D-MARKET Elektronik Hizmetler ve Ticaret Anonim Sirketi (HEPS) Q4 2021 Earnings Call Transcript

D-MARKET Elektronik Hizmetler ve Ticaret Anonim Sirketi (HEPS 3.88%)
Q4 2021 Earnings Call
Mar 24, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Hepsiburada conference call and live webcast to present and discuss the fourth quarter and full year 2021 financial results. [Operator instructions] And the conference is being recorded.

[Operator instructions] At this time, I would like to turn the conference over to Ms. Helin Celikbilek, investor relations director. Ms. Celikbilek, you may now proceed.

Helin Celikbilek -- Director of Investor Relations

Thanks, operator. Thank you for joining us today for Hepsiburada's fourth quarter and full year 2021 earnings call. I'm pleased to be joined on the call today by our CEO, Mehmet Emirdag; and our CFO, Korhan Oz. The following discussion, including responses to your questions, reflects management's views as of today's date only.

We do not undertake any obligation to update or revise this information except as required by law. Certain statements made on today's call are forward-looking statements. Actual results may differ materially from these forward-looking statements. Please refer to today's earnings release as well as the risk factors described in the safe harbor slide of today's presentation, today's press release, the 6-K, our prospectus filed with the SEC on July 1, 2021, and other SEC filings for information about factors, which could cause our actual results to differ materially from these forward-looking statements.

Also, we will reference certain non-IFRS measures during today's call. Please refer to the mix of our presentation as well as today's earnings release for a presentation of the most directly comparable IFRS measures as well as the relevant IFRS to non-IFRS reconciliation. As a reminder, a replay of this call will be available on the Investor Relations page of Hepsiburada's website. With that, I will hand it over to our CEO, Murat.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Thank you, Helin. Welcome, everyone, and thank you for joining us today. 2021 marked an important milestone in our company over 20 years of history as we became public in July. As a national champion in a highly competitive market with significant growth potential, we laid out three strategic priorities: first, accelerate growth drivers such as adding more customers, driving product frequency, attracting more merchants, and expanding our selection; second, differentiate the way of logistics and technology capabilities to offer best-in-class customer experience; third, expand our strategic assets, such as Hepsipay.

As part of our continued focus on accelerated growth drivers, we achieved 53% annual growth -- order growth, which was instrumental in our GMV growth. Such order growth was on the back of 25% annual growth in active customers and 23% annual growth in order frequency. By leveraging our robust logistics and technology capabilities, we continued our NPS leadership in the Turkish e-commerce market with 68 in December 2021. We believe that this score underpins our superior customer experience on our platform and our ability to drive the service quality further even during the high season of Q4 2021.

Being one of our key strategic assets, HepsiPay, has achieved 5.2 million open wallet pays on Hepsiburada's platform as at the end of 2021, an impressive level in just six months. Overall, through solid execution of our strategic priorities, despite a fairly turbulent operating environment, we concluded the year with encouraging growth across our key operational metrics delivering TRY 26 billion GMV. This corresponded to a 54% year-on-year growth in 2021. On a two-year basis, the annual GMV growth was at 80%.

We are glad to see that we recorded higher GMV than our guidance. This was possible through our strong execution and our products and services in line with customer needs and expectations throughout the year. Our revenue growth in 2021 was 19% and a 7.1% gross contribution margin. It is worth mentioning that our focus on sustainable growth has also resulted in a 2.7-percentage-point improvement in the gross contribution margin in the fourth quarter compared to the third quarter of 2021.

Now let's take a closer look at the fourth quarter dynamics and our action. Next slide, please. We faced several challenges in the fourth quarter, including currency volatility, supply trend extent and a highly competitive market environment. We navigated through these headwinds successfully with our hybrid 1P/3P business model, strong execution experience through nationwide logistics network, and a data-driven marketing as well as diverse affordability solutions, addressing the needs of our customers.

Our 1P retail operation has served well, particularly at the time where rapid price changes were inevitable. Mostly available for important merchandise as well as supply shortages due to global supply chain issues. Our diverse affordability solutions, such as the credit card play, instant customer loans, and our ability to offer buy now pay in January campaign in November, which we delivered through our collaboration with bank. We also achieved a broadly active merchant base and wider selection, resulting in improved availability across long-tail products and services.

Our investment in growth, brand selection, and exceptional customer experience paid off well, showing strong momentum in all key growth drivers. Active customer base grew by 25%, reaching 11.3 million. Our order frequency grew by 23%, reaching 4.7 million. Active merchandise grew by 68%, reaching 75,000.

Total number of SKUs more than doubled, reaching 19 million as at the end of the fourth quarter. Next slide. 2021 was a year during which we accomplished a great deal toward ensuring fast, reliable, and frictionless customer experience through our services selection and convenience solutions. Having our own robust logistics capabilities provide us with a competitive edge and flexibility to introduce and deliver differentiation services to the market.

One example is our frictionless return service, in which we pick up returns from customer stores at their preferred schedule, and we do it across the country. By doing so, we have observed a 40% lower contact ratio through all our after-sales channels due to return requests in the fourth quarter compared to the same period of the last year. Next, we introduced a filter product feature highlighting the availability of products for next-day delivery. In 2021, HepsiJet delivered around 79% of our orders through our retail operation on the next day.

In 2022, we plan to enlarge the production available for the next-day delivery and our capability to do so. Furthermore, we began to offer our customers an exchange option for products they purchased from our 1P operations for another size or color. New convenience product features of drop off its neighbor store and change the delivery address wireless shipment underway were introduced by HepsiJet in early 2022, making life easier for our customers. A variety of wide selection on our platform is highly critical for us.

Having onboarded over 30,000 merchants in Q4, we ended the year with some 90 million SKUs. During the fourth quarter, we launched new digital products and services, including gamified lotteries and raffles as first in the market. These have resonated well with our customers and contributed to our engagement with them. Equally importantly to ensure our customers can find what they are looking for in a swift manner.

For that purpose, we have redesigned our Hepsiburada app, increasing the visibility of our non-electronic categories and on-demand grocery service. Moreover, we invested in our skill to personalize the content, better ranking, and recommendations, increasing the click-through rate and order completion. Last but not least, our diverse affordability solutions served well to facilitate financial flexibility of our customers. I will talk more about our buy-now-pay-later solution on the upcoming slide.

Before I do that, I would like to give an update on the experience of our merchants. Next slide. Our value proposition for our merchants is designed to serve their entire life cycle. Our approach is to be their entry-end solution partner, maximizing returns for both sides.

It all begins with a smooth onboarding. The improvement in the process throughout the year, the average onboarding speed is reduced to half by February 2022. An efficient and effective interaction with our merchant base is highly crucial to ensure fast service for our customers. The deployment of HepsiPartner, our merchant app, has enhanced this interaction.

Through HepsiPartner, our merchants can view their transaction summary, handle inventory management, respond to any customer question, review their financial summary and connect to customer services as well as our training portal. All these have contributed to the rise of the number of active merchants from 45,000 in Q4 2020 to 75,000 in Q4 2021. Besides our comprehensive set value-added services for merchants has continued their penetration within our base. I would like to share some data points here.

HepsiJet delivered 52% of total marketplace parcels in the fourth quarter, totaling 43% in 2021 versus 15% in 2020. HepsiLogistics served fulfillment to some 191 merchants and all seven distribution centers located across strategic locations in Turkey. Nearly 25,000 merchants use our sponsored app through our advertising platform, HepsiAd, in 2021. Our collaboration with Facebook and Google on advertising and technology solutions contributed to the growth of our ad services business.

Over 68,000 training stations were completed on our training portal HepsiAcademy during 2021 and was instrumental in accelerating the integration of our merchants to our platform. In 2022, we will continue our focus on attracting more merchants to our pay by further improving merchant lifecycle management and value to services and widening our solution in non-electronic and long-tail products on our platform. Next slide, please. We invested in strengthening our logistics footprint in 2021.

Including our fulfillment centers, transfer hubs, and cross-docks, our total service area reached over 190,000 square meters in 2021, up from 135,000 square meters a year ago. Instrumental to our strong performance, fast and on-time delivery, HepsiJet has partnered with 2,150 carriers. HepsiJet's expansion has been diligently constructed in line with our needs across the country, including nearly 2,700 dropoff points. This year, HepsiJet delivered roughly half of our total parcels, up from 27% a year ago.

In addition, HepsiJet continued to raise the bar in customer experience and introduced two-man handling cargo service under the name HepsiJet XL, addressing the need for a high-quality and reliable service in that particular segment. Recently, this service became available in all 81 cities in Turkey. HepsiJet XL service quality is evidenced by 98% customer satisfaction score in the fourth quarter of 2021, according to our internal reporting. Initially, having started with our retail business, HepsiJet XL will serve the merchants on our platform, which is expected to contribute further to customer satisfaction, given its service quality and easy return option.

Now let me elaborate on another strategic updated in our portfolio, Hepsipay. Next slide. Again, Hepsipay is one of the most strategic assets in the TAM that is addressing a sizable market opportunity in payments. Since its debut, Hepsipay has displayed strong momentum in the uptake of customers reaching 5.2 million open wallet accounts by the end of the year, and this resulted in around 37% of total GMV, passing through Hepsipay wallet in the fourth quarter.

During the year, Hepsipay signed collaboration agreements with two prominent parties. One of those is the fintech subsidiary of Turkey's leading telecom operator, Turkcell, to enable direct carrier capability at Hepsipay Wallet. Turkcell subscribers are able to show at Hepsiburada without a credit or debit card up to a certain monthly limit and payback through their mobile phone invoices. Second one is the Istanbulkart by Istanbul Metropolitan Municipality, which is a contactless prepaid card estimated to be around 80 million for public transportation payment in the city.

The Istanbulkart will soon become another payment tool at Hepsiburada. And this will take us one step further in bringing e-commerce experience to a broader audience. Another exciting development is the first in the market launch of the buy-now-pay-later-solution by Hepsipay. This new feature is an important milestone for the Turkish e-commerce industry in terms of innovative affordable solutions.

The user limit at buy now pay later are defined based on the credit scoring record at the Credit Bureau of Turkey and shopping history at Hepsiburada. The initial demand has been encouraging. Buy now pay later has resonated well with our audience, particularly in environments where affordability solutions are more wider than ever. Our plan is to scale it gradually as we continue to learn and improve.

In addition, we will also continue our focus on advancing with new features in 2022. As disclosed, we have taken the first step to tap the consumer financing sector by acquiring Doruk Finansman, a licensed holder company. We are in the process of taking the next step to launch our consumer financing solution in addition to those offered by a leading bank already on our platform. By doing so, we aim to further diversify our affordability solutions.

As shown on the next slide, these actions actually reflect on our strategic roadmap as it moving forward. Next slide, please. In 2021, we made good progress on Hepsipay. It was the initial step in our journey to evolving into a best-in-class, payment companion across online and offline.

Going forward, we intend to build on this momentum and expand the use of already launched solutions and develop further fintech capabilities in 2022. We believe Hepsipay is well-equipped to enable a frictionless platform experience across payments, money transfers, and other fintech capabilities across online and offline. Next slide. As another strategic asset, Hepsiexpress expansion continued in 2021 through integration of strong retailers and wide installation products by making solid steps toward unique customer experience.

Its ecosystem now includes over 60 brands from both leading national and regional retailers across roughly 2,100 stores. Along with the advancement in interface, Hepsiexpress provides grocery, water, and flower delivery in a hybrid localized experience with easy product discoverability and price comparison features. During the fourth quarter, Hepsipay Wallet was integrated into Hepsiexpress experience, contributing to convenience at checkout. Hepsiexpress contributes to our platform in acquiring new customers, increasing order frequency as well as engaging strategic segments, such as women.

While we remain focused on customer journey and end-to-end experience, we will gradually optimize our service model that will lessen the dependency on our delivery resources. On the next slide, I would like to elaborate on our strategy for 2022. In line with our strategic priorities, we aim to deliver strong and sustainable growth in 2022. Operating with disciplined cash and cost management in mind, we will continue to strengthen our value proposition in the market with our hybrid 1P/3P business model; our household brand name; our strong customer experience; our robust nationwide logistics network; our diverse affordability solutions; our innovative gamification tools; our efficient marketing web segment-based initiatives, including women, family, and youth; targeted marketing campaigns and in-house data science capabilities; and finally, with our super ecosystem of individual services.

Before I finish, let me summarize how we see the current outlook on the next slide. Let us remind you that Turkey offers an attractive market with a sizable young, urbanized, tech-savvy, and growing population. With the majority of retail still being offline, the online penetration within total retail is expected to exceed 20% by 2025, indicating great potential for growth. In 2022, despite the inflationary environment, we have started the year with solid performance and expected GMV growth in Q1 to be higher than the growth rate for the rest of the year in 2022.

Based on our current view of the market dynamics and macroeconomic environment, we expect to achieve around 50% GMV growth compared to 2021 for the full year of 2022. As we grow, we currently have no plans to raise capital during the next 18 months. On our path to profitability, we expect to improve our margins by accelerating growth drivers, differentiating via logistics and technology, and expanding our strategic assets with disciplined cash and cost management. With this, I would like to thank you all for listening and leave the floor to our CFO, Korhan.

Korhan Oz -- Chief Financial Officer

Thank you, Murat, and welcome, everyone. As Murat highlighted, continued growth momentum in our key growth drivers in 2021 was encouraging. Rising active customers and higher-order frequency were instrumental in increasing the total order volume growth of 53%. These robust trends in our key growth drivers give us confidence for our adds.

Let's move to the next slide where I would like to highlight some cohort analysis. Next slide, please. To track our customer growth and engagement, we performed cohort analysis. In this cohort analysis, we grew our active customers based on the year of their first purchase through our platform and track GMV generated per cohort as seen on the left.

We also monitor order frequency in a similar fashion as seen on the right. Since 2013, we observed consistently improving trend in GMV per cohort active customers. In the first year of purchase, GMV per cohort active customers in 2021 increased by approximately 7% compared to 2020 on a strong pace from last year. The average growth of our order cohort in 2021 was approximately 26% compared to 2020.

Similarly, we also observed a consistently improving trend in our order frequency per cohort active customers since 2013. In the first year of purchase, frequency per cohort customer in 2021 increased by roughly 19% compared to 2020. The new cohorts are more frequent purchases than the prior one. The continued growth in frequency is also supported by our online grocery business, Hepsiexpress, which is instrumental in attracting and engaging customers to shop on the Hepsiburada platform.

In the next slide, I will talk about our strong GMV performance. Next, please. Let me first share insights on the last quarter. In line with our order growth, our Q4 2021 GMV grew by 52%, compared to the same period of last year to TRY 9.4 billion.

This solid growth was registered against an already strong fourth quarter of 2020. Considering the strong baseline effect last year, our two-year CAGR growth rate was 81%. During the fourth quarter, the share of marketplace GMV reached 65%, compared to 60% in Q4 '20. When we analyze on a quarter-on-quarter basis, on the contrary, the share of 1P increased by five percentage points.

Strong 1P operations helped us in meeting the customers' demand under currency volatility and sourcing issues in Q4 2021. With regards to the full year, in line with our order growth, our GMV grew by 64% compared to the year 2020. At a two-year compounded annual growth rate, this corresponds to 80%. The share of market of 68% in 2021, up from 59% in 2020.

Having launched our marketplace six years ago, we continue to see strategic advantages of it in our business in the long term, a wider selection, availability, and competitive pricing. With that said, 1P will remain as one of our strategic competitive advantages in the market. On the next slide, I would like to discuss GMV breakdown along with revenue performance. Next slide, please.

Before discussing our revenue performance, let me give you some color on our GMV breakdown. In 2021, while we see a similar 50% to 40% GMV in favor of electronics, the growth in units sold but higher for non-electronics as a result of expanding our selection with long-tail products. Revenue, on the right-hand side, increased by 25.4% in Q4 '21 compared to the fourth quarter of last year. This was mainly driven by 23% growth in 1P operations, 30% growth in our marketplace revenue, and 35% increase in our delivery service revenue.

For the full year, revenue grew 18.5% compared to 2020. This was mainly driven by a 15.7% growth in market operations, and 66% growth in our delivery service revenue against nearly flat marketplace revenue. The difference in annual GMV and revenue growth rate is mainly a reflection of the nine percentage points, shifting GMV mix in favor of marketplace, higher campaign costs, and customer discounts, particularly during Q3 2021. On the next slide, I would like to discuss how certain factors impacted our profitability.

Next slide, please. Let's look at the key factors that helped us to better understand the dynamics behind our gross contribution margin trends. First, our commission rates. Our commission rates that we are able to charge to our merchants on the marketplace remains at around the same level in the fourth quarter compared to the previous quarter.

And as we previously mentioned, this is at a high single-digit level on average. Second, customer discounts. This was a tool we had been heavily reliant in the third quarter of 2021 to stimulate the customer demand in relatively slower market conditions. During the fourth quarter, although there is an increase compared to the same period last year, we substantially cut down on spending on such discounts compared to Q3.

We have used data-driven and targeted campaigns more effectively and worked on generating efficiencies within the ecosystem via our in-house growth engine. Q4 is typically is not a best quarter to realize the full impact on effectiveness due to the existence of peak shopping occasions such as the legendary November. Nonetheless, in Q4 2021, our gross contribution margin improved significantly by 2.7 percentage points compared to Q3 2021. Higher 1P operations with the early secured inventory also contributed to this margin performance.

Compared to the same period last year, our gross contribution margin declined slightly from 7.5% to 7.1%. For the full year, our gross contribution margin declined 1.9 percentage points to 7.1% year over year, particularly due to low margin performance in Q3 '21. Now let's have a look at our operating expenses in the next slide. Our net operating expenses as a percentage of GMV reached 14.3% in the fourth quarter, up from 10.5% a year ago.

In 2021, 3.8 percentage points rise in net operating expenses as a percentage of GMV was mainly due to 1.9 percentage points rise in advertising expenses as we continue to invest in our brands and growth drivers. These advertising expenses became more costly particularly in the second half of last year as both the need for advertising and the unit cost of advertising continued to increase. 1.4 percentage points rise in our G&A expenses mainly due to the talent onboarding and share payment expenses. 0.5 percentage point rise in shipping and packaging expenses driven by the 53% increase in number of orders and around 25% rise in unit prices applied by our delivery partners.

Let's move to the EBITDA margin bridge on the next slide. As a function of aforementioned drivers, EBITDA as a percentage of GMV in Q4 2021 showed a 4.3 percentage point year-over-year decline. On the upper part, you can see that. And yet, it improved by a solid three percentage point increase compared to Q3 2021.

For the full year, below, EBITDA as a percentage of GMV declined by 5.7 percentage points year over year due to a 1.9 percentage point decline in gross contribution margin, 1.9 percentage point rise in advertising expenses, 1.4 percentage points rise in payroll and outsourced staff expenses and 0.5 percentage points rise in other opex items. Finally, I would like to say a few words on our cash flow dynamics in the next slide, please. In Q4 2021, net cash provided by operating activities decreased by TRY 214 million, reaching TRY 45 million, mainly as a result of higher net loss once the positive impact of the unrealized foreign currency differences is eliminated. For the full year, the TRY 352 million decrease in net cash provided by operating activities is a result of increased net loss for the year.

With the TRY 77 million capex in the fourth quarter, total for the year reached TRY 215 million. Our capex were mainly for product development across app, side and mobile platforms as a result of growing operations as well as purchase of property and equipment. Free cash flow was negative TRY 32 million, compared to positive TRY 221 million in Q4 2020. For the full year, our free cash flow declined to negative TRY 124 million from positive TRY 341 million in 2020.

The decrease was mainly by the decrease in cash flow from operating activities and higher capex expenses in 2021. We continue to operate with negative net working capital during 2021. The change in net working capital in Q4 was TRY 230 million, whereas it was TRY 1 billion for the full year 2021. I would like to end my presentation saying that we remain committed to our focus on strong healthy sustainable growth in 2022 onwards, the disciplined cash and cost management.

With this, I end our presentation. Thank you for listening. Operator, please open up the floor for questions.

Questions & Answers:

Operator

[Operator instructions] The first question is from the line of Josiah Miriam with Morgan Stanley. Please go ahead.

Miriam Josiah -- Morgan Stanley -- Analyst

Hey. Good afternoon, everyone. Thanks for taking my questions. Firstly, just going back on the full-year results.

So your guidance was set in November. So just wanted to get a bit more color on what has changed in the last couple of months for you to be so significantly, obviously, higher inflation has been an issue. But just wanted to also get a bit of a sense of what you've been seeing in the last couple of weeks given your statement you made around Q1 growth to be higher than the rest of the year. So have you already started to see some weakness in the consumer sentiment and trading in the last few weeks? Any more color on that would be great.

Then secondly, if you could just give more detail on what you're seeing at the moment in terms of inventory on the 1P business? How difficult is it to get stock at the moment? How much of price increases are you passing through? And then finally, if you could just give a bit more color on EBITDA and your expectations for this year and perhaps any color on the trajectory of that as we move through the year. Thanks.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Hi, Miriam. Thank you so much for the question. To my understanding, you'd like to understand the consumer sentiment and how much is actually behind the recent trend in Q1 period trading, if I'm not mistaken, right? That's the first question. Let me take that one and maybe Korhan, you can address the others.

In terms of like -- despite the inflationary environment and the macro challenges in the market, actually our Q1 started off very strongly, which is very encouraging for us. But with that said, also, let me maybe clarify a few details behind this growth momentum we experience right now, which we believe actually is strongly driven by strong growth drivers, including customer as well as frequency as we also had been last year in Q4 as well. So basically, we see continued momentum of our growth drivers also being healthy in Q1. And with that said, maybe I can also give some flavor on the inflationary environment and how it impacts on our consumers in Turkey in general.

First of all, let me just say, it's very unfortunate that we are experiencing high inflationary environment in Turkey right now. But actually, Turkey has gone through this high inflationary in the past as well. So this management team here is pretty experienced to handle this kind of environment. Our first observations on the customer behavior, even though it's very early, maybe to tell is the fact that, actually, we haven't seen yet any extreme behavior up to this point.

When I say extreme, I refer to two potential extreme behaviors. One actually is that people start consumption, which we haven't seen yet; or people actually focus on stocking up and piling up, which we also haven't experienced and observed yet. So basically, we haven't seen the two extremes up to this point. And then also, we believe in this dynamic, we also believe customers tend to come more online to check for price comparison because now actually it's more than important to understand the price transparency and being able to compare it.

These are the few many dynamics I can tell on customer behavior. With that said, maybe I can mention a few rising insights and trends in terms of customer behavior also actually realized. And those are actually first of obviously, the affordability which is now very more than important it was before. Affordability actually is very important.

And lastly, because we have a diverse set of affordability solutions, we believe we are well-positioned to address that need with our customer loans, cards to play, and actually with buy now pay later, and many more. And in that work, we believe actually we are able to address that in that sense. And also our ability to offer bundled offers, ecotax also available for the affordability seekers. And of course, our new trials and models, how we can actually make social commerce much more actually accessible for micro-influencers so people can also get some income in it also seems to be really relevant for this time.

And other insights, we realized that also makes up even more early in this time that our 1P muscle is very strong. Because this -- during these times, when there is a high volatility and there's a need for price consistency and access to inventory, our 1P was very relevant. Actually, we see the benefit of it obviously, like we did in Q4. And also, we understand customers CCR trusted brands like we are with our 20 years of history and trusted brand equity, we believe we are a good choice for our customers.

Our aftersales support with credible and peer customer experience also positions us well to address that need. Let me stop here. Maybe Korhan, you can take the other two.

Korhan Oz -- Chief Financial Officer

Thank you, Murat. Miriam, thank you for the question. On the inventory side, we have been directly sourcing with our 1P arm. And since October, we have been buying necessary inventories to get ready for the November period and even toward the first quarter.

So even there have been some sourcing issues on the 3P, we're always able to compensate it with our 1P strong arm. Also, our current inventory level is sufficient enough to source us for the next quarters, and we don't see any sourcing problem for the time being. I can say for these payment terms, vendors are asking for shorter payment terms or even instant payments for those inventories. But with our negotiation skills, we're always able to handle it with the vendors.

And so far, we haven't faced any major issues. On the EBITDA side, we have a plan for better profitability. Would you like to start, Murat, and I --

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Yes. Maybe I can give some insights on that and you take the question to make sure we address it fully and completely. In terms of path to profitability, actually, it's fair to say profitability will be more important than ever in this macro-environment, and we really understand that need, and we have a view on path to profitability in the team. And actually, we also understand that the market expects to hear from us about this path to profitability.

However, due to uncertainties and current circumstances in the market, we believe it's not the best time to communicate a specific calendar at this point. But we already began taking solid actions as visible in our Q4 results and also our current momentum in Q1. So I think once the macro stabilizes, we may also consider disclosing more details on our path-to-profitability calendar. But with that, maybe Korhan, you take that question on EBITDA.

Korhan Oz -- Chief Financial Officer

Yes. Thank you, Murat. But with this path to profitability, we are being by improving our margins by selling more non-electronics through increased long-tail selections and with our current merchant base, and this efficient and data-driven marketing, disciplined cost and cash management, and incremental monetization and contribution from our strategic asset and initiatives. So one can expect that this path to profitability, our EBITDA will improve throughout the time.

And going forward, we will reduce our cash flow. Thank you.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Well, did that address your question, Miriam?

Miriam Josiah -- Morgan Stanley -- Analyst

Yes. Just two follow-ups. Just on the first one. So on the guidance for Q1 to be higher.

So are you basically saying that it's not as if you started to see any weakness in the last couple of weeks, really, as to why you're guiding for Q1 to be in the rest of the year?

Murat Emirdag -- Chief Executive Officer, Hepsiburada

I see. Actually, yes, as you said, I think the year-to-date momentum is pretty promising and encouraging for us. However, based on the current uncertainties in the macro environment and our commitment to disciplined cost and cash management on our path to profitability, we believe around 50% is the prudent guidance at this point. So that is the reason why.

Miriam Josiah -- Morgan Stanley -- Analyst

Got it. And then just secondly, in terms of the 1P/3P mix for this year, should we take the 4Q mix is sort of broad indication for what you'd expect? Or do you think 1P will be even higher?

Korhan Oz -- Chief Financial Officer

Well, we are taking net questions from time to time. If we foresee any sourcing issues then we just actively start buying on the 1P side but not under normal circumstances. We just keep it as is. So there's a healthy balance between 65% to 75% depending on the sourcing, we can always act accordingly.

Miriam Josiah -- Morgan Stanley -- Analyst

Thank you.

Operator

Next question is from the line of Kilickiran, Hanzade with J.P. Morgan. Please go ahead.

Hanzade Kilickiran -- J.P. Morgan -- Analyst

Thank you very much. I have three questions. The first one is related to your working capital and the impact on the margin. You also ended 2021 with a very strong inventory buildup as far as I can see on the balance sheet.

So could this mean that there is also another positive quarter is ahead in terms of margins because inflation still keeps going up in Turkey? So do you see some sort of extra room in first Q margins? And the second one is, again, inflation-related. On your 50% GMV growth guidance, what is the inflation assumptions you have? And the third question is about the competitive environment. Have you been observing a better, I mean competition, competitive environment, particularly after surging inflation because I presume this could accelerate the cash burn in periods or periods of focus has been shifted to others platforms, I'm not really sure about it and I really appreciate if you can comment about the competitive environment? Thank you.

Korhan Oz -- Chief Financial Officer

Thank you, Hanzade. Let me take the first one, Murat. On the working capital side, our negative net working capital keeps on increasing. One of the major reason is that our trade payables and service payables are increasing due to inventory procurement.

As I mentioned, we started procuring inventory starting from October onwards, and especially in the last two months to get ready for the first quarter and to eliminate the impact of inflation and currency volatility. Yes, we have a lot of inventory available as of the year-end, and we are utilizing the benefit of it during Q1. So you can expect our margin improvements will slightly continue during this period. Also on the inventory assumption, on the cost side, our inventory assumption is something around 40% to 50% depending on the nature of the costs.

And also third question, Murat?

Hanzade Kilickiran -- J.P. Morgan -- Analyst

Sorry, Korhan. Is it -- I mean, do you base your 50% GMV guidance on 40% to 50% average inflation expectation?

Murat Emirdag -- Chief Executive Officer, Hepsiburada

I will take the competition question, but an -- did we address your first two questions, Hanzade, before I take the competition one, issue?

Hanzade Kilickiran -- J.P. Morgan -- Analyst

The first question has been addressed but the second question, because your GMV, you are guiding GMV growth of around 50%, which is lower than the expected inflation in Turkey and you are still acquiring customers and more merchants there. So this sounds like a little bit, I mean, conservative to me. So I really wonder what your macro assumptions under this GMV guidance?

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Korhan, could you take the assumption on the behind our value --

Korhan Oz -- Chief Financial Officer

Hanzade, our 50% growth is mainly based on our frequency increase and customer increases. It's not directly correlated to the inventories. The inventory impact is not directly affecting our GMV growth. Those are not apples to apples for frequency and number of customers, is increasing significantly on our side.

In our inventory assumptions, there is inflation assumption varies between 40% to 50% depending on nature, but recently, Turkish Central Bank made a survey, and according to this survey, the result is around 42% for 2022. So we based our budget on this assumption.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Maybe also -- maybe just to add more color on it. Like Korhan said, the survey, the Central Bank participation survey cited 42% inflation roughly I guess. But also in our model, Hanzade, it's also good to remind you all and maybe also to clarify the fact that the growth in GMV or average sales price or average order value is not an apples-to-apples comparison with the inflation rate. Maybe let me give you some examples why and the underlying factors behind it.

The first one actually could be, for instance, the mix factor. The inflation usually hits the food and grocery categories more than it does the others in the early phase, especially. And then another factor could be the pressure on purchasing power because we know customers tend to switch for cheaper brands and lower-priced products and also the bundle packs tend to downsize. Maybe just to give an intangible example, rather than buying 150 diapers in a pack, you buy now 40 diapers in a pack.

So this is why it is not immediately one-on-one correlation between those dynamics. That's what I want to clarify. And also finally, maybe on our guidance of around 50%, I want to maybe iterate a little bit, but that is actually based on the current uncertainties in the macro environment and our commitment to cost and cash in a disciplined way, on our path to profitability, we actually believe around 50% is the prudent guidance at this point. That is actually another rationale behind it.

Now also, let me address the third question, which was about competition. So I guess, Hanzade, it's fair to say maybe there are three big impacts that we have or observations we have on competition right now. First one, actually, it is fair to say that competitive dynamics are still valid in Q1, like it was in Q4, it is still a competitive environment. That is still actually going on.

In terms of second observation, maybe it is fair to say, we observed an increased competition in online food delivery business with multiple players fighting for market share. That's what we observed. And also third impact or observation we have, actually, the fact that the COVID-19 actually impacts the tailwind, if you will, it's kind of fading away. And we believe this is going to make the ones like us, which actually has been investing in the long-term value proposition even more relevant, because we know now it is time for our strong growth or strength to help us differentiate even further, for instance, our hybrid model like the 1P and the 3P, or our superior customer experience, our nationwide logistics network, our brand, or our affordability solution, which is now very diverse, or our markets and merchants, as well as customer value proposition with the new assets we have, fulfillment, jet, X-Large, advertising and many more.

So that is actually why we believe also this impact is fading out actually has us actually stand out in the market as well. Let me stop here and verify, did we address all your questions, Hanzade?

Hanzade Kilickiran -- J.P. Morgan -- Analyst

Yes. Thank you very much.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Thank you.

Operator

[Operator instructions] The next question is a follow-up question from Kilickiran, Hanzade with J.P. Morgan. Please go ahead.

Hanzade Kilickiran -- J.P. Morgan -- Analyst

Sorry. I forgot to ask one more question. You actually briefly highlighted about your plans, I mean, your strategic expansion. And can you please elaborate your capital allocation strategy a bit detail? So for 2022, how should we think about you allocating the capital? Are you going to put more capital in the HepsiExpress or is it HepsiPay, which is going to be under focused and buy now pay later may take more capital, so how should we think about this?

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Yes. Please, Korhan, take the first.

Korhan Oz -- Chief Financial Officer

Yes. Maybe you can add afterwards. On the investments, especially on the capex side, Hanzade, we have budgeted for a substantially higher capex in 2022 compared to last year and for several reasons. However, I will not be able to disclose the number, but I will try to explain the relevant data points.

First, roughly half of our capex is for website development costs, which is mainly cost of the engineers that work for this purpose in the research and development department. This year, we will onboard many merchants on these R&D centers and our spending for this purpose will increase significantly. On the other side, the remaining 50% purchase is mainly in hardware and for our strategic assets going forward. Maybe you would like to add some color for the strategic assets, Murat.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Actually, maybe it's good to mention the fact that in terms of the gating of strategic assets, Hanzade, actually, as we mentioned on HepsiExpress, we are definitely gradually optimizing our search model, so we can actually lessen the dependence on our delivery resources. So you will see us continuously optimizing for sustainable model in that actually are focused there. In terms of HepsiPay though, you will also see even we speak about to buy now pay later as well. In terms of buy now pay later, we are very focused on precision, accuracy in our scoring, making sure that journey is frictionless and experience is actually smooth.

So our focus will be definitely first on the experience side, and we are also going to be very smart about our cash and cost and allocation on that. So you will see us keeping true to our principles in terms of disciplined cost and cash management, even if you refer to the surge effect. It will take the test gradually in a measured way. There is no inventory actually the advertise.

It's much more about that calculated and disciplined expansion plan. And in terms of also HepsiJet, you already know HepsiJet XL already reached in every single city in Turkey, 81 out of 81, which is also making another big difference in terms of customer experience with oversized delivery items.

Korhan Oz -- Chief Financial Officer

One addition, Murat. Our hardware, software capex, and our financial leasings are 30% foreign currency denominated. So this is another reason for the substantial increase in our next year's capex expenses.

Hanzade Kilickiran -- J.P. Morgan -- Analyst

Thank you very much. I mean, Murat you mentioned about that you are trying to optimize the HepsiExpress model as being less dependent on the delivery. What do you mean exactly? I mean, are you -- I mean, are you, I mean, is there a change in the delivery process of HepsiExpress?

Murat Emirdag -- Chief Executive Officer, Hepsiburada

So to our modular model, as you remember, actually, we have a model that can allow our partners and deliver or we can deliver or vice versa. So that's actually a modular system allows us now to optimize that value chain. So our focus is right now by keeping our customers actually still high, how can we minimize the friction in this new economy and actually maximize for longer-term sustainability. That's why you'll see us continuously and gradually optimized and working with our partners and which will eventually maybe also lessen our dependency on our delivery resources and cost items.

That's actually an area on our path to profitability also going to look deeply and making sure diligently we deliver optimization there as well.

Hanzade Kilickiran -- J.P. Morgan -- Analyst

OK. Understand. Thank you very much.

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Helin Celikbilek -- Director of Investor Relations

Murat Emirdag -- Chief Executive Officer, Hepsiburada

Korhan Oz -- Chief Financial Officer

Miriam Josiah -- Morgan Stanley -- Analyst

Hanzade Kilickiran -- J.P. Morgan -- Analyst

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