HeadHunter Group PLC
Q2 2019 Earnings Call Transcript

Published: 16 Sep 2019

[Roman Safiyulin:]

Hello everyone and welcome to HeadHunter Group Second Quarter and Third Half 2019 Earnings Call. On the call today, we have Mikhail Zhukov, our Chief Executive Officer; Grigorii Moiseev, our Chief Financial Officer; and Dmitry Sergienkov, our Chief Strategy Officer.The press release and supplementary slides containing our second quarter and first half 2019 results were issued earlier today and a copy may be obtained through our website at investor. hh.ru.Now, I will quickly walk you through the Safe Harbor statements. Today’s discussion will contain forward-looking statements. Actual results may differ materially from the results predicted or implied by such statements and forward-looking statements made today, speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements.For a discussion of some of the risk factors that could cause actual results to differ, please see the Risk Factors section in our final prospectus in connection with our initial public offering and filed with the U.S. Securities and Exchange Commission on May 9, 2019.During this call, we will be referring to some non-IFRS financial measures. These non-IFRS financial measures are not prepared in accordance with IFRS. A reconciliation of the non-IFRS financial measures into the most directly comparable IFRS measures is provided in the earnings release we issued today and the slide presentation, each of which is available on our website at investor.hh.ru.Now, I’ll turn the call over to Mikhail to make a quick opening remark. Please go ahead.

[Mikhail Zhukov:]

Thank you, Roman. Hello to everyone. Thank you for joining our second quarter 2019 earnings call. We are pleased to announce another strong set of operational and financial results in the second quarter of 2019 despite the ongoing economic slowdown in Russia. In such environment, we have sustained growth of our client base, showed considerable revenue expansion, and boosted profitability, which makes us confident in our ability to execute our long-term growth strategy.Our recent brand awareness strategy demonstrated very satisfying results. We are now the number one online recruiting platform, not only for white, but also for blue collar candidates and the gap between us and the nearest competitor continues to widen. On the back of investment in brand and product development, we achieved two important milestones in this quarter

[Dmitry Sergienkov:]

Good afternoon and thanks for joining us on the call. Overall, as Mikhail mentioned, we continued delivering strong financial and operational performance in the second quarter 2019. Our revenue grew by approximately 26% year-on-year, primarily driven by continued Small and Medium Accounts expansion and monetization enhancement of key accounts in Moscow and St. Petersburg. This has led to a 28% revenue growth in the first half of 2019.As noted last time, revenue growth in the second quarter was lower than in the first quarter 2019 due in part to calendar effect. the second quarter of 2019 contains fewer working days and also we saw somewhat lower than usual customer activity in the working days between May holidays, which might be related to the convenient adjacencies of the weekends and overall propensity for the workforce to take additional days off. So obviously, we believe this affected our revenue recognition in May.Our adjusted EBITDA reached 989 million in the second quarter of 2019, representing a 52% margin compared to 48% in the second quarter of 2018. This substantial margin expansion was mainly driven by the operating leverage effect on the back of our revenue expansion. As a result, our adjusted EBITDA in the first half of 2019 was RUB1.76 billion, representing 49% margin compared to 42% in the first half of 2018. Capitalizing our asset-light business model, we continue to drive high cash flow conversions in Q2. And as a result, our CapEx, as a percentage of revenue, was less than 6%.Turning the page, we’re also continuing to deliver on the key pillars of our long-term growth strategy in Q2. We continued penetrating untapped market segments with high potential such as small and medium businesses in regions of Russia. Our total estimated customer base increased by 38% year-on-year, and our total customer base in the Russia regions increased by 62%, of which key accounts in Russia region increased by 20% year-on-year and small and medium businesses in the Russia regions increased by 65%.Following an effective price increase since beginning of the year and increase in usage of our services key accounts ARPC in Moscow and St. Petersburg increased by 17% year-on-year accelerating from 2018, 2017 full-year dynamics. Also, small and medium business ARPC in Moscow and St. Petersburg grew by 2%.As Mikhail already said, recently, we conducted an annual brand awareness survey and we like to share some results with you on Page 5. We always say being on top of mind for candidate job search makes a big difference in our double-sided business model. It’s the main source of free, high quality traffic, and which defines [indiscernible] platform efficiency in the end. It also drives inbound flows of new customers predominantly in small and medium category.So, we are very pleased with the survey results received this year. Our total top of mind brand awareness increased by 10% from 45% to 55% making the gap with the closest competitor close to 3 times. It shouldn’t surprise that in white collar space, we’re leading the growth by a big margin, and that continued expanding this year. What we’re most excited about is the result in blue collar segment, which is an emerging and arguably the most competitive area.And for the first time in our history, we’ve become the most recognized brand in Russia, and in this segment as well, where top of mind brand awareness grew by 9% to 42%. This speaks of our ability to transform HeadHunter business towards our strategic goal of being truly universal platform for all types of candidates and employers.Turning to Page 6, in terms of product portfolio, our key product dynamic is generally consistent with what we saw in Q1. So, we maintain comfortable share of subscription revenue in our portfolio of approximately 52%. Job postings is by far the highest growing category driven by first and foremost our expansion into Small and Medium Accounts as well as by additional monetization of Key Accounts.As I mentioned before, subscription prices do not always link to the actual consumption, especially when it comes to large clients. Whereas in job posting areas, this relationship is stronger and more direct making it easier for our sales force to upsell existing clients. You can see it from the nice listing fee dynamics in Q2.It would require some time monetization changes before we have potential to enjoy the same effects from subscription for the upsell, and that’s definitely our mid-term objective.And now here is Grigorii to talk to you about our financial performance.

[Grigorii Moiseev:]

Yes. Thank you, Dmitry, and hello, everyone. As we mentioned earlier, our consolidated revenue increased by circa 26% year-on-year in the second quarter reaching approximately RUB1.9 billion and 28% year-on-year in the first half of the year reaching approximately RUB3.6 billion.If we flip to Slide number 7, you can see that we have managed to sustain high revenue growth rates both in our key accounts and the Small and Medium Accounts segments. Specifically, our key account revenue increased by 17% in the second quarter and 19% in the first half of 2019 year-on-year. The growth in the segment in the second quarter was mainly attributable to a 17% increase in average revenue per customer in Moscow and St. Petersburg. This was driven by increase in prices and reducing discounts and actually as well by the increase in usage of job postings, meaning the number of postings per customer in this category.Now, our Small and Medium Accounts revenue increased by 31% in the second quarter and 34% in the first half of the year. Again, primarily, as probably at last quarter and actual 2018 primarily due to the growth in the number of these paying Small and Medium accounts, and specifically by a 65% in the second quarter in other regions of Russia.If we flip a page in terms of geography breakdown, we are also – we are making a very good progress, expanding in Russian regions and our customer base in central cities continues to grow as well. Revenue from regional customers increased by 46% in the second quarter and by 51% in the first half of the year, meaning that the pace of increase of revenue in this regional customers’ is actually the same as it was in 2018.This increase was mostly driven by the growth in number of regional Small and Medium accounts. And we consider this dynamics to be good reflection of our strategic focus to further penetrate into the regional customer segment, specifically, Small and Medium accounts. Revenue in Moscow and St. Petersburg increased by 17% in the second quarter and 19% in the first half of the year. And as Dmitry mentioned already, that was mostly driven by increase in amortization of key accounts in Moscow and St. Petersburg.We skip the next slide, Number 9 as it was covered before. Moving onto Number 10. Let me give you some more detail on our expenses and margins. Here on this slide I will comment on the first half of the year numbers, which are at the bottom of this slide, because I think there are more meaningful as the spikes of actual particular quarters are balanced out.But you can do your own calculations of course for the Q2 as we – from data we’ve provided in our press release. So in the first half of 2019, our total operating expenses has increased from circa RUB1.7 billion to RUB2 billion or by 21%. And they decreased as a percentage of revenue from 61.4% to 57.7% by circa 4 percentage points.Now, excluding items that are adjustable on the EBITDA levels, such as share-based compensation and IPO related expenses. Our total OpEx in the first half of the year has decreased as a percentage of revenue by 7% to 51% contributing to the EBITDA expansion. If we start from the personnel expenses, they have increased by RUB219 million, as you can see from the chart at the bottom or by 26% in the first half of the year. And they reflect as percentage of revenue to approximately 30%.Actual excluding the share-based compensation personnel expenses increased by 22% and they went down as a percentage of revenue by circa 1.4 percentage points to 28%. The key drivers of growth in personnel expenses, excluding share-based compensation were 92% new people, we have hired over the last 12 months, primarily in our development and production teams in Russia and also the indexation of wages effective from the first quarter of 2019.Now moving onto market and expense. As you can see, they remained roughly flat in ruble terms, both in second – in first half of the year and Q2. And in the first half of the year, they declined as a percentage of revenue by 4% point to 13.4%, which is a bit optical as marketing was very high as percentage of revenue in the first half of 2018. But we still expect marketing to go down as percentage of revenue for the full year, not that significant, but probably by 1 percentage point compared to the 2018.And other costs are mostly represented by professional services, subcontractor costs, office rent and maintenance expenses as well as professional services. You can say that professional services really surged this quarter by RUB145 million more than a 100% on the back of increased IPO-related expenses. And excluding the IPO-related expenses, other costs were flat in ruble terms and declined as percentage of revenue by circa 3 percentage points.And the approximately half of that decrease is attributable to implementation of the new standard of accounting for leases, IFRS 16 and the other half is the operating leverage from the back of increasing revenue. So in conclusion, you can see that all our key expense buckets, excluding the adjustable items have declined as percentage of revenue in this quarter, contributing to the expansion of margin.If we flip a page, you can see that our adjusted EBITDA has reached to RUB989 million for the second quarter of 2019 and RUB1.7 billion in the first half of the year. Adjusted EBITDA margin was 52% in the Q2 and as compared to 48% in the Q2 of 2018. In the first half of the year, adjusted EBITDA margin was 49% as compared to 42% in the first half of 2018.Now moving on to CapEx. Our CapEx in the second quarter of 2019 was RUB107 million, an increase over RUB16 million year-on-year. That was primarily due to RUB37 million of office renovation cost, as we are planning to redesign our office of Moscow in 2019 and have allocated the budget of a circa RUB220 million to RUB250 million for this purpose. In this year, it’s worth mentioning that CapEx adjusted for this investment in office renovation in the second quarter is lower than CapEx in the second quarter of 2018.Net Working Capital as of June 30, 2019 remained flat as compared to the end of year 2018, because the increase in trade payables related to IPO expenses was offset by the increase of the advances we have waived for the services we will receive in the second call of the year.Income tax expense was RUB175 million in the second quarter 2019 compared to RUB89 million in the second quarter of 2018. And the key growth driver here was the release of the deferred tax liability last year, which we did not accrue this year. The effective tax rate in the second quarter of 2018 was 38.8%. That was affected by the IPO-expenses, which are mostly non-deductible on the operational level. If we exclude these expenses, effective tax rate would have been 29.5% as for the second quarter as compared to 33% in 2018.Turn into cash generation metrics on the next slide. In the first half of 2019, we generated circa RUB1 billion from operating activities compared to RUB618 million in 2018 and the growth was primarily driven by the increase in sales. net cash used in investing activities was RUB361 million in the first half of 2019 and the key strength here was the prepayment for acquisition of 25% ownership interest in Skilaz, the Russian HR IT company.net cash used in financing activities was RUB666 million in the first half of 2019 and the change between the periods was primarily due to operating loan repayment of RUB270 million to the associate for loan controlling shareholder. our net debt has decreased from circa RUB3.5 billion to RUB3.2 billion and our leverage has declined from 1.3 times EBITDA to less than one, mostly due to adjusted EBITDA expansion.And finally turning into our guidance, we feel very confident to reiterate the outlook for 2019 for revenue growth in the range of 27% to 30% and the adjusted EBITDA margin in the range from 48% to 50%.That concludes our presentation on our side, and we are opening the floor for your questions.

[Operator:]

Thank you, sir. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Vyacheslav Degtyarev of Goldman Sachs. Please go ahead.

[Vyacheslav Degtyarev:]

Yes. thank you very much for the presentation and the questions. So firstly, to the extent possible, can you comment on the pricing strategy for the next year? Do you aim to move to the consumption-based pricing, and maybe there is any early feedback from your key accounts with regard to the strategy if you aim to pursue that. And secondly, can you comment on the seasonality of the cost allocation between Q3 and Q4, particularly marketing and personnel expenses should we see high margins in Q3 or in Q4 of this year? Thank you.

[Dmitry Sergienkov:]

Yes. Thanks, Vyacheslav. I’ll take the first one on the monetization. I’ll say our biggest theme in monetization is, as you know, aligning value to price and linking to the actual consumption to price. And as you rightly said, we target first of all our big clients and we believe that they consume our services at the very old price there as a value unit. And for that, we have developed a number of initiatives that we are planning to explore in the coming years. We can’t adopt too many changes from a client at a time. Otherwise, we need to push their budgeting growth into trouble. So, we must be careful.And in Q3, we sort of usually start talking to our clients about the next year prices and the process usually is very iterative. So, based on client feedbacks, we can – we normally modify our plans. And so, I don’t think we can disclose at this point of time any detailed pricing and tariff updates. I can only tell you that you should not probably expect any extreme jumps in prices driven by certain initiatives to kick off. As we – generally, we aim for gradual and sustainable monetization strategy. So even crucial changes, like you mentioned, CV database access limits would be implemented in a very smooth and smart way that allows us to sustain high customer growth and contain churn. So on – in particular on CV database access, we will move towards linking consumption of candidate information to price. As you can imagine, for some of our clients, this will – would result in substantial paycheck growth, and therefore it would require some transition period. Next year, we are planning to start running certain experiments with new monetization model for CV database access. But as I said, for the full blown integration, it would require some time and very neat execution to make it smooth.

[Grigorii Moiseev:]

Hi, Slava, this is Grigorii. On the cost side, for marketing, we expect more expenses in the second half of the year as a percentage of revenue than in the first half of the years. So, we should expect, probably around 14% of marketing as a percentage of revenue for the full year results. And in the personnel, it's actually vice versa. We expect that in the second half of the year, personnel costs will be lower as a percentage revenue than in the first half because of several one-offs we had in Q2. Speaking of the full year results, I guess, you can look at maybe 1% or 1.5% decline, I mean percentage points decline as a percentage of revenue for the full year for the personnel expenses

[Vyacheslav Degtyarev:]

That's clear. Thank you very much, but maybe you can somehow comment with regard to the cost allocation between Q3 and Q4 in particular specifically as we don't have the comparison for 2018, maybe there is any seasonality in marketing for personnel expenses, particularly between Q3 and Q4.

[Grigorii Moiseev:]

Slava, as you know, our cost based out – specifically our marketing expenses are very discretionary, especially when it comes to digital marketing before it may change. It's not custom installed. We generally have this year a smooth allocation of our marketing expenses throughout the year. For example, last year we had significantly higher allocation first quarter, while this year it's smaller. But the exact allocation between Q3, Q4 would also depend on the competitive environment. So, I don't think we can actually comment very precisely now.

[Vyacheslav Degtyarev:]

Okay. Thank you much.

[Operator:]

Thank you. And your next question comes from the line of Miriam Adisa of Morgan Stanley. Please go ahead.

[Miriam Adisa:]

Two questions from me. Firstly, could you just comment on the current macro environment and what you're seeing in terms of current trading, and any impact the environment could be having on your customer acquisition or if it's changing behavior of certain customers as well. And then also, if you could just comment on what you're currently expecting in terms of macro environment going into the second half in terms of what this implies and your guidance? Thank you.

[Mikhail Zhukov:]

Thanks Miriam. I'll take your questions. As you see, we just posted – in our view, a very strong first half results on the backdrop of slowing economy. So, we’re generally satisfied with these dynamics, and to some extent it just shows that the business – our business has lots of secure growth drivers that are not directly linked to the economic cycle. And also our leadership and our business model based on subscriptions actually helps to smooth out any volatility. Having said that, slowing economy doesn't help us either. We are seeing but from the economy both on the key accounts in small and medium business revenues. We are actually operating in the environment, where the vast majority of our clients either not expanding their headcount at all. Right, so mostly we're helping them to replace their existing headcount or they're going through a very heightened scrutiny, very harsh budgeting process when approving HR budgets, especially expansion budgets, right.So from the one end, it creates high necessity and efficient online solutions that we deliver versus traditional word of mouth or some other less-efficient off-line channels. On the other hand, that limits our upsell opportunity for add-on products, right, i.e., ARPC development.So on balance we believe that in the upward moving economic cycle we would grow even faster, at a pretty much high rate but at the same time we haven't experienced significant impacts on our business. So you’d see that we are still growing at very decent rates. And we do not expect the further economic development somehow affect our guidance or expectations for the remaining part of the year.

[Miriam Adisa:]

Great. Thank you very much.

[Operator:]

Thank you. And your next question comes from the line of Maria Sukhanova of BCS. Please go ahead. Your line is open.

[Maria Sukhanova:]

Yes. Good afternoon, congrats on results. I have two questions. First on the number of your key accounts in Moscow and St. Petersburg, could you please comment why there is a small decline? It's related to, like, is it a trend? Or it just a technical thing? And second, if you could, comment on what's happening with this antitrust litigation? What’s the issue right now? Thank you.

[Mikhail Zhukov:]

Thanks, Maria. What would you see in Q2, in terms of key accounts dynamics in Moscow, St. Petersburg? I would rather call it the optical decrees, which is 1% and that is caused by a number of technical factors including quantification of companies between Key Accounts and SMBs when they are changing [indiscernible] for example, net value, et cetera. So we don't see it in six months numbers for instance. And we expect this impact would straight away on the annual numbers.Speaking of general direction and key accounts in Moscow, we deem this to be a goal is to sort of saturation point and largely all the growth what we see from Moscow and key accounts coming from monetization improvement, 70% in Q2.And on the anti-trust, a few days ago that probably the only update a few days ago, FAS announced that they dropped the case against Superjob and Rabota stating absence of violation. Nevertheless, they noted that the case against HeadHunter still continues, so we haven't seen the official decree or can’t speak away from the ground of the decision, but anyways, we can see that this as positive side or negative for us.

[Maria Sukhanova:]

Okay. Thank you.

[Operator:]

Thank you, Maria. Next question comes from the line of Ivan Kim of Xtellus Capital. Your line is open.

[Ivan Kim:]

Yes. Hi, I have three questions from my side please. Firstly, on the top of my brand awareness, which is very strong, you launched the marketing campaign at the same time of September on which I just wanted to understand, that'd be better why you need to invest again more, even though you are so much ahead of your competition, that’s the first question.The second question is on the revenue market sharing, 2018, can you share some information on that with us please? And then lastly on the competition in general, so what do you see is going on in the competitive field with, I don't know, the latest development with Sberbank acquiring Rabota with new owner of Workey, what Yandex Talent do? Any color on what do you see at the moment as the biggest competitive threat would be, very helpful. Thank you.

[Mikhail Zhukov:]

Thanks Ivan. Maybe I will deal with the second one, the easiest one and the simplest one. We don't know numbers of revenue for our competitors, unfortunately none of them really report disclosed, therefore, I can’t comment on the revenue market share. So in terms of we are very satisfied with the operating statistics that you see, operational KPIs, like sharing job postings and CVs, et cetera, right? So this could be used as a proxy, but I wouldn't probably speak about it on the revenue side here.Then in terms of top-of-mind brand awareness, we’re actually analyzing our marketing spend across whole Russia and we’re assessing cost of acquisition of new candidates very rigorously and regularly and we see that cost of acquisition is not growing that fast. So we see very good returns on marketing campaigns both off-line and in digital. And we saw in other markets when the top-of-mind brand awareness was even higher and the gap was the second player was even bigger, and this is what we aim for because we believe that this really drives the key competitive advantage of our business to traffic and also this results in a very low acquisitional cost for new clients, SMBs.And as you saw from our result it’s the biggest growth driver at the moment. As we drive our brand awareness across Russia, we would just enjoy lower and lower and cheaper acquisition of new clients. We don't really see that. First of all, if you compare that last year we decreased slightly marketing spent is potential for revenue, but we don't think that we should actually decrease it significantly at this point of time.And then on the competition, I would say that there haven't been any significant changes to the competitive environment since we last spoke. As I said, we are pleased with our own dynamics at operating financial and hard to compare directly with the peers. So with regards to short term competitors you mentioned, we know there is some high activity from work in mail and in Android store. But same time we are confidently holding leadership in number of downloads by big margin and also we defended our topmost position in store ranking.With still competitors more effective, especially in Q3 on TV and the digital video, for example, doesn't surprise us, because we are obviously entering a new business season and many companies allocate higher budget to [indiscernible]. So I would say that on balance, there's nothing that would force us to reconsider our original tactics and budget for the year, so everything within expectations.And on Sberbank, Rabota again, I don't think they disclosed any incremental, meaningful information. As far as we understand, they tried to upgrade their significantly aged platform. That's their main focus at the moment. And we didn't witness any significant changes or improvements in the operating metrics or any high scale marketing activity as of yet for nothing takes place, no major update here as well.

[Ivan Kim:]

Okay. Thank you very much.

[Operator:]

Thank you. And your next question comes from the line of Svetlana Sukhanova of Sberbank. Please go ahead. Your line is open.

[Svetlana Sukhanova:]

Good afternoon everyone and congratulations on strong results. My question would be on effective tax rate. As far as I recall, you were guiding for about 27.5% effective tax rate for the full 2019. It was higher than a 40% in Q1 and slightly below 40% in Q2. So is it kind of guidance, 27.5% is still on track? And my first question here.And second, would you please elaborate about the reasons for high ETR in the second quarter and how your Russian tax residency has affected your ETR in the second quarter? Thank you very much.

[Grigorii Moiseev:]

Yes. Svetlana, thanks. As I said, I think before we have substantial IPO related costs in Q2, which are non-deductible just because they sort of – it's not possible to relate them to the operating profits of HeadHunter, right? So if we exclude this IPO related expenses, which obviously one off the effective tax rate is 29.5% and that is actually lower than 33% in 2018. So we frankly are on track in this guidance. We gave on the last call, and we expect to achieve 27%, 28% in – for the full-year results, excluding the one off IPO relates expenses.And also on the Russian tax residency, it's actually a lot to increase in the effective tax rate, but on the contrary because the applicable tax rate for dividend payments in our group is now zero percent, that actually decreases the effective tax rates. So it's already accounted for in our guidance. If not for this change, it would be probably 15% higher as this is the applicable rate for the dividend distributions from Russia to Cyprus holding company?

[Svetlana Sukhanova:]

Thank you very much. Of course, it's very clear for me that Russian residency decreases effective tax rate. My question was more if it had any kind of effect on you in the second quarter, Grigorii?

[Grigorii Moiseev:]

Oh I see. Well not in terms of any – I don't know particular amounts we would include in our PML, in income tax, but as we do not include this 15% tax rate on dividends anymore and in the Q2 as well. Of course, it had the impact on the couple numbers.

[Svetlana Sukhanova:]

Good. Thank you very much.

[Operator:]

Thank you. There are no further questions at this time.

[Grigorii Moiseev:]

Thanks everyone.