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

Thank you for standing by, and welcome to the hipages Group Holdings Limited H1 FY '25 Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Roby Sharon-Zipser, Chief Executive Officer and Co-Founder. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us today for hipages Group's First Half Financial Results for the 6 months ended 31 December 2024. I'm Roby Sharon-Zipser, the CEO and Co-Founder of hipages Group. And joining me on the call is Jaco Jonker, our Chief Finance and Operations Officer.   I'll start this morning's presentation on Slide 4 with a brief overview of the company for those of you who may be joining us for the first time before touching on the highlights from the first half. Then Jaco will talk through the financial performance in more detail before I'll provide some more color on our strategic evolution and the outlook for FY '25. Hipages is Australia and New Zealand's #1 platform to connect homeowners with trusted tradies. Our purpose is to transform the trade industry, building better lives for everyone. Hipages began life as a marketplace business, but with the launch of our single tradie platform last year, we continue our evolution to a Software-as-a-Service business through the development of our hipages tradiecore platform. This year, so far, we have reached several key strategic milestones, including in Australia, migrating all tradie customers onto our new single tradie platform, in New Zealand, migrating all tradie customers to a full subscription model and delivering continued ARPU growth in both markets, driven by our enhanced value proposition. And alongside all of this, we delivered continued growth in recurring revenues, EBITDA and free cash flow in the first half.   Turning to the highlights on Slide 5, where you can see our momentum continued in H1 as we reached two very important strategic milestones. I'll talk more about this in a moment. From a financial perspective, growth in recurring revenues, ARPU and continued free cash flow generation shows the power of the operating model. With our balance sheet remaining strong and debt-free, this sets us up for a strong second half.   Before I hand over to Jaco, I want to take a moment to talk about our strategic executions in H1 on Slide 6, where we successfully migrated all Australian customers to our single tradie platform. The team did an exceptional job to complete the platform migration in Australia and subscription model migration in New Zealand while continuing to deliver growth in our key financial and operating metrics. I can't overstate how significant these achievements are, given the level of execution risk these types of migrations carry. I always say it's like rebuilding the engine of the plane while flying the plane. I'm really proud of the team's efforts to get this done on a tight time frame.   As of today, all of hipages 32,000-plus customers have migrated onto the new hipages tradiecore app and about half of the customer base has migrated to the new pricing packages with the remainder to roll over before the end of the calendar year. This is expected to progressively benefit our key metrics and the early signs for engagement and retention are positive. During the half, we also launched a desktop version of the single tradie platform to complement the app for those tradies who run their businesses on desktop. And we also delivered tap-to-pay functionality in the app, which we know is an important feature for our customers.   In H2, we will be focused on completing the migration of all customers to the new subscription model and implementing a go-to-market plan to drive increased adoption of the new functionality, which we expect will further boost engagement and ultimately retention. So as you can see, it's been a busy first half, still plenty for us to deliver in H2. And sitting here today, I'm very pleased with our progress and confident in heading into the second half. Now I'll hand over to Jaco to talk you through our financial performance in more detail.

Thanks, Roby. I'll kick off by looking at the financial highlights for the half on Slide 8, and I'll note all comparisons are versus the first half of FY '24, unless otherwise stated. As Roby said, we are pleased to have seen continued growth in our key metrics in a half that was focused on strategic delivery and featured two significant migrations.   Looking at the top line, MRR was up 14% to $6.8 million, driving an 11% increase in recurring revenue to $39.2 million. Total revenue grew by 9% to $40.6 million with operating revenue, which excludes the impact of rental income in the prior period, up by 10%. This revenue growth also reflects the nonrenewal of our contract with the New South Wales Department of Education, which removed circa $600,000 of annual recurring revenue. This revenue was not scalable and not material to the business.   Moving down the page. EBITDA before significant items was up 4% to $8.7 million, with the EBITDA margin of 21%, down 1 percentage point due to planned additional investment in brand marketing, including new creative assets that won't recur in the second half. Net profit after tax before significant items was $0.1 million.   As Robbie mentioned, we generated free cash flow of $1.2 million in the half, noting we define free cash flow as operating cash flow less payments for capitalized development spend and leases. Looking at the key drivers at the bottom of the slide, the Group subscription trade count was 34,900 tradies, down 1%, with 1% growth in Australia to 32,300, offset by an expected decline in New Zealand tradies due to the impact of the transition to a full subscription model, which Roby will expand on in a moment.   Group ARPU grew by 9%, $2,267 and the number of tradie homeowner connections, which is a reflection of marketplace activity was up 4% versus the prior period to $1.4 million, which is a first half record. Our balance sheet remains strong with closing cash and funds on deposit of $22.5 million and no debt.   On Slide 9, you can see the positive trajectory of all our key metrics, showing the power of our operating model to deliver sustainable growth in revenue, profit and cash flow.   Slide 10 shows our strong marketplace activity, which remains at near record levels, continues to drive double-digit MRR growth, up 14% to $6.8 million for the half year. New business yields are at record levels, benefiting from the rollout of the single tradie platform with further upside to come as the remainder of our customer base migrates from legacy pricing models to new subscription packages by the end of this calendar year.   For our existing customers, ARPU growth continues to be driven by extensions to higher-priced packages in a highly active market, supported by dynamic lead pricing based on supply and demand in each trade category and geography.   On Slide 11, you can see how operating leverage continues to emerge and largely offset the impact of increased investment in the half. As mentioned previously, there was planned additional marketing spend in H1, including the development of new creative assets to support brand initiatives that will be used beyond FY '25 as well as some additional Tradie focused brand marketing to drive acquisition. This additional brand spend will not recur in H2.   Looking ahead to the full year, we expect marketing spend to be around 24% to 25% of revenue. While sales employment costs increased by 12% in dollar terms, they are steady at 13% of revenue, reflecting reduced vacancy rates and the new roles established in our Manila operations.   Operations and administration costs were down 3% on the pcp to 31% of revenue, reflecting our disciplined cost management and operating leverage offsetting increased subscription and license costs.  Slide 12 provides an overview of hipages' technology spend over time, with H1 reflecting our trajectory to continue to invest whilst reducing spend as a percentage of revenue. As a reminder, the step-up in tech development spend in previous years was instrumental in our shift to a subscription model between FY '20 to FY '22. As well as to improve our matching engine and laying the foundations of our job management solution in FY '23 through FY '24.    The FY '25 tech development spend focuses on the continued development of the trading platform alongside further marketplace optimization. It is expected to be 24% of revenue at full year, in line with H1. As we look forward, we will continue to invest to support the delivery of our road map and believe technology spend as a percentage of revenue will continue to reduce.    Turning to an overview of hipages Australia on Slide 14, where you can see that strong marketplace dynamics continue to drive exceptional experiences for our customers. On the left, you can see connection volume, which occurs when the tradie claims a job, showing steady growth half-on-half. Here, we can also see the seasonality in connection volumes with demand in the first half typically lower because of the holiday period. On the right, you can see that the proportion of jobs being connected to a tradie remains near record levels at 84%, meaning we are delivering an exceptional experience for homeowners.    On Slide 15, you can see ongoing growth in ARPU for hipages Australia, which increased by 8% to $2,374. Key drivers of ARPU growth were new customers joining the single tradie platform at higher price points, existing customers migrating to higher price plans on contract renewal, and ongoing optimization of job lead prices, driving increased credit usage, extensions, and lead back purchases.    Slide 16 shows our continued growth in trading numbers in Australia with subscription tradies up 1% at a time when we increased subscription prices and migrated tradies to the single tradie platform. We are really pleased to see this number continue to grow and expect further growth to come as single tradie platform adoption increases and retention improves. Roby will speak about some important initiatives underway in the second half shortly.    On Slide 17, we highlight that the MRR retention has remained stable while we have consistently grown ARPU. Our focus remains on increasing the adoption of top management features to drive improved retention, and we are seeing encouraging early signs of high retention on first contract renewal from single tradie platform cohorts. On Slide 18, we look at the record awareness we have seen from our investment in multichannel always-on brand investment. As I mentioned previously, the additional planned marketing spend in this half included new creative assets to support brand initiatives on both sides of the marketplace that will be used beyond FY '25.    We expect the level of investment as a percentage revenue to drop back in the second half, but we'll continue to invest in our brand, which is a key differentiator for us in market. And with that, I will hand over to Roby to provide an update on our New Zealand operations, strategy, and targets.

Thanks, Jaco. So turning to our New Zealand business on Slide 20. We delivered a key strategic milestone in our New Zealand business in the first half with the migration of all customers to a full subscription model at higher price points with a longer average contract length. Previously, the subscription product was a hybrid model, still partly commission-based with low commitments on average 3 months. Having implemented the same model change in our Australian business in 2021 through to June 2022, we knew that there would be some attrition as tradies were migrated onto the new subscription packages. So it has not come as a surprise. Since completing the migration, we've seen New Zealand tradies begin to increase again with over 200 new net tradie accounts added to the platform since the end of H1.    What is also pleasing is that we have already seen an 18% lift in ARPU due to the new higher-value tradie base, and we anticipate further ARPU growth as we leverage our experience from Australia to unlock significant upside opportunity. On Slide 21, you can see how the transition to a full subscription model drives significantly enhanced value for tradies and consumers with the number of connections per tradie increasing significantly over the prior corresponding period. We know from the Australian experience that subscription tradies are more active, contributing to greater value exchange and ARPU growth and an overall more healthy marketplace. We anticipate that this high tradie engagement and activity level will also translate into greater propensity to ascend to higher price points in subscriptions.    Before I close, I want to take your mind back to the strategic road map I shared at the beginning of the presentation. This slide shows the current state of play with 100% of Australian tradies now migrated to the new app. As I said, this is a huge achievement in itself. At the end of H1, 42% of our tradies had migrated to the new price plans. This number is more like 50% today. This reflects the significant yield opportunity from the rest of the migration through to the end of this calendar year. On the right-hand side, you can see that 2,900 or less than 10% of our Australian trades are regularly using the job management features on our hipages tradiecore app. This means that over 90% of our customers currently either don't use or don't know about the enhanced value of the platform, reflecting a huge opportunity to educate and engage our customer base and drive significantly higher engagement and retention.    The early signs are promising with our first renewal tradie cohorts showing positive early signs of improved retention. We're very focused on capturing this opportunity and rolling out a go-to-market to help our customers understand the value of the platform is key to driving this. I look forward to reporting back on this at our full-year results in August. And finally, looking at our FY '25 targets on Slide 24. After a successful H1, where we delivered 10% operating revenue growth alongside 2 significant-tech migrations, the group has updated its FY '25 revenue target to $83 million to $84 million for the full year.    The Group's confidence in achieving this target is underpinned by the key technology and subscription migrations being completed and initiatives in place to drive increased engagement and retention in H2. Expectations remain for EBITDA margin expansion of 1 to 2 percentage points from FY '24 to 23% to 24%, with increased confidence in the outlook for free cash flow resulting in a range of $5 million to $6 reflecting the power and flexibility of the Group's operating model. I'd like to thank all of the hipages team for their huge efforts this year so far. They are key to our ongoing success. Thank you for listening. And I'd now like to open the line to questions.

[Operator Instructions] Your first question is from Jules Cooper from Shaw and Partners.

Roby, can you hear me?

Yes, we can hear you, Jules.

Excellent. All right. Just a question from me. I wondered if you could expand a little on the retention benefits you're seeing from those early renewals. Now I know the pool is not large, but anything that you can share there would be helpful. And then when we're talking about go-to-market and improving the engagement with the business apps, what are you thinking there? Is that more sort of employee-driven? Or are there digital tools that you can use? How are you sort of really thinking about executing on that over the coming months given the opportunity?

Yes, sure, Jules. I'll answer those 2 questions as concisely as possible. So for everyone's benefit, obviously, the hipages tradiecore rollout and adoption of more features in the system of record, so workflow management, quoting, invoicing, scheduling, payments is a critical feature to get more engagement with our customers outside of our core marketplace lead generation solution. And if we can get more customers on to that platform using it more best practice, globally, research says that your retention rates will improve. And obviously, that would be material for us. So as you can see, we're just -- we're getting close to about 3,000 customers actively using the product. We have quite a bit of work to do to get what the customers are actually paying for using the product. But our focus was obviously a big technology migration, getting everyone in the app in the first half, which we successfully did, which is a big achievement.  In terms of the cohort of customers, so the way we operate is there are more customers that came up potentially for renewal in the period. But within the 6 months first contract, we upgraded quite a lot of customers. And so their contracts have now been extended out for a longer period of time. So on one hand, you could say that those customers were retained. But the customers that didn't upgrade that did renew to the customers that we put on in April, May, June, last financial year, their renewals have come up. And what we're seeing is very, very strong retention rates. So in terms of what we typically see for a normal customer that didn't have job management, the retention rate is around 45%, 50%. The customers that are -- even though it's a small cohort, we're talking about 80 to 100 of them coming up for renewal on a monthly basis, their retention rates are above 70%. So as you can see, that differential is significantly material for our business. So yes, that's probably the color I'd like to give at this stage on that. And as we start getting more and more customers, we hope to see that percentage improve even more as those customers use more and more of the features.   So I think that answers the first part of the question, Jules. I'll move on to the second part in regards to how we're engaging with customers. So that's going to be a really big feature for us in the second half. So for example, we know that if a customer uses the quoting feature, because it's a very, very nice, easy-to-use feature, the adoption of all the other features gets easier. More importantly, if a customer does a quote for a job that is not generated by a hipages lead, but through maybe other means, maybe through their existing customer base or through other advertising channels that they may use, then the customer is going to be even stickier, potentially also using our tap-to-pay functionality or a payment solution, it's even stickier again. So what we'll probably do in the business, and there's a team being put together and actually already starting actively engaging customers to use those features, is to put incentives, rewards, better onboarding, better engagement, acknowledgment of their capability as a business using some of those features on their business profile. So a lot of that kind of stuff, that's been very effective in many businesses to get enhanced engagement adoption, looking at badging on customer profiles as an example of that and creating a community around using the features to make their businesses easier to run. So those are some of the ideas and things that we'll be delivering on in the second half to improve engagement.

Thank you very much. Very generous with the color there.

Your next question is from Olivier Coulon from E&P Financial Group.

Just on the New Zealand transition to a full subscription model, I guess, how has that gone relative to expectations? You obviously have grown your total subscribers and some of them were only hybrid. So I imagine that you feel reasonably good about that. But how do you feel -- did you -- were you hoping to do better on the transactional trades that have dropped out? Or do you think you may pick them up over the coming months? And then the second part of that is, I suppose, how does the rebuild of that subscriber base look like in your kind of thinking?

Absolutely. That's a really good question. It allows me to open up a little bit more detail on our New Zealand business. So in Australia, we were a lead generation pay-per-lead model for many, many years, and we had a little bit of a subscription model. And we were getting quite low ARPU, sub $1,000 from customers, very similar to the New Zealand business. And we've been trying to slowly migrate customers into subscription. So the customer counts in the New Zealand business was challenging because we were trying to align the New Zealand counts to the way the Australian business does subscription counts. And the way it worked in the past is, if we had invoiced a customer one amount in the previous 12 months, that was included in the New Zealand subscription counts. But now, because we've now got every customer paying us something every single month, that obviously reduces the counts.  And optically, we're trying to be transparent in regards to how we recorded accounts in the past, but it's not really the same. It's definitely apples and oranges when you compare to accounts. Having a customer pay you every single month compared to a customer that may pay you once a year is a very different proposition. Having given all of that detail around what happened in New Zealand, it is an exact -- almost exact replicate. It's not -- we've done it better in New Zealand than what we did in Australia. I think if I remember, when we were going back, this is just rough, but I think we were around circa close to 40,000 customers in Australia well before 2021 when you included every single type of customer. But then when we went to full subscription, we fell below 30,000, and we've been building that up over the last few years. So what happened in New Zealand is an exact replica of Australia, and you can already see the higher ARPUs coming through, and that will continue to grow at that kind of rate going forward for quite a while as we are doing it in Australia.   In terms of what we're doing in New Zealand as well, what's different is New Zealand was a very self-service business model in the past where people just self-signed up, had to provide all their credentials. It was all self-service. We know for this category that the best model is to have a combination of self-service and operational sales capability. So what we've built up is a sales capability to support a subscription business, so some customers might find that subscription is a little bit more complicated, so we need to help them on that journey as they register into our platform. All of that capability is built now. The subscription model and the upside of longer subscription terms, the value from a longer subscription term is now built in. We're just scaling that all up as we speak. So I mentioned in the presentation that we've already added a couple of hundred more customers to that number. And that's continuing to grow week on week on week because of that operational capability. So I hope that answers your question, Oli.

Yes. That's a good one. Maybe if I can have one more. Just on Manila, what does that mean for your ability to drive those sort of initiatives and drive sub growth across Australia and New Zealand?

Yes, absolutely. So Manila is an operation that we set up about 10 years ago. We have about 80 people that work for hipages in our Manila office. What we did with -- by connecting it to the previous question is we've opened up some roles in Manila to support our business in New Zealand. We also still have people on the ground. We like to work a bit hybrid, making sure that we have operational capabilities in the domestic country and also in Manila. Obviously, that gives you cost advantages. But more importantly, it gives us longer operating hours because of the different -- the extended time zones. You get about 2 to 3 hours extra time to operate having both locations running concurrently in a hybrid model.

Perfect. And then just like a question on capitalization. I mean, I saw that, that has come down. Has that been a big part of the driver of the upgrade to the free cash flow guidance?

I'll hand that to Jaco to answer.

In terms of the capitalization, just to remind everybody, we typically look at technology spend as a whole. And so for us, the technology spend has been consistent. So we've spent -- it's about 24% of revenue, and we expect that to be holding for the full year. So we haven't made any changes to the capitalization and the spend on capitalization. As I said earlier, we are still going to continue to spend to support building out our platform. So in terms of the on cash flow as a result, but that is just really the operating leverage across the business that is generating that. So it's not a particular area where we had to cut down. You will see that we have managed our operating expenses in line with that.

[Operator Instructions] There are no further questions at this time. I will now hand back to Mr. Sharon-Zipser for closing remarks.

Great. Thank you, operator. So only final remarks is thank you for everyone's time. Very pleased with the strategic milestones and the deliverables in the first half. Now we're going to do an acceleration in terms of the operating leverage in the business for the second half and deliver on those targets that we've set out to achieve. So I appreciate everyone's time, and I look forward to catching up with people over the coming days and weeks. Thank you.

Thank you. That does conclude our conference for today. Thank you all very much for participating. You may now disconnect your lines.