HeadHunter Group PLC
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to today's Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be the question-and-answer session. I must advise you that this conference is being recorded today on the 18th of March 2021. I would now like to hand the conference over to your first speaker today, Roman Safiyulin. Please go ahead, sir.

[Roman Safiyulin:]

Thank you. Hello, everyone, and welcome to HeadHunter Group fourth quarter and full year 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.

[Mikhail Zhukov:]

Thank you, Roman, and good afternoon, everyone. Last year, HeadHunter celebrated its 20th anniversary. And without a doubt, there has not been a year like that before. COVID-19 pandemic has changed everybody's lives, adversely impacting some businesses and opening up new opportunities to the others. Our business emerged from this backdrop even stronger than ever been. The powerful network effect of our platform reinforced by timely marketing and monetization steps during recovery allowed us to further consolidate the market and significantly improve key operating metrics. In February 2021, the number of CVs on the platform reached a 50 million milestone, and vacancy seats holding on a record level of above 800,000 job postings. Despite all of the challenges, we have not only defended our leading market position, but also accelerated our development in certain key strategic areas through the acquisition of strong regional job platform, Zarplata.ru, and introduction of new consumption partners into our product suite. Now, we see life is slowly getting back to normal, which gives businesses more confidence and visibility. The competition for labor is intensifying in Russia, forcing employers to leverage the most effective channels of recruitment. All these factors, alongside accelerated digitalization, makes us to believe that 2021 will be a really exciting year for HeadHunter.

[Dmitry Sergienkov:]

Thank you, Mikhail. Good afternoon, everyone, and thank you for joining us on this call. I will do quick overview of year-end results, and as usual, have enough time for Q&A. Looking backwards, 2020 by no stretch of imagination can be called a dull year as it turned out to be one of the most difficult, but equally important year in Company history. We once again demonstrated the resilience of our business and our ability to an economic volatility in our favor, hence, coming out of recession even stronger than ever. Our 2020 revenue went up by 6.3% year-on-year, with a full recovery to pre-COVID revenue growth levels by end of fourth quarter. And despite overall challenging year, we progressed significantly on our monetization strategy, switching to a new subscription model, which will hopefully have a long-lasting effect on RPC growth. Our pre-COVID pricing differentiation initiatives became noticeable and made significant impact in Q4, facilitating overall revenue recovery. Throughout this year, we demonstrated strict financial discipline and ability to manage our cost base in line with our business performance. We retained 40%-plus profitability in all quarters, and eventually even managed to increase our annual EBITDA margin compared to 2019. On top of organic growth, we have carried out acquisition of strong online platform in the most untapped market segment, regional blue collars and SMA. In 2020, Zarplata generated revenue of 780 million, which is right on top of the range provided in November. Last year dynamics of our core operating metrics indicate the continuous product development and overall online equivalent market expansion in Russia, despite all the economic headwinds. During 2020, we added more than 6 million net new CVs, sustaining leadership in all Russian regions in terms of new candidate inflow and expanding the gap with competitors. More importantly, we maintained high share of active CVs. 70% of total visible CVs on our platform either applied or were updated over the last two years. So, this database remains very relevant. And as we move to new access monetization, this becomes very crucial. Especially strong trends we see in blue collar worker categories where we have demonstrated circa 45% year-on-year CV growth. As of the end of 2020, circa 35% of all job secured CVs from this category, this just testifies our considerable traction in blue collar market.

[Grigorii Moiseev:]

Thank you, Dmitry, and hello, everyone. Let me first give you some detail on the cost side. As you see on slide 11, in the fourth quarter 2020, our adjusted EBITDA margin has decreased by circa 2 percentage points from 49.5% in the fourth quarter 2019 47.4% in the fourth quarter 2020. As Dmitry already probably mentioned, that was due to the elevated growth in our personnel expenses in the fourth quarter 2020, which I will explain later. At the same time, for the full year 2020, we are able to sustain profitability. Our adjusted EBITDA margin for the full year was 50.6% compared to 50.5% in the year 2019. Let's dive into our key expense buckets in the fourth quarter 2020. Our personnel expenses increased by 33.6% to RUB 808 million, and that was driven by three key factors

[Operator:]

Thank you. The first question comes from the line of Vyacheslav Degtyarev from Goldman Sachs. Please ask your question.

[Vyacheslav Degtyarev:]

Yes. Thank you very much for the presentation. A couple of questions. Firstly, how do you think about the margins, how they’ll perform in 2021 on a like-for-like basis, excluding the acquisitions? Basically, do you think that revenues will outgrow the key cost components being the personnel expenses and the marketing expenses? So, any color would be appreciated here. And also, secondly, how would you assess your market share trends across the blue collar segment in particular? And among the competitors, who do you think are the most active and potential relative share gainer among the competition?

[Dmitry Sergienkov:]

Just to clarify, your question was on the margins for 2021, right? So, we take the guideline on margins?

[Vyacheslav Degtyarev:]

Yes.

[Dmitry Sergienkov:]

Yes. Look, yes, we debated this internally. And I think just at this point of time, we decided not to provide any official guidance on margins at all, right? Because the prevailing environment is still relatively uncertain. It's quite -- I would say, quite encouraging, how things developing, year-to-date, overall. And -- but at the same time, we understand that, yes, we are not out of woods yet. And economy is still experiencing -- certain segments of the economy still struggle. So, we provide quite a wide range for revenue next year and feel quite comfortable with that. For margins, we just preserve, and -- but maybe we'll come back to the market later once we kind of adjust further growth and recovery of the economy. But just from a longer term perspective, I think we always guided towards gradual market expansion, right? It not always happens year after year, because it also, to some extent, a function of combat situation and some upside. It could be at a certain cost upfront. But generally, we expect that margins continue growing as a vast majority of our expenses are not tied to revenue expansion. And on the market share gain, it's always a bit a speculative, right, because our competitors don't report, and all of them actually report revenue numbers. But for last year, we may try to speculate a little bit because it feels quite safe to say that our market share significantly increased, right? First of all, inorganically, we acquired a substantial player. Market share was estimated be around 6% -- 7% of the market. So, that's accretive. And they predominantly operate in the segment of blue collars and regions and among smaller businesses. So, I think that also affected more or less proportionately our share in blue collar. As to the just kind of organic market share evolution, we also believe that we are gaining market share, and there are clearly two players who are significantly outperforming the others, right? It's us and Avita. And we look at their dynamics. Because effectively, almost the entire business of Avita is targeted at blue collars, right? So, we're actually not splitting out any revenue streams or vacancies, while our business is kind of split into blue and white. And if you look at our blue dynamic that is clearly outstripping white collars, right? And even if you look, for example, at the job posting dynamic, revenue dynamics in Q4, it was 32% up. And I can tell you that if you are going to split out and look at only blue collar vacancies, that growth rate would be almost twice as high. And I believe it sits relatively comparable to what Avita is experiencing for the last few months, quite a dynamic growth. So generally, the other players, we don't see that they're growing anyhow close to this before seems like we are gaining.

[Operator:]

The next question comes from line of Ivan Kim from Xtellus Capital. Please ask your question.

[Ivan Kim:]

Two questions from my side, please. Firstly, can you just maybe comment on the revenue growth that you were seeing in January and February, which will be more sort of pre-monetization kind of growth because the pricing comes later this year than last year? And then, my second question on the marketing, specifically. If you can talk about what to expect in terms of marketing to sales in '21, given that the marketing budgets of your rivals remain fairly high, but also your revenue grows a lot. So, any comments on that will be appreciated. Thank you.

[Dmitry Sergienkov:]

Yes. Just a few words on the year-to-date performance. We started all this year with exceptionally strong performance across virtually all market segments and products. We noticed acceleration compared to December quite significant, while December was the best month in 2020. And now, we also see that, effectively, February is better than January, and March is stronger than February. So, we kind of noticed month-over-month growth acceleration across all segments. I wouldn't provide specific any numbers, but I think from our guidance, you may kind of read that we would expect -- what kind of numbers we expect for the whole year. And we, at this point of time, feel pretty comfortable within this range. We see that the main kind of growth drivers for this outperformance is just accelerated kind of shift to online from small and medium businesses, and their consumption of our job posting product, and also constantly improving consumption of Key Accounts driven predominantly by monetization. And also, it's kind of side effects from our introduction of our CV device monetization last year because we see Key Accounts started consuming more vacancies than they did before the introduction. Just they're trying to save on contact somewhere. So, we believe that these both factors there quite robust. We don't expect them to significantly roll back over the year. And as you rightfully said, we effectively not increased prices yet. And we plan to do so from April, the first, almost all products prices would grow by 10% or around 10%, some products a bit more, but not less. That's on the first question. On the second, as you know, we were not big sense of kind of guiding on marketing strategy, right, especially at the beginning of the year because we see that you mentioned competitors investing. They keep investing in this business. Because they also see that the economy is recovering and the market is growing, and so, we do. And at this point of time, it's within our expectations and budgets. We retain some flexibility throughout the year depending on our top-line performance, so increased or decreased marketing spend. Generally, a lot of our expenses are discretionary. So, it will be just a reflection of first, the competitive environment; the second, our expectations on kind of return on investment, right, because we increased marketing in the second half last year, actually defining regardless of competition just because we saw that that's a great potential for us to boost revenue growth. So, we’ll see how the market develops this year, and maybe we will also just follow the same strategy. For us, the priority would be just driving revenue growth, first of all, but we don't expect the margin fall below 50%.

[Operator:]

Thank you. The question comes from the line of Dmitry Vlasov from WOOD & Company.

[Dmitry Vlasov:]

So, the first question is on your strategy. When do you see -- when do you expect prices for small and medium enterprises to increase? When do you actually start -- expect to start to see some monetization opportunity in those accounts? And the second question is on other segments. When do you -- when would you expect to start to see monetization of your users? And when do you expect to start entering new segments? Thank you.

[Dmitry Sergienkov:]

Thank you, Dmitry. Well, actually, we -- in SMA, we have already been seeing constantly enhancing monetization and growth and average check, right? At the time when you see kind of outpacing customer base growth in this segment, obviously, the average RPC may go down. But if you kind of split up and look at the historical vintages, almost in all vintages, you see healthy growth, around 20% plus, even in small and medium, although it's not our main target for monetization. It's not going to become our main target for the next two to three years because we see much higher potential, monetizing bigger clients with bigger consumption just because at this point, they disproportionately can use more and cheaper use our services. And they can definitely pay more for the value that we provide. But for small accounts, we -- I think we already started a few years ago, a little bit more aggressive monetization, and we didn't notice any churn. So, I would say that they also contribute to overall RPC dynamics. And in terms of new market segments, well, we have strategy, right, where we say that it's one of the three major growth pillars of our business, expansion of portfolio. And we already invested in HR automation products where we see significant potential. We believe that that market is just effect scratching surface. And the growth in the segment of HR automation will be a long lasting, and we should definitely take a significant role in this opportunity. We look at other areas, specifically now we look at very attentively at temporary market, because it's driven by some legislation changes, and it's probably one of the most dynamic markets, and we definitely also want to be present as a significant player in the space. But I think we're constantly monitoring. We're just trying to find the right way, whether we do it internally or acquire the right platform to start with. And in the shorter term, I think HR automation is the area where we've actually made steps and we see some early benefits.

[Operator:]

The next question comes from the line of from UBS.

[Unidentified Analyst:]

I have a quick question on your leverage. Do you expect it to go down this year on the current 1.2?

[Grigorii Moiseev:]

I think it would kind of depend on whether we are acquiring any new debt or making any M&A projects. So, it's kind of hard to say definitely. Provided that we are not, I would say that the leverage would go slightly down as we make these regular payments for that, and also as the EBITDA is increasing in 2021.

[Operator:]

The next question comes from the line of Miriam Adisa from Morgan Stanley.

[Miriam Adisa:]

Just two questions from me. Firstly, just on your personnel costs. I mean, I know you're not giving any specific margin guidance, but any color you can share there on how you're thinking about hiring for this year, and if there needs to be another big step-up from Q4 level? And then, just on Zarplata, if you could just give a bit more color on the business? I know you mentioned the strong current trading. Is there anything specifically to call out for the Zarplata, or have they seen the same trends as for the broader business? And then, also just to confirm that you're also going to be putting up prices in April on Zarplata as well with -- in line with the rest of the group? Thank you.

[Grigorii Moiseev:]

Miriam, this is Grigorii. I think, on personnel expenses, as Dmitry already mentioned, we are kind of not officially making guidance on expense buckets, because to some extent, it is kind of moving towards during the year, depending on what we see in terms of revenue development, competition situation, et cetera, et cetera. Probably, I wouldn't say that there's a kind of specific plan in place to significantly increase headcount or salaries in the Company, right? I would also say that the -- our major investments in personnel would probably lie in our development team for the 2021. Yes. That probably is the strategy.

[Dmitry Sergienkov:]

I'll take the second and third. Hi, Miriam. On Zarplata, what we see now that they also recovered, and they perform quarter-to-date stronger than before in the fourth quarter. A little bit lagging, I would say, group average dynamic, and that's kind of reflective of their market position. I think, it's a good example of a smaller player operating in today's environment compared to a much bigger company, like HeadHunter. First thing. And second, as our competitors, Zarplata used to utilize that tax benefit, particularly non-VATable. They were selling non-VATable licenses that became VATable this year. So, that made also a certain effect, of course, some clients of the Zarplata who can actually deduct that from their taxable income, right? And so, that limits to a certain extent monetization in this year. But same problem faced by all of our competitors, I think, besides Avita, because it's just us and them who actually never sold the license. But generally, we see that in February, they're already kind of returning to growth. And now, they are more or less operating within the budget that we agreed. In terms of prices, they have a slightly different cycle. We are trying to align it now. And that's a kind of first priority in terms of our integration process and roadmap, because we see a lot of potential cross-sell and Zarplata product across our group, and also align some extent our products in terms of pricing. I think that will be clearly our high priority for the second quarter. And some results and synergies would be hopefully absorbable in the second half this year. But, they also plan to grow prices and even more aggressive than what we budgeted originally for HeadHunter.

[Operator:]

The next question comes from the line of Maria Sukhanova from BCS. Please ask your question.

[Maria Sukhanova:]

I have question about automation, HR automation segment. Could you please update us what happened in 2020 to use a base or like revenue trends of Skilaz and use a base of Talantix. I'm just wondering whether you saw any strategic benefits like, for instance, with group of specializing companies, like using more of the services, something like that, or it's more like the services were pressured by the macro environment? And probably, what are your -- if you could voice it, what are your plans for 2021 for, for instance, Talantix, in terms of monetization? Thank you.

[Mikhail Zhukov:]

Thank you, Maria. I'll start with Skilaz. We're very pleased with the Skilaz performance last year. I wouldn't say that the environment and circumstances helped them a lot, to be honest, because the second quarter was almost lost in terms of revenue. They were severely under budget. And obviously, companies, they try to put all expensive programs on hold with the lack of visibility in the second quarter. So that affected effectively their kind of client base penetration. Although the need for our clients to automate and kind of go on remote interactional increased, they just didn't receive approval for budget expansion. So, the second quarter was very challenging, but they -- effectively, they managed to recover that second quarter -- and the second and third and fourth, especially. And they managed to double their revenue base. They managed to double their client base. And it's actually almost reaching their original budget targets. For this year, we'll have -- we will consider acquisition -- consider the additional control in Skilaz while also option exercise later this spring, and because we have actually time until end of June. But so far, we're very pleased. And also, we identified a lot of synergies between our sourcing products and their processing products, so not always standalone revenue performance, it’s also about boosting kind of cross sell our services to clients. As to Talantix, same -- it's probably the same problem, but just kind of smaller scale because Talantix is gated. So, it's midsized segment, which was under the biggest pressure due to pandemic. At the same time, in the first year of monetization, Talantix managed to gain around 400 paying clients, which is a pretty good result. We never consider Talantix as a significant revenue stream, to be honest. And just monetization launch was more to just crystallize client base. It's more the stickiness. So, in this mid segment, it's more about data flowing through the funnel. And from that perspective, we see Talantix as very strategic. But we don't think that you -- that Talantix will become noticeable in our P&L, while Skilaz hopefully will, over time. And generally, we saw that the need in automation and some restrictions on kind of offline interactions happened during pandemic, just gave a raise and client interest, and that should help us sell these two products this year.

[Operator:]

Dear speakers, there are no further questions at this time. Please continue.

[Roman Safiyulin:]

Thank you, everybody, for joining the call. And take care. Bye, bye.

[Mikhail Zhukov:]

Bye, bye.

[Grigorii Moiseev:]

Thanks. Bye.

[Operator:]

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.