Rightmove plc (RMV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Rightmove full year 2020 question-and-answer conference call. [Operator Instructions] I must advise you that this conference is being recorded today, the 26th of February 2021. I would now like to hand the conference over to Mr. Peter Brooks-Johnson, the CEO. Please go ahead, sir.

Thank you, Roberto. Good morning, everyone. I'm joined this morning by Alison Dolan, our CFO; and Miles Shipside, our housing market expert. Hopefully, you've had a chance to see the presentation, but I thought I'd take a couple of minutes to start off with and give you a quick summary of all the words that you may have heard. 2020 was Rightmove's 20th birthday, and of course, there's not been a year like it in our history. COVID has upended the lives of everyone in the U.K., and it's had a tragic impact on many people. But from a revenue perspective, we've emerged stronger. The network effect on the housing business is stronger than ever with record traffic and leads. Traffic in 2020 was over 30% higher than 2019, and the trend continued into this year with a new record number of visits on the 17th of February with 8.5 million visits in a day. And that's all led to our market share of time according to Comscore emerging slightly higher. That traffic is turning into leads and sales for our customers. Leads last year were up over 27%. And quite remarkably, transactions according to HMRC were only down 11% from 2019. Despite the uncertainty around the end of the stamp duty holiday, home hunters continue to want to move. And our leading indicator of sales agreed for February 2021 is 20% higher than the 2019 number. Undoubtedly, 2020 was tough for our customers, and we offered both financial and practical support, as you know, both to help them in the short term but also to share empathy at a moment when our customers were hurting, which we know, from past experience, built a long-term goodwill. Despite the challenges, our branch-based agents were resilient with only around 200 leaving the industry in the year and branch numbers in total being positive in the second half partly as multiple branches were unfrozen and new businesses started up, encouraged by the vibrant market. The number of [ agents ] who joined us in the second half of the year was the highest in any 6-month period since the first half of 2015. But looking forward, I wouldn't want to get too carried away. The lack of available stock, and there is, of course, continuing macro worries. And for clarity, I don't think the timing of the stamp duty holiday will have much impact on the number of transactions in 2021. I think we'll see broadly similar branch numbers in 2021 in total, and from a New Homes perspective, I think the combination of the strong demand and relatively slow build rate due to COVID safe protocols will see the numbers of New Homes development listed fall a little from here. We're planning product made offer growth in 2021 and expect the growth rate to be close to that of 2019. Over 1,000 agents have upgraded to Optimiser 2020 in the last year and consistent sales -- we've seen consistent sales in the second half of 2021. In second half of 2021, we've got to a good start with around 60 upgrades in January. We've also made good progress with our strategic projects in 2020; amongst other things, the ground-up rebuild of the property details page, which will enable more exciting products in 2021, and we've delivered the first phase of the digital tenant journey. And finally, I'm delighted to say that after pausing 2020, we've restarted our capital return program with a 4.5p dividend today and share buybacks in March. So that's it for me. Over to questions.

[Operator Instructions] We have the first question from the line of William Baker from Exane.

It's Will Packer from Exane BNP Paribas. 3 for me, please. Firstly, it's encouraging to see a rebound in agent numbers in the second half of the year and your guide of flat agent numbers for 2021 suggests a stabilization after some weaker years. Could you talk about how you see the structural agency outlook? I suppose some would argue that consolidation is likely. Others would argue digital actually reduces barriers to entry, and so you could see an acceleration in the state agency formation as the market recovers. So just the first question, a comment on that dynamic. And then secondly, more specifically, does your guidance include any negative impact from consolidation with Countrywide? And final question for me is, Boomin published a pretty aggressive e-mail this morning calling you overpriced and not innovative. Could you update us where we are on their launch process and what they're doing differently? How many agents have they signed up? Is there any product differentiation?

Thanks, Will. So starting off with sort of my view on structural outlook for agency. I think I would -- I would hope I'm being pretty consistent when I say what we're going to see, and I totally accept that from the outside of the industry, it's a little harder to see, what we're going to see is a continued process where, at the very large end, I think we'll see a little bit more consolidation. I'm interested, as I'm sure you are, that we've seen rumors of a few deals in the last few weeks. But what's fascinating is it seems to be -- on the whole, it seems to be people looking to buy in to the industry, which I think suggests that there's some real positivity about agency for the future. And then at the bottom end, what we're seeing, so I shouldn't retail -- in the smaller end, what we see is continued fragmentation. So what's fascinating in those numbers of branches that joined us in the second half was around that 50% of them were entirely new businesses, and they're small. These new businesses are small 2-, 3-person businesses. At the moment, what we're seeing, as I noted in the presentation, is sadly around about 50% of them densify their first 6 months, which I think is probably pretty usual for SMEs. Obviously, as the market gets better, that ratio will improve. So I think we're set for digitization to continue to allow you to operate at a smaller level. Interestingly, one of the guys who used to work at Rightmove the last couple of years did set up his own agency and assets. In the last 6 months -- he's a great test case for us. His argument was, "I've been telling agents all these years what to do. I'm going to go prove I can do it myself." So what he's done actually, he set up on his own using entirely digital methods and opened a small branch because he said it was a projection of confidence. And in the last half, he's actually recruited 2 more people because he couldn't keep up with the work himself. Now I wouldn't want to say that John is every agent. And obviously, I've got a soft spot for him because he was a good employee. But I think that sort of shows the direction of travel. I think we'll see more of these very small because they can be nimble. So yes, hopefully, my -- I'm being consistent. I think in the medium term, we'll still see branch numbers rise in total. Talk about Boomin. So Boomin, latest information we have is that Boomin is possibly going to launch -- second half of March would be my best guess. In terms of agent branch sign-ups, not all. Don't have a number to hand. I think I would probably conservatively say they should do quite well signing agents because at the moment, it's 0 cost, 0 commitment. So as mentioned, why wouldn't we? So I would expect -- I think we should expect that number to be reasonable. I think as ever, thinking about competition, the real challenge for a portal of any sort is actually getting consumers to come to your website. That -- a great turn of our traffic actually is brand-led. So 80% of our traffic comes to Rightmove because people have either type Rightmove directly into the browser or type Rightmove into Google. So you have to offer something different to attract that traffic to your portal. I think Boomin is taking quite a different approach at the outset. It appears, again, I'm only going on what I've read, which will be the same as that, that you've read, it appears that what they're trying to do is talk about sort of everything to do with the home, whether that be whether this sofa will fit in my living room or whether my energy bill can be reduced. So if you like, it took a bit of Rightmove, a bit of interest and a bit of Moneysupermarket and Uswitch sort of blended together. So it's a really interesting approach. I tend to believe the Internet prefers specialists, and consumers will come for a really clean experience around this topic. But as ever, we will watch carefully, and we'll see what they want.

Very useful color. Can I just follow up and use this as a segue just to hear your latest thoughts on the wider competitive backdrop? Zoopla, obviously, launched a pretty aggressive price point or went free for a while. Have they reverted to normal pricing now, where on the market in their pricing? And are you seeing any big shifts in agents among your peers?

Yes. So as far as I know, Zoopla have now returned to normal pricing. No particular big shifts. You're right, Will, first, if you don't remember, the 2-for-2 deals, 6 months free for an agent if -- if they signed up for, I think it was a 24-month contract; and 9 months free, if they left right -- if an agent left Rightmove and you signed up for a 32-month contract from memory. Well, you can see the impact of that in our numbers. In terms of OnTheMarket, I think what we've seen there is OnTheMarket have become rational and have really started cutting back on the free deals they're offering people. So you can see that their branch numbers have fallen recently as they've asked people to pay, which I think makes loads of sense. Broadly speaking, seeing through the noise, active competitive dynamic doesn't feel terribly different to this time last year.

We have the next question from the line of Adam Berlin from UBS.

Welcome, Alison. 3 questions for me. The first question I want to ask is all the demand indicators you talked about in terms of housing transactions, house prices, agency commissions, were going in the right direction. So why have you been a bit cautious on pricing this year and guiding for kind of ARPU growth below 2019 levels in such a strong market? So just explain -- if you could explain your thinking around that, that would be really helpful. Second thing is, I wanted to ask you about what Scout24 is doing in terms of a consumer subscription model focused on tenancy initially. You're obviously not going down that path and you're giving away the tenancy possible free and hoping to generate efficiencies. Why did you not think you could charge consumers in the same way for Scout24? Because that product seems to be getting quite a lot of traction in Germany. And then the third question I wanted to ask you was about -- something you didn't talk so much about in your presentation, which is about kind of other lead-gen you might be able to do in terms of mortgages and broadband and other things that was talked about more in the note this morning. How are you thinking about those issues? What progress have you made? And will we see any revenue impact in 2021, 2022 from those initiatives?

Thanks, Adam. So let's talk about ARPA first. I think it's easy to walk past the fact there's still a lot of uncertainty in the macro economy. I think we're all on a sort of vaccine high, but there is still uncertainty. And when we were thinking about pricing for 2021, that uncertainty was certainly forefront of mind. And we could have led with price this year but we chose to lead with products for a few reasons. Firstly, product upsell tends to pick up sooner. And it picks up as soon as agents feel confident about their marketplace. And you can see from our numbers in the second half of 2020, we think that focusing on product, we'll see confident agents increase, spend more quickly than we would do with sort of normal pricing around. Secondly, we've got a lot of goodwill in the second half of last year, and certainly, our sentiment indicators would show that. And we want to be empathetic to our customers. Not all of them are feeling confident just yet, whilst, as you know, the demand indicates internationally are really strong. There are areas and submarkets which are not looking too great, so central London, particularly [indiscernible]. And actually, from a practical point of view, a product-led strategy really -- it's great because it adjusts really quickly and really effectively to an uncertain market. Whereas as you all remember, a pricing strategy is -- takes around 4 to 6 months to fully roll out. And what would we do if the national housing market shut as it did, I guess, roughly March last year? In the middle of that, what do you do? Or if the local area has its market struck? There are practical considerations for us. And it's not to say we're not doing some price rise, too. It's just less of the mix this year. I suspect that by the end of the year, when we look back, we'll be close to the sort of 70-30 product price growth in the spectrum rather than perhaps where we've been in previous years, which is 50-50. So that was really the logic with them after that. The other thing that's worth noting, when you look at ARPA in total, is when we talk about ARPA, we talk about if the blended ARPA between agency and new homes. And I think what we'll see in 2021, as I noted in the presentation, new homes developers are sold out pretty much, the large ones. So we'll see a double impact. We'll see a reduction in volume of developments listed on-site because they're all sold. But also fairly rationally, and the new homes developers are terribly rational, you don't market so hard. If you're forward sold and you've sold everything you've built, and you guys will go from there from the -- the big PLCs put out a lot of them are forward sold until the middle of the year. So inevitably, you don't market quite so hard. So that also feeds into the blended offer. Secondly, you asked about Scout24. Yes, I think it's a really interesting product. We talked about them in sort of -- I like the idea. I think the customer market is different. So P2P sales and the sort of mindset around transactions and now revenue rentals as well in Germany, much stronger market. So it's -- I'd never say never. It's certainly not on our road map right now. It's one to keep watch. I have a gut feel -- and we haven't researched that. I have a gut feel that U.K. tenants would behave quite differently. We also, of course, have to be mindful that the legislation in the U.K. around upfront rental fee is different, and so that would add complexity if we chose to go into that market. What we've chosen to do to sort of go after similar -- a similar theme is all around our digital kind of journey. So by giving the parcel upfront, which is free to tenant and agent and Viewings Manager, which I'm sure you've seen my slide, so I won't talk about it too much, but Viewings Manager, which really helps efficiency. It also helps -- we've had feedback from agents that it's reduced no shows by 50%. And part of that is because the Viewings Manager reminds sellers to turn up. But part of the actual feedback from tenants saying they might prefer it because if they found somewhere else, they can cancel automatically without intent to bring up. And obviously being British, we don't like having difficult conversations. So I'm pleased to do that from a link. But the monetization for that comes -- it's sort of -- to play into your last question, the monetization comes from both referencing. Referencing is a profitable business, and obviously, that will think through. But also what we're calling tenant services, so the idea when you move into a rental, you really need to sort out insurance. Many tenants don't realize that they are responsible for insurance, and they think it's covered by the landlord, so that's an interesting conversation. We've helped 7,000 tenants with that. And we are also now starting talking about broadband. One of that was in the slide, one of the fascinating things we've learned is that broadband is more important to tenants than water, which probably at the moment makes a lot of sense, doesn't it, because we're all connected by broadband. So they actually sought out broadband much earlier in the process. So again, we're exploring that. It's early days for us. It's really promising because, yes, if you offer a good product at the right moment in the conversation, and of course, with referencing, we know you guys could be moving in as a tenant because the reference is passed and we had moving day. What we can now experiment with, and it showed some really, really promising signs, is when do we start talking to you about broadband. And that's how we know that you have to start talking about broadband before you start talking about insurance because it's much more important and people want broadband earlier. In terms of mortgages, we continue to work with Nationwide. We have learned so much in the last year. And you'll remember us describe it as an experimental partnership. We've learned so much in the last 13, 14 months, and actually, this year, we're really planning to push on. The thing for me right now is I want to accelerate our learning. So not particularly focused on generating revenue from that. I don't want to just flatten the site with banner ads and things, which would be the way we can generate revenue or probably to calculate or comparison tool. That doesn't feel like us. We want to really learn. Again, we're focused on making the journey more efficient, because I think that's how we'll maximize its revenue in the long term. I think -- I hope that we see a little bit more revenue intention too from those activities, but probably it's '23, '24 before they really start to be noticeable in the P&L. Was that -- was that your 3?

We have another question from the line of Natasha Brilliant from Citi.

I just wanted to come back to ARPA and pricing. I know you said the majority will be product. Can you just confirm what the underlying price increases for this year? And then beyond this year, the sort of 70-30 split that you talked about, do you expect that to be the new norm? And if so, will you need to put more investment into people, technology to constantly deliver these products if pricing power starts to fade? Second question is on the developers and the development numbers. I know previously, when we've talked about the cyclicality of this business, there was a thought that maybe even in a more buoyant market, actually, the developers would continue to advertise, clearly sort of out of stock at the moment. Is there a better way you could perhaps charge them to avoid these lumps and bumps rather than charging on a per development basis on sort of retainer just to try and smooth that revenue stream? And then my final question is just on cash, and you talked about maintaining a cash balance of about GBP 50 million. Why do you feel that, that's necessary? And would you go below that for any reason temporarily?

You're welcome, Natasha. So your first question, pricing. So what we're doing with our pricing is we're doing -- we're expanding on our geographical and stock-based splits. So you might remember, I think I talked about this last year, if you roll back a few years in Rightmove, we used to charge the same amount regardless of stock level and regardless of location, which wasn't the most efficient way of doing pricing. So what we've been doing over the last few years is, I think last year, it was sort of plus or minus GBP 60, GBP 70, depending on the area in the country, divided the country up into 5 zones. This year, we're expanding that a little bit more. So more like plus or minus GBP 100. And also, we're just looking at those agents that have got higher stock. So can't give you sort of average increase because it doesn't really work like that. It's very different depending on customer type and package. But that's the sort of sense. If you are a customer in those groups, you're probably looking at 10%, something like that. In terms of 70-30. So interestingly, I think our growth in 2015 was 70-30. And we then probably 2019, we would have been 50-50. So it does move around. I wouldn't want you to think that 70/30 is now a new normal. We plan it and it changes depending on the market. So depending on market structure, it could be anywhere between those 2. They're probably the end stops of the range. I'd say this year, it's probably more like 70-30, but I wouldn't want to think that it might not be 50-50 next year. It doesn't really indicate anything because, after all, for us, it all looks pretty similar when it hits the P&L. So we don't mind. We think either model works and it has to -- what's more importantly is does it work for our customers. So certainly wouldn't want to suggest we give up on 50-50. I'm sure you'll see it again. In terms of developers, yes, it's an interesting question. We have looked at different models in the past. I actually think this model, the model we have is a pretty reasonable model for us and our customers. I suppose I can sort of whinge about things and many people will tell you I'm good at whinging. But actually, it is a hedge. It is a semi-hedge because the markets account cyclical. Obviously, when agents are having a really good time because the market is great, we do well with agents, but you [indiscernible] interrupts their selling marks. And vice versa. So I'm probably not terribly minded to change the model because I think that natural hedge, we also have to accept that it has its down moments. So if you look at numbers in, say, '19, it helps us. So actually, I think it's a reasonable balance. I mean what the developers are doing is they're still listing all their stock with us that they have. They still spend on marketing. They just take away a little bit of discretionary marketing at the top, which, as I say, I think is entirely rational for them. So yes, we continue to look at it. I don't think we'll change it. For your cash question, I'll pass on to Alison to talk about GBP 50 million.

Sure, Natasha. You should think of it really as a liquidity protection measure and probably a bit of caution in calling an end to the volatility of the last year. Certainly, our underlying policy in terms of returning surplus cash to shareholders has not changed, and neither has our policy in terms of long-term holding of cash in the balance sheet. I think we are just being mindful of the way that the past year has played out and, particularly, the third lockdown, where there were moments at which it seemed at least likely that the housing market would be closed again. So it's really just a reflection of caution in calling an early end to volatility. We're making start to returning to a more normal balance sheet with the dividend and the resumption of the share buyback. And you shouldn't really read anything into the higher levels of cash other than a bit of caution in preserving some extra liquidity.

We have the next question from the line of Robert Berg from Berenberg.

Just one follow-up from me, actually. Maybe a question for Alison. If I was to look at the top line growth 2021 versus 2019, the growth is coming at 0 or next to 0 profitability. Obviously, you've been through very strange times. So I'm asking a question on, is this kind of a trend where we should expect growth? Because as you mentioned, it's coming more from products, more investment. Should we expect growth now to come at lower profitability levels? I think Alison alluded to a margin more towards the 70% level. Or is this kind of an abnormal trend and we should expect margins to progress back up to the mid-70s that we've seen in the past?

Thanks, Robert. So I think -- I mean in terms of the drivers of growth, we are seeing growth in ARPA, particularly at the agency level of sort of 7%. And we've talked this morning about a return to the sort of margins that you saw in 2019. There is definitely an element of cost catch-up this year. If you look at the profile of costs during 2020, gross savings of GBP 4.6 million will not repeat this year. The majority of them won't repeat this year, and there is an element of catch-up, particularly with respect to recruitment, which will accelerate some of the costs into 2021. I wouldn't necessarily read that as a structural change in the margin of the business. If you think about the margin at the agency level, which is the primary driver of our margin and how strong that is, it takes a large movement in margin elsewhere to really make a dent in that. So what you're seeing in '21 is an element of cost increases on 2019, which is a combination of lack of savings, the lack of the savings that we saw in 2020; the return of a more normal level of annual increases of sort of GBP 5 million to GBP 6 million, which is the levels that we've seen in the past; and then an element of catch-up. And don't forget that 2020 was the first year in which we saw a full year of [ unmelded ] costs, which will also be included going forward. So those are the underlying dynamics of the margin for '21.

We have the next question from the line of Silvia Cuneo from Deutsche Bank.

I just have one follow-up for Alison actually on the [indiscernible] policy. Considering where the cash balance ended in 2020, and considering what your previous policy was to return all excess cash to shareholders. So we think that if you want to get to around GBP 50 million balance, you mentioned, the buyback program in 2021 could be substantially higher than it used to be.

Sorry, he's just making a funny face at me. I mean clearly, the in-year level of cash generation for '21 will be similar to previous years, yes. And we ended the year with just under GBP 97 million of cash in the balance sheet. So if you take this final dividend, which is about GBP 40 million, plus the in-year cash generation, we will potentially need to accelerate some of the buyback levels that we've seen in the past in order to end the year with GBP 50 million, but that is what we will do. Does that answer the question?

Yes.

We have another question from the line of Lisa Yang from Goldman Sachs.

I just want to follow up on the ARPA growth guidance. You said it would be mainly led by product this year. Could you maybe give us a bit more color in terms of the main contributors and your assumptions around the package upgrade beneath that? The second question is similarly on the ARPA. Would it be possible to get your thoughts around evolution of ARPA for agents as opposed to new homes? I understand new homes might be under a bit more pressure. So if you were to compare versus the 2019 level, would you say ARPA for H2 could be a bit higher and new homes a bit below where we were in 2019? And the third one would be on your comments around revenue opportunity from referencing, contractor and services. Could you maybe talk about the sort of road map to just sort of tap into that revenue opportunity, how big could that be? Is that going to be a contributor for 2021? Or should we think about maybe more the outer years? And the very last one, if I can. Is it just possible to get your sense of how you think commission pools or agents have changed in 2020? Just to get a bit of a sense of the underlying health of your customers and how you think that could evolve for 2021.

Thanks, Lisa. So ARPA, what's going to drive up growth in 21. I think that's the first question. Mainly, as you see, sort of continuing optimized upgrades, it's not the only thing we would -- we get -- you might remember, you can either buy our products -- you can either buy them in a package or you can actually buy them from [ that account ]. But I think the main driver would be those Optimiser upgrades, but so people upgrading potentially from [ some ] 2015, which was the old package, up to our new super premium package of 2020. And you'll see we're seeing upgrades at about the 3 50, 3 60 level. So that makes quite a big difference to us quite quickly if we continue on that path. So that's the majority of the ARPA growth in agency. And yes, in terms of the growth in segmental office in new homes alone -- new homes agency, sorry, yes, I think your assumption is broadly correct that we'll see -- compared to 2019 at a segmental level, we'll see more coming out of agency than we will out of new homes. So yes is probably the shortest answer possible. And then sort of road map from here on that digital tenant journey and journey some more revenue, think the contribution in '21 will be small probably similarly. I don't -- I wouldn't want you guys to be writing any big numbers into your notes for '22, probably even '23. I think it's a sort of 3- to 5-year horizon that we're looking at in terms of that journey. Obviously, we're sort of laying down the structure of the journey. I don't think -- while tenants are moving towards it, and I'm absolutely delighted that we're seeing -- from an agents perspective, we're seeing up to 70% fewer viewings per let, which of course is sufficient for agents. But the other thing that's not often talked about, of course, it's much better for tenants because that means tenants aren't wasting their time and potentially facing disappointment. So -- but I don't think you should expect a particularly notable revenue contribution through until probably 3 to 5 years from now. I think that was it. Does that answer your question, Lisa? Or was there something else I missed?

Yes. Just wondering your thoughts about the evolution of commissions, agents commission last year and into 2021.

Yes. Good questions, sorry about that. So what -- measuring commission is definitely more of an art than a science because, unsurprisingly, agents don't publish their commission rates because [indiscernible]. So what -- you have to rely on a few relatively small-scale surveys. And you have to be a bit careful because extrapolation, too, becomes a full errand. So what I think we've seen is that commission has bumped up a little bit, maybe 5, 10 basis points, that sort of level. So that don't want to get carried away. The other thing, of course, has happened is that achieved prices has gone up, and we continue to see pretty good achieved price growth. So all in all, I think the net agent commission pool has gone up on a unit basis. And then, of course, this year, I would like to think we'll get back to a more normal transaction run rate. So on a volume basis compared to last year, maybe they'll see a bit more as well. So I think agents are in a known [ take ] place. Actually, when you take all of that together, and I think it's interesting that we're seeing good agents actually get some guidance on noticeably pushing their commission up a bit more than 5 basis points but probably fully a reasonable average guess. Miles, anything to add on the commission pool?