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

Thank you for standing by, and welcome to the hipages Group Holdings Limited FY '22 Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Roby Sharon-Zipser, CEO and Co-Founder. Please go ahead.

Thank you for the introduction. Good morning, everyone. Thank you for joining us this morning. I'm Roby Sharon-Zipser, the CEO and Co-Founder of hipages Group. Today, I'm joined by Melissa Fahey, our Chief Finance and Operations Officer. As many of you already know, hipages Group is Australia and now New Zealand's largest online tradie marketplace and SaaS provider, creating effortless solutions that help tradie streamline and grow their businesses and delight their customers. We efficiently connect users with up to 3 trusted better trades at speed. For our tradie customers, we provide them with the type of work they want, when and where they want it. Additionally, we provide tradies with tools to help manage and run their businesses. We have a simple purpose, transforming the trade industry, building better lives for everyone. And our vision is to be the most trusted partner in the trade industry. There is quite a bit to cover this morning. First, I'll provide an overview of our results, then Melissa will take you through the financial and operational aspects in more detail. Then I will provide an update on our strategy, including the next evolution of our strategy, which I'm very excited to share. We'll then cover what we're currently seeing in the market and the outlook for FY '23 before opening up for Q&A. FY '22 highlights. So turning to Slide 7. I'm very proud to report a resilient performance this year. We grew through one of the most difficult periods in the industry's history, while investing in our product and technology to strengthen our position as the #1 online tradie marketplace in Australia and New Zealand. We made significant progress in our strategy, completing our transition to a subscription model. We also continue to invest in our people and technology, which are key to driving our growth moving forward. Our brand investments continued to deliver good results with record brand awareness on both the consumer and tradie side. Importantly, in the current environment, our efficient operating model enabled us to deliver improved cash flow, and we also maintained our strong balance sheet. Moving to Slide 8. This year was a challenging one for the market with the ongoing impact of COVID, including government-mandated lockdowns, which meant tradies were unable to work for extended periods. The onset of the Omicron outbreak and extreme weather further delayed the industry's recovery. To support our tradie customers, we took quick and decisive action by introducing industry-first COVID site badges for fully vaccinated tradies as well as subscription offers such as temporary contract pause, short-term discounts and lead credit extension. Then as lockdown eased across Australia, COVID-related supply chain disruptions triggered a global wave of inflation, increasing the cost and availability of key materials and labor, putting tradies under more pressure to preserve their profit margins. At the same time, record consumer demand from households still cashed up from 2 years of stimulus and restricted discretionary spend are keen to upgrade homes where they are spending more time for both work and play. Saw tradies at full capacity, facing a significant backlog of work with demand far outstripping supply. For our marketplace business like hipages Group, whose platform's primary purpose is to connect tradies with residential and commercial consumers, this represented a perfect storm with our tradie customers either unable to work at all or too busy to take on more work. Against this backdrop, I am extremely proud of our performance. The strength of our business model and team has shone through, having delivered growth through one of the most difficult periods in the industry's history, while investing in our product and technology to strengthen our position as the #1 online tradie marketplace in Australia and New Zealand. I'll hand over to Melissa for the financial and operational update now.

Thanks, Roby. On Slide 10, you can clearly see that hipages Group continues to deliver profitable growth and sustainable positive operating cash flow. Our financial profile illustrates our proven unit economics and operational leverage in the business, even in a year like FY '22, where the market was impacted by events outside of our control. Slide 11 shows the financial highlights for FY '22. MRR grew by 5%, driving 11% growth in reoccurring and total revenue with the transition to our subscription are now complete. Gross margin remained robust at 85% and EBITDA of $10.7 million was delivered at a strong margin of 17%. The business delivered an NPAT loss for the year of $900,000, which was a significant improvement on prior year loss of $6.2 million. Subscription trade is up 11% to 34,600 with hipages Australia returning to growth in Q4. Strong ARPU growth continued, up 11% with high patter up 16% as we attract higher-value subscribers. Over 1.6 million jobs were posted on the hipages platform during the year. This was all delivered whilst maintaining a strong balance sheet with cash of over $13 million and no debt following our inorganic investments this year. We were pleased to deliver a positive free cash flow in Q4 and have a clear path to sustainable free cash flow. Moving to Slide 12, which looks at our ARPU growth. Our subscription-only product continues to drive strong ARPU growth, ARPU grew 16% to 1,789 for hipage in Australia. This was driven by the completion of our transition to the subscription-only product offering in Australia as well as new tradies joining at higher price points, which drove new business yields up by 12%. We also saw ARPU growth driven by our dedicated sales team targeting medium to large-sized tradies. Moving forward, we expect continued ARPU growth to be driven by price increases, increased yields from higher-value customers, and continued market improvement. On Slide 13, you can see the total subscription tradies were up 11%, with a slight growth in hipage Australia achieved in a challenging market. Retention was impacted by industry lockdowns and restrictions in H1, followed by unprecedented demand to fulfill the backlog of jobs, which drove increased cancellation requests due to tradies being too busy, which normalized in H2. As Roby will talk about in more detail, the next evolution of our strategy is focused on enhancing the user experience, which we expect to improve retention. Slide 14 shows our LTV to CAC ratio, which remains healthy at 8.2x. Despite the impact of cover disruptions and subsequent marketplace in balance, reducing their average customer lifetime and offsetting double-digit ARPU growth. Customer lifetime is expected to improve throughout FY '23 as churn returns to pre-COVID levels. Turning to our operating expenses on Slide 15. As you can see, expenses as a percentage of revenue were up 3 points to 83% in FY '22 after increased investment in growth driven by increased marketing and technology spend. In marketing, continued brand investments across both sides of the marketplace, drove increased consumer and customer brand awareness. We also continue to invest in our product development and technology team and architecture, which is critical for us to deliver our growth strategy. On Slide 16, you can see that our significant investment in brand continues to deliver results for us on both sides of the platform. We continued our platinum sponsorship of the block for the fourth season and also do a successful integration with Channel 9's Space Invaders program. This drove our highest-ever consumer brand awareness of 60% with market-leading top-of-mind awareness for consumers at 26%, 15 points ahead of our nearest competitor. -- regional advertising for trades drove total awareness up to 67%, up 8 points since December of last year. Our top-of-mind awareness for trades is also market-leading at 21%, 10 points ahead of our nearest competitor. The outcome of our sustained investment in enhancing the experience and building a strong brand is increased consumer awareness and trust. As Slide 17 shows, in FY '22, 68% of jobs came from repeat consumers and 78% of jobs from organic channels. This provides us with significant leverage as we continue to grow. Now I'll hand back to Roby to talk more about our strategy.

Thank you, Melissa. Those of you who follow hipages regularly will be very familiar with Slide 19, which we call our Tradie Ecosystem. This shows all of the segments of our TAM as well as what tradies spend to keep their businesses running. We have made good progress this year despite the challenging operating environment to continue to execute our strategy, including moving into property management with our investment in bricks and agent. The reality is we're just getting started, and there is so much opportunity for us to go after with a small share of our TAM. I'm very excited to share with you the next evolution of our strategy that we refer to as hipages 3.0 on the next slide. hipages 3.0, the next evolution of our strategy. hipage 3.0 has a significant focus on our core product, identifying that our customers, both consumers, and tradies have different journeys and business needs when using our platform. Today, we offer most of those journeys, but in different forms. Our vision is to create a bespoke journeys and make them as streamlined as possible when customers come into our platform. Consumers will have access to our content, directory, our core offering of get quotes, and fixed price services, which I will cover off in more detail in the next slide. For tradies, we know that our product provides the best return on investment when compared to other solutions. We also know that our product has some complexity to it. We want to simplify and improve our customer experiences and enable them to better understand the value proposition we provide. We will do this through our continuous nurturing and lead claims experience strategies. While through our marketplace growth strategy, we will continue to grow our marketplace in both jobs and tradies, whilst working towards keeping it in balance through our technology and operations. We also know our tradies want more from our platform, and they need support in the other areas of managing and running their businesses. We see expansionary services and partnerships, including joint ventures as a way to fulfill that need. And over time, we will be providing more solutions into our subscription products. Pleasingly, we've already started and delivered to this in FY '22, including Tradiecore solutions being made available to tradies as part of their subscription, and we have executed on our payment solution working with Stripe as a solution provider, which is currently being rolled out. We see so many more opportunities to expand here. In terms of the business enablers, we see an overall technology investment, delivering a technology uplift and business transformation program, providing efficiencies and improvements across the business, resulting in meaningful improvements in productivity and effectiveness of our people. We've also invested in our data capabilities to support the business and our team to help us make better decisions and building better solutions for our customers, both for consumer and tradie. Slide 21 talks about capturing consumer intent. A core element of our strategy is more effectively capturing consumer intent to enable us to deliver tailored consumer journeys to enhance the experience on both sides of the marketplace. By developing a better understanding of the intent of the consumer, we are able to send them on a journey that suits their needs and to price the leads more accurately, providing more value for our tradie customers. In instances where a consumer may simply be looking for a price guide before undertaking a job, we can send them to our cost guide. If a consumer wants to browse profiles of tradie businesses and review content about those businesses, a directory journey is more appropriate. If the consumer is more progressed in their thinking and wants to be connected with up to 3 trades, we can offer them our quote service, which is hipages its core offering. We can go even further with a double access where the consumer can further curate the list of trades based on their preferences. This goes all the way up to a fixed price service where we know that consumers have the highest intent, and we can price the job accurately using the rich data captured through our marketplace. The outcomes of all of this is providing better value for our tradie customers, enhancing our trust and reputation with consumers, and ultimately increasing our take rate and driving higher ARPU. Tradiecore in FY '22, we successfully rolled out Tradiecore, our job management solution, which is a key part of our evolution to a SaaS model. Since launch, we have delivered enhanced functionality and new features, including scheduling, soft-service options, and personalized documentation, which have all been well received by our users. Tradie uptake has benefited from a free trial subscription for hipages' customers and engagement has been strong with over 15,000 jobs created in FY '22, 86% via the high pages lead integration technology. In FY '23, we will continue to roll out new functionality, including a payment system we have designed with Stripe in the second half. And as we process more data through the platform, the insights we can provide to our tradie customers will expand significantly. Moving to Slide 23 on Builderscrack. During the year, we also made our first strategically significant acquisition in Builderscrack, New Zealand's leading online tradie marketplace. This made us the Transtasmin market leader. Since the acquisition, Builderscrack has continued to perform well, delivering strong EBITDA growth and cash flow while retaining its market-leading top-of-mind awareness among New Zealand homeowners. The team has made some key hires in marketing and sales to accelerate their growth and implemented a new tear pricing model and product functionality, which drives increased yield per job. We are very excited about the future with Builderscrack and have been really pleased with how the business is progressing. In terms of our outlook for FY '23 on Slide 25, our business exited Q4 with good momentum, with registrations improving and credit most normalizing as balance continues to return to the marketplace. We expect the impact of rising inflation and interest rates to further balance the marketplace, which will drive growth due to the counter cyclicality of our business model as trades now need to compete harder for jobs. Looking ahead, we expect H1 revenue growth rates to be similar to H2 FY '22 before accelerating to the mid-teens in H2, with churn remaining elevated above pre-COVID levels before normalizing in the second half. We expect the EBITDA margin to be slightly ahead of FY '22 with H1 impacted by timing of marketing expenditure, principally our sponsorship of the block. We will continue to invest in technology to execute our growth strategy with higher level of capitalized development spend to continue in FY '23 to '24 before reducing in FY '25. We will also continue the rollout of our Tradiecore functionality and further strategic initiatives to build out our ecosystem. Importantly, the efficiency of our operating model enabled us to generate positive free cash flow in Q4 and give us a clear path to sustainable free cash generation while giving us the freedom to invest, to execute our growth strategy while maintaining a strong balance sheet. As I look back on this year, I am incredibly proud of our team for delivering a strong result in a challenging environment, and I'm looking forward to executing our plan in FY '23. With that, I'll open to questions.

[Operator Instructions] Your first question comes from Sophie Carran with Goldman Sachs.

Just a couple for me, please. I guess first on the guidance, on the revenue guidance. Could you break that down a little bit more just around your expectations for new tradie additions? And then you've mentioned churn is going to be elevated in the first half, but maybe just your expectations around churn? And then also on ARPU growth, please?

The 3 questions there. So let me just -- let's work through -- I'll just work through what I can remember. And then if I've missed something, Melissa will pick up on the ones I probably missed. So in terms of the churn expectations, I think, obviously, that's top of mind for everyone. I think it's important to call out that we look at a number of indicators in the business. Some of those, obviously, we've talked about the registrations and our outbound and inbound sales teams and how they are performing. They're doing really well. We're seeing some record numbers of tradie registrations coming through. But so we are seeing a bit of a drag from the churn. Also, more recently, we're seeing some of that ascension revenues that's upgrade through our product coming through. We also look at claiming behavior of [ trades, ] and we're seeing that coming through at really high levels, back to levels that we expected. So those lead indicators for us are strong. Claims per job are also strong. But unfortunately, the churn is dragging that growth down. And what we're focusing on with our strategy, as I talked about, is to deal with that through better nurturing of customers as they come into the platform, better pricing on our leads. That could be up and down. There's a lot of work in there that we're doing. But in terms of that churn metric, the decision to leave maybe because they're too busy, maybe because they just didn't understand the product, which we've clearly said, we know we need to improve or simplify has already been made, and that just takes longer and is taking probably a little bit longer than we expected. And so that's why we've called that out today in terms of some of the outlook. Maybe, Melissa, would you like to take the ARPU question?

Yes. So Sophie, in the outlook that we said, we were basically saying for H1, we would expect a similar level of growth at H2 of '22, which was 10%, and then expecting H2 to get to the mid-teen levels of growth. We're not giving specific guidance around tradie growth or ARPU growth in particular, but we do expect growth in both of our key metrics there delivering that overall top line revenue growth.

Excellent. And then maybe just a follow-up on the churn point. I mean you made a comment in the presentation just about focusing on enhancing the user experience to improve retention. Can you talk a little bit about what you're planning to do there, please?

Yes, absolutely. So we called it out in the hipages 3.0 strategy. So we've identified that we know that our product has the best return on investment in terms of every dollar spent by tradie, they get the best return compared to other options that are available in the market. So what we've identified is that we think we can communicate that a lot clearer to our customers and also what we actually do provide our customers through loyalty bonuses, additional credit, referral bonuses, and things like that. The pause capability that we have our customers, we think we can do a much better job of simplifying and explaining that value proposition and the flexibility that's available in our subscription. So we've got a stream in the business or a team, I should say, that's focused on making sure that those key things about our product is understood. We also have a team called the lead claim experience team. So that team looks at our leads that we're providing them, and we are doing incredible sophisticated work in our algorithms to ensure that the price of those leads are priced accurately and fairly. And I mentioned earlier, that means that suddenly prices may come down and other lead prices will go up. In a way, that's an indirect way of getting price increases once you identify the value that we're providing. So just to recall for everyone's benefit, we take a very small percentage of this gross merchandise volume or value that we generate, the GMV, to our customers, it's under 3%. It's between 2.5% and 3%. And so what we know is that there is an opportunity to improve on that. Further to that, there is a slide in the deck that talks about the different journeys the consumer goes on. And if you are closer to that buying decision, such as a fixed price solution, the take rate can increase, and that's why we're looking at introducing those products. We also know from research with our customers, the tradies and also the consumers that they love those solutions. And so that's why we put a lot of focus on building that solution for both tradies and consumers.

Great. And then just one final question around the margin guidance. Can you just give an indication of your expectations for the first half, second half split of marketing. Maybe a comment on overall marketing spend for the year as well. But does that imply that first half margin will be a bit of a step back from the second half exit run rate?

Yes. So our margins in H1 are always lower because of our marketing spend predominantly with the block is in H1. So you would expect a slightly softer margin in H1 and a stronger margin in H2.

Great. And then maybe just what you expect for marketing overall versus this year?

It's not something we're specifically giving guidance on. But in terms of the margin, we've said that we would expect the margin to be slightly ahead of FY '22. So that gives you an indication of where we expect the overall margin to land with a slight variance between H1 and H2.

Next question comes from Elijah Mayr with CLSA.

A couple from me. Just with the price increases, as I mentioned, are there price increases to date in FY '22? And what magnitude are you expecting for FY '23 when the price increases comes through?

So in terms of price increases in FY '22, we actually have only done very small things like our lowest tier product. We amended -- we've repurposed some of our lower tier products with some other offers, but nothing significant occurred in FY '22 in terms of price increases. In terms of our plans in FY '23, it's pretty -- it's pretty interesting in terms of how pricing works in hipages. There's 2 levers on pricing. You've got the headline prices of subscriptions that you can increase, but then you also have the opportunity once we understand the value of the service being entered into our platform, you can change or vary the prices and potentially move into dynamic pricing with the algorithm sophistication investments that we've made. So the lead prices can go up, which ultimately uses the credit that's available in the subscription faster and then results in upgrades. So there's 2 levers in terms of pricing that to summarize, we can play with. So on the first lever, we are -- we have rolled out in July, a price increase for our headline subscription offering for new customers. Existing customers will be preserved for a bit until we roll out some further enhancements to the product, but new customers are coming on at the higher prices. And then in terms of the pricing in terms of leads, we have a dedicated team in hipages. Looking at that lead claim experience, which I called out in the presentation and answered in Sophie's question, that will be looking at pricing our leads more accurately and potentially moving very soon into dynamic pricing based on supply-demand equations that our algorithms can work out in the complexity of our marketplace being a few hundred categories, over 600 primary categories with thousands of geo postcodes and regions to work it out. So those are the areas. In terms of the specific metric, we're expecting around about 7%, Melissa, confirmed 7% yield increase from those price adjustments.

Excellent, makes sense. And just on, I guess, the one to Tradiecore and the paying option. Can you give us some, I guess, feedback to date from the tradie side and how, I guess, their response has been, maybe, particularly to the payment side of things, I feel like there would be a little bit of a roadblock in terms of the trades coming across and providing the payment details. Can you just give us a sense of what the feedback has been today?

Yes, sure. So just to be clear, we haven't got the payment solution in Tradiecore as yet. That will be rolled out. We're planning for that to occur in H2 of this financial year. In terms of just a little bit more detail on Tradiecore, we're very pleased with the uptake of the product. Remember, building something really from scratch, getting that 0 to 1 is really hard, then getting 1 to 100. We're right now at this point where we've got about 827 users on trade core, probably getting closer to 1,000. We're adding a few hundred every month to the platform. We really -- this year is about getting scale. The feedback from the customers is exceptional. It's very simple to use. You can download it on the app. It's available on iOS and Android devices. We've gotten feedback that customers actually have a preference to have the integration with some of the accounting software to improve that reporting function that they need with the assets and GST and accounts. So that's actually our current priority. And then we will roll into payments. Payments is -- the payments is something that they have asked for. It's up there in like the top 3 things that they want that will improve adoption, but it's not the top one. The accounting integration has been what's been asked for the most. So we're focusing on that in the coming months and then onto payments.

Yes. And then maybe just one final one. Just on Builderscrack. So the ARPU in the fourth quarter, things have gone backwards quarter-on-quarter. Can you just give us a little bit of color into why and what you're expecting for the ARPU in that business?

I'm not specific on the ARPU. Melissa, maybe I'll give you a chance to check that. Well, I can talk to you a little bit about what's going on in the Builderscrack business and in the market, and that might help join the dots on the ARPU commentary. So in terms of the Builderscrack business, that business is a little bit different to the hipages business. It's very much driven by job volume that comes into it. whereas hipages is obviously, job volume in the quarter to seek our marketplace in balance that we are driven by a subscription product, whereas they work on a combination of various products here a bit of a subscription and jobs that converts into -- they take like a commission of those jobs and outcomes, which is something that we're looking to change over the next 24 months. But in terms of that, New Zealand has been hit a little harder because they're driven more by job volume. So the job volume has dropped off in New Zealand due to the economic environment there. Inflation is higher. Interest rates are higher than Australia, been happening a little bit faster in New Zealand than what we saw in Australia, I guess, really due to the size of the economy and where they are in things. But Melissa, you have some color on the ARPU?