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

Thank you for standing by, and welcome to Hipages Group Holdings Limited FY '23 Investor Briefing. [Operator Instructions] I would now like to turn the conference over to Mr. Roby Sharon-Zipser, Cofounder and CEO. Please go ahead.

Good morning, everyone, and thanks for joining us this morning. I'm Roby Sharon-Zipser, the CEO and Cofounder of Hipages Group. Today, I'm joined by Jaco Jonker, our Chief Finance and Operations Officer. It is my pleasure to present to you Hipages Group's FY '23 financial results. Before we kick off, I'd like to remind you that Hipages Group is Australia and New Zealand's largest online tradie marketplace and SaaS platform, helping tradies build better businesses. Our vision is to be the most trusted partner in the trade industry and our purpose is transforming the trade industry, building better lives for everyone. Today, I'll begin by touching on some of the highlights for FY '23. Jaco will then go through our financial and operational performance in more detail. Then I'll take you through an update on our strategic evolution before looking ahead to our FY '24 targets. Turning to the FY '23 highlights on Slide 7. I'm very pleased that Hipages Group finished FY '23 carrying a strong momentum, which accelerated in H2. Our key metrics clearly show that the economic activity caused softening consumer demand, more competition for work among tradies. There's been record tradie demand for our services, which is driving MRR up by 15% at the end of June, with ARPU up 10% on the pcp. This shows the defensiveness of our core marketplace business, being able to deliver a strong performance in a cooling economic environment. I'm also pleased to say that we were free cash flow positive in H2, an important milestone for our business and showcasing the strength of our business model to deliver profitable growth. We also retained our robust balance sheet and no debt. To reduce our exposure to the economic cycle and open new opportunities for growth, we are continuing our strategic evolution from marketplace to platform. This is an exciting evolution, and we've made good progress in FY '23, which I look forward to taking you through in a few moments. We enter FY '24 with healthy trading momentum, with the business firing on all cylinders. Our subscription model gives us good visibility over future revenues, and we remain focused on tightly managing costs and cash. We expect this momentum to continue, and we are targeting positive free cash flow for FY '24. Now I'll hand over to Jaco to run through our financial and operational performance in more detail.

Thanks, Roby, and hello, everybody. It's my pleasure to present to you the group's financial and operational performance for FY '23. On Slide 9, you can see the financial highlights for the 12 months to 30 June 2023. As Roby said, our marketplace gained strong momentum in the second half, driving improvement across our key metrics for FY '23. Monthly recurring revenue, or MRR, grew 15% on the prior corresponding period, or pcp, to $6.3 million at the end of June, driving recurring revenue up 8% to $62.9 million for the year. Operating revenue, which excludes lease income, was up 9% to $65.9 million, while total revenue was up 8% to $67 million. Our gross margin remained healthy at 88%, up 3 percentage points on the prior year, with EBITDA before significant items up 14% to $12.3 million, reflecting margin expansion of 1 percentage point to 18%. The business delivered a pro forma net loss after-tax of $2.3 million for the year. On a statutory basis, the net loss after-tax was $5.1 million, which included a $3.1 million noncash goodwill impairment on the value of Builderscrack. Looking at our key drivers. It was pleasing to see subscription tradies returning to growth, up 3% for the year, reflecting robust tradie demand in the second half. ARPU continued to grow strongly, up 10% to $1,872, with the core hipages Australia business growing up by 11% to $1,985. Job volumes continued to normalize from the exceptional hires of the prior year, down 13%, but a stable quarter-on-quarter in Q4. More importantly, total connections between tradies and consumers, a metric we have been not previously reported, which represents when tradies accept a job lead and use lead credits, were up 8% in H2 on the pcp. This is a far more accurate reflection of marketplace activity and lead indicator for future revenue growth. As Roby said at the outset, we reached a key milestone in delivering positive free cash flow in H2, with cash and funds on deposits increasing to $10.7 million at year-end, with no debt on the balance sheet. Slide 10 is a great example of the evolution and the positive momentum of the group's key financial metrics over the last 4 years. The group has demonstrated significant resilience and the ability to deliver growth and positive operating cash flow in challenging operating conditions. Our financial profile clearly illustrates our proven unit economics and operational leverage, and we are in a great position as we progress towards our target of positive free cash flow in FY '24. Turning to Slide 11. You can see that our MRR growth rate has returned to pre-COVID levels having been impacted in previous periods by lockdowns and the post-COVID home improvement boom. In H2, MRR grew by 12% over H1 driven by record tradie demand for our services as well as subscription price increases and lead price optimization. With 94% of our total revenues recurring, we have a high degree of visibility, which underpins our confidence heading to FY '24. The next two slides show the key metrics for our core hipages business in Australia, which is now a full subscription model. This removes any dilutive impact from Builderscrack, our smaller New Zealand business, which predominantly operates a transactional model. Slide 12 shows how we continue to drive ARPU growth by enhancing the value exchange with our tradie customers. On the left-hand side, you can see that our subscription model continues to drive ARPU growth in our core hipages business as new tradies join higher price points with new business yields up 26% on the pcp. On the right-hand side, you can see the progressive migration of our customer base to higher priced packages as we continue to optimize our lead pricing and implement subscription price increases for new customers. We are also seeing a significant impact of dynamic lead pricing where our algorithm prices jobs according to their characteristics, including job type, location, time and tradie demand. This drives increased lead credit usage and ascensions to higher priced tiers. Looking ahead, we are confident we can continue to drive ARPU higher from our core marketplace business by more effectively pricing leads and enhancing the experience for our customers. On Slide 13, you can see how marketplace balance drives revenue growth. hipages fundamental promise to customers who post their jobs on our platform is that we will connect you with up to 3 tradies at speed. As you can see on the left, in prior periods where tradies were either unable to work during COVID or later too busy to require additional job leads, almost 30% of jobs went without being connected to a single tradie. On the right-hand side, you can see the number of tradie/consumer connections over the same period. More connections mean tradies are consuming lead credits faster, triggering ascensions to higher priced subscription packages. We can clearly see that the marketplace returned to balance in the second half of FY '23 with 84% of posted jobs connected with at least 1 tradie and 1.4 million total connections being made, an increase of 8% on the pcp. This delivered an exceptional user experience, as well as higher lead credit usage, which is a lead indicator for future revenue growth. Turning to Slide 14, which shows hipages subscription tradies reaching 32,300 after returning to growth in H2. This was driven by record tradie registrations in the second half, including approximately 25% from returning customers, mainly [ were let up ] because they were previously too busy. This is an encouraging trend, which we expect to continue as competition among tradies remains fierce. In addition to our paying subscribers, there is significant opportunity to monetize nonsubscriber customers, including those who only use Tradiecore on a free trial basis or interact with us solely through our partnerships with the likes of the New South Wales Department of Education, Bunnings and IKEA. We currently have over 40,000 tradies on our platform, including the 32,300 of hipages subscription tradies and 3,400 paying tradies from Builderscrack in New Zealand. This means that over 4,000 of our tradie customers are not currently paying for subscription, which represents a significant opportunity to monetize these tradies. On Slide 15, you can see how our effective brand investments continued to deliver results on both sides of the marketplace. On the left, you can see an image of an activation from the newest series of The Block, which is now underway with the hipages Ford Ranger used alongside Tom, everybody's favorite contest from last season. We are proud to continue our sponsorship of The Block, which continues to be an effective brand investment for hipages. On the tradie side, targeted radio, television and digital advertising drove tradie registrations up 41% year-over-year, with a record tradie brand awareness of 68% and increases in both tradie consideration and preference. On the consumer side, the hipages brand drove 80% of jobs from unpaid channels, and the high-quality customer experience resulted in 72% of jobs coming from repeat customers. In total, 4.2 million unique users have posted a job on hipages, making us the market-leading online marketplace for home improvement jobs by a wide margin. On Slide 16, you can see hipages' strong unit economics with the LTV/CAC ratio for our Australian business at 9.1x in FY '23. At the group level, our LTV/CAC ratio is back to pre-COVID levels. The improvement on the prior year was driven by increased marketplace activity and yield optimization, which boosted customer lifetime value as well as record tradie demand, which unlocks acquisition efficiencies. The strong LTV/CAC ratio is not expected to increase materially moving forward. Turning to our operating expenses on Slide 17. As you can see, we have stabilized our cost base a volatile period while continuing to invest in technology development to deliver our strategy. In FY '23, overall operating expenses as a percentage of revenue improved by 1 percentage point to 82%, largely due to our effective brand investment, enabling more efficient acquisition spend. This resulted in marketing expenses as a percentage of revenue improving by 7 percentage points to 27%. Looking ahead, we expect enhanced operating leverage to drive further margin expansion as our investment in technology development stabilizes. And finally, on Slide 18, I'd like to talk about the performance of Builderscrack, our New Zealand marketplace business, and the recently rebranded PropTech Labs, formerly known as Bricks + Agent agents. Builderscrack currently operates a commission model with revenue driven by job volume and value. Leveraging our experience with hipages in Australia, we are transitioning the business to a subscription model to reduce cyclicality. In FY '23, revenue was down 4% on a like-for-like basis in a challenging economic environment in New Zealand. The team did a great job managing the cost base well to support a 21% EBITDA margin. We have taken a noncash goodwill impairment of $3.1 million due to the lower-than-expected transactional revenues. We remain very positive on the future of Builderscrack and expect its performance to improve as we transition to a subscription model and increase investment in sales and marketing. During the year, Bricks + Agent rebranded to PropTech Labs, following the acquisitions of Maintenance Manager and Inspection Manager. This made PropTech Labs the ANZ market leader for property management productivity software with over 1 million properties under management out of approximately 2.6 million across Australia. The business continues to deliver very strong growth, with annual recurring revenues growing at 30% CAGR since 2020. Its latest fund raise demonstrates the valuation has increased by 70% since we originally invested $6.25 million for a 25% share in FY '22. And with that, I'll hand over to Roby to talk more about our strategic evolution.

Thanks, Jaco. As you can see on Slide 20, we are continuing our strategic evolution from marketplace to platform, which we believe is critical to winning the tradie economy. Many of you will be familiar with the road map we showed at the half year, which depicts the 3 pillars of our strategic transformation over the next 3 years and beyond. The first pillar is optimizing our core marketplace business with lead price optimization, increased uptake of existing services and enhanced Tradiecore functionality to drive higher ARPUs and revenue growth. The middle pillar is our tradie platform evolution where we are developing Tradiecore into an end-to-end SaaS platform for tradies to run better businesses. This will provide opportunities for us to develop and sell an expanded range of products and services for tradies as well as driving additional growth through new platform pricing and packaging. The third pillar is consumer platform evolution for consumer products and services, including fixed priced services, enabling us to increase our take rate over time. Down the line, the huge amounts of data we capture through our platforms will enable us to create bespoke products and services that will drive further growth. One of the major benefits of our transition from marketplace to platform is enhanced retention, which you can see on Slide 21. We've already seen the significant benefits of transitioning hipages to a subscription model in FY '19, having doubled our ARPU to almost $2,000 while increasing retention to 59% in an industry that has an annual exit rate of 14%. This demonstrates strong pricing elasticity and shows we are on the right track. But there is still room to improve. On the right-hand side, you can see why we are so confident in our platform strategy. We know that tradies use multiple services to deliver 1.8x the average customer lifetime value of the total hipages trading base. These tradies are stickier and spend more with us, which will be important to improve retention and drive growth moving forward. Turning to Slide 22. I'm very excited to announce our new Tradie Advisory Board, the first of its kind in Australia, to ensure that the voice of the customer is at the heart of our product and strategy. This year, we launched our inaugural Tradie Advisory Board comprised of 8 tradies, representing a wide range of tradies drawn from across Australia. This Advisory Board will have a direct line into the Hipages Group management team and report to the Board, providing us with an invaluable opportunity to listen, learn and collaborate directly with the people who use our products and services. Together, we will tap into the expertise and insights of this group to drive innovation and deliver even greater value to our customers. The launch of our new profile and payment functionality in FY '23 means that the hipages customers can now complete their entire workflow on our platform. However, the process is still completed through 2 separate apps. That's flagged at the half year. The next step is to move to a single platform, which is expected to be completed in FY '24. Once this is in place, tradies will be able to complete an entire job flow within a single app interface, removing friction and becoming a business-critical system. Over time, data from Tradiecore will provide powerful insights to enable the group to develop new products and services for tradies and consumers to drive future growth. To show you what the future looks like as we combine hipages and Tradiecore into a single application, we put together a short video. The first minute shows the current state with the workflow separated across for hipages and training apps -- and Tradiecore. This demonstrates a lot of room to grow and adopt Tradiecore. The middle section shows what it will look like when the full workflow is available in Tradiecore, providing a seamless experience for tradies. Then the final section shows a range of potential future services that are unlocked by Tradiecore. I really hope you enjoy it. [Presentation]

I hope you all enjoyed it. I'm certainly very excited to see this come together over the next 12 months and deliver on the opportunities. Turning to our targets for FY '24. Having delivered positive free cash flow in H2, we reached a major milestone for the business. Looking ahead to FY '24, we are targeting positive free cash flow. While the timing of our payment for the sponsorship of The Block in Q2 will skew free cash flow slightly negative in H1, we are targeting positive cash flow in the second half such that if we phase The Block spend over 12 months, we would be free cash flow positive in both H1 and H2. I wanted to close by discussing the medium-term margin potential for Hipages Group. We have a highly efficient and scalable operating model, which are intended to deliver enhanced operating leverage and market expansion over time. This should be driven by revenue growth, further marketing efficiencies, the stabilization of our technology development costs and tighter expense management, which we will manage in line with inflation. In FY '24, we are targeting revenue growth in the low teens, with an EBITDA margin of approximately 20%. In the medium term, we are targeting revenue growth in the mid-teens with EBITDA margins of greater than 25%. Our confidence in these targets is underpinned by the huge opportunity we see from all 3 pillars of our growth strategy. In the near term, the opportunity from the first pillar alone with lead price optimization, new pricing and packaging is significant. Our evolution to platform from tradies and consumers gives us confidence in our growth prospects over the long term. I'm extremely excited in the future of Hipages Group. We've had a strong year to FY '23, and we are carrying significant momentum in FY '24. I look forward to reporting back on our progress throughout the year. With that, I'll hand back to the operator to take any questions.

[Operator Instructions] Your first question comes from Piers Flanagan from Barrenjoey.

Just on the 2 half subscription growth, which was strong. Could you maybe just give a bit more color on how that evolved during the period? And then just on those record registrations, are you starting to see them converting to subscribers over the first half '24? And how should we think about subscription growth in '24?

Thanks for the question. Okay, so in terms of the subscription turnaround or registration volumes, that really materially increased from January. We did have obviously a challenging H1 and then FY '22 was also challenging. The reasons that we presented are material. That's consistent now in terms of H2 where we're seeing that record number. It's been like that month-over-month. So we're pretty pleased with that. And then the conversion rates have actually slightly started to improve. So we're very pleased with those conversions, to those registrations to actual paying subscribers. Returning customers convert the best. Obviously, they've got familiarity with our product and solution, and we can activate them faster than probably a new customer. But that's all healthy, and we're pleased with that. And just looking ahead, in terms of both registrations and conversions, we're targeting for that to be consistent with what we've seen over the last 6 months, over the rest of the financial year for FY '24.

Great. And just on job volumes, I mean, you previously talked about wanting to manage volumes as the marketplace dynamics improve. Maybe talk about how you're thinking about job volume growth as subscribers grow, and particularly against the current macro backdrop.

Yes. So obviously, we've disclosed that the job volume is down compared to year-over-year. And just to emphasize to everyone, it's not necessarily a bad thing because, remember, the marketplace, our promise to the consumer, to post job to get a good outcome for them. For the better part of the last 6 months, our consumer NPS scores have been at record positive levels, which has been excellent. But having said that, at the end of the day, whilst we're giving good outcomes to the consumer, job volumes often leads to obviously subscriber base growth. We're anticipating year-over-year growth in job volume. We're seeing that now stabilize. And in fact, I think the outlook just confirm Q4 was stable, the job volume. So we've really seen that stabilize and now moving to year-over-year growth. It won't be an exponential growth, but it will be reasonable growth, in line with keeping the marketplace balanced and healthy.

Great. And then just the final one on integration or combined product to hipages and Tradiecore. Just talk in a bit more detail how you're thinking about the benefits, maybe one, from a price perspective; and then two, retention rates as functionality improves or increases.

Yes, absolutely. So we've talked a bit about hipages as a single trading app, which is currently designed for tradies to come onboard. We create a profile for them. They can capture recommendations. They get ratings. They can put pictures. Put all their licensing information on their profile. And then the actual job lead, they can accept or decline a work. That's been the core product of our marketplace for tradies for many years now. We obviously invested, for the audience and investors on the call, in Tradiecore a few years ago, maybe 2, 3 years ago. That application was a completely separate application, as we illustrated in the video. And so the level of interaction between the 2 applications is really simple. [ You kind of lead in ] hipages. And if you have the Tradiecore app downloaded separately, which obviously have some friction in that, the leads appear there, but then [ it's a whole new ] flow. And it's a bit of double-handling and double-interacting. You've got to go into one app then another. We know that that's not the best experience for the tradies. And obviously, that's been hard, as we've been building up functionality in Tradiecore to get huge adoption. What we've been able to do is we allocated R&D, our technology investment, a big proportion of it going into consolidating all of that technology, as we showed in the second part of the video that opened up the discussion on that, where that will be joined together. And so you can receive, accept, check your profile up, then quickly move into this job quoting, the scheduling, the invoicing, the integration with the [ carrying software ], with the ROI, that's all in a single application. And so our teams are working on delivering that by the end of FY '24, with a single application and a single interface that will enable us then to start adding those extra services that are embedded within that workflow, our procurement, anything around stock, the inventory that they need to do their job. It could be an equipment hire, lending products. They're all add-on services that we want to integrate into the platform. Probably those things also, I have it happening in FY '25. But FY '24 is primarily around creating that single application. We expect then, once we have the single application in market, all new customers will be joining hipages in the end of FY '24 onto the Tradiecore app. They'll have to download the app and have access to the full suite of services. And during FY '25, we'll commence the migration of our existing customers on the hipages tradie app into the newly formed app. We know that as soon as the customer has more than one service with us, their retention rate is just going to double, which is what we showed in the graph on the right-hand side. And we know that in some of the stuff with it that's about partnerships, the retention rate will -- 4x higher than just standard single hipages platform. So we definitely really need them quickly to improve the retention rate of the business over time.

[Operator Instructions] Your next question comes from Elijah Mayr from CLSA.

Just a couple of quick ones from me. Just in terms of the guidance, I guess, for FY '24 of low teens growth, with the monthly recurring revenue, or MRR, of $6.3 million, that kind of implies, I guess, 13% growth year-on-year that's maintained through FY '24. So can you maybe talk through, I guess, your expectations for ARPU and subscription tradies that flow into that guidance number?

Probably just to clarify those, the targets, we're not using those in the guidance. Maybe I'll hand it over to Jaco to maybe provide a bit more detail on that.

So as we mentioned, we had quite a strong MRR exit rate, which was [ 50% ] year-over-year growth. So when we think about that in terms of revenue, I think we've had -- the strong position that we're on at the $6.3 million, that actually would give us mid- to high single-digit growth in the FY '24 as we see the -- just the higher starting point. I think we would see that we would have a consistent flow of new registrations. We probably don't necessarily expect the same significant volumes that we've seen through H1, but we still believe that there's going to be some strong demand going in -- well into FY '24. And we're also looking at further lead price optimization as well as our pricing tiers and moving -- as the customers move into the higher price tiers. All those components, we expect are setting us up well to maintain those sort of revenue growth numbers.

Okay. So I guess the $6.3 million per month, I mean if you times that by 12, you get $75.6 million. Are you putting that on the base of $67 million because then that should be sort of low teens.

Yes. But also remember that MRR includes GST, so to me, it's adjusted for that already.

Okay. Yes. No problem. Maybe just secondly then, just on the price increases, are you able to give us an idea of the magnitude and, I guess, timing of when these pricing increases came through?

So I'll provide a little context on pricing. So hipages has available 2 levers to drive -- 2 major levers to drive price increases. One price increase is the headline subscription prices for trades, which is the thing that you see when you register inside of the platform. We rolled out a price increase for all new subscribers in FY '23 -- beginning of FY '23. And we grandfathered existing customers in FY '23. We are commencing that some price change for the grandfathered customers in FY '24. That commences in the next few weeks. That has a 2 percentage point increase there. It's not significant. The main driver -- the mechanism to drive growth is in the actual lead pricing. Just to provide a bit of context and thinking around where the opportunity lies in the lead pricing, in terms of the value exchange we create at the business, if you look at hipages' revenue in FY '23, it was about -- excluding the segment of New Zealand, just hipages Australia, it was circa $65 million. Now we know that we're generating around $2.5 billion to $3 billion worth of work for the tradies that are in our platform. And so if you think about the value of the take rate that we have, so if you put our revenue over the value created, as a percentage, it's about 2.5% to 3%, which is pretty low when you compare it to what you think about traditional marketplace businesses. Now in terms of hipages business as a marketplace business, we obviously need to appreciate that our customers don't make the kind of [ mileage ] that you get from maybe lower value, [ higher level of improved ] marketplace business. So we obviously can't take 15% to 30% ramp that marketplace do. But we certainly have room to move on our pricing as we get more sophisticated in dynamic pricing. So what we are doing, we have a team in the hipages business that is looking at the experience that tradies have, and they're using now dynamic pricing to adjust the consumption and the claims that are occurring in the platform leads. And that's resulting in customers utilizing their credit probably more quickly and resulting in more ascension, so more upgrades, which is what we -- when customers use the product, they you obviously buy more of it. And then also it's also allowing us to price our product more accurately, put customers on more accurate subscriptions than lower subscription when they initially joined us. So we've been doing a lot. Long story short, I tried to provide a bit of color there on everything that we're doing on pricing and what's happening there. And then obviously, the next phase is to move into the improvement in the value space, particularly around the lead pricing, to result in higher consumption of what is available in the subscription.

Yes. No problem. I appreciate the color. And then maybe just one final one on just CapEx and what you're expecting in FY '24.

Jaco, do you want to take that?

So from a cash point of view, we are still building the technology platform. So we will still continue to invest in that at the current levels. We will only start seeing that -- we'll start stabilizing in FY '24. But our key focus is really to be able to deliver on the platform strategy. So that will really be a particular focus area for us, at least until in [ May ] of FY '24 before we start seeing it flattening.

Gentlemen, there are no further questions at this time. I will now hand back to Mr. Sharon-Zipser for closing remarks.

I just want to thank everyone for their time today, a busy day. Have a wonderful day. Take care.