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

Good day, and welcome to hipages Group Holdings Limited H1 FY '23 Investor Briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Roby to begin the conference, Roby, over to you.

Thank you. Good morning, everyone, and thanks for joining us this morning. I'm Roby Sharon-Zipser, the CEO and Co-Founder of hipages Group. Today, I'm joined by a new face, and I'd like to introduce Jaco Jonker, our new Chief Finance and Operations Officer, for his first results presentation. Jaco joined us in November last year and brings over 20 years of senior finance experience across Australia, South Africa, the U.S. and U.K., including working in a marketplace and e-commerce business. Most recently, Jaco was the CFO and COO at Open Colleges Australia where he was instrumental in preparing the business for its sale to an Australian private equity firm. Jaco and I have been working together for almost 3 months now, and we're already seeing the benefits of his strong financial and strategic mindset and fresh perspective on the business. As a reminder, hipages Group is Australia and New Zealand's largest online trading marketplace and SaaS provider, creating effortless solutions that help tradies streamline and grow their business and delight their customers. We aim to connect consumers with up to 3 tradies, providing a slick customer experience across our desktop and mobile applications. To date, over 4.2 million unique users have posted nearly 11 million jobs on the hipages platform. Today, I'll begin by touching on some of the highlights from the first half, before handing over to Jaco, who will talk in more detail about the results. I'll then provide an update on our strategy before looking ahead to the outlook for the second half. Turning to the first half highlights on Slide 5. In H1, we were pleased to deliver continued growth in revenue and ARPU with the countercyclicality of our model becoming increasingly clear in a softening economic environment as our lead indicators turn overwhelmingly positive. We continued to prudently manage our expenses and saw the benefits of operating leverage continue to emerge and drive EBITDA margin expansion. Our evolution from a marketplace to a SaaS platform provider continues as we build an end-to-end platform to win the tradie ecosystem. Core to this evolution is continuing to develop our Tradiecore platform, which will enable us to grow into expansionary services and develop significant insights about our customers and their workflow. It is already delivering significant benefits for customer retention. With the benefit of our emerging operating leverage, focused capitalized development and balance sheet strength, we are comfortably capitalized and well positioned to deliver margin expansion ahead of schedule and are targeting positive net cash flow by the end of FY '24. And I'm particularly pleased to say that our business is off to a strong start in H2. Turning to Slide 6. Those who have tuned in to our recent market updates will have heard me describe the perfect storm that we faced over the last 18 months. Trading supply was initially constricted by our customers being unable to work due to COVID restrictions then by an unprecedented backlog of jobs was driven by record consumer demand. Our expectation based on our experience was that a softening macro environment would bring balance to the marketplace entering accelerated growth for hipages due to the countercyclical nature of our model. In the past, we've observed that when economic activity starts to slow, declining consumer confidence leads to less discretionary spend, resulting in fewer jobs and more competition with trading naturally coming to hipages as the highest ROI lead generation provider in the market. Pleasingly, we've seen this expectation become reality as consumer demand has begun to normalize and both new and returning tradies are coming to our platform looking for work in record numbers. As competition for jobs among tradies heat up, our key lead indicators are showing the marketplace is returning to balance with registrations at record levels and utilization and claim value increasing, and most importantly, we are seeing MRR growth return and subscriber numbers returning to growth in January, which we haven't seen since 2021. We expect these lead indicators to flow through to our financial metrics in the second half. Now I'll hand over to Jaco to run through the financials in more detail.

Thanks, Roby, and hello, everybody. It's my pleasure to present to you the financial and operational update for H1 FY '23. Slide 8 shows the financial highlights for the half year to December 2022. As Roby said, we are pleased to deliver continued growth in our key metrics in H1. Monthly recurring revenue, or MRR, grew by 5% on the previous corresponding period, or PCP, to $5.6 million, driving 6% growth in recurring revenue. Total revenue of $32.6 million was up 8% PCP with the benefit of 6 months of additional transactional revenue from our acquisition of Builderscrack in December 2021. In H2, we expect double-digit MRR growth which will drive revenue acceleration from H1. Our gross margin remained robust at 89% with EBITDA margin expansion of 4 percentage points to 18% driving EBITDA before significant items up to $5.8 million. The business delivered a net loss after tax of $1.5 million for the year compared to a loss of $830,000 in the PCP. And the vast majority of the difference was driven by amortization related to capitalized development of Tradiecore as well as amortization of intangibles arising from the Builderscrack acquisition. While subscription tradies were flat in H1, we are pleased to have seen the number grow in January and February as balance returns to the marketplace with job volumes normalizing. ARPU continues to grow strongly, up 11% to $1,863, and we expect this to continue as we push through subscription price increases and benefit further from dynamic pricing over the next 6 to 18 months. The business maintains a strong balance sheet with cash and funds on deposit of $9.7 million and no debt. Slide 9 shows our ARPU and subscription trade growth over the last 5 years. And as you can see on the left-hand chart, our subscription model continues to drive strong ARPU growth as new tradies joined at higher price points with new business yields up 29% on the PCP. Importantly, our hipages Australia subscription product has 6- or 12-month contract terms paid monthly, which provides good visibility over future revenues. Moving forward, we expect continued ARPU growth to be driven by price increases as we migrate our pre-July '22 customers to higher pricing tiers, increased yields from targeting higher-value customers and continued market improvement. On the right-hand chart, you can see that total subscription tradies have remained flat in H1 versus PCP. However, the start of H2 has already shown growth with total subscription tradies at 34,400 at the end of January, as softer consumer demand drives higher trading engagement and further balance returns to the marketplace. As Roby will talk about in more detail, evolution of our strategy is focused on enhancing the user experience, which we expect will improve retention and serve as an additional lever to support subscription growth over the long term. Turning to our operating expenses on Slide 10. Operating expenses as a percentage of revenue improved by 4 percentage points to 82% as we adapt to the current market conditions while continuing to invest for growth. Our respective brand investment enables more efficient acquisition spend with marketing expenses as a percentage of revenue improving by 9 percentage points to 28%. We also continued to invest in our product development and technology platform, which is critical to deliver on our strategy. On Slide 11, you can see how our effective brand investment continues to deliver the results on both sides of the platform. On the consumer side, another successful sponsorship of The Block drove our highest-ever consumer brand awareness of 66%, up from 58% in the PCP, with market-leading top-of-mind awareness 15 percentage points ahead of the nearest competitor, [ Google. ] On the tradie side, targeted radio, television and digital advertising drove record tradie brand awareness of 64%, up 5 percentage points, with market-leading top-of-mind awareness 14 percentage points ahead of the nearest competitor. As you can see on the right-hand side, our strong brand enable us to reduce our reliance on paid channels for sourcing jobs, which we can see in more detail on the next slide. And as Slide 12 shows, a key outcome of our sustained investment in enhancing the customer experience and building a strong brand is creating consumer familiarity and trust. In H1, we saw a record 72% of jobs come from repeat customers, validating our ongoing investment in enhancing the customer experience. 81% of our jobs came from organic channels, providing us with significant leverage to use our marketing spend efficiently to drive growth. Slide 13 shows the evolution and the positive momentum of hipages Group's key metrics over time. The business has demonstrated significant resilience and the ability to deliver growth and positive operating cash flow even in challenging operating conditions. Our strong financial profile clearly illustrates our proven unit economics and the operational leverage. The business is in a strong position to continue on its path to net positive cash flow. Now I'll hand back to Roby to talk more about the strategy and outlook.

Thanks, Jaco. As you can see on Slide 15, we are continuing our strategic evolution from marketplace to platform, which we believe is critical to winning the tradie ecosystem. Many of you will be familiar with our tradie ecosystem wheel showing the significant opportunity in the vertical. This slide shows the road map for how we plan to get there. Over the rest of this financial year and next, we will focus on optimizing our marketplace with optimized subscription pricing and dynamically priced leads driving higher ARPU. The next stage of our evolution will be underpinned by our continued investment in Tradiecore, our SaaS platform, which is key to providing an end-to-end experience for tradies and will open opportunities for value-added services. And the third stage will be using the large amounts of data we are capturing to create better consumer experiences with expansionary services, including real-time bookings and fixed-price services, which will enable us to significantly increase our take rate. The future state of hipages and Tradiecore will enable tradies to handle their whole job flow in a seamless way from start to finish with the integration of lead generation, quoting, scheduling and payments. We are creating an end-to-end platform for tradies to manage their business within a single application. This will provide a better customer experience and keep tradies on platform to complete their jobs. It will also enable us to expand into other services such as procurement, insurance and lending. We see in the future of removing that friction and bringing the 2 apps together as one. We're working on the execution of this strategy, and we'll update you further in H2. On Slide 18 -- sorry, Slide 19, you can see exactly why we are doing it. With the data already showing significant benefits of customers' retention and lifetime value when customers have multiple services -- apologies, I meant Page 18. Customer retention is 4x higher when using hipages and Tradiecore platforms, and even stickier when using additional services such as payments or partner jobs. While it is still relatively early in the rollout of Tradiecore to our customer base, this slide validates our strategy and underscores why we are so committed to investing in Tradiecore to drive long-term growth. We continue to make progress in enhancing the Tradiecore product, now approaching 1,000 users actively engaged and regularly using the app. In the first half, we rolled out the functionality that was most requested by tradies with accounting integrations completed with Xero, MYOB and QuickBooks. In H2, our payment features developed with Stripe will go live in Tradiecore, alongside other additional functionality and a desktop version. On Slide 21, I'll touch on Builderscrack, New Zealand's #1 trading marketplace, which we acquired in December 2021. With Builderscrack currently leaving a lot of value on the table, we continue to refine the business pricing model and product functionality, leveraging our experience from hipages which has shown that subscription models are superior at delivering more predictable and better revenue outcomes. We expect growth to accelerate in FY '24 to '25 as we continue to improve the user experience for tradies and consumers. Now looking at our investment in Bricks + Agent on Slide 21. B&A has consolidated its position as #1 in the ANZ market by acquiring its nearest competitor and now have 800,000 users on the platform. The business has completed integrations with Palace and Console and is working on a new partnership network, such as McGrath. As you have heard throughout this presentation, marketplace balance is returning, and our key lead indicators are green. With softening consumer sentiment driving competition for work among tradies, lead credit claim value at record levels, which will result in MRR growth through subscription upgrade sales. Record demand is normalized. Quotes per job are at record levels, and 0 quote jobs are 50% lower than PCP. As you can see in the chart to the right, the orange line shows record inbound registrations as new customers come to the hipages platform, and customers that were too busy returned to look for work. Pleasingly, January was the best month for MRR growth since 2021, a trend which is continuing in February. Before I turn to the outlook for FY '23, I think it's important that we take a step back and remember that our revenue base is now 50% larger than it was before COVID. This reflects an amazing effort by the hipages Group team to continue developing amazing solutions for our tradie customers and consumers and growing the business through the most disruptive period in the industry's history at a time when many of our other players in the market stagnated or shrunk. On Slide 24, as I look into my crystal ball to the year-end, I expect a strong second half for hipages Group. As interest rates continue to rise, we expect consumer demand to continue to moderate and drive more demand for hipages platform. Churn is expected to normalize with evidence of that already happening in January versus PCP. Due to the impact of marketplace balance in the first half, high single-digit revenue growth is expected in H2 with MRR acceleration already evident in January. Due to marketplace imbalance and churn being higher in the first half, we expect single-digit revenue growth for FY '23 with MRR growth expected to accelerate through Q3 and fall. Our EBITDA margin is expected to be above FY '22 with the benefit of prudent cost management and focused capitalized development. We will continue to invest in making Tradiecore an end-to-end solution with further functionality to roll out over the remainder of the half as we continue our evolution from marketplace to platform. With balance returning to the marketplace and subscription tradies returning to growth, we expect revenue growth to accelerate in FY '24, driven by dynamic lead pricing and higher subscription pricing. Having grown significantly as a business over the last 2 years, we have now reached operational scale. Operational leverage will continue to emerge as we prudently manage our costs and focus our capitalized development while leveraging our strong brand to generate marketing efficiencies. With higher operating leverage expected to deliver margin expansion and strong positive operating cash flows, we are targeting positive net cash flow ahead of schedule by the end of FY '24. With that, I'll hand back to the operator to take any questions.

[Operator Instructions] Your first question comes from the line of Sophie Carran from Goldman Sachs.

Just the first one around the sort of penetration of tradies using multiple services, just looking at the chart on Slide 18. Just interested on sort of where that's at. I mean how many of your tradie base are using multiple services and then the strategy to sort of increase that and where you think it could get to over time?

Thanks, Sophie. So the slide on 18 is based off a relatively small sample. Some of the other services does have quite a very large statistically significant samples such as our partner job channel, which has been around for a few years. But still, the data from that sample is still sufficient for us to draw more conclusions to help develop the strategy. So I just wanted to make sure that was clear. In terms of the Tradiecore rollout, we saw some really good numbers in January. We nearly have about 1,000 customers actively using that. Just to define what we mean by active. It's not just simply logging in. That number's a lot higher. But it's actually customers invoicing and quoting and using the scheduling function. They're going in and readily use the core functionality of Tradiecore. It takes time to build up a technology solution and then get adoption and then work it through the sale process. But at 1,000, we're pretty happy with that. I think we mentioned on one of the other slides earlier, I think it was the previous slide, Slide 17. To get real accelerated adoption of Tradiecore, the onboarding needs to be a lot more seamless. So part of the work that we're rolling out over the next 12 months is to work on how to integrate that end-to-end solution in a single platform which will provide more updates. The payments solutions also, that's also a small sample, but it's around a few hundred customers. Again, the key feature for that payment solution is it needs to be embedded in Tradiecore. And that's where the adoption will accelerate. That's another important feature that customers are asking for. But we're pretty pleased with the rollout of the features. On Slide 19, we talked about getting the accounting applications rolled out. Originally, we were only hoping that we would get Xero done by the end of the year, but we were basically able to get Xero, MYOB and QuickBooks, which is pretty much all the accounting applications that [indiscernible] will be using. So far, it's progressing well, and it's sufficient data for us to help us support our [indiscernible] strategy.

That's helpful, Roby. And then just noticed and sorry if I've missed this, but it doesn't look like you've got the slide which has the sort of churn for the half. Just interested in sort of what you've seen around churn and maybe how that sort of progressed over the half and into January?

Yes. So just to call it out, I mean, I presume the question is the indication where our revenue is going is a little softer. It is driven primarily by churn. We were hoping that [ leaving ] the market would have happened sooner around the [indiscernible] [ It's given ] and it's hard to catch that up. So what we are seeing in January and February is a really, really strong rebound. It's about 6% [ benchmark ] PCP. Whilst we haven't finished the month of February, the best line of sight I can give you is that it's on track to be where we were hoping it will be for February. But the month is not over yet, but it definitely appears to be returning. I think the metric that's worth focusing on is that we talked a lot in the last 12 months that our churn was elevated due to tradies being too busy. That's really, really how to combat the primary product advertisement solution to generate a lot work. And what we're seeing is that all the new customers that we are selling, 25% of new customers are actually returning customers. So when you do our churn calculations, we don't normalize or adjust for returning customers. We take the whole number. And that number is really big. Like historically, of our sale, of new sales in a month, it would be around 14%, 15%. We saw that slightly improve over November, December around 18%. But now it's at 25%. I've never seen that number before. So what it's telling me is that the market is returning back to balance, and tradies are now excited to look for work. So we're in a healthy position, and we should see that at the time in anticipation of churn getting back to normal levels coming to fruition.

Great. That's helpful. And just around the sort of tradie additions through January. That looks like it's really stepped up versus the half. I know January is seasonally sort of a stronger period for you. But just any sort of color on how you're sort of thinking about the remainder of the half, maybe what you've seen into February as well and how we should think about the sort of pace of momentum of tradie sub stepping up?

Yes. So in terms of what we're seeing, [indiscernible], January is always a busy month for us in the year. There's [indiscernible] that are really important. [indiscernible] obviously, January has delivered more than what we anticipated, which is maybe a correction of what we were hoping in November, December. Obviously, it's hard to catch up on a subscription MRR basis. This is what we were hoping for in the earlier months. But January is correcting itself, and overcorrecting is good. In February, we're seeing the similar trends in January. In fact, what we have to do is put more people on in our new business acquisitions and just support that continued volume. So we'd have to move [indiscernible] around to take the orders that are coming through, which is a good place to be. The good news as well is that March is a longer month, having a longer work day month without the short -- without the holiday areas in January and the February short. March is longer. So we expect March to continue. And if that run rate goes through to June, we'll put ourselves in a really healthy position for FY '24.

Excellent. And then just one another thing I noticed. There was no split of tradies between New Zealand and Australia. And again, apologies if I've missed that. But just sort of if you can provide any color on maybe any differences you saw between both the tradie bases and then just talk a little bit about how you're seeing that transition to subscription through the Builderscrack business, please?

Sure. I think I'm going to take a pass to this and hand over to Jaco. I'll hand over to other parts to that question. But the headline for why we didn't go into the detail on Builderscrack. It's pretty much the anniversary of the acquisition. Builderscrack is a part of hipages Group. We just wanted to keep the presentation material as simple as possible to provide a little bit more detail on the Builderscrack business. For everyone [indiscernible], Builderscrack does have a different operating revenue model to hipages. It works on a commission success fee basis, requiring the transparency of outcomes on work from tradies. We know that there's a lot of opportunity left on the table to a number of ways of analyzing what's going on in Builderscrack. So we are strategically moving Builderscrack over to a 100% subscription model as we have successfully done on hipages. And as I mentioned in the script, we successfully did that in hipages over the course of 2020 and '21, completed that entire project by the end of 30 June 2022. In terms of some detail on Builderscrack's performance, because it's successful and very much driven by demand, it's been challenging. Jaco, do you have any more detail on Builderscrack that you want to share?

Look, I think what we are seeing, we are seeing that as they start moving over to some of the subscription, as they introduce more subscription [indiscernible], that ARPU is increasing over the half. That has increased double digits already. But again, that's still relatively small comparatively.

Yes. They're still building -- they're still -- that will still take at least another 6 to 12 months to completely build the best aspects of the hipages subscription model and the best aspects of the connection process that Builderscrack has into a new commercial model. And it will take time to roll out to the 3-ish thousand customers that they have [ as it is for hipages. ] But that is progressing well. It's a small team. I'm very pleased with our -- Builderscrack is handling the more difficult consumer demand environment there and doing that transition. So keep watching that space. We'll keep providing updates and separate slides in [indiscernible] try to give a little bit more clarity on the call out on the output of our business in [ due time. ]

But just to -- maybe -- so we did call out the ARPU of Builderscrack in the footnotes.

It's in the footnotes?

Yes.

That's great.

If somebody's looking for that.

Excellent. I missed that separation of Builderscrack. And then just one final question for me. Just looking at the marketing spend and sort of pulling back on that a little bit. Could you just give us a little bit more color on the focus of marketing among sort of brand investment and then maybe sort of how you're focusing it between tradies versus consumers?

Yes. So do you want to go, Jaco? I'll give the deal on that. So [indiscernible] for the business. We're always chasing one of the site of the marketplaces. We're chasing demand for consumers to post more jobs or you're chasing suppliers, suppliers [indiscernible] some more tradies. We have the pool of money that we put into our marketing to drive that. In the last year or 2, demand hasn't really been an issue. We obviously wanted to continue to build the brand, and we did do that. But we certainly took money from that marketing budget and allocated it to tradie acquisition. The 1.5 years [ for launch ], it was a very challenging environment to try maintaining our tradie registration volume. So we did put a lot more capital into that, and it was effective, at least to help us drive the growth in a very difficult environment. I would say that, that is now [indiscernible]. We've got to watch the movement in consumer demand to ensure that it doesn't reach a level that goes below what's tolerable. And likely, we will probably take some of that money that we allocated to trade marketing and put it into consumer. In fact, I know that, that's what we will be doing in our budgeting process in FY '24, and we've already started doing in H2.

Yes. And maybe just to add to that. Because they are always in the market in terms of brand and actually marketing to both tradie and consumers, it allows us to flip between tradie versus consumer without having to significantly increase our cost of acquisition on the performance marketing side. So that allows us to flip relatively quickly.

I think the last thing that's another high-level thing to add to that as well is what everyone probably want to hear is that we have committed to doing the next season of The Block with a fresh new format than what we've done. That has been effective over the last 4 years, but we've done something quite different and exciting for the year ahead and working with our partners [indiscernible] to deliver an amazing reality to the experience. So that's something we're looking forward to. But then we'll also ensure that, that consumer demand and brand awareness continue to grow at a healthy level.

I look forward to seeing what you do there. That's everything for me.

Thank you, Sophie.

[Operator Instructions] There are no further questions via phone. I would like to hand back to Roby.

Thank you, everyone. Thanks for your time, and have a wonderful day.

This now concludes today's conference. You may now disconnect.