PensionBee Group plc (PBEE) Earnings Call Transcript & Summary

Hello. I'm Romi Savova, the CEO of PensionBee. Welcome to our trading update for the 9 months to September 2021. For those of you who are new to the PensionBee story, we are a leading online pension provider in the U.K. We exist to make pension simple so that everyone can look forward to a happy retirement. We enable our customers to combine their pensions into one new online plan with money managed by the world's largest asset managers. We aspire to build a lifetime relationship with our customers, generating predictable and scalable revenue stream for our company and for our investors. We are very pleased to deliver another quarter of resoundingly high growth, achieving our operational and financial goals across our core key performance indicators. Underlying the results we are sharing today is our value proposition, which resonates in the enormous market of pension consumers who have GBP 1 trillion in defined contribution pension across the U.K. Today, we will take you through the key highlights, some important business updates, a detailed financial run-through and confirm our outlook for the end of the year. In sum, we expect to deliver revenue growth at the top end of our IPO guidance for 2021, combined with increasing operating leverage, thereby concluding a productive first year as a listed company. Turning to our financial and operational highlights for the third quarter. I am pleased to report that our assets under administration increased to GBP 2.25 billion, continuing to reflect a compound annual growth rate of over 100% for the period since 2018 and underscoring the growth story of PensionBee. We were pleased to celebrate the milestone of our 100,000 invested customers and are greatly encouraged by the rapid growth of our customer pipeline, which now stands at over 600,000 registered customers. Thanks to our predictable revenue model and high retention rates, the growth in assets has translated into similar growth in revenue. Our annual run rate revenue increased to GBP 14 million or roughly $20 million. Examining the progress that we have made over the last year to the end of the third quarter, our invested customers grew by 75%, and our assets under administration grew by close to 110% year-on-year with similar increases reflected in our annual run rate revenue. The growth in our AUA reflects, of course, healthy markets, but also importantly, an increase in the average pension pump being transferred to PensionBee over the past year. These results are a testament to our strategy and proposition, which continue to resonate in the market. First, we continue to efficiently invest in customer acquisition and brand awareness. As in previous quarters, the majority of our marketing spend was deployed in our top 3 channels, TV, out-of-home and Paid Search. Out-of-home advertising has been particularly important for us this quarter as consumers continued to return to the Street. If you have been out and about in any major city, you are likely to have seen our advertising. And if you watch football, you will not have missed the Brentford Bees for which we are the official pension partner well rooted in the top 10 clubs of the Premier League. We continue to scale our digital channels with paid search leading the way. Our data platform has helped us grow and optimize this channel while also delivering important insights on our other channels that have helped us allocate our marketing budget with the primary focus of growing AUA while keeping the cost per invested customer within our desired GBP 200 to GBP 250 range. This quarter has truly been a quarter of innovation for the PensionBee product, and I'm pleased to show you one of our latest feature launches, Easy Bank Transfer. We have been rather explicit that our main commercial ambition given the enormous size of the U.K. market is to increase our customer base, then enable them to contribute more money into their pensions and then to expand our product offering beyond pensions. Having hit the 100,000 invested customer milestone, I'm pleased to announce that we have also taken an important strategic step to enable our customers to put more money into their pension. Specifically, we are pleased to launch our Easy Bank Transfer feature, which enables our customers to pay into their PensionBee pension in just 60 seconds. This feature has been achieved through open banking technology and a long-term partnership with open banking platform Plaid. This feature lays the groundwork for more innovative payment features into the PensionBee pension, which by removing friction, we expect will increase our net flows from existing customers. An additional feature of note for the quarter is the use of personalized tax code for customers over the age of 55, enabling them to access their pensions more tax efficiently from the get-go and avoiding the emergency tax protocol for their second taxable withdrawal and beyond. This feature is important to maintaining customer satisfaction among our more mature customers who continue to account for a larger proportion of our overall customer base, positively contributing to our net inflows. And finally, our financial metrics continue to demonstrate improvement in our efficiency and operating leverage. These improvements are owing to ongoing product developments that enable us to serve our customers with less and less human intervention. One of the key features we offer is to flag exit fees or special benefits where they are found in the transfer process. This quarter, we revamped the review and transfer process to take into account the latest data about each pension provider, so as to make the transfer automatically more experience and safer for our customers while reducing BeeKeeper involvement. We continue to invest in our technology over the year. Last quarter, we updated you on our data platform, which is helping us to drive marketing efficiency, an important objective as we continue to expand our marketing budget in line with our ambitious growth objectives. This quarter saw the onboarding of a dedicated data team who sit within our technology department and are actively expanding the use cases of the platform. When we regroup in early 2022, we will be sharing more insights from the data platform as we provide an update on the 2022-2023 marketing approach. I won't say much about the rest of 2021 at this stage as we are very confident in the remaining budget deployment and consequent output for the year. As always, customer service continues to be a distinguishing marker of our offering to consumers. We are pleased to have maintained our excellent ratings to have added 10 new awards to ourselves since we last spoke and to have built the type of internal culture that promotes employee and in turn, customer happiness. And finally, we continued our ongoing engagement with our asset management partners. Today, we announced the simplification of our product range from 9 to 7 plans as we close the Match and Future World Plan. Our Match Plan will transition to our tailored plan, both plans are managed by BlackRock. Our Future World Plan will transition to our Fossil Fuel Free Plan, both plans are managed by Legal & General. We expect this product simplification to improve customer decision-making, a key factor underpinning conversion, but to otherwise be budget neutral. And now I'd like to hand over to our CFO, Christoph Martin, who will take you through the financial update for the first 9 months of the year.

Thank you very much, Romi. Hello, and welcome from me to everyone. I would like to cover the financial section of the Q3 trading update. We continue to execute on our growth story as reflected by the consistently strong performance over the first 9 months of the year. We are pleased to record strong asset growth to GBP 2.25 billion of AUA as of September. Over the first 9 months in 2021, we added close to GBP 900 million in total assets, of which the majority of roughly GBP 720 million came from underlying net flows, excluding markets. I would like to highlight the asset growth drivers being new customers, existing customers and market growth. First of all, we have driven asset growth through new customer acquisition. Growth from new customers represented the majority of asset growth over the first 9 months at GBP 521 million or 60% of total asset growth. Over the first 9 months of the year, we have acquired roughly 35,000 revenue-generating invested customers and a higher proportion of these were mature customers, which came onto the platform with a higher pension pot size. Therefore, being accretive to the average pot size figure, which reached GBP 21,700 as of September compared to GBP 19,700 at the end of last year. Second, we have driven asset growth through existing customers on our platform who have continued to accumulate the pension wealth with PensionBee. Growth from existing customers was strong over the first 9 months, adding close to GBP 200 million of AUA. Therefore, existing customers, together with new customers, net flows contributed more than 80% of asset growth over the first 9 months. Since the inception of the company, we have seen a high customer retention rate of 95% plus, meaning customers may on the platform and build the pension savings with us. We recorded a continuation of the 95% plus customer retention rate in Q3. In addition to staying on the PensionBee platform, customers have continued to consolidate further pensions into the PensionBee pot, have contributed into their pensions. And overall, we have seen low levels of withdrawals. We therefore, recorded a continuation of the circa 5% annualized underlying core growth in Q3, which captures consolidation, contribution, transfers out, withdrawals and the PensionBee fee, and does exclude any market appreciation. These dynamics of high retention, coupled with underlying core growth have generated attractive long-term value for the company. So, we have seen asset growth supported by healthy markets. As it is customary, pension assets are invested in capital markets, which have performed well in 2021, and therefore, we benefited on the back of market appreciation. In summary, both new customer acquisition of higher pot size customers and the retention of existing customers on the platform who ruled a pension wealth with PensionBee, have served to drive strong asset growth for us over the year-to-date period. We have turned our asset growth into recurring and predictable revenue stream, thanks to our resilient contractual gross revenue margin. By way of reminder, the contractual gross revenue margin is the all-in fee charged to our customers before applying a discount which increased slightly to 70 basis points for September 2021. This meant that we converted the 108% of yearly asset growth into 107% of annual run rate revenue growth translating into annual run rate revenue of GBP 14 million for September. We demonstrated clear operating leverage over the first 9 months in 2021, thanks to the scalability of the technology platform. One of our profitability measures, adjusted EBITDAM reflects profitability prior to considering any growth market investment. We have seen any improvement of that metric from negative 35% to negative 23% over the first 9 months this year compared to the same period last year, underscoring the scalability of the tech platform. The second profitability metric is adjusted EBITDA, which has captured the investment in marketing growth, which I will cover separately in the next 2 slides. But this metric has also demonstrated a notable improvement, thanks to the scalability and continued efficiency spend. To conclude, we have converted asset growth into revenue growth, thanks to the resilient contractual revenue margin and we have generated operating leverage for the year-to-date period. The majority of proceeds we raised during the IPO have been earmarked on marketing spend, and therefore, a close monitoring of the spend is critical. We routinely evaluate the attractiveness of that marketing deployment within the unit economics return framework, which includes a constant return component. On the cost side, we measure cost per invested customer, which represents the unit costs of our marketing investment. I will cover the cost side on this slide, while the return for lifetime value component, I will cover on the next. We have continued scaling up our capital deployment into marketing. September represents an important growth month and is therefore a high marketing spend months potentially. Which is why we concluded the quarter at the upper limit of our tolerant threshold. In summary, we utilized a methodological approach to marketing investments to ensure healthy growth, and we continued to grow in a cost disciplined way over the first 3 quarters of the year. It is very important to fuel the cost of acquisition together with the expected return on that investment in order to evaluate the return potential of the market investment as shown in the illustrative unit economics example. The unit economics framework includes a cost and return component and the multiple of the turnover cost guide to the attractiveness of the marketing investment. With regards to the cost components, we pay a onetime cost to acquire a given customer to come to our platform, which are covered in the previous slide. With regards to the return component, once on the platform, a customer build the pension wealth with the company over the long term, evident in the high customer retention rate. This translates into a recurring and predictable revenue stream for many years. We then pay a fee to our money manager partners and bear a cost to serve our customer on our Scalable Technology Platform. The remaining profit accrues to PensionBee and generate lifetime value. The illustrative unit economics of the return over cost calculation with simplified assumptions indicate the PensionBee deploy marketing capital with attractive returns of mid- to high single-digit multiples. I will now hand back over to Romi to cover the objectives and guidance and the outlook for the rest of the year.

Thank you very much, Christoph. Given the excellent performance for the year-to-date, as you might expect, we are reconfirming our medium-term financial objectives and guidance. I'm also pleased to note that we expect our revenue growth for 2021 to be at the very top end of the IPO guidance. You will see that we have achieved our stated revenue margin objectives, and we expect this to continue as will our focus on disciplined expenditure, which leaves us very much on track for our profitability objectives. We expect to continue delivering fulsome quarterly updates and we'll be providing a detailed end of year and forward-looking review in early 2022. We will also provide a more detailed timeline of our transition to the premium segment, a move we expect will generate additional demand and liquidity for PensionBee. At this stage, we can confirm we are expecting the transition to occur in the first half of 2022. Thank you for your time today. We look forward to engaging in the Q&A session and during our upcoming meetings with the investor community.

[Operator Instructions] We will take our first question from Jonathan Richards of Berenberg.

This is Jonathan Richards from Berenberg. Four quick questions, if I could. Could you please comment on the conversion rate between the active and the invested customers, how that's changed over time and perhaps what it was at the beginning of your sort of story and what it is sort of now at the end of the third quarter. The second question is on the marketing spend per customer. I saw that you hit that sort of GBP 250, which is the upper limit of your guidance. Given the way that your guidance works, is there scope for that to overshoot in the short term? And then how would you sort of adjust that? Would you look to sort of curtail marketing spend? Or would you just wait for sort of the customer numbers to pick up? And then the third question is around your product simplification. I'm just wondering if I can go the other way in the future, i.e., could you see sort of new products being added in that customers might ask for in your interactions with them? And I think I'll leave it there and see if -- and perhaps come back if any -- if there is time for more questions.

Absolutely. And good morning. Thank you so much for the questions. We're happy to take them all. On the conversion rate, we actually look at registered customers to invested customer because those are 2 points in time that are incredibly clearly defined in our database, registered customers has created the exact moment that someone leaves their e-mail and name and invested customers created the exact moment that somebody has money in their pension. So a balance above zero. Active customers can transition in and out of being active. And so the conversion rate metrics are slightly less reliable from a measurement standpoint. So when we look at registered to invested customers, what we have seen over the past couple of years is a marginal increase in the ratios on a year-on-year basis within a particular year. However, registered customers to invested customers are impacted by the deployment of marketing spend. And what we have previously guided to and what you will see in today's data is that September was a very heavy spend and a very productive month for us. So we increased the registered customer base substantially, and we expect to continue seeing the invested customer base continuing to convert over the last quarter of the year. And the reason why we expect to see a strong movement in that is because December typically is a very low expenditure month for us. And so registered customers grow at a slower rate. So given we are currently at 17% on the registered customer to invested customer conversion ratio, which is where we were towards the end of last year, we expect the closing of the fourth quarter to have an improvement on that ratio. I'll take your second question as well around marketing spend per customer. We remain very committed to the GBP 200 to GBP 250 cost per invested customer. The reason we gave that as a desired threshold is because of our confidence in our ability to maintain it. You would expect us to approach the upper limit of the threshold in high expenditure months. June was set a month. September was such a month. But as per my answer on the previous question, we expect the fourth quarter and specifically, December to have quite a depressive impact on that. Do we plan on adjusting it? We don't plan on adjusting it, we feel confident in managing within it. And then on product simplification, we exist to make pension simple so, of course, where we have the opportunity to simplify the product range, we will do so. At the same time, we continue to scan the market for new products. Our customers have expressed an interest, which we have also been public about on our blog in wanting to go further on the ESG side and wanting to have a product that is more impact oriented. So we continue to search for the appropriate product to add to the platform. We will add products as our customers ask for them. We're a very responsive company. And we have a history of doing that. Fossil Fuel Free Plan, was such an example, when our customers wanted to exclude oil companies entirely from their pensions and this new product that we are likely to add in the near term is another such example. I hope that answers your question.

Great. Thank you, very clear.

There are no further questions on the conference line. We will now move to our written questions submitted via the webcast page. The first question is from Greig Paterson from KBW. The question is, has the AUA risen sharply with market post the end of third quarter?

The answer to that is that we have seen an increase both the third quarter. So when we looked at market performance over the month of September, the S&P was down roughly 5% from the beginning of September to the end of September, that market volatility had an impact on us on the 30th of September AUA number. And as it did on virtually everybody who invested in markets. Of course, markets have since recovered and you can expect a resulting impact on our own AUA base. But despite the market volatility, we recorded exceptional growth in AUA for the third quarter. And so we haven't focused too much on that in the results release because we think the results speak for themselves. I hope that answers the question.

Thank you. At the moment, I don't see other questions. Excuse me, we have another audio question on the conference line. It is coming from Jonathan Richards of Berenberg.

Maybe just one quick follow-up on the adjusted EBITDA number. I just thought I was just looking at how it was evolving over time, and I see that it's improving as a percentage of your revenues. I was wondering when you expected the absolute number to trough, that would give us an idea, I think, on the trajectory of your guidance to profitability. And it doesn't have to be a specific date. I didn't hold you to anything, but just a general feel versus sort of 2023 breakeven point.

Thanks, Jonathan, for the question. So as you can see in the numbers, the operating leverage has improved year-on-year. And also, if you're looking at it on a quarterly basis, we saw improvement over the last 3 quarters. I think from a guidance perspective, we are guiding to reach adjusted EBITDA breakeven point at the month at the end of 2023. And I think the best way to model that to visualize that is probably a straight line kind of development. I think -- I hope that gives you a further context on how to think and move that.

We have one more question from the webcast page this coming from [indiscernible]. The question is, are you considering monetizing your customers in any additional ways?

Thanks very much for the question. We have been pretty clear in the strategy in terms of the steps we intend to follow. First and foremost, we are growing the invested customer base and the AUA base. Second to that, we expect to increase the net flows from existing customers. And you can see us having taken a very important step today in the launch of Easy Bank Transfer, which will enable our customers to make contributions into the pension in 60 seconds or less. And so growing that share of wallet, growing the overall invested customer base, we believe, leaves us best positioned for any additional cross-sell. Once we have achieved our objectives on that front, we will, of course, explore additional products, we've obviously started with the hardest product, that being pensioned, and our customers have trusted us with that particular investment, which for most of them is the second largest asset that they have after their homes. So we don't really see barriers from a trust or from a technology perspective with regards to additional products, but we want to follow the strategy that we've laid out to first increase the customer base and then increase the share of wallet going into the pension.

Thank you. And we have one more written question from Robert Murphy from Edison Group. The question is, in calculating return on marketing investment, what are your assumptions on pension drawings versus new contributions over the client life cycle? And to what extent have you modeled in a younger client base as you grow?

Yes. Thanks very much, Rob, for the question. I think from -- to best answer that question, I think it's important to understand how cohorts work and how they develop. And so what we see our acquisition of the customer that are typically adding pensions and contributing into the pension over their lifetime. And I think the data point that we provided in the presentation is the 5% underlying pot growth for customers that remain in the accumulation phase. So what we see is our acquisition, a rapid increase in the pot size up until the 12-month period and thereafter a more normalized growth of the 5% that we presented in the presentation. And then from a modeling perspective, once they reach the accumulation phase. Obviously, the natural thing is to draw that down, but also that is based over a longer period of time. And I think what a good way to think about that is that a portion of the customer takes out that takes free cash. But then the mature is actually retained and still remained invested. So that obviously benefits the company from a revenue generation perspective. I hope that answers your question.

Thank you very much. For the moment, I don't see any other questions. And we don't see any questions on the webcast either. [Operator Instructions] Thank you very much. We don't have any questions at the moment. So let me just hand it over to Romi Savova for closing remarks.

Thank you very much. Thanks for taking the time this morning to hear about our progress up until the end of the third quarter. We were very pleased to engage with everyone this morning and to take your questions, and we look forward to seeing you on the next one if not before.