hipages Group Holdings Limited (HPG) Earnings Call Transcript & Summary

Welcome, everyone, to the half year results presentation. I'm Roby Sharon-Zipser, and I'm the CEO of hipages. As a quick introduction to the business, hipages Group is the largest trading marketplace and SaaS provider for the trade industry in Australia and New Zealand. Today, we'll do an overview of the results. I'll provide an update on our strategy. Then Melissa Fahey, hipages' Chief Financial and Operations Officer, will present the financial and operational update. And then I'll talk about the outlook for FY '22 and beyond. So let's go into the business highlights. I'm incredibly proud of the continued execution of our strategy over the half. It's fair to say that the half has been one of the most turbulent times for the trade industry in living memory. Early in the half, we saw severe restrictions imposed by various state governments on the sector suppressing demand before a huge surge of pent-up demand coming back into the marketplace and causing supply chain issues which was before the Omicron variant arrived and caused further disruptions. Despite all of these events, we have really delivered in a meaningful way. We've continued to strengthen our leadership position in the ANZ market, having made our first major inorganic investment and deployed the capital raise through our IPO as we said we would. We continue to build technology and solutions to deliver on our purpose through Tradiecore, our field service software solution. And we are able to support our tradies as they navigated through the turbulence of COVID. Our business model has continued to demonstrate resilience and growth and we are really pleased to be seeing tradies demand for hipages solutions strengthening so far in H2. Even in the turbulent time for the industry, we were able to continue to deliver growth in our key metrics. And we are pleased to see continued growth in revenue and ARPU. We maintained a strong gross margin of 87% and our EBITDA margin of 14% was in line with our expectations. We delivered EBITDA of $4.2 million with good pro forma operating cash flow of $4.2 million. Melissa will go into further detail in our metrics in a few minutes. Before we go into the detail of our metrics and results, I think it's very important to understand the hipages strategy and why we are doing what we are doing. Many of you will be familiar with this slide, which shows you how we look at the on-demand tradie economy and the opportunity ahead of us. We continue to work progressively on many opportunities, and we are making great progress on the execution. I'll provide an overview on these things and then go a little deeper on each of these areas in a few slides to come. So hipages does an excellent job of connecting homeowners to tradies, and we provide a very simple product to tradies to connect them with consumers and ultimately win work. During the last 6 months, we moved further into the ecosystem in a number of ways. Firstly, we grew our total addressable market by acquiring Builderscrack. Yes, it's a great name. And more importantly, it's the #1 platform in the New Zealand market. Builderscrack has a slightly different model, and the IP we have obtained is critical in delivering product features we will be making available to customers in the future. We also entered the property management space for residential and commercial with our investment in Bricks + Agent. We already have existing partnerships in retail and government with our partnerships with Bunnings, IKEA and the New South Wales Department of Education. We've also made great progress in bringing to market Tradiecore, our field service software technology. Tradiecore is a powerful software that allows tradies to schedule, generate quotes, invoices and provide insights into their business. And finally, we were able to deliver a prototype of our payment solution in the half, ahead of our expectations. As you can see, it's an incredible amount of technology and activity delivered in a very short period of time. We've also provided, in previous presentations, the update on the size of the market, the addressable market in both Australia and New Zealand. Further, on Slide 11, we know exactly what trade businesses are spending to manage and run their businesses. This is important as this identifies clearly how much more we can offer to our tradie customers and further demonstrate how significant the opportunity really is for hipages. Moving to Slide 12. We've presented our strategy execution plan a number of times. I won't labor on this slide too much, but rather just spend a little time talking about some of the more recent developments. Firstly, we have identified that whilst enjoying our subscription product, we know that tradies would like more flexibility in how we offer our services, and we'll be looking to see how we can make our products even more relevant for our customers and meet the new normal. Further, this is leading into hipages 3.0, which is looking at how our product captures our consumer intention to do work and the pathways we send consumers on in our platform and how these convert to jobs for our tradies. This is bringing together our directory profiles, enhancement of our Get Quote process, incorporating the IP we have obtained from Builderscrack and fixed price services. We are looking at how we can make it easier for customers, including our tradies and consumers to access phenomenal expansion services, incorporating adjacencies and partnerships. The good news is you don't just have to take my word for it. We've got a great short video testimonial from one of our larger business customers that you can watch by clicking the link in the presentation you received this morning, talking about how hipages helped his business to grow. It only takes a minute, so please enjoy at your leisure. It's always great to hear from our customers about the value they feel hipages bring to their business. And the even better news is that it's only going to get better for our customers as we bring more features and functionality into the hipages ecosystem. On Slide 14, I'll talk a little bit about Bricks + Agent. So turning to Bricks + Agent, we made a 25% investment in the business. The investment in Bricks + Agent provides hipages access to that complex property management space illustrated in the diagram on the right, in both the residential and commercial side of the addressable market. Pleasingly, Bricks + Agent is also executing on its strategy really well and has signed exclusive partnerships with leading property management groups, Raine & Horne, Belle Property and First National and also Australia's largest apartment builder, Meriton. New functionality has been added, including invoice automation, and Bricks + Agent has also integrated their platform with property U.K. CRM provider, Reapit, which enables it to kick off its operations in the U.K. Moving to Builderscrack. Late last year, we completed our acquisition of Builderscrack, New Zealand's largest platform for trade services. The acquisition has increased our addressable market and made us the Australia and New Zealand market leader. But importantly, has given hipages access to critical IP that will enable to further enhance our product offering as we move further into our product vision of hipages 3.0. Cross synergies between the 2 businesses have already commenced and the operational integration is underway. Quickly moving to Tradiecore. We have discussed in detail, in previous announcements, the launch of Tradiecore, hipages' field service software technology. In late January, we began making Tradiecore available to our customers. And as part of the launch, we have made Tradiecore available to customers for free for up to 6 months. We're starting to see some good numbers of customers registering and downloading the app. There are a number of important features to be released in the coming weeks that will increase adoption and utilization of the application. They include making the application available in Android and personalization of documents and attachments. Later, this financial year, we will make our payment solution available in Tradiecore. On that note, let's provide you with an update on where we're at with payments. In regards to our payment solution, we have made some excellent progress. After an exhaustive vendor review and selection process, we have pleasingly landed on Stripe as our platform payment provider. We've also been able to develop a prototype of the payment solution before the end of the calendar year. By being agile and delivering a prototype, we've been able to obtain significant learnings about adoption and utilization. As you can see from the image on Slide 17, we're going to be able to allow tradies to accept different forms of credit cards and payments, which will be generated with QR codes. Further, this will open up the payment options in the future. I look forward to telling you more when we have gone live and fully deployed the payment solution in both hipages and Tradiecore in our next update. I'll hand over to Melissa now, who will give you a financial and operational update. Thank you.

Thanks, Roby. On Slide 19, you can see the transformation and the financial profile of our business over the last 3 years. We delivered strong growth of 12% in the first half in a challenging macroeconomic backdrop. This compares to 18% in H1 of last year. We are a profitable business, delivering strong operating cash flow with an EBITDA to operating cash flow ratio of 101% and strong unit economics with an LTV versus CAC ratio of 7.6x. In terms of our H1 highlights on Slide 20. MRR of $5.3 million at December was up 15% on PCP and drove strong recurring revenue growth of 14%. Excluding the impact of COVID-related customer support initiative, recurring revenue growth would have been 17%. Total revenue of $30.1 million was up 12% on PCP and 15% up excluding customer support initiative. The reason total revenue growth is lower than recurring revenue growth is due to us still having some transactional product revenue, which is diluting top line revenue growth. 90% of our customers are now on the subscription product with 95% of our revenue now recurring. By the end of FY '22, we would have completed the migration to the subscription product. Profitability metrics are strong with gross margin maintained at 87%. We delivered EBITDA of $4.2 million for the first half, which was to our expectations. Despite softer revenue due to COVID, we still delivered EBITDA at expected levels due to cost efficiencies. EBITDA margin of 14% was as expected. As previously communicated, FY '22 has been flagged as a year for investment, in particular, in marketing our brand and technology, especially in the first half. We still expect to exit FY '22 at EBITDA margins similar to FY '21 levels of plus 20%, with operational leverage expansion in FY '23 and beyond. In terms of our key drivers, subscription tradies were up 19% or 7% on a like-for-like basis for hipages Australia. This is a strong level of growth given the uncertainty COVID has created and the challenges to the trading industry. hipages Australia ARPU grew nicely by 19% to $1,771. ARPU growth last year of 31% was inflated by the migration from the lower-yielding transactional product to the high-yielding subscription products. With the migration being complete, with 90% of our customers now on the subscription product, we believe ARPU growth of 19% is sustainable over the medium term. Slide 21 gives an overview of the changes we have made to our business models, product offerings and the initiatives we are currently focused on. Just to recap what we have done. In November of 2019, we commenced the transition from a transactional product to a subscription-only product for new tradies. Our subscription product has 6- or 12-month contract terms and is paid monthly. As we have communicated before, back in 2019, we implemented a new version of our subscription product with new and improved features. We also did a deep dive into our customer cohorts and removed lower price tiers which were not generating the required ROI. In terms of what we are doing now, the migration is going well, as I said, with 90% of tradies now on the subscription product. We are seeing new subscribers join the platform at record price points. And importantly, we had further enhancing and evolving product features to introduce more product flexibility and value for customers, which optimizes retention. As you can see on Slide 22, all of this has driven strong ARPU growth for hipages of 19%, driven by a combination of the move to subscription-only product with only 10% remaining to be migrated; new tradies joining at higher price points; existing subscribers ascending to higher price points and are targeting medium- to large-sized tradies. On the next slide, you can see our subscription tradies basis continue to expand to 34,000 despite the challenges of COVID that COVID has presented, representing 19% growth or 7% on a like-for-like basis for hipages Australia. Retention has been impacted by industry lockdowns and restrictions, followed by unprecedented demand to fulfill the backlog of jobs. In H1, we saw an increase in the level of cancellation requests due to tradies being too busy, which represented 40% of total cancellation requests in H1, up 30% since pre-COVID. We have seen this start to normalize in H2 coming down to pre-COVID levels. We have a really strong data science team in-house who have developed sophisticated proprietary churn prediction tools to identify at-risk tradies and take action. We will be implementing new product features to provide more flexibility and optimize retention while maintaining committed recurring revenue, which we will provide further updates at the Q3 release in April. On Slide 24, you can see our LTV versus CAC ratio of 7.6x is strong. However, over the half, COVID-impacted churn impacted customer lifetime. Other unit economics continue to improve with ARPU up 20% and CAC slightly down over the last 2 years. Slide 25 illustrates the flywheel effect driven by growth on both sides of the marketplace with strong growth of subscription tradies up 19% combined with 3.8 million unique users posting a job to hipages platform in H1 of this year, up 14% on PCP. Operating expenses as a percentage of revenue increased to 86%, in line with expectations. We communicated that FY '22 was a year of investing in growth, specifically in marketing our brand and our technology development. Increased investment across both sides of the marketplace in H1 continue to drive strong consumer and customer brand awareness of 58% and 59%, respectively. Marketing efficiency continues with only 22% of jobs from paid channels. We continued investment in product development and technology architecture while partnering with technology leaders in specific areas, such as Stripe for payments and Zuora, investing to build the capability required to be a category leader. Operating expenses as a percentage of revenue was lower last year at 75% as costs were tightly managed due to COVID with reinvestment in growth occurring in the second half of last year. This year, we expect margins to continue to improve over H2, returning to FY '21 level by the end of the year before increased operational leverage to drive significant margin expansion in FY '23 and beyond. Our effective investment has driven increased brand awareness. We had another successful platinum sponsorship of The Block. Our consumer brand awareness is at all-time high levels at 58%. And targeted radio, television and digital advertising for tradies maintained strong awareness at 59%, up 11 points on H1 of last year. You can really see the consumer trust we have built up and the increased brand awareness coming through with 67% of jobs now from repeat consumers and 78% of jobs from unpaid channels. I'll now hand back to Roby to provide an update on trading and outlook.

Thanks, Melissa. So let's do a little bit more detail on the outlook and what we're seeing that's happening in the market. So the market recovery was delayed by the Omicron outbreak with further moderate impacts to FY '22 revenue is expected. This is due to the extended customer retention initiatives. We expect slower growth in some of the key metrics in Q3 before growth accelerates in Q4, again, subject to market conditions. We are seeing a rebound in tradie demand so far in H2, as illustrated by the graph on the right, with new tradie registrations up circa 48% versus Q2, and inbound yields are increasing, which is pleasing. Balance is returning to the marketplace and subscription tradies are expected to continue to grow in H2. Margins will return to FY '21 levels by the end of H2 before increased operating leverage drives significant margin expansion in FY '23. Evolving our product to increase flexibility and optimize retention is key, and we are well positioned to withstand macroeconomic turbulence with a proven business model. Looking ahead, I see so much opportunity for the hipages Group. We are the market leader with a strong brand, large and growing customer base and a product ecosystem that will continue to adapt and evolve to suit our customers. Over the long term, we think this puts us in a fantastic position to achieve our ambition of winning the tradie economy, and I'm very excited about that. Thank you for your continued support. We're going to move into Q&A now. So we're going to open up the line for questions. Thank you.

[Operator Instructions] The first question today comes from Michael Peet with Goldman Sachs.

Roby and Melissa, just the first one, I'm just interested to know a little bit more, if I can, about how you're going to monetize the payments in invoicing. I guess it's probably obvious, you'll probably stick that into Tradiecore. And when that subscription, you can -- when that's not free, you can do it in there. But I'm just thinking about on the hipages subscription price points. Will you sort of build it in as a feature or come up with some more price points to start and monetize that? I'm just interested in that.

Yes, thanks for the question, Peet. So look, we're still in the prototype stage, really trying to get adoption of the product. All the options that you'd expect are available. We could take -- with Stripe, we obviously get a rate and then we can add a margin to that. But we may also integrate that as part of the credits that are available in the subscription to utilize that. That's an idea, or just take a percentage and that's invoiced separately. Obviously, the cleaner and simpler the billing, the better. So that's what we'll be working on actually in the coming quarter, to work at how to monetize that properly.

And just the next one, just on the churn. I mean obviously, elevated for obvious reasons with COVID, but it's not a surprise. I'm just trying to get a sense of as we come out of it maybe in the last month or so, how has that started? Has that started to settle down? And are you still expecting that, I think you've got roughly 50% of people that might churn off and churn back on within a 6-month plus sort of period quite regularly? I'm just trying to get a sense of is that trend still likely to be there. And has that churn started to settle down?

Yes, I can answer that. So we have seen it start to settle down. Like if we look over H2, there was around 40% of cancellation requests were due to tradies being too busy, and that was up 30% compared to pre-COVID levels. So we have started to see that normalize in H2 back down to pre-COVID levels and we expect that to continue to normalize over Q4 as well.

The next question comes from Elijah Mayr with CLSA.

Just a couple of questions from me. Maybe just quickly, just on Bricks + Agent firstly. Is there any sort of, I guess, update you can provide on those operations, and if we're starting to see any sort of revenue or work or tradies through -- flow through from that relationship?

So we are still doing -- we basically have been deploying that a lot over the last -- since we acquired the business and over Q2 and Q3. So we are still starting to see those flows come through. It is in the early stage, but the technology is -- are now being deployed for that.

Yes. Just to remind everyone, with Bricks + Agent, the acquisition occurred late in November. So obviously, moving into the Christmas period. But we had a clear understanding of how we can make that work. But remember, the investment was done on a stand-alone basis as well. And the monetization of that business is strong in its own regard.

Excellent. And then maybe just on marketing because said that marketing is obviously sort of split between tradies and consumers. But as we see that start to tick up, can you give us a sense, I guess, on how effective that, I guess, incremental marketing spend or maybe the CAC environment? Just as sort of a step up, and I guess on the consumer side and the job side, it's still limited contribution from paid channels to the jobs that you're seeing. So just maybe a few comments on the marketing and the effectiveness that you're seeing in the market at the moment.

So I'll just -- I'll add to that as sort of -- there's a multiple facet way to answer that question. So first of all, the way we look at it is, well, our brand awareness is at an all-time high for consumer. So that's really strong. We deployed some of that marketing and the way the campaigns for our marketing has also been to target tradies. And obviously, because of the demand/supply mix in the marketplace is a bit out of whack, targeting tradies is an important part of what we're doing. And you can see that on the outlook slide, the graph on the right is demonstrating that we're seeing quite meaningful improvements on the number of registrations coming through. So that's what we're using the marketing for. Now to be also fair, there's so much demand in the market that makes perfect sense to be deploying that marketing to the tradies. Like it's just not necessary to be too heavy-handed on demand. Yes, so we're very pleased with where that's going on the marketing side.

I think as well, like we've communicated with our marketing efficiency, if you look back a few years, jobs from paid channels used to be around the 50-plus level, and we've brought that down. And we continue to maintain it and it now represents 22% of paid jobs. So we're getting a really good ROI from our marketing spend.

Yes. And that's just washing through in the unit economics, which is great.

Yes, that's clear. And then maybe if I can just sneak in one more. Just on, I guess, tradie subscriptions, and maybe just, I guess, what you guys see in a low employment environment. Do you think it's more difficult or, historically, it's been more difficult to bring tradies onto the platform if they are, I guess, finding work elsewhere into the more full-time contracted roles?

Yes. I haven't really thought too much in terms of low employment environment. The trades that we have on our platform are all businesses. The way we look at it is there's a little bit of counter cyclicality in the way we operate. So when there's less jobs trade, we get more registrations coming into our platform, more tradies start wanting to buy more of our products. It's purely because the brand is so trusted by consumers. But then when there's way too much work in the market, and that's currently where we've just -- we're coming out of that period. There's a bit of a pullback. So they don't upgrade as much. They don't register as much to one of our products. But we are seeing a normalization starting to happen. Some of the searches dropping off the demand, which, in a way, actually is a really good thing to bring the market back into balance.

[Operator Instructions] The next question comes from Johnny Huynh with Evans & Partners.

I just wanted to ask about the supply issues because of the pent-up demand and whether this has an impact on the consumer experience? Did you guys see like an uptick of unfulfilled jobs? And then was this number included in your job volumes as well?

Yes. So we report our job numbers at a top level. We don't report on the unsuccessful claimed jobs. There's various reasons why some of the jobs are unsuccessful. Some of them are just too difficult to do, not described well enough. And obviously, we endeavor to make that better. But so, yes, there has been an increase in unsuccessful claimed jobs, which has had some impact on some of our consumer experiences. Having said that, it's important to note that consumers don't really have a lot of choice at the moment because of that much demand. So obviously, we have other routes. We send consumers to our directory for them to do more research, although that's not exactly fulfilling what our commitment is to the consumer, at least it's better than nothing.

Okay. Cool. And did you guys see it all like was there ever any kind of experience where some of the -- because a lot of these tradies are so busy, some of the good ones weren't using the platform and maybe some of the ones that aren't as good will [ be used ] by the consumers? And then has that -- have you seen any complaints from consumers on that front at all?

No, we haven't seen any changes there. Our reviews on various platforms that capture all the different reviews have been relatively consistent. In fact, I think our ratings have gone up a couple of points as well from what I've last looked at them. So yes, no, nothing too severe there or any changes. In fact, more positive because of how difficult everyone knows it is to get tradies right now.

I think as well, if we look to over H2 and -- sorry, over H1 and, in particular, in H2, we are still seeing strong demand for tradies registering on our platform. And that has accelerated in Q2. So we're seeing registration requests up 48%. So we're still seeing that strong demand across the tradie base.

Okay. Cool. And then just the last one for me. In terms of the churn, I think you said that 40% of it was -- there was tradie businesses being too busy. Outside of that, was there any of these businesses shutting down? Or what was the other churn in relation to?

Yes. So the churn is broken up in -- the best way to talk about churn, there's obviously many reasons, but the simplest way to look at it is there's exits from the industry. And that's generally around 17% to 20%. So let's call that 20%. And then the too busy is we're sitting at 40%, which has now improved, I think it's down to 30%, so circa 30%, maybe a bit above that. And then the balance is just we've got customers that can be hard to work with. So yes, that's just generally the 3 buckets we look at.

And there's also that solution of our customers that will go off platform for a period of time and do come back on platform as well. So we do include that in our churn numbers. So we typically see around 10% to 15% of our new businesses coming on having been on the platform before. So there is that high return level.

The next question is a follow-up from Michael Peet with Goldman Sachs.

Roby, just a follow-up on hipages 3.0, I was just wondering if you can give us a bit more color on the timing of sort of pushing through some of these changes. Who are you really targeting here? And why is this part of the plan? And I guess, will you continue to offer that? Do you see the subscription model staying for the longer term? Or is this sort of going to give you options to do other things?

Yes. So hipages 3.0 is quite a comprehensive planning program that we're going through right now. But I'd like to give, obviously, more color on that in the next full update. But what I'll do is I'll explain some of the early thinking on that. Where we're going with it is -- and if you remember the previous presentations, we talked about fixed price services. Well, we realized that capturing consumer intent and delivering to what tradies actually want, which is they want to win work, is not as straightforward as just providing a single product solution as we have it today. Tradies want different options to get work. Some of them are very happy to get inquiries through their directory and profile that may come through social media and landing directly on their hipages profile. We have that today, but we need to enhance that. We have our current Get Quote process, which is what we call like a single accept process. And that single accept process works very well. We've done a phenomenal job of that. There are probably areas that we can optimize and improve that experience for both the consumer and tradies, which we'll be looking into. That falls into hipages 3.0. There are also other models, which is in the Bricks + Agent model, which is what they call the double accept, which is when the user curates the tradies a little bit more. And I'll explain in a second the monetization reasons why we're looking at that. And then we'll be looking at fixed price services. We already have several fixed-price services in play with our partnership with Bunnings, but we're looking to expand that. We've seen a lot of success in that program overseas. And we're also aware that, that is something consumers really want, but also tradies want as well. Now putting the metrics or the business metrics behind it, generally, the take rate on a directory model is around 1%. The take rate in the current program that we have with our business model is 2%. In the double accept program, it's around 4%, we know this from our Builderscrack acquisition. And in fixed price services, it's 10%. So what you can see is by having the ability to capture the user intent, it gives us the ability to drive higher take rates, which will drive growth in the future. So that's one big segment of what we're talking about with hipages 3.0. And another big segment of hipages 3.0 is we feel that there is a lot of opportunity. We get approached by partners nearly every day for some other additional servers that we can offer in the ecosystem. We need to create a really simple, elegant way for tradies to access those programs, which again drives expansion revenue, which is what I mentioned earlier in the presentation and is the right-hand side on the ecosystem wheel.

There are no further questions at this time. I'd now like to turn the call back to Mr. Sharon-Zipser for any closing remarks.

I have no closing remarks. I just want to thank everyone for your support and your time and for the great questions. Have a wonderful day. Thank you.