Hemnet Group AB (publ) (HEM) Earnings Call Transcript & Summary

Good morning, and welcome to this presentation of Hemnet Group's results for the Third Quarter of 2021. My name is Cecilia Beck-Friis and I am the CEO of Hemnet, I am joined today by Carl Johan Akesson, and together we will present the summary of the quarterly reports published earlier this morning. Starting off with Page 4, where I am happy to say that this is yet another strong quarter for Hemnet, with strong growth in both revenue and adjusted EBITDA. Net sales increased 38%, which is well above our financial target of 15% to 20%. This is the second quarter that Hemnet greatly outperforms its financial targets, and we are now at 37% growth for the year-to-date, mainly driven by the operational changes to our business made during Q1, and also supported by an active property market. This combination has given us optimal conditions for revenue growth. We continue to demonstrate scalable growth with adjusted EBITDA increasing 61.6% to SEK 102.3 million and margin increasing 7.6 percentage points to 52.2%. This is a direct result of the high operating leverage in our business model. The main driver of our growth continues to be revenue from property sellers where operational factors, such as the changes to our business model in Q1 pricing part. As you may remember, we implemented a segmented pricing model also for the Bas product, as well as adjusted the compensation model for brokers. Now turning to Page 6 for an update on our key drivers. ARPL, average revenue per listing, our most important operational KPI continues to grow, driven by both conversion and pricing. We have since steadily increasing awareness and uptake of our value-added services for property sellers throughout the year, and this trend continues in Q3. On the topic of conversion, we have also seen agent recommendations for Hemnet Plus and Hemnet Premium continuing to increase, which provides additional support. On the right, you can see that the number of published listings continues at a high level with growth of 5.3% in the quarter, while operational factors have had the highest impact on our result, we are, of course, also benefiting from the positive development in publication volumes. After 2 quarters with high growth in the number of published listings, we currently see that volumes for the fourth quarter seem to be returning to levels that are more in line with what we had in the same quarter last year. Looking one level deeper on net sales by service category on Page 7. We can sum up that revenue from listing fees remains the single largest contributor in absolute terms. A long-term focus for us when it comes to consistent revenue growth is to continue converting property sellers to our value-added services. As you can see in the middle chart, the category value-added services have more than doubled from Q3 last year, driven by exactly this, the higher spend by property sellers, indicating that our product improvements have had great effect in line with our strategy. This category also includes net sales from business-to-business value-added services, where growth rates have been lower. In the category advertising services and other, we continue to have stable demand for Hemnet's products in relation to high comparability from last year. Our product portfolio currently consists largely of display products, which, to a certain extent, correlates with traffic on Hemnet's platforms, as well as our current site setup. So, although traffic remains high in a historical perspective, it has decreased from record levels in Q3 2020, where we saw the pandemic really focusing people's attention on housing-related matters. Those of you that have participated in one of our previous presentations will recall that the third pillar in our strategy is to create unrivalled product to meet agent and partner needs. After investing significant efforts into our products for property sellers during the last couple of years, looking ahead, we can now increase focus on the potential we see in developing our offering to our business partners. Turning to Page 8 and 2 things from the autumn that I'm especially proud of. Firstly, the Allbright Foundation ranked Hemnet as one of the most gender balance and equal opportunity employer among all Swedish public companies. Secondly, the public opinion and data company, YouGov ranked Hemnet as the fourth strongest media brand and the fifth most popular employer among all media brands in Sweden. And as you can see on the right, we are in good company. Finishing my part of the presentation with another note of something that will at Hemnet rank highly on Page 10. We have published a sustainability report outlining our ESG work for the past 2 years, in which we have identified the areas within ESG that are most important to us and to our business. However, we are now in a process where we want to better understand the ESG expectations on Hemnet, with the intention of reviewing and updating our approach. We believe that this new process will be more aligned with expectations from external shareholders and will allow Hemnet to focus on initiatives that matter most to us and to our stakeholders. I look forward to speaking to you about this in the future. And with that, I will hand over to CJ, who will take us through the financial update.

Thank you, Cecilia. And turning then to Page 11 and our financial highlights. As Cecilia mentioned, this has been yet another strong quarter for Hemnet. We have continued to execute on our growth strategy with some additional support from an active property market. But important here is to recognize that the main growth is coming from the operational decisions that we have taken this year rather than from the market. Net sales grew 38% to SEK 195.8 million, and adjusted EBITDA was up 61.6% to SEK 102.3 million, thanks to the high scalability of our business model. The main growth driver has again been our increasing ARPL, which was up 53.7% to SEK 2,642 and we continue to be highly cash generative with SEK 77 million of operating cash flow during the quarter, which puts our net debt at 0.8x our trailing 12 months adjusted EBITDA. On the next page, Page 12, we look at the main contributors to the growth in adjusted EBITDA. In essence, this is driven by high growth in revenue, in combination with the operating leverage in our business model. We have continued to maintain good cost control and the cost increase in the quarter is around 27% of our increased revenue, giving us a strong margin development. Looking at the compensation to real estate agents. This consists of 3 components. Firstly, the administration fee paid on the base listing. Secondly, the commission paid on the value-added services to property sellers; and thirdly, the education compensation that is specific for this year. In total, this compensation to brokers grew with SEK 1.5 million in the quarter. Other external expenses increased with SEK 4.1 million, which is due to higher selling costs and marketing costs. What we have continued to invest in is to expand our team. And you can see here that personnel costs are up SEK 8.8 million in the quarter. The focus has been on additional product development resources. We foresee continued investments in this area at a slightly higher pace as we're looking at increasing efforts when it comes to developing products for our business-to-business partners. Looking at revenue by customer category on Page 13. It is, of course, revenue from property seller that is the main driver for the reasons mentioned previously. Across our 3 business-to-business categories, the real estate agents, real estate developers and advertisers were the combined growth of around 3% in the quarter, so more modest in comparison to our main category. We have seen traffic normalizing in the quarter from high levels in Q3 last year. Real estate agents have continued to invest with a growth of 19% in order to stay top of mind with prospective property sellers in a market where activity continues to be high. While we saw the opposite trend for property developers, where high demand from buyers means less need to invest in media at this very moment. Other advertisers are very close to what we saw in Q3 last year. We now turn to Page 14 to look at cash flow and leverage. We continue to deliver a very healthy operating cash flow, as mentioned. Cash flow from operations before working capital was SEK 90 million, and the majority of this was used for voluntary repayments on our existing loan facility. As a result, leverage decreased to 0.8x our trailing 12 months EBITDA. And this can be compared to 1.2x at the end of the last quarter and 2.4x last -- in Q3 last year. Working capital increased somewhat in the quarter, which is a seasonal effect as revenue and, therefore, accounts receivable are higher towards the end of the third quarter. The outgoing cash balance was SEK 112 million. Before handing back to Cecilia to sum up, we'll have a look at our financial targets on Page 15. So after 2 consecutive quarters where we have clearly outperformed our growth target, we'll now have an LTM growth rate of 34%. This has also put us in a range of 45% to 50% for the profitability targets, with LTM adjusted EBITDA margin coming in at 45.9%. Worth mentioning here is that our targets have a longer time horizon than 2 quarters. So there are no plans for a review at this time. When it comes to leverage and capital allocation, that is a topic for discussion as we get closer to the Annual General Meeting next year, but we are clearly in a very good position. With that, I hand it over to Cecilia again.

Thanks, CJ. Finishing this call off with a brief summary on Page 17. Net sales grew 38% and adjusted EBITDA 61.6%, as we continue to enjoy the benefits of the changes implemented to our business in Q1. ARPL growth is progressing well, with growth coming both from conversion and pricing. And to summarize the quarter in one sentence, a strong quarter driven by primarily successful execution from the company. And with that, we will move to the Q&A.

[Operator Instructions] Our first question comes from the line of Miriam Adisa, Morgan Stanley.

Two from me. Just firstly on the margin. So I understand what you're saying that it's only been 2 quarters and it's sort of too early to review the margin targets. But just wondering what you'd need to see to feel comfortable to upgrade that? Sort of how long would you need to be sort of tracking ahead of that guidance for you to upgrade that? Perhaps also if you could just remind us about the seasonality around margins, because I guess Q4 margins last year did sort of see a big sequential contraction. So is that something that you would expect to see again this year? Or is there sort of any one-offs around that margin contraction last year? And then also on the listings volume, so it looks like you're expecting quite a big drop in listings quarter-on-quarter, slightly bigger than the drop last year again. So could you just talk about your expectations about listing volumes and sort of what you're seeing at the moment in the last couple of weeks?

Okay. Thank you, Miriam. So on the margins, I mean, I think we'd like to see, first of all, a full year and probably a little bit more than that as well, just to sort of have more data before we make any adjustments. As you know, we have a long-term plan on how we think this business will develop and 2 consecutive quarters of strong growth is, of course, very sort of satisfying, but we want to have a little bit more data before moving to any changes. On the seasonality and the Q4 margin, it's correct what you're saying that historically, Q4 is a little bit weaker on the margin side and I think it's sort of a seasonal pattern that will continue because the market has that cyclicality, you tend to sell less properties at the end of the year. So that's sort of the main reason why revenue tends to be a little bit lower in the fourth quarter compared to, for example, the third quarter. So we don't see anything sort of unusual in this year compared to the historic seasonality. On the listings question, So I mean, what we're guiding to here in the report is that after quite significant growth in 2 quarters, we rather see sort of a year-on-year steady performance in terms of listing volumes for Q4. It's still early on, only 1 month has passed, but that's what we see in the data so far.

Our next question comes from the line of Andrew Ross at Barclays.

I've got 3 questions. The first one is on ARPL and trying to understand the seasonality you typically see in Q4 against Q3. It looks like in 2020, the ARPL was quite a bit higher in Q4 than Q3. So just trying to understand why that is? And then as part of that question, the year-on-year growth in Q4 '20 against Q3 '20 was quite a bit less, so the comp is easier. So when we think about Q4 '21 for ARPL, could we expect it's going to accelerate both in absolute and percentage terms versus what you've seen in Q3? That's the first question. The second one is, any chance you can update us on the product penetration of Plus and Premium. And the third question is, the Q2 results, I think you talked about some new features for Hemnet Plus, so just wondering what contribution that had in Q3 and wondering if any other new features have come on board since then?

Okay. So if I start with the ARPL question, I think Cecilia can do with product and the Plus features. So the seasonality in ARPL is a bit accounting driven. So as you might remember, we take the revenue across the average duration of an ad. So currently, it's about a 3-week period that the average ad is on the platform. So when we come from a strong month of sales, like, for example, September, that's typically a high-volume month. We have to move a certain part of the revenue into Q4. So that's obviously then a positive benefit to Q4 because revenue in relation to the number of published listings in Q4 benefits. December has the opposite sort of seasonality. So it's quite low volumes, and we have to push less revenue into Q1. So that's sort of the recipe that creates this seasonality. And I think on sort of the Q3 to Q4 question, the second part of your question there, I mean we -- I don't think we guide much more than we've done on that issue. But we -- as I said previously, to Miriam's question, we don't see anything in particular in this year that deviates from our sort of historical trends.

And then I can answer the questions on products. So we don't disclose the conversion numbers on Plus and Premium. But what we can say is that we'll see a steadily growth in those products and the uptake is there. More and more sellers choose an upgraded package. And we can also see that more and more agents do recommend these products as well. And it's correct, we did some product changes in Hemnet Plus during last quarter, and we've seen a positive effect on those changes. We have been putting some effort into improving the publication and the payment flow during this quarter, giving more options, how we can pay for your ad, for example. So that's been the focus on improving that flow. And we continue and look into changes and improvements and so in this quarter as well.

Helpful. And just to follow up though on the first question. So to be clear, when I look at the 22% ARPL growth you did in Q3 '20 and the 11% only in Q4 '20, but nothing odd that was going on in 2020 to be aware of, and therefore, we should just think about it being an easier comp for this year?

No, nothing particularly that we want to highlight.

Okay. Very helpful.

Our next question comes from the line of Eirik Rafdal, Carnegie.

Eirik from Carnegie. A lot has been covered already, but a couple of follow-ups. I think, CJ, you mentioned accelerating investments in personnel to kind of double down on product innovation towards B2B. Could you give a bit more color on kind of anticipated spending there into 2022? And also on the B2B side, if we look at the kind of revenue by service type, advertising services and other revenue was fairly muted year-over-year kind of the key reasons to that would be good to know. And lastly, also kind of OpEx question, I guess, a lot of tech companies talk about a war for talent. Are you guys seeing the same? And then how will this impact short-term personnel cost and also medium-term growth opportunities?

Okay. So on the personnel side, I mean, we don't provide any more sort of tangible guidance, but we do see that we have an opportunity to take on more new colleagues a little bit quicker than we've done historically. And that is sort of going to be put into the business-to-business side of product development to take the next step there. We focused quite heavily on the business to consumers or the property sellers for the last couple of years, and we had great results, and we feel there's a lot of growth still there, but now we want to sort of have a parallel track as well, where we also add on the business-to-business focus. On your second question there on the business-to-business advertising. So I mean what we come from last year, I would say, is quite a particular year when it comes to the pandemic and the very high interest in properties in general. So we had good traffic numbers last year. In a historic perspective, we continue to have very good traffic numbers. So I think we're quite happy with the results, but it's still a bit of a drop from quite an exceptional last year. But the underlying trend is very solid, we feel, and we think we can continue to grow this, of course.

And on the -- I think you said war of talent. I mean I believe that we have a great company and a great company culture and a lot of -- and many, many engaged driven and very competent co-workers. And we will continue, as CJ said to invest in growing our returns. There is a challenge, I mean not only for us, but I think in the overall market to find the talent, especially when it comes to product development. And we are doing several things in order for us to kind of further emphasize our great culture and our -- and produce value proposition. And I believe that we are in a good state and in a good position to continue to hire more people.

[Operator Instructions] And there are no further questions on the telephone at this time. Please go ahead, speakers.

So with that, I think we're finishing off for today. So thank you for listening in and goodbye.