Very cool. Alright. Let’s start kind of a high level. Not that anyone needs to know what DocuSign is, because we’ve all used it. But maybe I’ll — starting with having a look at the evolution of DocuSign from being just a digital ink provider into this broader Agreement Cloud that you’ve really become today.

Dan Springer

Yes. Well, as you said it right, when you say the word DocuSign, most people immediately respond with eSignature. And it’s clearly what brought us to the dance. It’s clearly what built over $1 billion in revenue. And we feel great about it. There’s nothing but positive feeling we have because it’s a fantastic ROI products for our customers. And that makes them happy to be customers and makes our employees happy to be at the company where our customers love the products. So, it’s just nothing but goodness.

And we talked about in the past, I think we could with an only eSignature business, because the TAM is so significant, we could grow at a substantial rate. And as we have historically, just on the eSignature platform. But as you alluded to, Rishi a couple of years ago, when I still recently newly joined, I joined about four years ago, start talking to customers, it became clear to me that they were asking us to broaden that, and what we ended up coming as an answer to that is what we call DocuSign Agreement Cloud. And we now really squarely think of ourselves as the Agreement Cloud company. And in addition to eSignature, we’ve realized that our customers need more of — they need a way to prepare agreements that are native to the signature workflow and process. So, somewhere down the process — some are going through that workflow, they want to edit and associate a permanent agreement. You don’t have to cancel, start over again, go back to Microsoft Word or whatever, where you created the agreement before, to create a new one, put it back into the flow and start over again. So, that was a key step and we are excited that we launched last year the prepare functionality.

We also saw more and more demand from people who said, we need to act on agreements once they’ve been memorialized. And so, we’ve already had some pretty good API integrations. We’ve really stepped that up again. Now 60% of all of our transactions actually occur, not with someone starting an envelope session in a web or mobile browser, but someone having an API call kick-off a DocuSign envelope being sent. So truly integrated, whether it’s integrated into Salesforce or SAP, or Workday, or one of their other softwares that are integrated with us, or in your internal systems, where they’ve leveraged our API library to build an integration.

And then the last piece, after the act on, say, taking actions was around the edge. And increasingly what we see has happened with the advent of the digital signature becoming so popular, people now have digital agreements and they need a way to manage all of those agreements. So, the manage phase is about the repository. It’s about rules and obligations management for those. It’s about search, and being able to intelligently understand how to run your business better and manage your business better, because you can access those agreements that you create. So, that cycle, prepare, sign, act, and manage is how we think about the components of the Agreement Cloud.

And one of the things I always say, Rishi — I know it’s a long-winded answer, but kind to set up the whole piece together. When a seller goes out today, to talk to a customer or to a prospect, they need to say, DocuSign, we’re the Agreement Cloud company. Let me walk you through how we prepare, sign, act and manage. And they give their little spiel. If a customer says back to them, hey, that’s great. And it was really, really good to understand that foundation. But today, I’d like to buy some eSignature. That’s why I called you. The only right answer is, yes, ma’am or yes, sir, we can sell you some eSignature today. And what we’ve seen with business today, eSignature is still a killer app here. It’s still the killer piece. People are going to want to enter the relationship with DocuSign. And there’s no shame about that. Signature will be that leading franchise for us for years and years and years to come. But we do want to start every conversation with the Agreement Cloud position. So that’s the vision.

Rishi Jaluria

Alright, that sounds great. Alright. Let’s dive kind of into the current environment. So obviously, you’ve put up some really impressive numbers, billings accelerating twice during the current environment, and Q2 often is really a difficult compare. Maybe can you — you talk about what you’re seeing — how sustainable do you think this boost is because arguably you’re the second biggest software beneficiary after [Zoom], which is a crazy thing to think about. And I’m going to tie an investor question I just got into this one, which is, do you see pent-up demand for products that’s going to be unleashed once the pandemic is in the rearview?

Dan Springer

Yes, that’s an interesting perspective, and the last question, too. So let me give you the high-level view we have, I think we were off in Q1 to a great start. The first half of Q1, we started February 1st, beginning of our year, we were having a good year. When the pandemic hit, it absolutely accelerated. It created a tailwind and accelerated our business. It’s not something you want to have accelerating your business. And obviously, we have struggled, as most other companies have, taken our 5,000 employees that involve work a 100% remotely now. It’s been very challenging onboarding new employees. We’ve hired almost 1,000 people since the pandemic started. So onboarding people, we never had a chance to meet in person. It’s not the easiest thing. But it has created a need for certain companies in a work-from-home environment to take some use cases around contracts, agreements, new hiring packages and things that they used to do in a manual paper-based process that they couldn’t do because no one was in the office to get paper. And so that has definitely been a boost.

If you look at the billings, I think is the best indicator of that. See 59% in Q1 and 61%, as you said, off a tough compare — reasonably tough compare in Q2. A big part of that is definitely because we had that sort of boost.

In terms of what happens going forward, I mean, I don’t think it’s going back. So our perspective is nobody says, have this paper-based process, it’s manual, and I route it around, it always takes a while to sign. And you know what? I miss that. Now I got the digital solution, but I really want to go back to that paper-based manual process because it takes more time, it’s a less good experience. It costs more money. I mean, what’s not to like. So people aren’t going back. And I know it’s a big question for a lot of SaaS businesses right now. We’re very comfortable with it.

The question, how long will it continue? And then the new one is, will there be other pent-up demand to unleash, here’s how I sort of think about it. I think we will continue to provide increased value and Mike put out perspective and said, yes, we’re going to see attractive growth rates in revenue and billings on good compares from the previous Q3s and Q4s, particularly Q4 is a very strong compare. So we obviously have confidence that the rest of this year we’re going to see good strength. We haven’t provided any guidance into the New Year. But I can tell you at a high level, we think that there’s a lot of momentum that is built in the business, and a lot of people are starting to see that these digital transformation plans they had, they had in the distance, they just pulled forward. It wasn’t — these aren’t things that weren’t going to happen eventually, they’re just happening a little bit faster now. And so I think we’re going to continue to see that expansion and growth in the future. And the prospects for that eSignature piece are very good.

In terms of pent-up demand, I don’t know that I’d say there’s a lot of pent-up demand for additional eSignature solutions. But if you go back to that Agreement Cloud and you think about things like CLM in that manage phase, we know there’s a lot of companies that started talking to us about CLM in, let’s say, February and March getting ready to make a purchase decision. The pandemic hit and those transactions slowed. People said, you know, I got all my people in different places. To put in a CLM, you need to do a statement of work, higher professional services of some sort, maybe the systems integrator, maybe it’s your own people, maybe it’s DocuSign for a server. There’s a little more complexity to those. And I think we’re going to see towards the end of this year and going into the New Year, there will be some pent-up demand for those software products that we sell, that we’ll probably see a little bit of a boost from that.

Rishi Jaluria

Alright. I want to go to maybe some of the recent acquisitions that you’ve made to expand the platform, right? SpringCM, Seal and now Liveoak. Can you talk a little bit about traction with these acquisitions? And obviously, we can’t read real traction because that just happened. But kind of how you’re thinking about that? And maybe philosophically, how do you weigh that build versus buy decision here?

Dan Springer

Yes. So in terms of those three, so SpringCM is almost 2 years old now. In fact, it’s coming up on the 2-year anniversary on that deal where — we did the Liveoak, as you said just weeks ago. And Seal though actually closed in the end of May. So that wasn’t that long ago either. Keep in mind, Seal had been a partner. We had an investment in Seal software prior and as we had — we’ve been co-selling with them. So we knew them pretty well before we decided to buy the rest of that business. I think the way I’d position it this way. I think SpringCM, now it’s called DocuSign CLM, we’ve made some changes. We integrated into our business. It’s going well. At the end of last year, we ended up telling people we were ahead of our plan. We actually were getting that adoption in the — now being able to cross-sell that into our DocuSign base above our plans and expectations. That definitely slowed a little when hit COVID and so — because of that longer sales cycle I was describing, take some of that momentum. But we’re starting to see that pipeline build through this period. And I think as I said, I think we feel that will be back on track as we get through this first stage of the pandemic.

In terms of Seal software, we’re already selling it jointly with customers. I think we feel it’s continued to have good momentum. Same situation with Spring, I think COVID definitely put some headwinds. When someone is making a big AI-type decision, they really want to be able to get their teams together. It’s harder to do that. So that has elongated some cycle, but we’re also seeing a lot of momentum building there, filling there same sort of space. With Liveoak, as you said, the key thing that we’re doing is Liveoak has got collaboration capability that we saw as an interesting. But more importantly, we saw that, that together with our electronic Notary Service together will allow us to really deliver on the promise of remote online notary. And so that beta — and in fact, we just put together and sort of published the demo of what that data is going to look like, that’s coming out in a couple of months. And by the beginning of the year, we should have that again really available. So we think that won’t really kick off until Q1 for us in terms of starting to see meaningful volumes, but it will be in customers’ hands in Q4. And it feels like that development work is going great.

And in terms of your strategy question broadly about build versus buy, looking at the highest level, I suppose I’d rather build versus buy only because then you don’t have any integration questions. You don’t have any integration risk questions with teams, et cetera, that’s all known in your control. You don’t spend as much money probably. But the way we look at it is, we are trying to deliver on that Agreement Cloud vision. And if we see somebody has built something that is central to that vision we want to deliver to our customers, we think they have the domain expertise, maybe the starting of the business it could accelerate our pace to get there in a significant way, and it’s not egregious as a cost, then buying is something definitely we’re open to do. We feel — we did this first deal of Spring, so we didn’t want to do another one for a while. We really wanted to make sure we got the integration right. We build that muscle, how we can successfully integrate companies. I think we did a really nice job. And I think we had some initial — like we had to figure that out. We were kind of doing it for the first time as a company in many, many years, definitely under the regime of this leadership team. And I think we got pretty good at it, and that allowed us to make the decision to do Seal. Seal went very smoothly and allowed us to very quickly follow up with Liveoak. The Liveoak is a much smaller deal, small, 25-person team in Austin. But still we wouldn’t have been able to make that decision so quickly if we hadn’t booked the Seal, the process we had to integrate Seal, I think was going to go very successful.

Rishi Jaluria

And I’m sure you’ll integrate Seal really well, please don’t stop giving out little stuffed animals, the Seal is I think just a different from a lot of those.

Dan Springer

Yes, yes.

Rishi Jaluria

Alright. I wanted to think about — going back to the API, as you brought that up, I think that’s a really fascinating point that, that 60% of signatures happening through APIs. Can you talk a little bit more about that API strategy, and especially with the fact that you have like 100,000 developers getting DocuSign APIs today?

Dan Springer

Yes. Yes, 100,000 sandboxes now. Yes. The way we’ve thought about it is, developers are going to be key to us in our ecosystem. And one of the things that’s interesting about DocuSign in the history of the company, when we were private, it’s quite unusual how many large software companies, that all compete with each other, were not only customers of ours and go-to-market partners, but investors in the business. So that includes Microsoft, SAP, Salesforce, Google, Intel, I mean just sort of down the line most of the big tech, and particularly in the software space companies were part of our ecosystem that way. So we spent a lot of time thinking about integration with that broadly sign ecosystem. We have about 450 prebuilt integrations with a leading software company, leading SaaS provider. And then again, as you said, we have about 100,000 developers who built their own, just leveraging our award-winning API sort of set of tools. And I think the answer is, we want to have both those strategies. We want to look at people who are getting successful where our customers are saying, hey, this is an important integration, and then we’ll work with those companies to create direct bidirectional feeds.

And then in the other situation, we want to let 1,000 flowers bloom. And a lot of our customers are doing those innovations. It’s not about a third-party software. They’re just hardwiring us into their own business systems. It’s going to be homegrown software, and we think that’s great. One thing we find is that those use cases are pretty sticky. When people build the integration, they tend to last longer, and then we grow with the customer. As their business grows, they just have more transactions with some of those platforms and we get more growth. So we really like those aspects a lot. We just, last week, rolled out a new developer center, very slick. We kind of took it up I’d say, from a level of good to a leading in the space. And I think that strategy is going to allow us to continue to be successful by continued investment in the developer community.

Rishi Jaluria

Got it. Alright. I want to turn to international now. We’ve had some really strong international growth this past quarter and even before that. What geographies are we seeing the most strength in? What changes in the international or should we expect now that Mike’s taking over that? And maybe alongside that, Mike is someone that we all got to know really well as CFO. What should we expect now with Cynthia kind of taking over the role of CFO?

Dan Springer

Yes. Yes. So let me start talking a little bit about the market, and then I’ll come back and talk to you about the team and how we’re thinking about the leadership from that standpoint. So look, I mean, you saw we bumped up from 18% to 19% of our revenue from international. And I was pleased to get that extra point this quarter. Just to be frank about it, a company well over $1 billion in revenue, I believe software company like ours should have more than 19% of its revenue internationally. We were a little late to enter in the international markets. Some of that was because we had a lot of success domestically, and the company just hadn’t gotten around to it quite frankly. But there’s also some nuances about the core signature business, I’ll just share with you to understand how it will play out.

Most of countries, the vast, vast majority have 1 or 2 models for agreements. It’s common law or civil law. And the differences are specific to each country, but mostly there around how you identify someone in order to make an agreement, and that’s how the rule of law works there. So the Commonwealth countries are the ones that you think about real Commonwealth, the British Commonwealth. So that’s the U.S., that’s Canada, it’s the UK and Ireland, it’s Australia, New Zealand, countries you think about in that context. And those are the places we’ve done well because we launched in the U.S. and we had that framework in place and went into those markets.

We came to basically all the other countries in the world, which are in the civil law now. So that’ Germany, that’s France, Brazil, that’s Japan. I mean, they’re not part of the Commonwealth, they tend to have the civil structure. And we had to do some work on our core platform procedure to really be attractive to those markets. So we were slower in getting in there. And therefore, they’re — our level of adoption there is lower. So that’s how to think about where we are in the markets. But I think the growth opportunities are — France is just as effective as the market for us in the UK is, UK is bigger right now because we got an earlier start in the UK than we did in France. Think about that one.

In terms of what to expect, I think you’re going to see Mike is going to aggressive and help us try the giant growth opportunity. And I think we’re going to see some work right now, the kind of three phases, as I’ve been thinking about it. There’s some work on execution. As you guys maybe heard on the call, Mike started his role sort of playing a GM of Europe. We ask you to sort of look at coordinate across our functions there. And we got so encouraged by that effort over the last couple of quarters that we came up with this idea that we really should just make this senior executive responsibility and inevitably the all-in international opportunity. But the first phase is very much around getting us as a company to work effectively across each of these pieces. And I think that’s good. I think that’s a good opportunity for us to do that in the other regions. And so we’re not done with that in Europe, but we’re off to a great start there. We’re seeing improvement already. We’re going to see that in LatAm. We’re going to see that in Japan. We’re going to see that in APAC. So that will be phase one.

Phase two is think about what are the other countries we have this what we call focused 8 model. We said we don’t want to put physical presence. We sell digitally in 140 countries, but we want to be focused on our direct efforts in the core 8. Those focused 8 countries are U.S., Canada, Brazil, Germany, France, UK, Australia or ANZ, and Japan. And so those are the focused 8. The question is, what are the next ones we should be going into? And when does that happen? So that will be a big secondary thing for Mike to dig in on. And so I think that’s what you should expect. I think you’re going to see even more great growth coming out of the international business.

Now in terms of Cynthia, I wouldn’t have been able to promote Mike into that role and allocate his time to the international growth if we didn’t have a fantastic CFO like Cynthia right there. And it was just a perfect set. I’ve been on Board for a couple of years chairing our Audit Committee, so working closely with the finance organization. Great experience, both as sort of a strategist, she was Head of Corp Dev for Twitter. She was a Morgan Stanley MD in their tech team there. So that was a fantastic background. And then she was the CFO of a public software company, Pivotal. So it’s just kind of check all the boxes of the experience we want. And the fit, we just knew was going to be fantastic, which is always one of these issues. It’s harder to sometimes to figure out while interviewing. So as the pieces came together, Pivotal got bought back in to their ecosystem, the Dell system. And she is available. We saw the path of Mike, and it’s just the piece that fell together really very nicely. I think what you’re going to see with her as a very strategic CFO who is very straightforward. The nice things about Cynthia, you don’t have to wonder if there’s a — in the same way, Mike, it is direct. And you’re going to get a clear straight answer. She is going to tell you what she is going to tell you. And she’ll also tell you what she is not going to tell you. And you can ask her 19 times about some questions disclosing some perspective. And the answer was no the first time. It will be no the next 18 times too. You are all free to keep asking. It’s your job. But she is going to be really disciplined in that way. And I think she is going to be just fantastic add to our senior management team.

Rishi Jaluria

Yes. Right. And really looking forward to working with Cynthia. So I got another question on — or two more investor questions. So first is, with the broad move into the Agreement Cloud, are you potentially infringing on the TAM of your partners? What does that mean for the core eSignature? Do you see companies like Salesforce and SAP and Adobe investing into their CLM offerings and maybe launching their own products to compete with the DocuSign Agreement Cloud? And while you’ve mentioned Adobe, we may as well ask about what you’re seeing from Adobe Sign because that was the most common investor question I got when I launched it with $40, and I still get that question today over $200 here.

Dan Springer

Yes. Well, so I think if we talk about the ecosystem a little bit, Rishi, and I think the answer is we have a robust set of relationships. I feel pretty good. Same thing when we kind of start to go public, the two big questions were competition from Adobe because it’s a great company and a reasonable question to ask. And this question of are all these partners going to someday try to compete and get into your core signature business? So I’ve been answering that question for a number of years, and there’s been very little change to the answer because there’s been very little change to the market situation. I don’t have — see a lot of concern from our partners that they think we’re infringing on their franchises and what we’re doing with the Agreement Cloud. I think we’re building the next big cloud opportunity. I don’t — I think it’s very distinct from what’s in like the CRM cloud or the HR cloud or ERP, it’s just different. It’s how people do their agreements as opposed to how they manage those systems of record.

But that could change I suppose at some point. We haven’t seen any indication of that yet to have a partner, so to say, hey, we’re uncomfortable with what you guys are doing in this basically to compete with us. I suppose it could happen someday, but I haven’t seen any of it today. And I’m pretty confident that they all look at DocuSign as a clear leader in the space. And so if you were one of our key partners, and you were to say, well, I’m going to build my own or I don’t know, buy — I don’t know if you buy, but buy someone else that has kind of capability and start competing with DocuSign, I think they have put themselves at such a competitive disadvantage against the other folks in the ecosystem, that’s great. They’re using this product signature price. We’re going to push the fact that we use DocuSign. So I think it kind of — the Switzerland aspect we have sort of I think restricts the probability of that. Anything could happen, I can’t promise that it won’t happen. So if Oracle launches eSignature product tomorrow, I can’t take responsibility for that. But I don’t think they’re going to.

And then when we think about the question around the competitiveness, we do really thoughtful analysis every quarter, Rishi, right before — we do it right before the earnings call, to take a look at how our pricing has changed and how competitive threats have changed. There has been virtually no change since we’ve been a public company. 10 quarters in, and we’re just not seeing it. We do know when people who compete with us, Adobe is the next biggest player, we’re about 6, 7 times their size and we’re growing, we think close to twice as fast as theirs. We’re taking share even at that rate. But they compete primarily on price, and they bundle a lot. So we will have cost, sits with enterprise customer commentating like, hey, Adobe’s offering us free or virtually free signature as part of our overall relationship to sort of strengthen that relationship because they don’t — I think the — they can compete on features or quality. They just don’t have the scale that we have. They don’t have the brand, they don’t have the uptime. They don’t have the network that we’ve built, the security. They just — they haven’t been able to at their scale to make the same investments we’ve made. And don’t forget, Adobe is a great company, but eSignature is somewhere around 1% of their revenue. It would be crazy for Shantanu to be investing in that. The other way we’re investing in it, where it’s our Agreement Cloud is our only business. So I think that kind of naturally makes sense, and we haven’t seen any changes there. We talk about, very clearly it sounds sometimes like a little tough to achieve, but we mean it very straightforward, which is our biggest competitor is paper. And we’re out there in the market as we’re competing with paper and manual-based processes. That’s what we have to make sure we can beat and show the dramatic ROI benefit, and the rest of it takes care itself.

Rishi Jaluria

That makes a ton of sense. Alright. On kind of going back to the expansion into the broader Agreement Cloud, how has adoption of the products outside of the core eSignature been to the extent you can, like what sort of multi-product penetration are we at now? How should this trend over time? Any way to kind of frame this would be helpful?

Dan Springer

Yes. Yes. Great question. So we get that question a lot. And a lot of times it comes around the net retention rate, too, right? I say, hey, if you got a net retention rate of 120% was last quarter and 119% the quarter before. I think is that because you’re selling a lot of CLM into the product? And so let me be really clear. Signature is the dramatic majority of our business. And it will be to years from now. It will be through — it’s just the scale and the rate at which eSignature is growing. Even before this kind of boost, we talked about from COVID. Now at the COVID boost, it’s even more dramatic in terms of getting a bigger scale and the rate of growth there being very difficult for the other products to sort of make a dent in it is that’s just the reality of where we are. I don’t think it’s a bad reality, it’s good reality. But we do believe the TAM for outside of signature, we paid about $25 billion is how we think about the signature TAM. And we got to grow over time. And we think the rest of the Agreement Cloud broadly the time will be around $25 billion as well. And we’re already seeing significant chunks like CLM, like intelligent agreements, Advanced Analytics. We’re getting into a bunch of other areas there. But in totality, that maybe equals the signature TAM.

So — and we’re, of course, well on our start with signature and we’re new in the other agreements. So it’s going to be years and years before we start saying things like the percentage of CLM, we’re ways away from that. I can tell you that when we have 120% net revenue retention, the vast majority of that is because signature grew. And the people — if you look a year ago, it was almost all signature, but then today, it’s mostly signature, right? So it’s a small piece. But the TAM, I think, is a good way to think about the size of these other deals. So I actually think that the — if you’re doing a CLM deal, it can be the same as our total eSignature business with that customer, depending on where the maturity is. So it’s that sort of magnitude of deals. They tend to actually be bigger deals on average on signature deals. They’re more involved. As I said, is also a statement of work, there’s just some implementation and integration work.

So the magnitude over time should start to approach roughly even, but it will be years and years and years before the rest of it can catch up. It’s the same problem. You talked about international, when you go. If international is growing faster, shouldn’t you catch up? And the answer is, yes, the domestic business is growing a little fast from a very large base. So it’s hard for the international business to sort of catch up, even though it’s growing at a much higher rate. So that’s how I sort of think about the mix.

Rishi Jaluria

I got another follow-up question on international, which is how do we think about pricing? Is international more price sensitive, especially APAC? And then maybe I’m guessing LatAm on top of that. So how do we think about that?

Dan Springer

Yes. There’s not dramatic differences in pricing for us. It’s interesting to say that about — think about APAC. Remember, most of our APAC business is Australia and New Zealand, which has very similar pricing models as the U.S. because the Aussie dollar is down, at times it’s been at parity with the U.S. dollar. Now it’s around $0.70 on the dollar. So I think it’s probably more — it’s a little less expensive there if you do in U.S. dollar adjust, but they’re in the same ballpark. We don’t have a big — we don’t have a presence in China there. We don’t do a lot of selling in India, which took a little bit of digital. So some of those markets that get associated. I think in Asia we’re being very, very price competitive. We’re in Japan and ANZ. So we don’t — I mean, we have some business in Southeast Asia, but it’s small as a mix. So we don’t see it as much. Europe, I don’t think pricing is very different. LatAm, I think will be a market. In Brazil, where there’s a little more price competitiveness. I wouldn’t say it’s dramatic, but I would say it’s noticeable difference. And I think the challenge there is some people will not need our full advanced functionality but want to buy, so like an enterprise pro addition, but want to pay a business addition kind of pricing.

So we have some of that scenario where I think we have a little bit of challenge sometimes trying to control that distribution. But in general, it’s not something that we spend a lot of time thinking about in terms of international pricing.

Rishi Jaluria

Makes sense. And please, by the way, I know you’re not there in a big way, but please get into India because Jesus Christ, they’re like, will travel across town for 2 hours and Mumbai to get people who physically sign things. That is clearly a massive need for these solutions. Alright. Last question I got because it’s end of day, and I think we all can use a drink desperately. But an interesting one, just how should we think about blockchain. Is that something that you could see more widely used buy customers and buy products in the future, especially as it goes more into the broader Agreement Cloud?

Dan Springer

Yes. Yes. Blockchain is one of these fascinating topics. But by the way, we talked earlier about questions that have been with us through from the IPO process. And at the time, blockchain — crypto was even a little more — 2.5 years ago, a little more in the business press. So it was probably even a more heightened sense of interest in the topic. So look, we look at blockchain and say, blockchain is an underlying technology that we think has got a lot of promise. And we’ve actually built out for customers that have requested it, the ability to do a blockchain storage of their agreements. And there are certain people that are intrigued by that as a business process. I can tell you to date that the number of people that have done a blockchain implementation with DocuSign is exactly equal to the number of customers that wanted to do a press release about doing a blockchain. And so this is not — it’s not a constructive business piece for one reason, the economics. It’s the scale economics aren’t there yet, blockchain is too small. So we’ve partnered with Ethereum. It’s open source rate blockchain network. And it costs us about $1 to sort of say we’re going to store that agreement in their blockchain virtually forever. The same way we store them all in the DocuSign system forever. The total cost for us of a transaction, we just think about that implementation cost to do just talking about signature now. But to do that creation of the envelope, the routing around in the envelope, the storing of it, the processing, the encryption, all of the whole things that happened to that workflow, it cost us about $0.07, and that includes the storage, whatever, right?

So we have incremental buck on top of that, you look at it and you go, it’s just irrational almost if you’re doing a pure economic decision today. And so I think the key thing about blockchain is, today, it’s just not commercially viable to scale. But if you think about what you need is you probably need about one or two orders of magnitude change before it becomes really highly valuable in that solution. So I think the question is how fast the overall blockchain development is going to occur. If it happens really fast, I think we’ll see in the future, DocuSign customers saying, I want to have that option. That’s why we’ve built that capability. If it doesn’t take off, and I think the answer is blockchain will be an interesting technology that people will still be kind of curious about, and then when they want to sort of demonstrate a new technology and do a “press release”, it will still happen from time to time. But it just won’t take off because it’s just not commercially — economically viable at this time.

Rishi Jaluria

I think it’s a great place to hop off, Dan. Thank you so much. Always appreciate the insights and for sticking out until the end of the day. I wish this was in person, so we could go grab a beer in happy hour, but I trust you’ll get some much needed relaxation time. So thank you again. Really appreciate it.

Dan Springer

Thank you, Rishi. Pleased to be with you guys. And looking forward to the time where we can have that beer together versus this.





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