GTOFF - PT GoTo Gojek Tokopedia Tbk (GTOFF) Q2 2023 Earnings Call Transcript

2023-08-15 17:39:05 ET

PT GoTo Gojek Tokopedia Tbk (GTOFF)

Q2 2023 Results Conference Call

August 15, 2023 6:30 AM ET

Company Participants

Reggy Susanto - Head of Investor Relations

Sugito Walujo - President, Director and Group CEO

Jacky Lo - Group CFO

Tom Husted - COO

Hans Patuwo - President of Financial Technology Services

Catherine Sutjahyo - President of On-Demand Services

Melissa Juminto - President of E-commerce

Conference Call Participants

Ferry Wong - Citi

Ryan Winipta - CGS-CIMB

Pang Vittayaamnuaykoon - Goldman Sachs

Sachin Salgaonkar - Bank of America

Presentation

Reggy Susanto

Hello, everyone. This is Reggy Susanto, Head of Investor Relations. Welcome to the PT GoTo Gojek Tokopedia Tbk Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded.

Joining us today are Patrick Walujo, President, Director and Group CEO; and Jacky Lo, Group CFO. Also present are Tom Husted, our Chief Operating Officer; Catherine Hindra Sutjahyo, our President of On-Demand Services; Melissa Siska Juminto, President of E-commerce; Hans Patuwo, President of Financial Technology Services; and Kevin Widlansky, Head of GoTo Logistics.

Following management's prepared remarks, we will open up the call for questions. We would like to highlight that the information presented today has been prepared solely based on unaudited consolidated selected financial information for the 3 months ended June 30, 2023. We have also submitted and published our consolidated financial statements as of and for the 6 months ended June 30, 2023, that have been reviewed. The limited review was conducted to fulfill our internal standard operating procedures to improve the implementation of good corporate governance by the company.

As a reminder, today's discussion may contain forward-looking statements about the company's future business and financial performance as well as a discussion of certain non-Indonesian financial accounting standard measures as complements to the Indonesian financial accounting standards disclosures. Before using and/or relying on these measurements and forward-looking statements, please take note of our disclaimer and cautionary statements disclosed in our earnings presentation and press release.

During this earnings call, we will be going through our results of operations and earnings presentation, which can be found on our website. For more information and additional disclosures on our recent business and financial performance, please refer to our earnings press release and supplemental presentation, which can be found on our IR website.

With that, I will turn the call over to Pak Patrick.

Sugito Walujo

Thank you, Reggy. Hello, everyone, and thank you for joining us today on our first earnings call together. Many of you know me already and are aware of my long history with GoTo as well as my belief in its potential. I was an early investor in Gojek and have been close to its founding management as well as that of Tokopedia from the early days all the way to the formation of GoTo.

GoTo is very close to my heart, and I am humbled and grateful for the trust and support that shareholders, employees and partners have shown in me as their new CEO as I embark on a singular mission to accelerate GoTo's trajectory as Indonesia's leading tech company and national champion.

Over the past 12 months, GoTo has confronted significant challenges, particularly around our cash burn. The extensive cost-cutting we undertook in response to this has impacted our growth because by cutting back on incentives, we have skewed our total addressable market away from the masses towards consumers who value convenience over affordability. At the same time, integration issues have meant we were not fast enough to capitalize on the promise of the Gojek-Tokopedia merger. If we are to win, we must address all of this with urgency as time is of the essence and competition is intensifying.

As such, there are 3 key points I would like to convey today. First, I have no doubt that we remain committed and are on track to deliver positive adjusted EBITDA within Q4 2023, as per our guidance. As a reminder, our adjustments for EBITDA primarily consist of share-based compensation and changes in the carrying value of our investments.

Second, we understand that achieving adjusted EBITDA breakeven is not the end goal. We must go on to deliver sustainable and profitable growth. If we are to win, we must increase our total addressable market by expanding our consumer base, particularly among budget customers who demand value for money. We must do this without turning to the unsustainable use of incentives, and we must also accelerate the pace of our ecosystem integration to solidify our long-term competitive advantage. To achieve all this, I have initiative -- I have initiated a comprehensive review of our strategy, and we'll provide an update on its progress on our next earnings call.

Thirdly, in almost -- in around 45 days that I have been here, we have wasted no time and started to take decisive actions across 3 main areas. First, we are acting with extreme discipline when it comes to costs. GoTo has reduced its workforce by 24% over the past 3 quarters while also reducing its non-personnel fixed OpEx by around 10% over the same period. This equates to around IDR 1 trillion in annualized savings. But there is more to do.

I have asked Tom, our COO, to identify further savings to make our company even more efficient.

Additionally, we are in the process of exiting our entertainment businesses as these are no longer a core part of our strategy, and we will continue to look for opportunities to divest other noncore assets. We have also reduced our shipping subsidy cost per order by around 15% year-to-date. I am taking steps to double this by year-end by increasing the penetration of GoTo Logistics, which currently supports around 1/5 of Tokopedia deliveries. This will enable us to drive down costs further and provide affordable or even free shipping sustainably.

Second, we are improving synergies across our ecosystem, executing faster and building stronger symbiotic relationships with our strategic partners. We have accelerated the integration between FinTech and E-commerce with the launch of cash loans on Tokopedia while offering our consumers competitive buy now, pay later products. On the partnership side, we are strengthening our collaboration and deepening our integration with Bank Jago, building additional financial products for our users, which directly translate to the expansion of bank accounts for Bank Jago, long-term reduction in the cost of funds for GoTo and accelerated loan disbursement.

Underpinning all of this is a focus on cultivating a shift in our internal culture to foster accountability as well as faster decision-making and execution under a GoTo-first approach. What do I mean when I say GoTo first? We are an ecosystem that is greater than some -- the sum of its parts. All of our employees must feel and believe this. No more silos, no more thinking about business units in isolation.

For everyone in this company, including myself, GoTo must be our absolute priority. I have been very focused on achieving the One GoTo vision by breaking down organizational barriers, having everyone working from the office full time and committing all teams to the common goal of putting our customers first.

Lastly, we have already begun adjusting our product mix, making it more mass market-focused. As I mentioned, due to the focus on profitability over the past 12 months, our consumer base now naturally skews toward consumers who prioritize convenience over affordability. To drive sustainable long-term growth, we must increase our total addressable market profitably by expanding our product offerings to address the needs of budget consumers as well. As we develop a comprehensive strategy for this over the coming weeks, significant work is already taking place.

Within our On-Demand business, we are leveraging our Hemat products for 4-wheel transport and food delivery to provide a more affordable option for consumers, ultimately resulting in higher order density and value creation to both drivers and GoTo. By providing these Hemat offerings, we estimate that we can grow our consumer base by 50% to 60%. We are also in the process of launching our GoTransit Multimodal feature, the first and only in the region, which provides a seamless end-to-end booking experience for public transport consumers who can be persuaded to also utilize our 2-wheel services as part of their journey.

Meanwhile, in FinTech, we have launched the GoPay app. We designed this app not only to make life more convenient for our existing users, but also to make GoPay more accessible to budget customers by making it light in size for people for whom data and phone storage resources might be limited. We also introduced a cash loan feature that will drive the expansion of our lending portfolio far beyond existing Gojek and Tokopedia consumers. So far, we have recorded over 1.5 million downloads with 0 marketing spend, showing the demand that exists for our product.

In closing, I remain strongly optimistic about the outlook for GoTo. We know what we must do. We are focused on executing with precision and urgency, and we are committed to keeping you up to date as we progress. I'd like to give particular thanks to our employees and partners who have continued to work in the best interest of our business throughout the ongoing change. It is thanks to their efforts that we will succeed.

I will now turn the call over to Jacky to review our business performance. Jacky, please go ahead.

Jacky Lo

Thank you, Patrick. Good day, everyone, and thank you for joining us on today's call.

Incremental improvements to our group adjusted EBITDA are ongoing, and we are on track with our time line to achieve positive adjusted EBITDA within Q4 2023. In the second quarter, group adjusted EBITDA narrowed by 72% year-on-year to negative IDR 1.2 trillion or negative 0.84% of GTV. This is underpinned by ongoing improvement in contribution margin, which remained positive at the group level in Q2, in line with our previously communicated time line.

Group contribution margin as a percentage of GTV was 0.73%, amounting to IDR 1 trillion. This equates to an improvement of 207 basis points year-on-year and 30 basis points Q-on-Q. Profitability improvements are mainly underpinned by disciplined management of incentive and product marketing spend, resulting in a 43% reduction in associated costs, reflecting total quarterly savings of IDR 2.7 trillion year-on-year.

We also continue to improve monetization across our businesses, resulting in gross revenue growth of 6% year-on-year to IDR 5.8 trillion in Q2, as our group take rate increased by 40 basis points year-on-year, reaching 4.1%. Net loss also improved and came in at IDR 3.3 trillion, narrowing by 15% quarter-on-quarter and 56% year-on-year. This includes IDR 1 trillion in losses arising from the impairment of our investments in joint ventures and associates as well as changes in the fair value of our investments.

Net cash burns reduced by more than half year-on-year. Our cash and cash equivalents of IDR 25.4 trillion at the end of the second quarter and IDR 3.1 trillion remaining in our IDR 4.65 trillion credit facility provide us with ample cushion to become self-sustaining. As Patrick mentioned, ongoing improvements in profitability continue to impact our short-term growth.

GTV slightly declined by 5% year-on-year to IDR 143.7 trillion, mainly as a result of reduced incentives and product marketing, but also due to increased number of holidays in Indonesia during April and June. The number of profitable users and overall profitability per user remains stable with profitable users contributing close to 75% of total GTV. User engagement has improved as shown through an increase in spending per user of 42% year-on-year.

I'll now walk you through each of our 4 core segments. In On-Demand Services, adjusted EBITDA was negative IDR 164 billion, an improvement of 89% year-on-year. And as a percentage of GTV, it improved to negative 1.24% in the second quarter, up 874 basis points. With ongoing incentive rationalization, total On-Demand Service incentive spending declined by 35% year-on-year, which is equivalent to IDR 1 trillion in savings for the quarter. Our focus on profitability and monetization supported increased revenue -- gross revenue, which reached IDR 2.9 trillion, up 3.5% year-on-year.

Subsequently, our bottom line also saw significant improvement. Our international markets became contribution margin positive this quarter as On-Demand Service contribution margin reached IDR 623 billion and improved to 4.7%, up 853 basis points year-on-year as a percentage of GTV. The targeted rationalization of incentives has impacted participation from low-quality users, resulting in lower GTV from this user group. As a result, GTV for On-Demand Services declined 8.6% year-on-year to IDR 13.2 trillion. There's also some seasonality in Q2, owing to higher number of public holidays in Indonesia, during which consumer activity slows down.

We see the brunt of this impact in our mobility and food delivery services.

As mentioned by Patrick, On-Demand Service will aim to address the need of budget consumer segments through 3 key products: Food Hemat, Car Hemat and GoTransit. Our Hemat products are cheaper not because we subsidize them, but because the inherent business model is more efficient, thanks to order batching and a managed assortment in the case of food and more economical vehicles with more efficient routing in the case of cars. In addition, GoTransit Multimodal helps drive incremental demand to our 2-wheel business by targeting users who normally use public transportation and subsequently onboarding them to go ride for the first and last miles. These 3 products have generated new users and reactivated dormant users during Q2, proving our hypothesis that they can broaden their use base for GoTo.

Turning to our E-commerce business. Adjusted EBITDA was negative IDR 229 billion, an improvement of 86% year-on-year. As a percentage of GTV, E-commerce adjusted EBITDA improved to negative 0.39%, up 203 basis points year-on-year. E-commerce contribution margin reached IDR 413 billion, and contribution margin as a percentage of GTV improved to 0.7%, up 201 basis points year-on-year. This bottom line progress is attributable to our incentive rationalization, which brought about a decline in incentive spend of 48% year-on-year, equivalent to IDR 1.2 trillion of quarterly savings.

Strong progress has been made in monetization as the commission adjustments we implemented earlier in the year have started to bear fruit. As a result, E-commerce gross revenue increased by 8.5% year-on-year, amounting to IDR 2.2 trillion. The increase in revenue is a testament to merchant loyalty to our platform, which has come about as a result of the competitive moat we are building for our E-commerce business, including the value of GoTo's unique ecosystem for merchants and users.

E-commerce GTV declined 13% year-on-year to IDR 58.7 trillion in the second quarter, due largely to our incentive rationalizations which result in fewer transactions from low-quality users. The increase in number of public holidays during the quarter also caused merchants to take longer recess periods and consumers to shop off-line. The winding down of parts of our Mitra Tokopedia business, which we announced in March, also plays a factor. Excluding Mitra Tokopedia, our GTV decline will have been 10% instead of 13%.

Throughout the first half of 2023, we experimented with GoTo Logistics' in-house logistics capabilities. Results have been very promising with GTL enabling a reduction in overall logistic cost for our E-commerce business and, therefore, will continue to ramp up GoTo Logistics penetration in Tokopedia. Additionally, we will immediately improve our personalized discovery through engaging content that caters to budget consumers. At the same time, we'll help our merchants to reach these consumers while supporting them in making their advertising more powerful and engaging using new formats. Finally, our FinTech PayLater products will also support Tokopedia by further driving product affordability and consumer engagement.

Now looking at GoTo Financial, we have continually improved our incentive spending efficiency, particularly in our consumer payment products while still growing sustainably. This is not a coincidence, but a result of our conscious effort to provide more use cases for GoPay users, which enable us to grow through increased user engagement instead of inorganic incentives.

Adjusted EBITDA for FinTech was negative IDR 508 billion, an improvement of 45% year-

on-year. And as a percentage of GTV, it improved to 0.56% negative, up 50 basis points.

FinTech contribution margins show an improvement of 99% year-on-year. And as a percentage of GTV, contribution margin improved 45 basis points year-on-year to approximately breakeven.

FinTech incentive spend improved by 59% year-on-year or equivalent to IDR 367 billion in savings for the quarter. This has contributed to our bottom line improvement and allow us to reinvest strategically into our profitable growth strategy. GTV increased 4% year-on-year to IDR 90.5 trillion in the quarter. Gross revenue also increased by 2% year-on-year to IDR 399 billion.

We remain very prudent in lending. We grew our loan book by 21% quarter-on-quarter to IDR 1 trillion while maintaining a positive contribution margin. Our strategic partnership with Jago remains crucial with the majority of our loan book financed by Bank Jago. On top of being profitable, our lending products are also more competitive because we are able to manage our credit risk very effectively. We are still in investment mode for our FinTech business.

As we scale our lending in both closed and open loop systems, we expect fixed cost for the segment to increase in the short to medium term.

For GoTo Logistics, adjusted EBITDA was negative IDR 94 billion, an improvement of 62% year-on-year, and gross revenue increased by 10% year-on-year to IDR 562 billion. Early results from our efforts to improve the Logistics business cost structure are also showing. In the second quarter, we reduced incentive spending for Logistics by 64% year-on-year, equivalent to IDR 122 billion of savings for the quarter.

The first priority for GoTo Logistics appoint formation was lowering logistic costs for our E-commerce business by scaling up our highly efficient in-house delivery service and our fulfillment capacity as well as allocating orders to the most cost-effective third-parties using our in-house engine for orders that are better served by external vendors. The more we can lower user pay logistic costs, the more significantly we can reduce our shipping subsidies to incentivize budget consumers, bringing a multiply effect that supports profitability and business sustainability as well as growth.

Similar to GoTo Financial, we are still in investment mode for GoTo Logistics. Given the strategic importance of lowering delivery costs for our E-commerce business, as we scale our fulfillment and conventional delivery, we expect to see some cost increase in the short to medium term. That said, we'll continue to aim to stay as asset light as possible.

Before opening the call to your questions, we would like to reiterate our guidance. We continue to expect to reach positive adjusted EBITDA within the fourth quarter of 2023. And for the full year 2023, we are revising our guidance due to significant progress we have made in the first half. Our group adjusted EBITDA is now expected to be between negative IDR 4.5 trillion and negative IDR 3.8 trillion, an update from our previous guidance of between negative IDR 5.3 trillion and negative IDR 4.6 trillion. To conclude, our cash position is strong, and we'll continue to focus on achieving profitability while investing in sustainable long-term growth.

With that, we would now like to open the call to your questions. Reggy, over to you.

Reggy Susanto

Thank you, Jacky. We will now start our Q&A section. [Operator Instructions]

Question-and-Answer Session

A - Reggy Susanto

The first question comes from Ferry Wong from Citi.

Ferry Wong

Yes, I have three questions. Yes, the first question is that there seems to be a slower improvement on profitability in this quarter compared to the previous quarter. You mentioned that you are still confident to achieve the fourth quarter 2023 adjusted EBITDA breakeven. Could you please highlight the main driver to achieve this target?

And second, basically, as we approach adjusted EBITDA profitability by the end of the year, do we expect that the margin take rate will improve further? Or should we expect investment to maintain at current level to defend market shares, especially with the intensifying competition from TikTok and Lazada and potential entrance of kumu? And what is your estimated long-term adjusted EBITDA margin potential for each of the segments?

And the third question is more on the GoTo Financial loan outstanding as of June. Could you provide more color into that? Because in the first quarter, you mentioned that you -- the loan outstanding from GoTo Financial ecosystem reached around IDR 831 billion. And from Bank Jago, we heard that it's around IDR 1 trillion as of June. What will be the number basically by the end of the year?

And what's your expectation also in 2024 for this GoTo Financial loan ecosystem?

Sugito Walujo

Ferry, thank you for the questions. I'm pleased to hear your voice here. In regard to your first question, and if I can just recap, you have a question about the slowing down of our path to profitability this quarter versus the previous quarter and how confident we are that we will achieve our target of EBITDA breakeven by fourth quarter. Firstly, let me say that we are committed, and we believe we are on track to deliver positive adjusted EBITDA within the fourth quarter this year. And due to the significant progress we have made in the first half, we have improved our group adjusted EBITDA guidance for the full year of 2023.

In order to achieve this, we are disciplined in terms of cost. We have IDR 1 trillion in annualized savings through the reduction of personnel costs and non-personnel costs.

We continue to be very selective in spending incentives. We have decreased 43% year-on-year this quarter. Furthermore, I have asked the P&L optimization committee to continue identifying further savings, reviewing cost items line by line that will make our business even more efficient as well as exiting our noncore businesses.

I'll give the opportunity to Tom Husted to elaborate further on this matter. Tom, if you will?

Tom Husted

Great. Thank you, Patrick, and thank you, Ferry, for the question. Good afternoon, everybody. It's great to be here and to join the call for the first time. So as Patrick mentioned, we've made very good progress on cost cutting so far.

However, I really want to highlight here that we're going to remain laser-focused on reducing our fixed cost base in the coming months.

And to this end, we're working on 3 distinct work streams internally. So first, we're going to continue to rightsize the expense base, and this is really focused primarily on reducing the costs that are not essential to the core businesses. Patrick alluded to some asset sales earlier in his remarks, and we will continue to do those, and the benefit of doing those asset sales is that we also reduce the associated OpEx.

The second strategy, and this is something that I think everyone is focused on now internally, which is revisiting the Toko-Gojek post-merger integration work. This goes back to 2021. And really, what we want to do here is double down on streamlining how these businesses work together, including GTF. And our view on this is that we have to realize a lot more savings from this work stream. And frankly, at the same time, we have to drive the associated revenue opportunities and the flywheels.

So I think Patrick and Jacky will speak a bit more about this going forward.

And then finally, we have a third strategy, which is to focus on technology independence. And really, what this means is that we want to decrease our reliance on third-party tech solutions. We've done a deep dive on how much we're spending on these solutions, and it's big. So we're going to redeploy some of our internal tech team and work on solutions that make us more lean operationally. And the goal here, overall goal, is to reduce the costs on a per-transaction basis.

This will help us increase the TAM and get more customers in on a profitable basis. So I think that summarizes the overall cost strategy.

Thank you. And Patrick, Jacky, back to both of you.

Sugito Walujo

Thank you, Tom. Moving on to the second question from Ferry, I think the question is around our view about EBITDA profitability and margins going forward for each of the business segments. Ferry, as I mentioned earlier that achieving adjusted EBITDA breakeven is not the end goal. We need to go on to deliver sustainable and profitable growth. We believe there's still a lot of room to improve our margins for the beyond breakeven, and maybe I can talk about a few observations that we have made in the company.

In On-Demand Services, based on our hypothesis and early results, our model Hemat products had better profitability than our existing products. We will take time to test this hypothesis. And once we are convinced of the results, we are going to invest more in this product. For E-commerce, our hypothesis is that we will need to improve our assortment. We need to appeal to budget customers and expand our total addressable market.

By doing this, we will also be able to open new core opportunities for our lending products to tap into these budget customers.

Overall, by improving our offering to address the needs of budget customers, we will increase our total addressable market and, at the same time, improve our profitability. And as I mentioned in the first part of this presentation, we are in the process of doing a comprehensive study on GoTo's strategy, and we will provide an update in the coming quarters.

Your third question is about GoTo Financial. I have Hans who is the President of GoTo Financial. Hans, if you can address Ferry's question, that would be great.

Hans Patuwo

I will be happy to. Thanks, Patrick. Ferry, thank you for your question. The loan outstanding in Q2, it was about IDR 1 trillion, and this reflects about a 21% increase quarter-on-quarter. This is a little lower than it was in previous quarters, partially because we continue with our prudent approach, but also partially impacted by the negative growth in the ODS and E-commerce businesses.

If you look at the 20% Q-on-Q growth, this is still significantly higher and implies a higher penetration rate compared to the overall negative growth in the ODS and E-commerce businesses. Moving forward, we remain very confident as we have more and more experience on the cost of credit. We are monitoring and continuing to improve and optimizing our prudence, which means we are able to bring on more borrowers.

In addition to that, we have launched 2 new products, right? We have launched cash loans in Tokopedia fairly recently, and we are also now in the process of launching cash loans on the GoPay app. So the 2 additional new channels for cash loans have been opened up this quarter. Hence, we expect an acceleration in the loan outstanding in the quarters to come. Everything that we do, we work together in our strategic partnership with Bank Jago to manage the cost of funds and also to accelerate the loan disbursement.

Hopefully, that answers your questions, Ferry.

Reggy Susanto

Thanks, Ferry. Our next question comes from the line of Ryan Winipta from CGS-CIMB.

Ryan Winipta

I have 3 questions from my side. My first and second questions would be specifically to Pak Patrick as the new CEO. I'm just wondering whether there's any potential key changes in the strategy direction and action from you, Pak Patrick? And what do you think needs to be resolved quickly? And what kind of problems and concerns that you see previously as a shareholder before and now as the CEO of GoTo Group?

And my second question would be on the -- given that you are also the Founder and also the Managing Partner of the Northstar Group, do you see your role as a CEO in GoTo as a full-time commitment? And how should we think about that?

And my third question would be, I think it's just a reiteration of what Ferry mentioned previously, regarding whether how management can balance between the growth and also profitability at the same time in our second half onwards because of the intensifying competition? I'll stop there.

Sugito Walujo

Thank you, Ryan. Maybe I'll address the second question first because that's about my commitment to GoTo. I would just like to give everybody an assurance that my effort and attention are 100% to GoTo. I will commit to GoTo as far as it takes. A lot of the things, the initiatives and all the push that we are making in the company are long term in nature.

And again, I'm fully committed to see -- to push that. But at the same time, if there's somebody who walks in and can do a better job than I can, I would be more than happy to work with that person to hand over and bring this company to the next level, right? But again, at this moment, I'm fully committed to GoTo.

Your first question is about changes in strategic direction and the problems that I see needed to be fixed immediately or resolved quickly. Yes, no, I think our strategic direction remains the same in the sense that we are still committed to deliver EBITDA breakeven by fourth quarter. The bigger challenge is that how do we actually grow profitably from hereon amid intensifying competition? As we have discussed, we are looking to further reduce our fixed costs, and then we will use the savings to invest in areas that matter for us to be able to achieve profitable growth.

And the second thing is that, and I cannot stress this enough, that we are cultivating GoTo-first approach, improving synergies across our ecosystem and strengthening collaboration with our strategic partners. GoTo is unique because we have a suite of products that none of our competition has in an ecosystem. And it is up to us as to how we want to leverage that and how fast we want to get there. And therefore, as I mentioned earlier, that sharp and speedy execution is critical.

And the third component of this is we need to augment our total addressable market. We need to be able to appeal -- to make our products appeal to people who are seeking budget, people who are seeking affordable products. And we are -- we continue to be focusing on that.

And I think the last question that you have is about competition and how we react to it and what -- and our strategy to raise nice growth while staying on track on the path to profitability. Today, apart from Hans, I have Catherine who is the President of our On-Demand Services; and Melissa, the President of our E-commerce, also known as Tokopedia. On that note, I would actually give the opportunity to -- it's up to them to share with you their strategy. Cath, why don't you get -- why don't you start first?

Catherine Sutjahyo

Thanks, Patrick. Thanks, Ryan, for the question. Catherine here. Glad to meet everyone. So yes, on On-Demand Services, you notice as well, Ryan, that we have seen in the recent months, competition has been growing more aggressive.

A few things I would like to mention on the On-Demand Service that we mostly known as Gojek. First thing is we are still maintaining market leadership in both our Indonesia transport and food delivery market.

Secondly, Patrick alluded to this earlier as well that we are now going after ways to augment our user base by going after this affordability strategy to address the budget consumers. Our analysis show that we can drive our market potential growth by expanding our reach to this segment of users. And as Jacky mentioned briefly as well that the economics of this, what we call the Hemat product, which is translated to value for money, has been proven to be good as well. Therefore, we will continue to focus on our strategy to make our services more accessible, to be more suitable for the affordable segment.

Both our food delivery through GoFood model Hemat and our GoCar through GoCar Hemat, providing a cheaper entry point for our consumers if they are willing to sacrifice on -- compromise on a few things, for example, to wait a little bit longer, to take on slightly smaller car, to choose for a more nearby assortment for food. Similarly as well on our 2-wheeler services, we are launching our GoTransit Multimodal, which is a very seamless way, first of its kind, integrating between the public transport and ride-hailing with one tap. So this is -- are going to be our strategy that we will push aggressively to address this affordable segment.

With that, I'll pass it to Mel who will address a little bit on the E-commerce side as well.

Melissa Juminto

Thanks, Catherine. And also thanks, Ryan, for the question. So for E-commerce, overall, around 60% to 70% of our market share in Indonesia is actually shared between the 2 largest players. Both players have been reducing incentives, although we have seen our competitors becoming more aggressive in recent months.

I also would like to mention that there are 2 types of e-commerce. The first one is the traditional e-commerce with search-based product discovery. The second one is e-commerce focusing on content-based business, utilizing live streaming to drive transactions, especially in the area of impulsive type of transactions.

So far, we have been focusing a lot on our core strength and capabilities in traditional commerce. We are building product propositions to appeal more to budget consumers through improving our assortments, especially doubling down on AI to actually improve on personalizations as well as using GoPayLater to make our products more affordable and appealing to much more budget consumers. We internally are conducting a strategy review, and we'll provide more color in the next -- our next call.

Reggy Susanto

Thank you, Ryan. Our next question comes from Pang Vittayaamnuaykoon from Goldman Sachs.

Pang Vittayaamnuaykoon

Can we also go back to the question -- I know we've been asking about a couple of times the dynamics in E-commerce segment. Just wanted to have like a clear understanding here in terms of the focus for Tokopedia. As we move towards second half of the year and as you just mentioned that some of the competitors actually began to be more aggressive towards the later part of the second quarter and into 3Q as well, are you going to focus on turning profitable first still? Or the plan is also, to a certain extent, to defend market share as well? That's question number one.

Question number two, for the On-Demand segment, the dynamic that you've seen between mobility and food deliveries, if there's any color you can provide on GTV growth between the 2 products? How do you foresee this trend and through the rest of the year, given also that the number of orders seem to have coming down? And as you push towards profitability as well, same here, will you focus on profitability first or defending market share first?

And lastly, can we also have more color around the Hemat strategy that you are introducing and we have seen some success? What is the margin profile for this Hemat versus your legacy products?

Sugito Walujo

To answer your question, Pang, and if it is not clear, please ask again because I may have forgotten some of the questions. But in terms of E-commerce, the way we look at the business is that there is -- actually, the market is actually still has a lot of potential. If we look at the penetration of e-commerce in Indonesia compared to China, we are only half of the rate of the penetration. And in terms of frequency, we are 1/3 of what the Chinese consumers are consuming today. So the market is still quite open.

And yes, we recognize that there are -- we have a lot of competition in existing and new ones.

But there are certain things that Tokopedia still has a lot of potential to improve. The first one is that we need to make our assortment larger and more appealing to a larger base of the population. If you look at our type of customers, Tokopedia today appeals most to the most affluent market in big cities like in Jabodetabek because -- especially because of the integration that we have with our On-Demand Services where we can deliver our products to our consumers within 2 hours. And I still believe that we are probably the only one that can offer that kind of service. Tokopedia has a special appeal to that customer base.

However, the biggest growth potential is what we call the budget consumers or the mass market, right? And apart from assortment, the second thing that Tokopedia is reviewing is also about category strategy. We are strong in certain categories. We are -- we have a lot of potential in other categories that we are not present. So what we -- what I'm trying to say is that even within our current business, we still have a lot of levers that we can pull.

Now it's all when it comes to the delivery of that, it all depends on execution quality. And I think sitting here, having been here for only 45 days, I think I'm assured -- pretty sure that the team in Tokopedia are capable of pulling this. Not to talk too much details because we will talk about this in the next earnings call, I have personally seen early signs that the team has found new levers for growth. And together with the team, we are taking a comprehensive study to see where the gaps are and then we will fill those gaps. We are not perfect.

We have a lot of things to catch up, but we will address them. And we hope to provide you more details in the coming quarters.

Now I don't remember the second question. Sorry. The dynamic between mobility and food delivery. Okay, maybe I'll hand this over to Catherine to address it.

Catherine Sutjahyo

Pang, good to hear from you. Maybe I'll address your second question, and I'll come back to that one, right? You're asking, how does the Hemat work? So let me take a little bit of an example, for example, the Car Hemat, right? So Car Hemat, basically, what we are providing to the customer is in options, options of a very clear value proposition of a GoCar regular versus GoCar Hemat.

So regular is the product that we always have before, right? So for GoCar regular, the car -- if you order a GoCar, the car that is being assigned to you is the normal regular car. But if you order a GoCar Hemat, we will assign to you what we call economical car. This is a smaller car, right?

Similarly, as well, your waiting time for the car will be 5 to 7 minutes, slightly longer, that will allow us to allocate a more efficient -- cost-efficient car as well for us. So with -- lastly, it's also the distance. With the Car regular, you can travel a pretty long distance. But for a GoCar Hemat, you can only travel up to 10 kilometers. This is to make sure we can create such a density for our car driver, so they can increase the productivity of the driver as well.

Then with that, basically, the proposition is if, as a customer, you are willing to go for a smaller car, you were willing to go with slightly longer, your price can come down by 15%, 20% cheaper compared to the Car regular. This is back to Jacky's point earlier that this model that we are doing the Hemat is economically sustainable, and thus, we will be able to expand them and scale them very fast after this.

Similarly, for the Food Hemat as well, a customer can have a choice within the assortment. If you choose Food Hemat, you can only choose an assortment within first 2 kilometers, your nearby merchants, similarly to promote the density of the order. Secondly is also the waiting time. If you order the GoFood regular, the average waiting time is 25 minutes. But when you order GoFood Hemat, the waiting time can be up to 45 minutes.

This will help us to increase the probability for us to be able to order batch and improve the driver productivity by increasing the density.

Similarly with that, the delivery price for our GoFood then for the regular typically now is from IDR 9,000 to IDR 11,000. Now with the GoFood Hemat, you can lower down the delivery price by 1/3 of it, which is IDR 3,000 to IDR 5,000. So again, this is basically how we are doing it to provide a sustainable kind of a growth lever for us to expand our customer base.

Question on the margin, yes, lower price does not mean that it's going to be a lower

profitability margin. Again, as I mentioned, because using the car, for example, the -- because

it's economical car, as you can imagine, the driver main cost is their fuel and second is their -- the installment for their car payment, right? As you can imagine, when the car is smaller, more economical, the fuel efficiency typically are better and as well as their monthly installment is lower.

This would allow this win-win-win kind of a combination that the driver can take on slightly less that still help them to maintain their take-home income still. But at the same time, we will be able to pass on some of the savings for the customer to allow them to have a cheaper product. So yes, it's not necessarily mean that it's -- because it's more affordable, it's less profitability.

Sugito Walujo

Yes. I think generally speaking, all of the drive to affordability does not necessarily mean that we are going to have inferior unit economics for those products. Because it is -- we are creating those products with fundamental change of the business model or the way that we are doing business, our cost structures would also go down commensurately with higher volume. And therefore, from a unit economics perspective, the early signs convince us that these products are actually more profitable for GoTo.

Reggy Susanto

Thanks, Pang. Our next question comes from the line of Sachin Salgaonkar from Bank of America.

Sachin Salgaonkar

Congrats on a good set of numbers. I have 3 questions. First question was more regarding when do we see GTV bottoming out from a Y-o-Y growth? Listening to all the comments from management, it's very, very clear the focus on cost control is there. And clearly, there is a visibility of further cost control.

But just wanted to understand if it is coming at the expense of GTV growth, and when do we see that growth sort of bottoming out?

Number two, I wanted to understand the impact on competition. We did see a bit of an improvement in take rate this quarter for E-commerce, largely flattish for On-Demand Services. Directly, do we see further room for improvement in take rate? Or given where competition is, we don't see much of a pace of improvement?

And third question, just wanted to understand your thoughts on the government looking to regulate the cross-border commerce by imposing a $100 cap.

Sugito Walujo

Thanks for your questions. The first is about GTV growth, right, and where's bottoming up and when -- and how would that be affected by competition? So let me just say that there are things that we have control over, and there are things that we don't have any control. So what our customers -- our competition is going to do going forward, I think my answer is that if they depart significantly from the practice that they have -- we have seen in the past few months and to become more aggressive and the capital market of the investors tolerate that, obviously, that would put more pressure on our GTV growth or improvement.

I think I would not want to comment to exactly we are going to see our GTV turning around, if you will, from this level. But what I can say is that all the initiatives that we just talked about, we are seeing early signs that it will generate GTV growth from our level where we are today, right? But again, we think that it is still too early to predict. But hopefully, by our next earnings call, we will be able to give you a little bit more clarity on that.

And then, Jacky, would you like to take the second question?

Jacky Lo

Sure, yes. So I guess like in terms of the take rate, so On-Demand Service, it was flat quarter-on-quarter. I think the major reason is because of the holiday season. So that's shifting the mix towards the enterprise merchant for food delivery. So that's kind of impact because the take rate is lower.

So -- and offset by the increase in the mobility side, so that's kind of resulted in a flat quarter-on-quarter. And in terms of E-commerce, I think as you know, we increased the B2C commission rate in March. So that's the full quarter impact in Q2. But there's also like a mix shift in Q2, so a slight increase in the digital goods. So I think that's kind of offset that improvement.

But overall, I think going forward, we will continue to leverage like value-added services to such as like ads to drive.

Specifically for e-commerce, I think that has been a contributor and growing at a fast pace. So we will continue to leverage that to drive the e-commerce take rate. And for On-Demand Service, the ad's contribution is still relatively small, but we see a lot of opportunities in that area. So that will help to drive the On-Demand Service take rate as well.

Sugito Walujo

I think just general comment, I don't think that we are banking on increasing take rate from our On-Demand Services to drive growth. And that is actually contrary to our strategy to make our pricing to become more -- our services to become more affordable to our customers. At some point, the products have become too expensive for the general population.

So as we mentioned a few times in this call, the engine for growth is actually going to be about our products, new products that are going to be more affordable to our customers. And I think that is true for e-commerce. I think the focus on e-commerce is not only to make the assortment more affordable and shifting categories to those that are more lucrative for Tokopedia, but also working with our merchants to make sure that by working with Tokopedia, they can generate more sales and more profit to their business.

And the third question is about the regulation, the government regulation on cross-border, but the limit of the goods that can be directly imported. At GoTo, we are not doing any cross-border transactions. We are monitoring updates to the regulations and the implementation of it. And I think, generally speaking, we are going to continue to be compliant with all prevailing regulations.

Reggy Susanto

Thank you, Sachin. With that, we have reached the end of the question-and-answer session, and we conclude our conference for today. Thank you for participating.

For further details see:

PT GoTo Gojek Tokopedia Tbk (GTOFF) Q2 2023 Earnings Call Transcript