Trustpilot Group plc (TRST) Earnings Call Transcript & Summary

Good morning, everyone. Thanks to all of you who've joined us today at the London Stock Exchange. And of course, a warm welcome to everyone on the call. This morning, I'm going to take you through some operational highlights before handing over to Hanno, our CFO, to take you through the financials. Then I'll finish up with more color around our strategic initiatives. When I started out as CEO of Trustpilot almost exactly a year ago, I said I aim to drive strategic clarity, rigorous execution, and improving profitability. I'm happy to say we've delivered against all 3 of those priorities in the first half. First, our strategy is clear. We're an open, trusted review platform for consumers to help each other make the right choice, and the businesses to build trust, grow, and improve. By going deep in key markets and verticals, we maximize the inherent network effects of the platform. Our SaaS business model reinforces this by expanding customer engagement through product innovation. At group level, bookings increased 19% in constant currency, with particularly strong growth in our 4 focus markets of the U.K., U.S., Germany, and Italy. I'll cover each market in more detail shortly, but I do want to highlight the exceptional performance of the U.S., where the team delivered 23% bookings growth versus 11% in the first half last year. Consumer adoption of the platform continues to grow with monthly active users up 28% year-on-year to 67 million, and we recently crossed the threshold of 300 million cumulative reviews on the platform. Product innovation is at the heart of our offer. In the period, we released a well-received series of features, providing businesses with AI-driven insights into customer behavior and market dynamics. I'm pleased to say that these releases underpin a significant improvement in the last 12-month net dollar retention from 99% to 101%. As you know, it's more efficient to retain a customer than win a new one. So reporting NDR above 100% for the first time is a significant milestone for us. Strong execution of a clear strategy resulted in improved profitability. The adjusted EBITDA margin increased 390 basis points to 10.6%, allowing us to deliver adjusted EBITDA of $10.6 million, ahead of expectations as we delivered operating leverage across all key cost lines. As the business is cash generative and we've got a strong balance sheet, we're today announcing a further GBP 20 million share buyback and now expect full year adjusted EBITDA to be at the top end of market expectations. Finally, just to say, we had a really nice moment in the U.S. during the period, being prominently included in the customer advert in Times Square in New York, as you can see in the picture on the slide. That serves as a great moment of validation that we're gaining awareness and traction in the U.S., which is, of course, great for our growth -- great for the growth flywheel of our business. I'll now take you through the performance by market. Starting with the U.K. The U.K. continues to perform well, with bookings up 19% at constant currency to $47 million in the first half. Annual recurring revenue was up 18% to $85 million and the region delivered first half revenue of $40 million. As you'll have heard before, across our focus markets, we're driving growth, particularly with enterprise customers, where net dollar retention is well above the group average. We were particularly pleased in the period to win the state-owned Savings Bank NS&I as an enterprise customer. Our reputation in the U.K. financial services industry is now second to none, with other enterprise customers, including TSB, Monzo, Revolut, Starling, Wise, and First Direct. Due to the viral nature of our business, we see the success we've already had in establishing a powerful and trusted consumer brand as an effective enabler for further market penetration and expansion in the U.K. We still think of the U.K. to be clear, as an early-stage opportunity. Our proposition is relevant across both online and offline businesses and across all verticals from financial services to retail to healthcare. In the U.K., we currently have under 10,000 paying customers, so there's clearly massive room for growth. Moving on to Europe and the rest of the world. This region, of course, covers all European markets and those across Asia. We see growth across all markets in the region, but within it, we're particularly focused on building our presence in our focused markets of Italy and Germany. We chose these because they're large with huge potential, and we already have strong traction and growing consumer awareness there. Overall, we saw bookings growth of 16%, in line with our mid-teen guidance. Germany and Italy grew ahead of the regional average, and the dark region, which includes Germany, Austria, and Switzerland, is now our third largest market after the U.S. and the U.K. We've reallocated sales resource to these markets, new general managers have been appointed and our new office in Hamburg is now open, complementing our existing office in Milan. This brings structure and in-market presence, which we expect to drive growth, particularly in the enterprise segment. Revenue in the first half was $39 million, up 18% in constant currency. Moving on to North America, which comprises the U.S. and Canada. When I joined, I saw 2 key areas for improvement. First, retention rates in North America were well below the group average. And second, there was room for improvement in new sales efficiency. I'm happy to say the team has addressed both areas and are now executing really well against our strategy and in line with the broader group. The momentum we saw in the second half of last year continued, and the region delivered bookings of $26 million, up by 23% in the first half. Revenue was $21 million, up in line with last year's booking growth, and we continue to improve our contribution margin. Our go-to-market strategy in the U.S. of going deep, not broad, means we focused on high lifetime customer -- on high customer lifetime value market verticals. This drives brand awareness and business adoption, fueling the flywheel and supporting further bookings growth. The new product features we launched in the first half, like Market Insights and Review Spotlight have been really well received with 25% of customers moving on to the new plans. The sales team is buzzing given the progress that they're making. In the first half, we won new enterprise customers, including Verizon, LexisNexis, and Coinbase and secured significant customer renewals and expansions, such as Uber, all of which combined drove an 800 basis point improvement in the net dollar retention rate, bringing it close to the group average. We continue to believe that the U.S. is a huge opportunity for Trustpilot and the momentum we've seen over the past year, combined with increasing brand awareness and a 22% increase in active domains shows the growth flywheel is working. Let me now hand over to Hanno to take you through the financials.

Thank you, Adrian, and happy almost anniversary, and good morning, everyone. I'm Hanno, the CFO. In the first half of the year, we have continued to proactively manage our business to deliver topline growth, operating leverage, profitability, and free cashflow. We also returned $26 million in cash back to shareholders. Bookings have grown 19% in constant currency, ahead of our mid-teens guidance and you've just heard the regional breakdown on that. Adjusted EBITDA, as Adrian has said, is ahead of market expectations, and the largest ever profit we have delivered in the first half. Crucially, we delivered a 3.9 percentage improvement in margin, demonstrating operating leverage and we've achieved net dollar retention rate of 101%. Let's first drill into our retention rate a bit more. Most of our revenue comes from existing customers, many of whom have been with us from years. Our high and resilient retention rates support our visibility into future bookings and revenue, underpinning our guidance. We aim to increase retention rates overtime by both reducing gross churn and increasing net account expansion. In H1, we increased net retention rate to 101%, the highest ever reported. Our net expansion continued to improve, partially driven by the implementation of new packages with the launch of innovative product features in Q2. Adrian will take you through the product and pricing changes later. Account expansion includes renewals at higher planned levels, customers adding additional domains or market and price increases reflecting the higher Trustpilot brand awareness. The strong gross retention rate, which also improved slightly, highlights our compelling value proposition for our customers and the return on investment that they gain from our solutions. Regionally, North America saw a material increase in net dollar retention rate and is now closer to the group averages after previously being meaningfully below the average. The U.K. rate remains over 100%, and our 2 other focus markets, Germany and Italy, are also continuing to perform well. Let's take a look at the income statement from a management view down to adjusted EBITDA, excluding stock-based compensation and D&A. An IFRS statement and a reconciliation can be found in the appendix. We delivered revenue of almost $100 million. Looking back, we reported $100 million in revenue for the entire year of 2020, just before going public. 3.5 years later, we've achieved that just in the first half. So effectively, the business has doubled since IPO. You can clearly see the operating leverage we're able to drive through the P&L in the first half of 2024. As you know, cost of sales include network operating costs as well as the costs incurred to onboard, support, retain, and upsell our customers. Our gross margin slightly reduced to 81%, reflecting higher retention sales commissions, especially in North America. The customer success teams there really smashed their first half targets and have been rewarded accordingly. We anticipate commissions to return to more normal levels going forward as targets increase. Customer acquisition costs or the cost to acquire new customers reduced as a share of revenue. That's despite a lower capitalization of commission net of amortization, as we're now in the second year of capitalizing sales commission under IFRS 15 and amortization is increasing. The absolute increase in CAC to $27 million was driven by higher sales costs and marketing spend, but the relative reduction shows better operating efficiency. We are continuing to invest into tech product and content, bringing new people onboard and releasing exciting new product features. So costs increased to $26 million. Headcount is up 10% year-on-year. In relative terms, though, tech and content costs reduced as a proportion of revenue. This was due to improved operating efficiency and higher capitalization of product development costs as we developed and launched more new product features. Within this line item, we also capture costs associated with maintaining the integrity of the platform through our trust and transparency team. These costs were flat year-on-year in absolute terms. This is despite a growing review volume and platform usage. We were able to achieve efficiency gains, thanks to investments in new fake review detection technology using machine learning and LLMs, which demonstrates the operating leverage that we can deliver as the business grows. G&A is where we expect to continue to gain more operating leverage in the short term, and this was already evident in the first half. Total expenses were $16 million in H1, only a slight increase on the previous year and significantly reducing as a proportion of revenue. We drove this via good cost control and operating leverage resulting from strong revenue growth in the period. As a result of our SaaS business model, the long-term margin potential of this business is significant. Given the massive market opportunity in front of us, our top line guidance remains for sustained mid-teens revenue growth each year for the foreseeable future with incremental improvements in operating leverage. As we had previously outlined, at maturity, we can achieve adjusted EBITDA margins over 30%. In the near term, we expect general and administrative expenses to reduce as a proportion of revenue as we cover our group costs more efficiently. The next area we'd expect to generate leverage from is our tech and content spend. Within this, we've already demonstrated that we can achieve operating leverage from trust and transparency. Product innovation for our customers drives retention and expansion and so remains a crucial part of the business. However, product features will be developed for a growing customer base, and we're able to scale through technology in the content integrity area, allowing us to drive more efficiency. Finally, we do anticipate an improvement in sales and marketing efficiency in time. However, the spend is driving growth, underpinning the mid-teens top line guidance we've discussed and enabling us to capture the tremendous market opportunity ahead. Let's take a look at the movement in cash since year-end. We generated $11.5 million of adjusted operating cash flow in the period on the back of $10.6 million in adjusted EBITDA. We invested $3.5 million into CapEx, largely capitalized product development costs and taking into account principal elements of lease payments for our offices, we generated adjusted free cash flow of $5.9 million and an effective cash balance before equity transactions of $97.4 million. Employee stock option exercises added a further $4.7 million to the cash balance from strike price proceeds. And we launched and completed a GBP 20 million or circa $26 million share buyback between January and May this year. With that, we purchased 10.6 million shares or 2.5% of the shares outstanding prior to the start of the buyback. As we outlined in March, our capital allocation policy prioritizes investments in the business first. This includes innovation to drive growth and investing in our people and culture as they are at the heart of our success. We also retain the flexibility to engage in targeted M&A. After satisfying these priorities, we remain committed to return excess cash to shareholders. The period end cash balance of $75.6 million is more than sufficient for our business needs. And in addition, the business continues to generate positive cash flow. So today, we have announced a further GBP 20 million share buyback. Finally, having been operational since 2007 and only recently turning profitable, we have accumulated significant operating losses across our geographies, which can be used to offset future cash taxes. Presently, the U.K. and Danish entities are profitable. And so we have now recognized the deferred tax assets associated with those on the balance sheet. These amount to $24 million of cash tax shield using an implied corporate tax rate of 22% in Denmark and 25% in the U.K. There are restrictions on how these losses can be used. So you should expect some cash tax payable each year. Coming to the outlook for the rest of 2024. Given the recurring revenue nature of our business, prior period bookings and ARR are a good guide to future revenue growth. And as a reminder, bookings grew 16% in 2023. This underpins our mid-teens revenue guidance. We expect to maintain the adjusted EBITDA margin we have achieved in the first half and are consequently upgrading full year adjusted EBITDA guidance to be towards the top end of market expectations. The most recent consensus range was between $18 million and $22 million with a mean of $20 million. And with that, I'll hand back to Adrian for his strategic update.

Thanks, Hanno. As I mentioned earlier, one of my priorities in joining Trustpilot was to drive greater strategic clarity. We've done that in 4 key ways over the last few months. First, we're clear that we monetize as a SaaS business, which means we drive an upgrade cycle through product innovation, delivering positive net dollar retention as you've seen in these results. Second, we've clarified our business and consumer value propositions. Trustpilot helps businesses to build trust grow and improve by listening to their customers. Consumers help each other make the right choice with Trustpilot by sharing their experiences. Third, we maximize network effects by going deep, not broad. So we've taken that approach to drive growth, introducing our 4 focus markets where we see a greater marginal return on each dollar invested and greater discipline around customer segmentation, which is now well received and understood across the business. Finally, we've refreshed the values that underpin our culture, taking all the positive attributes that have built Trustpilot into the company it is today and layering on a more commercial focus. These have been very positively received internally. Let me elaborate a bit on the growth flywheel and network effects that underpin our growth. The flywheel should be familiar to you, but I think it's important to start here as it's so foundational to our business. The flywheel starts at the top with consumers who trust us enough to read and write reviews. That leads, of course, directly to more business domains on the platform. Businesses then engage with the feedback, actively inviting their customers and publicly showcasing Trustpilot, as I hope you've seen around London and wherever it is you happen to live. That in turn -- there are also real network effects. The platform is more useful to consumers if more businesses are on it and, of course, more valuable to businesses when more consumers use it. This network effect, combined with our 300 million strong review history and trust in the brand gives us a very real competitive moat. To capitalize on this, as I mentioned today, it's important to go deep, not broad, to strengthen network effects and to work on both sides of the flywheel. In the first half, we saw a 24% increase in the number of reviews on the platform, which now, as I've said, stands at over 300 million. Business has sent over 400 million review invitations in the first half of the year, up 15% year-on-year. The number of reviewed domains increased 19% and active domains were up 14%, in line with last year's growth. Customers use the power of our brand to drive their own growth, and we, in turn, benefit from their use of the Trustpilot logo in their assets, which vastly multiplies the reach of our brand. Our brand continues to get tens of billions of impressions every month from customer websites, appearances across all media channels, including TV and Google search impressions. It's this whole hive of activity on the platform rather than any one particular metric that gives Trustpilot so much influence and such rich potential for future monetization. Earlier, I spoke about rigorous execution as one of our key priorities. One of the first things I did at Trustpilot was to review in detail how we go to market to ensure our proposition is continuing to put customers first. We've listened to them and refined our offering, updating product, packaging, and pricing. We've reduced the number of paid packages down to 4 with a few additional extras such as Salesforce.com integration. This makes it easier for customers to understand and for our people to sell. Each step up in plan delivers clear additional benefits with progressively more review invitations and insight functionality. In April, we released new functionality across the platform, but particularly focused on our high-level plans. Two of the features are shown on the slide. These both leverage AI capability to drive insights from complex data or improve productivity. AI-assisted review responses is now offered to our enterprise customers as standard. These customers often receive hundreds of reviews a week, so responding to them can be very time consuming. The feature uses a large language model to learn the organization's tone of voice and draft review responses, which agents can then check and edit before posting. This significantly improves their efficiency, but crucially maintains the human element. While still early days, feedback so far has been really positive with over 70% of enterprise customers on the new plans using this functionality. Market Insights helps businesses to better understand competitors, market trends and key review topics, which are aligned with MPS. Customers can choose specific companies to benchmark against or using industry average. Our product team is, of course, already working on further features, large and small, for businesses and consumers. We're currently beta testing 2 new Trustpilot homepage designs to improve functionality. Looking ahead, we're focused on developing a multiyear product road map to drive retention, new business, and upsell on one side and increased consumer engagement on the other. All of these changes were a big lift for the organization. I'm really grateful to everyone internally for their hard work in delivering it on time and to such a high standard. Trust, of course, is in our name, and it's our foundation. It's what makes us unique and what drives all of us who work it. Our vision is to become the universal symbol of trust. We hold 4 core values around trust and transparency, which I highlighted on the right-hand side of this slide. We're neutral and independent, we're open, we're fair to both businesses and consumers, and we're transparent in how we operate. It's therefore paramount that we protect the integrity of our platform. We've been doing this since we were founded, so it's in our DNA, but we continue to evolve as the market and regulations change. Our fake review detection technology has been developed over many years, leveraging machine learning and more recently generative AI capability. We not only look at the review content, but take into account hundreds of data points and behavioral metrics to determine what looks suspicious. We released new detection technology in January that highlights review content against our policies and has proven quicker and more accurate in spotting breaches. This means we can deal with issues faster, helping maintain the trust of consumers. As a result, the proportion of fake reviews that are automatically removed from the platform is now over 90%, up 16 percentage points year-on-year. The Federal Trade Commission in the U.S. has recently released regulation, which prohibits fake or misleading reviews, insider reviews, incentivizing positive reviews, and review suppression. We welcome this announcement and have engaged extensively with the FTC throughout the process. In fact, Trustpilot was cited as a source around 27x by the FTC in their final ruling. Our trust principles comply fully with the FTC's requirements. In fact, we've been leading the way on many of these issues. For example, we banned the use of incentivized reviews in 2020 and began rolling out changes to reduce risks of review suppression earlier this year. The rule highlights to businesses the benefits of using Trustpilot as a third-party trust platform to support them in this evolving regulatory landscape. So just to summarize, our platform is highly differentiated and network effects continue to strengthen. The size, reach, and level of activity on the platform continue to grow, delivering more and more value to consumers and businesses. We've invested in our products to do more for businesses driving a SaaS upgrade cycle. We've delivered a strong first half performance and are returning further capital to shareholders. There's, of course, still plenty to do as we capitalize on the powerful network effects inherent in our model. Looking ahead, we're excited by the significant market opportunity. We remain confident in delivering sustainable growth and operating leverage over the long term. And now Hanno and I will take your questions, both in the room and online. Thank you.

Hello. Jessica Pok from Peel Hunt. I've just got 3 questions, please. The GBP 20 million -- after GBP 20 million of share buybacks announced, even after that, you're going to build up more cash nicely. I guess, one for Hanno, what kind of level of cash balance is the company comfortable with on an ongoing basis? And then the second one is, we're a couple of months in for H2. In terms of the bookings trends, have you seen any difference in H2 versus the H1? We've seen kind of corporate spending quite restrained for some of the other companies. So just wondering if you see any change in trends there? And the final one is just, I might have missed it. Did you say the 2 new AI products are included in the top tier packages? If so, then going forward in terms of the new product road map, do we expect them to be included into the packages to encourage upgrades and price rises? Or is it a matter of adding more products in order to get customers to do more add-ons?

So why don't I take the first 2. On the buyback, yes, look, I think we have a pretty clear capital allocation strategy. And obviously, we feel very comfortable that on the back of the strong balance sheet at period end, plus the continued cash generation to commit to another GBP 20 million buyback, that should take us through, say, March of next year, at which point we will take a look at the balance sheet at that point in time and review it. And then on the bookings trend, we have sort of seen a continuation of the momentum.

And then on products, I mean, what we're focused on is driving, as we say, an upgrade cycle through the 4 different grades of product that we make available. The product team are focused on products that are going to generate a lot more value, particularly at the larger end for our enterprise customers. I think we've shown in the first half that we're pretty adept at claiming our portion of that value once it's been generated. But we're very conscious of wanting to make sure our customers get great value from Trustpilot. And I think our success in the first half shows that we struck that balance really well.

Yes. It's Ciaran Donnelly from Berenberg. Three from me as well, please. Just firstly, on one of the comments you -- you said headcount is up 10% year-on-year. Could you just give us a bit more detail in terms of where those heads have been added? Whether it be geographically or between tech and sales? Secondly, just trying to get a sense of, I guess, the consumer engagement with the platform in North America and how that's developed. You obviously gave the monthly unique users growth at a group level, but any kind of indication of consumer engagement growth in North America? And I guess, thirdly, I think, Adrian, one of your goals is to be in a Super Bowl ad. Is this year the year?

Do you want to take the first one, Hanno?

Yes. So the product -- the reference, the 10% headcount growth was specifically to tech and product. And obviously, if you look at the P&L, we continue to invest in ad heads in the commercial organization to continue to drive bookings growth, albeit below sort of top line growth levels. And we've been very restrained and adding heads and G&A to continue to drive efficiencies and I think the other 2 are probably more for Adrian.

Yes. So in terms of the flywheel in North America, I mean, I hope what came across from what we presented is there's really a whole set of activities going on around our platform, which are growing together, and we've seen great traction across all of them in the first half. We're not sort of laser-focused on any particular one of those metrics. What we want to see is the platform as a whole growing and continue to drive value. Obviously, with the success on the B2B side in the U.S. with some really significant customer wins like Verizon, Fanatics, the great sportswear brand. We've seen businesses doing their bit to drive that flywheel around, and we're really pleased with how it's going there. Super Bowl, not on the cards just yet, but time will tell.

Hello, guys, Joe George from JPMorgan. Two for me, please. I think the first one, probably for Hanno. Just on pricing, a number of software vendors at the moment continue to talk about a more pressured pricing environment and putting these like-for-like price increases too. So on those like-for-like price increases, rather than adding additional product capabilities, how have they been received by the customers? And has this just been in line with the typical annual price increases? And then second question probably for Adrian. Just on a couple of the senior hires you made through the period, I think, including the Chief Revenue Officer. Could you just talk a little bit about the rationale behind these hires and what it is that they bring to the team, please?

Yes. So on pricing, the retention rate we showed in the deck is a trailing 12-months number. And so I think the last half of 2023, the mix was more towards like like-for-like price increases. And then this year, we've really focused on driving expansion through innovation and product upgrades. And so the like-for-like price increase component is actually shifting down. And as you've heard Adrian say, this is sort of our ambition is to deliver more value to our customers, to help them upgrade to a better product as we deliver more features and put them into the enterprise package first and then they trickle down, and that should support the long-term ability to expand accounts.

And then to your point about hires, yes, we announced earlier this year that we've hired Brian Green out of Adobe as our Chief Revenue Officer. I think Brian Green brings an exceptional mix of experience across verticals, across different customer sizes. I think he's already doing a lot to help us, particularly at the high end with enterprise customers. And I think it's just a great testament to where we've come, we've got to as a company, that we can attract talent of that caliber into the business. We also announced that we've hired Carrie Ryan out of Prosus as Chief Strategy Officer, among her responsibilities will be the strategy and, obviously, evolving that to the next level and also pricing and monetization and driving these decisions around once our product team have created a lot of value, how do we make sure that we're sort of claiming our share of that.

It's Mark Hyatt from Morgan Stanley. I've just got 2, please. Firstly, maybe this is for you, Adrian, just on the FTC's change in regulation. How big of a step forward do you think this is within the industry? Could you just maybe sketch out exactly what's changing? And how do you expect that to impact both Trustpilot and competitors more broadly? And then secondly, maybe this is one for you, Hanno. Just on the LTM net dollar retention rate, which improved as you pointed out, to 101%. I think what was most eye-catching in the release was the 8-point increase in North America, and you've flagged that that's increased more towards the group level. Could you maybe just sketch out a couple of the drivers, what's driving that and anything else that might help us understand what's -- how that's going to progress going forward?

Yes. So to start with the FTC, we think it's actually quite an important moment that Lina Khan and the FTC are explicitly advocating many of the same principles that we at Trustpilot have been talking about for years. And these aren't controversial things. These are common sense principles of fairness, like don't get your employees to review their own company, don't buy reviews from people, don't suppress negative reviews. I think what's changing and what's going to have a really great impact is the FTC are making clear that it's a C-level executive's responsibility as a company to make sure that they're actually compliant with these things. So just as people know what the rules are around financial reporting or environmental reporting, the same applies here to reviews. The FTC has set really clear standards here. We absolutely agree. And of course, what we do is we make it really easy. We have a solution to this, right? We make it really easy for senior executives and big companies to say, right, here's a company that's actually going to help us be compliant with what the FTC is saying.

Yes. On the U.S. retention rate improvement, it was largely more expansion. And so I think it reflects -- again, this is an LTM number. So we've talked about this in March already how we've seen improvements in the back half of last year. And it reflects continuous execution on that ability to increase price, but also then obviously supported by now a new product to drive more expansion. I think it's a testament to the fact that the brand continues to be more and more valuable in the U.S. And so we are able to then command higher prices from our customers as they get more value from showing Trustpilot on their website. And so I think the ambition overall is to increase retention rates by reducing churn and improving expansion, and that obviously holds true for the U.S. in particular as well.

Any more questions?

Great. So with that, I think we're done. Thanks, everybody.