Hypoport SE (HYQ) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the webcast preliminary results full year 2020 of Hypoport SE. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Ronald Slabke, who will lead you through this conference. Please go ahead.

Yes. Welcome from my side as well. Let's talk about Hypoport 2020 results, and I will give you as well a little bit peek preview on what's going to happen in 2021 and in our upcoming years. So as you know, we are digitalizing the credit, housing and insurance industry here in Germany. And the good news first, even when 2020 was a challenging year in general for the whole world, the German trading real estate and insurance industry had very huge impact from the corona pandemic. So quite stable market environment in general. For our more than a dozen [ software ] independent enterprises that integrate along the value chains of these 3 sectors. Hypoport in general delivered strong growth another year, so for 20 years now, double-digit again, plus 15% in revenue of EUR 388 million. If you are aware of this, that we skipped some traditional business models and didn't do so much life in the project business anymore and some acquired companies, this growth is even more impressive. And this is what we didn't do this year in project business, if you were to compare we grew by 20% compared to last year, especially when you look on the gross profit. Even when the environment was challenging and our employees had to change how they work and something didn't work out as planned, we were able to increase our profitability to EUR 26 million. And even this, you will see when you look on the different results of the segments was based on a strong growth, especially in our core Credit Platform unit. Yes, talking about the split, our 2 traditional business models in mortgages. They are growing pretty well in an overall stable market environment, plus 20% for the Credit Platform, plus 17% for Private Clients. You can see here that our platform models -- models where we digitalize industries already, performed pretty well in this challenging year 2020. While the 2 growth segments, real estate and insurance only distributed single-digit growth when you look on the top line, but especially here, we were in the transformation from, let's say, skipping license and project business to a recurring business model, where the revenue is linked to transactions and not to work done by us anymore. And if we eliminate this transformation, these are our growth segments. They are growing faster even than this what you see visibly in the Credit and Private Client Platforms. So looking on this overall numbers, we had a pretty good year 2020. And I thank all employees for what they did this year and how they were able to handle the, let's say, private challenges they are facing and still keep Hypoport growing and prospering. About this future, we will talk at the end of this session here. Okay. Let's first talk a little bit more about the market environment here in Germany, especially in these 3 industries we are operating in. We started our core business, Credit Platform and then Mortgage side. In the beginning of the pandemic, we learned that as a digital leader, the partners which were using Europace already outperformed the rest of the market. We were growing strongly based on the current client and partner network. Transaction volume went up fast in the first quarter and pretty well as well in the second quarter. Then in the third quarter, we learned that we see a slowdown related to COVID because to migrate new partner structures to the Europace system, got delayed. So especially in the traditional part of the credit industry, you could see these organizations, they are not able to handle big change project and a migration to the Europace platform, it's a big change project pretty well. So we got lots of delays, small delays, but a lot of delays in migration projects so that we could see our path a little bit slowing down. But in the same moment, a strong sentiment of this traditional players that they want to go forward, just that they are not able to. And so at the beginning of 2021, now we look on this market and we see that, well, everyone is heading towards the Europace system. Everyone wants to digitalize their projects. We are profiting from this, especially in the corporate finance world as well where we are just launching fundingport, but the projects are still slowed down as long as we are in a lockdown. As soon as we are back to normal and even traditional organizations are able to handle their way of doing projects as they were before, the company, we will go back on track with the speed of migration to the platform and even outperform this pre-corona environment because of the huge need everyone feels to be fully remote, able for their employees and to, let's say, bridge the gap between traditional and digital workflows finally. So once again, 2020 was a proof that there is no other way of doing credit business in Germany than with Europace. On the private client side, we had additional profit and gained additional market share, thanks to the ability technically and from a trending perspective of our advisers in the Dr. Klein network to remotely advise clients. Huge market share gains for the franchise system and this is something that is going to stay. Maybe it will even accelerate the growth rate of Dr. Klein further because people get more and more used to this, that in the end, all services are able to be -- all financial services are able to be done remotely and you don't need to go to any branch anymore. And so a pretty well environment during the pandemic and post corona for this product line division. Quick view on the perspective of how the market -- the underlying market is developing in Germany. During the pandemic, the real estate prices, housing prices were increasing. Our own index shows that last year, the prices in Germany rise by close to 10%, thanks to a still high demand and a lack of new constructions finished. The new demand this year didn't come from migration as of the previous years. It came from more need for remote working space or just an adjustment that you want more space for your family to live in the [ permanent ]. And when we look right now in the markets for 2021, looking forward, we expect further increases in prices short term, thanks to this higher needs, especially of affluent customers and the upper middle class to adjust the living situation to the new normal of remote work. And midterm, thanks to a new net migration gains the German economy will face, we expect that Germany, starting in 2022, will highly profit from migration from east and south Europe to the center of Europe because here will be more work to be done because of a faster recovery of the German industry from this shock to our economies. And Germany has a higher firepower to, let's say, get us in high speed out of this recession than [ the parser ] years or beyond. That's why we expect a net migration of 200,000 to 300,000 people per year, which will increase the demand for housing once more here in Germany. And together with this, again, rising prices as long as we don't meet the demand with new constructions. So pretty well good outlook for the new mortgage business here in Germany. So when we look on this market environment, a short step back to 2020 one more time. The same what I said for the traditional parts of the credit industry goes as well for the pretty traditional housing industry here in Germany. So we saw a certain slowdown in the transactions, and less vending transactions, less sales transactions but we didn't see any losses or defaults in rents. So the industry is pretty stable, just it slowed down everything a little bit. And let's say, here, we are an attacker with our platforms. We are new. We need a lot of new clients and to migrate, let's say, to acquire and then migrate these new clients to our platforms, it's a little bit more -- it was tricky during the corona. It was slowed down because of the ability of these organizations to handle such projects in a remote environment. So that's why real estate, and as well insurance, I'll talk about it in a minute, had some effect on the partner side, but not on the business of the partner. So when we look forward, 2021 ongoing and 2022, we see that this industry understood that they need to be digital, that they are not rushing to migrate, but that they are willing to migrate, that they see that Hypoport is offering a fully integrated solution for these 2 industries. And we expect huge market share gains going forward in both industries for us. So should market share gains. How these segments performed in 2020 in this environment. We started the Credit Platform and then the core Europace system. As you know, most of our business is mortgages. Some personal loan business linked to this and as a new entity, the fundingport and the REM CAPITAL, our exposure in the corporate finance space, financing Deutsche and Mittelstand here. We saw a strong growth in transaction volume last year, plus 22% to EUR 90 billion on Europace, above our long-term growth track, heavy double-digit market share gain, especially in mortgage finance and building finance, but as well personal loan performed pretty well. When you are aware of this that we had a high double-digit market decline, thanks to the lack of -- or the reduction of credit risks by banks and the lack of demand from the consumer side for personal loans. So pretty good results, especially based on the current installation base of the platform in all 4 segments. All 4 segments were growing a net for Hypoport. So Europace gained market share within the broker group and the brokers gained market share. Private banks, which operated already on Europace gained market share and they're growing. And in the regional retail banking groups of cooperatives and service banks and both, we were growing high double digits. Even when corona slowed down the project, especially here, so we profited from everything who we had migrated already pre-corona, and we saw a slowdown then in the second half of the year because of the slowdown of this migration project. In both, we feel a strong sentiment going in our direction, so players, partners want to migrate more structures to us. They understood, thanks to their special needs and challenges in the corona pandemic that only Europace is a solution where their advisers are able to work from every place in the world, so from home as well as from some remote locations, and that you gain a lot of flexibility in your business operation when your workforce is online and is able to operate all needed tasks online and not just certain ones, then you always end up with some tasks which had to be still offline and you fail to close a deal or close a task with the consumer. So in both industries, we expect high growth rates in the near-term future as well. Just a temporary slowdown, thanks to the inability of these organizations to operate within the current environment. So the segment finished the year with record numbers, more than plus 20% revenue and gross profit growth and even a little outperformance on the EBIT side, plus 26%, and all this with high investments in acquiring new clients, managing projects for migrations and investments in platforms, which we are doing currently in the segment. So growth segment is a high profitability and higher than the group numbers, you can say. And especially here, you see that operating on group number levels and trying to evaluate Hypoport with typical KPIs on a group level doesn't work out pretty well. You need to look on the 4 segments and understand how value added each of them is and how fast each of them is growing. And here, you see our core segment growing pretty fast. So second traditional segment. It's Private Client where we operate a network of franchise branches, which are all able to remotely advise their clients in their region. And this was a huge gain in the competition with especially traditional banks, which are not able to offer remote advise to their clients. So Dr. Klein performed as well, pretty well in the economy, plus 24% growth rate on the transaction volume, above the long-term growth rate once again and gaining market share in this 4% total market share -- market growth reported by Bundesbank. What is as well, pretty good, pretty impressive and shows that the near-term future looks sunny as well. We gained close to 80 additional advisers this year. In the first half of the year, it was getting pretty difficult because of the lockdown to hire new advisers because nobody wanted to really change their -- his employee in the middle of a crisis. But in the second half, this accelerated because a lot of advisers working in banks are smaller ones, so digital intermediaries had to make a choice if they want to sit at home and can't work or if they want to work with their system and the brand, which is known and which is providing clients and technology. And so we gained 60% in our adviser network, and this is above the traditional 10% growth track, which we had over the last 5 years. So an acceleration here. And this means we are able to advise more clients now than in 2020. And this is a promise for future growth for the Dr. Klein network because the bottleneck is not the amount of clients you are able to generate online or the lead generation online is unlimited. The bottleneck is the number of advisers you can do parallel and especially here, Dr. Klein was able to scale pretty well in 2020. This all leads to a record year for this segment as well, close to 20% growth on the top line and a nice growth to now EUR 80 million EBIT in the profitability. Last year, we had a huge investment in digitalization, especially of the user interface here. And we invested a lot in closing contracts with all the regional banks who lately joined Europace. This paid off now and we are back to our long-term profitability range of 35% to 40%. So pretty amazing recovery in the profitability as well, and this in, let's say, stressed market environment of corona. So as we, again, together with the profits of the Credit Platform, you can see that the 2 traditional units are scaling well, top line and bottom line. You can see the high efficiency gains that you have here and how well this kind of businesses are. So now we come to our growth segments, there where we are losing money when you look on the P&L, but investing in huge markets which are just around us and where we see as similar, if not even higher potential than in the credit market. First, housing. We are addressing, on one side, the consumer life cycle of homeownership, and on the other side, the rental market. The core for the long-time value of the platform will be the homeownership segment where we have a very important role with Europace. Every fourth mortgage in Germany is going for the Europace system. And when you look on the customer experience, if you're a seller or a buyer of the property, you understand that in this customer journey, Europace is playing a very important role. It's in the middle. And with our heavy investments on the property sales side and on the property valuation side, we are closing this value chain, and we are on the way to fully digitalize this and make a huge integrated offering of a platform to all participants in the market where, in the end, there is no way to transact a home anymore without using our marketplaces. File system on the seller side reached already 7% market share. Value AG on the property valuation side is at 8% market share. In both, we are investing heavily in digitalizing the processes, integrating the processes with all services needed along this value chain and integrating this all to the mortgage process, which is in the center of this customer experience. First, a deep dive in the property sales platform and this development here. This is the one where we got with most of traditional business model and we are not selling any license anymore. We are not selling software development resources anymore. The only thing we are now selling here are platforms, platforms to sell or to manage housing apartments. And with this shift in the business model, we lost revenue short term. Long term, we are gaining a completely different understanding of the relation between our partners and us and the complete shift in alignment between the interest of the consumer, our partner and us as the platform distributor. This alignment is important for, let's say, a well developing synergy between these different needs and where we invest and what we benefit from these investments. And this gains that we provide and the value that we add to the value chain is easier to monetize on an incremental basis as well. So in this transformation, we lose revenue or lost revenue. Now we are fully in recuring revenue. And from here, we are just going to grow. We are growing in the client base that you can see already, even when it got more difficult in 2020, thanks to the pandemic to migrate savings banks and cooperative banks and their real estate agents, but we did it closing the last open spaces here. In the savings banks industry, with only 13% left, and on the cooperative banking side, growing by roughly 30% from 8% to 11% market share. Here, still a huge potential. And that's why we have to invest on the sales side, on developing of the platform, on the features of the platform and on the integration with Europace to make this come true and to get to a fully integrated process. Fully integrated process is the same what we are heading to with Value AG in the appraisal business. Even with this COVID environment, Value AG was able to increase the number of partners. More than half of the partners of Europace are already partnering with Value AG even when they are only doing a fraction of their business with value still. But the partnership is there. They are improving it, and Value AG was able to grow top line 42% this year, even when it was a challenging environment especially for the depressed business. During a lockdown, you couldn't inspect the properties of your -- of consumers, so a slowdown on this supply side, you can say. And on the demand side, banks, especially traditional ones, had some difficulties to manage to pass through their mortgage applications and bring them to our appraisers to evaluate their properties and to finalize the evaluation process. So on the demand side, a slowdown temporarily with some applications piling up right now in the best offices of the banks. Short term, we expect to keep growing here. We are well on track by digitalizing this underlying processes, and we'll keep investing here because for the total value chain for the customer experience, it's very important that from the first touch point with a seller via the buyer, the broker, the adviser, everyone is looking to the same valuation, which is us adjusting during the process and is getting finalized. So that all the uncertainties, which right now is -- are here in Germany along the value chain, along the process about the value of a property is gone. Because in the end, Value AG is going to be the largest evaluator for banks, and banks are the one who determine what a buyer is able to pay. And with this as determining end, what their property is worth. And this way, we want to change, or let's say, we want to streamline this area of the housing transaction process. And with this, to make sure that even the motion from Europace is going to be more smoothly because there are less irritation about the value of the property. So switching to the renting side of the market. Here we are providing financing for housing portfolios and a platform for housing -- to manage housing portfolios, the transaction side, so closing mortgages for the housing industry was pretty well, stable, even in this corona environment. Usual volatility throughout the year, but all in all, a good year for the segment. What has slowed down here are the digitalization processes project because these companies are, let's say, they are not highly affected by the pandemic, but they are as well not able to work remotely. And you want to fully digitalize your housing association, you need to run a huge change project because every bit of your organization is touched by this and is changed when you fully migrate to our platform. So that's, all in all, stable environment, especially for the financing platform and a good distributor of revenue for the overall result of the segment. After all is said, you can see that there, say, we are well on track to change the way how houses are transacted or rented in Germany. We are on a growth track, high double digits just because of some project business gone and some license business gone. It looks a little bit 5% revenue growth only. So this is a net result of this strong growth in the return model, but this investment out of the traditional model. We said already in the beginning of the year that we want to invest heavily in this area, and we did, minus EUR 4 million in EBIT, let's say, less than 9 -- no, EUR 9 million less than last year in profitability. And then you see this and you understand, we really mean it that we want to go forward here. And that when the group is increasing its probability by EUR 4 million, then this means EUR 4 million plus this EUR 9 million here, which we spent. So we have a strong commitment to changing the housing market. And we are doing this here right now even with the profit increase for -- on a group level. And this is pretty amazing. So talking about amazing. Last growth segment, the insurance world that we want to do what we did to the mortgage market with Europace, with Smart InsurTech to the insurance market. And as you know, we are working hard on this already for more than 5 years. So we developed a lot of software. We acquired a lot of small companies. We transformed them and joined these forces and the workforces and the technology in the platform and offering this now for a couple of years already to the market, let's say, see that the need is high, the interest is high, but the ability to execute and migrate this huge IT project is sometimes disappointing for an organization like us, where we are used to fast moving and fast changing. And we see that the insurance industry is a little bit more traditional and, let's say, well situated to be able to afford this lack of speed. Corona didn't help us a lot. You can say that it slowed down once more even this migration project. So on the technical side, we see a flow of new clients joining the platform. We see of changes on the partner side that they use the platform more and more integrate better with it, establish more interfaces. But it's all still in a slow motion, you can say, when you think about is that the efficiency gains for the whole industry and for every participant that we are integrating are so huge. They're talking about a 700% efficiency gain when you fully migrate to the platform for most of the market participants. The good news is we proceeded with our business model. So as well in this segment, we let go from some license business and some leftover software development business. We have a clear path to migrate all our partners to the platform and we are proceeding on the business side with them pretty well. Just for you, it's difficult to track this from the outside world because what we lose on the onetime revenue side, we first need to compensate on the recurring revenue side and this takes time. So you see a small growth rate here, single-digit growth rate compared to last year. Profitability getting closer to a breakeven. Let's say, we are committed to this market. It's a EUR 600 million transaction fee market for us. We want a relevant share out of this and we are willing to keep going forward for a couple of more years and see this market to finally flip to our side and digitalization to be there, the core driver of the insurance market here in Germany again. We will drive this forward and we are absolutely sure that we are the right player to do this. And we are, let's say, best on track. Okay. So looking on the total numbers for the group, you see -- sorry. This tool is making it a little bit harder. You see double-digit growth, top and bottom line as promised. And as we do this now for the last 20 years, you can say, on the long-time track, after -- in the last 7 years, we scaled and expanded the network pretty well within 7 years, fourth time of the revenue, same speed as in the previous 7 years from 2006 to 2013. Just the difference this time is that we are scaling much more profitable than we did it during the first period of the financial crisis. So well on track, double-digit growth, huge investments in future business models. Roughly EUR 40 million of our P&L went to new business, so sales agents, project managers who are working on projects for future revenue, software development on new features of the existing platform, which can be monetized or just fully new platforms like fundingport for the COVID finance base. So EUR 40 million going through our P&L, where we developed something for the future. And so when you look on Hypoport, be aware of the future investment in all segments that we are doing here right now. So at this side, we plan to continue this path: double-digit growth, like in the last years as well this year. That's why we guide 10% to 20% revenue and profit gains, so EUR 430 million to EUR 460 million in revenue, EUR 40 million to EUR 45 million in EBIT and expect us to make sure that everything we do this year, the payback in the future years and that we will keep on track for our long-term growth in these 3 industries. So now I hand back to the moderator to see if there are some questions, and I'm ready to answer as much as possible of this.

[Operator Instructions] We have no questions in the queue. I will hand back to you, Mr. Slabke.

Yes, thank you. Okay. So I hope I answered all your questions. We are already well into 2021, 2 months are done. In 2 weeks, we are finishing the first quarter. In 6 -- in 7 weeks, we are back here in this call and I will present you a good start of 2021. And let's say, me and all my colleagues, we will work on this to make 2021 a new record year for Hypoport. And this is going to happen, I'm pretty certain. Thanks for your attention and hope to see you soon.

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.