HeadHunter Group PLC
Q3 2020 Earnings Call Transcript

Published: 20 Nov 2020

[Roman Safiyulin:]

Hello, everyone, and welcome to HeadHunter Group’s Third Quarter 2020 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. A press release containing our third quarter 2020 results was issued earlier today, and a copy may be obtained through our website at investor.hh.ru. Now I will briefly walk you through the Safe Harbor statements. These discussions 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.

[Mikhail Zhukov:]

Thank you, Roman. And good afternoon, everyone. Welcome to today’s call. We believe that our performance in the third quarter confirmed the statement that efficient remote solutions in such an important function as recruitment are vital for any enterprise. During this challenging year, we managed to grow our customer base serving almost 290,000 companies all over Russia and the CIS since the beginning of the year. Many of our clients have adapted to remote operations and now conduct hiring entirely online. Importantly, our timely recovery measures helped us to gain market momentum and accelerate growth, even despite the impact from the second wave of COVID-19. We are great to see all customer segments return to expansion and keep improving week after week. This gives us confidence that once we are finally out of routes and businesses regain confidence in future. We may reach our strategic targets even faster than we thought before the crisis hit the market in March. Now I’ll turn the word to Dmitry to walk you through the key highlights of the third quarter. Thank you.

[Dmitry Sergienkov:]

Thank you, and hello everyone. As Mikhail said in the third quarter, we continue and demonstrating a steady recovery across all major operating and financial measures. And it was done against the backdrop of continuous economic volatility. And specifically in terms of new CVs inflow we saw further improvements with double-digit year-on-year growth. Total number of CVs on the platform reached $48 million indicating net acquisition of circa 6 million CVs since the beginning of the year. And this new active audience acquisition coupled with our certain product improvements result in a growing number of applications I can see, which is one of the main efficiency criteria for our clients. And so we’ll enable our forward monetization improvement. Audience growth is vital, especially if put in the context of a rapidly recovering the employer activity until the beginning of September, the average daily number of job postings on the platform hold an historical high range of circa 720 – 740,000 vacancies. And again, that was despite the kind of worsening COVID-19 situation in autumn.

[Grigorii Moiseev:]

Thank you, Dmitry, and hello everyone. Let me give you some detail on the expenses and margins. In the third quarter of 2020, total operating expenses grew 8% year-on-year. This was primarily due to expenses related to our SPO, which occurred in July 2020. Our total adjusted operating expense, which excludes IPO SPO-related expenses equity-settled awards and other non-ordinary items were actually flat in the third quarter 2020 compared to the third quarter 2019. For convenience, we actually added to the adjusted operating expenses reconciliation table in our press release from this quarter and I will refer to the adjusted operating expenses in the discussion goal. So as I said, total adjusted operating expenses reflect year-on-year and this was the combination of several multidirectional factors. First, our personnel expenses adjusted for equity-settled awards and one off SPO-related expense $561 million, which was an increase by circa 9% year-over-year, mostly due to indexation of wages in the beginning of 2020, and an increase in headcount to 800 employees in the third quarter 2020 compared to circa 760 people in the third quarter of 2019. In 2020, in the third quarter, as we saw operating and financial performance during back on track, we have resumed usual bonuses for our employees, as well as listed our hiring spend however, some personnel expenses such as corporate events and trainings or education or still on hold partially for natural reasons. And now moving to marketing expense, as you saw from the release in the third quarter of 2020, marketing was to RUB235 million, which was decrease by a circa 20% versus marketing in the third quarter in 2019.

[Operator:]

Your first question comes from Ivan Kim from Xtellus Capital. Please go ahead.

[Ivan Kim:]

Yes. Good afternoon. Two questions from my side, please. Firstly, on the revenue growth trends lately, so can you please talk about the revenue growth trends in October, November, what you’re seeing? And then secondly on the IT industry taxation changes, is there a more clarity how these changes will reflect on your business and maybe also your business vis-à-vis your rivals? Thank you very much.

[Mikhail Zhukov:]

Thank you, Ivan. I’ll take the first one. I think Grigorii will deal with the second. On the revenue trends, looking at our quarter to date numbers, we can kind of reaffirm our previous guidance given at the last call for the fourth quarter. We expect a solid double-digit growth, revenue. And we actually expect this double-digit growth across all market segments. We actually see a very strong trend in recovery and growth in our key accounts both in regions, especially in regions St. Petersburg and Moscow, growing already over 20% year-on-year. And also quite pleased that are kind of lagging most probably marketing area of our business was kind of hit the most during crisis Moscow and St. Petersburg small and medium businesses, they also started growing pretty nicely already almost reached a double-digit growth. So, we’ve kind of reforming guidance and believe that yes we kind of tracking our regional expectations pretty comfortably. And I hand over to Grigorii to answer the second question.

[Grigorii Moiseev:]

Yes. Hello, Ivan. As you know these initiatives were actually enacted and they are effective from January 1, 2021. This includes reduction in the income tax and social taxes as well as elimination of 0% VAT rate on software unless some criteria unmet. I think what’s important kind of for our industry is that the legislation actually contains a specific provision in relation to the VAT rate, which says that in case the software is used effectively for kind of right in the platform, right two-sided business such as ourselves then this effectively is not the kind of activity, which is subject to 0% VAT. So we believe that the legislation actually clarifies that online recruitment is not entitled to a 0% VAT. So from this position, we think that the competitors will need to adjust for this new legislation from January 1, but honestly speaking we do not have the kind of confirmation or some definite information that they are the companies like SuperJob, for instance, who are using the 0% VAT exemption. We’ll move to 20% VAT rate from January. We’ll have to wait and see how their process will change. Also as you probably heard and we know that that there are ongoing discussions between the community and the government on expanding the 0% VAT rate on – effectively on platforms such as ourselves I think as well. And probably we will have to see how this course will also ultimately turns out.

[Ivan Kim:]

Great. Thank you very much. Nice to see recovery in fourth quarter.

[Operator:]

And your next question comes from Vyacheslav Degtyarev from Goldman Sachs. Please go ahead.

[Vyacheslav Degtyarev:]

Yes, thank you very much for the presentation. How do you directionally think about the trade-off on revenue growth and margins going into 2021? So, basically, next year should be good in theory from the growth standpoint of the very low base of 2020. Now I look into support that growth with high marketing and potentially product investments, just any thoughts directionally would be helpful how to think about the margin set for the next year. And obviously appreciate there is no guidance and lots of moving parts here. And also, secondly, can you highlight the new recruitment trends, you see emerging on the back of the pandemic, if any. And how are you positioned for them technologically or simply do you think that COVID is having a net positive for, and net negative effect on the business over the long run? Thank you.

[Grigorii Moiseev:]

Yes, Vyacheslav, this is Grigorii, probably or maybe Dmitry will add to it later. We are currently in the budgeting process for 2021 and I think it’s kind of bit earlier to give any even directionally, maybe kind of information on this topic. Also I think you’re right about the revenue goal for the 2021. But at the same time, there’s also an effect of the kind of low cost base for 2020 when – as you know we’ve some cost savings rates. And apparently, this will give some pressure over 2021 growth as well.

[Dmitry Sergienkov:]

Hi, Vyacheslav, this is Dmitry. On your second question, look, I don’t think we really noticed any incremental trends that we have noticed before during the first wave of the pandemic. And I think we’ve kind of, to some extent, we are reaping the rewards from our investment into the technology and product and platform diversification, that we started three, four years ago, right, when we kind of redirect our product and marketing efforts towards this newly emerging Bluecore segment, which accelerated during the crisis. And now we’re are seeing our effective job postings in Bluecore area growing 40% year-on-year and already reaching nearly 50% of total content items. So obviously, the pandemic helped this market actually transit faster to online. And hopefully, once they adopt the new kind of – new services, they will kind of remain in online, right, because the efficiency of online services are way higher than offline. So from that perspective, that’s kind of the most tangible influence from the pandemic in a positive way, right. In the negative way, we all know, right, because obviously the virtual can grow faster if business had kind of higher confidence in tomorrow. And also, there are certain kind of patterns from our clients that we are still digesting how sustainable they will be in the longer run. First of all, remote work, right, the remote work area arrangements because we see that now when clients, they either decided or considering remaining, partly kind of hybrid – partly remote forever, right. And that’s completely different. I’ll say the pattern, and that requires certain product solutions on our end as well. And that’s why we decided to – we do interviews, we decided that we really need to pay higher attention to contemporary workers, especially considering legislation changes, right. And also see our competitors, moving in this area, we believe that that’s a big opportunity that we’ll be able to spurred by the pandemic and also legislation development. So far we really see kind of more benefits for the longer run development. And this is why Mikhail mentioned in the beginning remark that we may actually reach our kind of penetration targets faster than we had thought a year ago.

[Vyacheslav Degtyarev:]

Okay. Thank you very much. All clear.

[Operator:]

And your next question comes from Kirill Panarin from Renaissance Capital. Please go ahead.

[Kirill Panarin:]

Yes. Hi, everyone. Thanks for taking my questions. Two from me, please. Firstly, on competition, it looks like some competitors have caught up with HeadHunter, in terms of listings and have been showing materially higher growth rates. So could you comment on the competitive dynamics? What’s happening with your market share? And do you see any implications for growth and margin outlook? That’s the first one. And then secondly, just a quick follow-up on your comment around marketing costs in Q3. Could you talk a bit more, why did you decide to spend less on marketing? I thought you were previously talking about the plus to be quite aggressive during the market recovery in order to catch some extra market share gains. So just trying to understand why it wasn’t the cash in the third quarter. That’s it. Thanks.

[Mikhail Zhukov:]

Thank you. I’ll answer the first one. On competition, well, first of all, as you know, listing numbers there, they are good indications, but they don’t really provide the full picture, right. Because they are much more volatile and the easier to kind of influence in the shorter-term, then for example, revenues. But talking particular, in terms of listing dynamic and vacancies, first of all, as you saw, we kind of reached a historic high number of inventories on our platform, right. And we already kind of beyond the levels we saw pre-crisis. So that’s good. And that was held by, as I said, by blue-collar acquisitions. In terms of kind of relative performance, we don’t really think that, any of our competitors are catching up in terms of listings for the longer run, because – I’ll try to explain it. Obviously, you may actually be referring to other names, but I think, first of all, we’re talking Avita and then Superjob here, right? I think on Avita, it’s – to some extent it’s actually two factors as we understand, they definitely demonstrate a pretty strong dynamics over last three months, three or four months. And the first reason why was that they dropped – they collapsed during crisis. As you know, their business is hugely skewed towards blue-collars. This affects 100% blue-collar of our skew. And their inventory in that area actually drove more than 50% during crisis. So it was a hugely global base. And obviously it was a kind of faster recovery, right. And we see this in the blue-collar area as well, right. But our numbers are kind of average, including, white-collars who were kind of proved to be much more resilient during crisis. And that was the first thing. The second, Avita historically and always – three or four years when we basically launched the monetization in jobs, they always have a big numbers during summer season, right, just because they present quite strongly in Engro and HoReCa. So effectively there are two factors, a low base and the kind of rebound in just the summer season. And we expected them to kind of normalize overtime. And even if you cut last month dynamics was already kind of declining somehow around 10% and we expect it to go further down. So that’s on Avita and we don’t really think that they are gaining market share. In terms of blue-collars, they’re probably on par with us, but they are not present in white-collars at all. In terms of Superjob, that’s a kind of traditional – quite traditional trick. We sold this last year. If you remember, end of last year, circle half of Superjob content is really generated by a few thousands of clients, right? 20 top clients. If you look at our vacancy base, top 20 clients contribute maximum 15%. So it’s much more robust diversified and sustainable in the long run because once you kind of loss this content, Superjob always show the kind of plummeted dynamics. We saw this in January, February, right. And we expect it to go further down from today’s level as well. And we already see this trend, was already kind of off-peak. And also we don’t think actually this dynamic is somehow linked to the revenue performance because there are definitely some monetization as past things involved. I don’t know if I answered your question sufficient. Otherwise I’ll handle over to Grigorii.

[Kirill Panarin:]

Yes, you definitely did. Yes, you did think so. Yes. Just comment on marketing spend in Q3 will be helpful as well. Thanks.

[Grigorii Moiseev:]

Yes. Thank you. It’s Grigorii. Well, basically we are definitely not kind of reduced on our step in our marketing activities. For instance, in September, specifically we are already comparable with the last year level in terms of the TV ads spending. I think it’s – to some extent it’s kind of optical we’re seeing here in the third quarter. As we’ve told you that the – we would like to invest more immediately after the lockdown ended and we’ve done it. So in Q2, we spent more on TV specifically in May, when we usually spent virtually nothing just because it’s a very sleepy holiday month. And in this year, it was the opposite we spent a lot more than I usually per month in this specific month of May. And, therefore it just turned out that kind of first half of the year expense is rather high. The question is how we kind of allocate around the subsequent months, right. And the decision that we will probably slightly reduce August and then go back on track from September and, we now are going to spend, I think well significantly more, I don’t think I have to disclose how many much specifically, but we are going to spend more in Q4 on TV than we did in the third quarter. And I think as we disclosed in the release, as a result total spent in the second quarter will be comparable to the last year. And we will have some growth for the full year results as well.

[Kirill Panarin:]

Okay. That’s clear. Thanks a lot.

[Operator:]

Your next question comes from with Dmitry Vlasov from WOOD & Co. Please go ahead.

[Dmitry Vlasov:]

Hi, thank you. I have two questions. So the first one is, just taking into account your large user-base, are you actually looking to expanding to other complimentary segments like freelancing or online courses to sort of monetize the base? And the second question is follow-up on Kirill’s question on competitors. Basically, maybe if you could provide some color on market share because we’ve noticed they specifically increased their marketing budgets during 2020, especially on the TV. Just interested if there was some success there, are they gaining or not? Thank you very much.

[Dmitry Sergienkov:]

Yes. Thank you, Dmitry. I will answer the both questions. First, yes, you’re totally right. Kind of expansion beyond our traditional markets been always an important part of our growth strategy, right. Maybe not in terms of revenue in the shorter-term, but in terms of longer-term growth runaway and we are all on a kind of constant lookout for opportunities, specifically on freelance, we look at this two years ago, we decided the market is not really sizeable in Russia and you can’t really kind of build up anything sizeable on our kind of grand scheme of things. And in terms of education, clearly it’s a kind of strategic area for us, and we had been discussing with number of potential partners and targets for a certain time. And I can’t really give you the timing, but you can kind of put an X for five years have quite high confidence that we may actually be present in the space because it’s also quite synergetic to employment and that’s growing, that’s quite potential, quite sizable. In other areas as well, like automation for example, with temporary workers, as I mentioned onboarding in other areas, they definitely will be paying high attention to these areas and dealing with that either via acquisitions or internal in-house development. Both our share, similar to other players shares to be honest, the last report that we can manage commission kind of assessing market shares was the time of IPO. And then since then, I don’t think there is a really good financial numbers for many of the players. Therefore we kind of try and find any proxies that could be good indicating revenue market share dynamics. So, first of all, we’re looking at traffic and content. And both we obviously seeing them as the most active spender in the market for certain time, with certain breaks by the way, but, I think they probably spend the most this year and we see them quite active both in all channels, effectively offline, in digital options. We see them invested quite a lot on mobile app downloads, right and accumulating certain installation base. But what we also see that the majority of this installation that kind of incentive based, they paid and we access that actually results in quite low audience engagement afterwards, right? So, because clients are not buying installation piece, right? Well, it could be used as a marketing environment of course, but in the end, clients are buying the delivery of relevant candidates. And if you look at our both kind of active audience dynamic, you’ll see that kind of level of engagement of their audience compared to their installation base is extremely hard compared to head under, because we effectually, half of our installation base translates to our active audience monthly, right? And that actually delivers and generates efficiency for clients. And we don’t see the same dynamics by far needed from where both are now working also invested quite a lot of installations. Before we were not seeing them catching up and that’s why we’re not seeing them kind of grabbing revenue market share. It’s all, at least now. We all understand that these operating KPIs could be a leading indicator for future. That’s why we’re tracking them, right. We are making conclusions and also responding in terms of marketing and products, but so far, there’s no reason actually to see that there, in terms of kind of candidate delivery metrics, that they are gaining any market share from us. That this – it’s our comprehension.

[Dmitry Vlasov:]

Thank you very much. Very useful.

[Operator:]

And your next question comes from Anna Kurbatova from Alfa Bank. Please go ahead.

[Anna Kurbatova:]

Good afternoon everyone. Thank you very much. My question is on your pricing policy effort could you make some comments, do you feel comfortable or not feel comfortable with – from efforts in the beginning of the next year or in general, what’s your expectations and enrolling with regard to coming months? So thank you.

[Mikhail Zhukov:]

Thank you, Anna. Well, I hope, I got the question, right, because the connection was not perfect. But I understood that you were going to ask him about the pricing strategy, especially in the beginning of next year. Right? Our plans, as we mentioned in the last call, actually grow prices – across neutrally all products next year. Despite the recent introduction of your subscription monetization model will most likely not to grow a subscription prices in pure access, not bundles, but for other products, we plan to raise prices. And we’re going to discuss this with our Board of Directors, end of this month as a part of our budget composites. And most likely given we already announced significant pricing initiative few months ago. We don’t want to be kind of heard too often on the – from this perspective by our clients. So most likely we will do those price raises starting from Q2, probably from April. And obviously that will be subject to the economic situation, because now we’re kind of all gaining more confidence, right, while the vaccine and overall economic recovery. And if, actually it continues this way, then we’ll get higher confidence that we actually can put push ahead with and kind of put higher prices – significant higher prices, but they’ve not. Obviously we are first of all – we are targeting in this environment when we see a lot of inquiries in the market. We’re targeting kind of our share in total client base and the form that what we are selling for. but considering today’s dynamics, represent kind of mobile price raises from April next year.

[Anna Kurbatova:]

Yes. Thank you. this is really very clear. thanks.

[Operator:]

Your next question comes from Ulyana Lenvalskaya from UBS. Please go ahead.

[Ulyana Lenvalskaya:]

Hi everyone. I have a question on average revenue per customer, especially from this segment, could you please comment on where you see it in the fourth quarter? Is it correct to say that you expect that it will result in growth? And the next question would be on regions. Could you please comment a bit on with what you see there, which regions perform best? That’s the one. Thank you.

[Mikhail Zhukov:]

Yes. Thank you, Ulyana. On average, it’s always – this check dynamics is always impacted by our customer base growth, right. because we don’t – like in many occasions we’re acquiring clients, who were any kind of lower average check, right. So, you may see similar to this quarter, you may see kind of a total dilution of average check, especially in small, medium category. but that is getting well-compensated by a customer base expansion. and what we see now that’s quite a strong growth in customer base. And therefore, I wouldn’t actually give any guidance for the fourth quarter in terms of ARPC. You may actually see similar numbers that you’ve actually already seen in the third quarter and the revenue growth will be higher and we believe that both on kind of the accounts front and on small and medium businesses front, we will see a revenue expansion, but I would kind of not command on the ARPC trajectory now. And in terms of growth in certain areas, we actually see a pretty strong growth in all regions, Nashville with certainly regions to kind of hit harder by the economic restrictions, which they are kind of underperforming for example, in Siberian. but those regions, who came out earlier from the – from lockdown or there was never any lockdown in the regions we saw stronger dynamics. but generally, across the board, our regional clients, they’re performing stronger both key accounts and small businesses in the regions outside of metropolitan areas.

[Ulyana Lenvalskaya:]

Thank you.

[Operator:]

And there are no further questions at the moment. and we’ve received no more question requests.

[Mikhail Zhukov:]

Thanks, everyone.

[Grigorii Moiseev:]

Thank you for the call.