HeadHunter Group PLC (HHR) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2021 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. Please be advised that today's conference is being recorded. 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 first quarter 2021 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. A year ago we were at the point of great uncertainty and couldn't imagine how much stronger our business would emerge from this crisis. So today, we are especially happy to deliver a solid set of financial and operating results. Positive market trends this year keep driving business' confidence up, resulting in ever-increasing competition for labor. In this environment of short supply, employers have to allocate budgets towards the most effective recruitment channels. And that is why we see over 1 million active job vacancies on our platform right now. Recently, we consolidated our ownership in HR tech company skills, which we believe would result in further expansion of our business beyond job advertising. Finally, as we have seen fundamental trends strengthening, we are significantly upgrading our growth guidance and I also would like to reward our shareholders with a 75% of 2020 net profits to be paid in dividends. Now, I'll turn it to Dmitry, to walk you through the key highlights of the first quarter.
Dmitry Sergienkov: Thanks, Mikhail. Good afternoon and thank you for joining us on this call. Overall, as Mikhail said, we’re very happy to report an excellent set of results in Q1. Our revenue was up 43% year-on-year, even despite a relatively limited low base FX set for the quarter last year. Growth rates accelerated significantly compared to Q4 across all client and product categories.
Grigorii Moiseev: Yes. Thank you, Dmitry and hello, everyone. In the first quarter of 2021, our total operating costs and expenses increased by 37.8% compared to the first quarter of 2020. Almost half of this increase is related to consolidation of Zarplata. Going by the each bucket our personnel expenses increased by 45.5% compared to the first quarter 2020. Most of the growth in this bucket came from our main business where we increased our headcount by circa 8% or 68 people over the last 12 months. As usual, this new hiring was mostly in our development and sales functions. However, it was smaller than in the same period last year due to COVID-related hiring freeze in 2020. We also have increased wages by circa 10% in the second half of 2020. Additionally, Zarplata segment has driven approximately one-third of the growth in our personnel expenses in the first quarter of 2021. We also had the COVID-related cost-cutting initiative in the first quarter of 2020, which saved us approximately RUB 35 million through reduction in bonuses and -- which is not occurring in the first quarter of 2021 and thus also contributes to the growth in our personnel expenses. As a percentage of revenue, our personnel expenses excluding share-based compensations and other items have increased in the first quarter of 2021 by circa one percentage point to 27.5%. This was a result of a decrease in personnel expenses as a percentage of revenue in our main business which was offset by additional Zarplata segment in which personnel expenses as a percentage of revenue is higher as well as COVID-related savings in the first higher as well as COVID-related savings in the first quarter of 2020 not occurring in the first quarter of 2021. Moving on, our marketing expenses increased by 39% compared to the first quarter of 2020. More than half of this increase was attributable to Zarplata consolidation. Marketing expenses were 15.5% of revenue, a slight decrease compared to 16% in the first quarter of 2020. This was similar to personnel expenses a result of a decrease in marketing expenses as a percentage of revenue in our main business, which was partly offset by additional Zarplata segment, in which marketing spend is higher as a percentage of revenue in general and also skewed towards the first quarter in this year in particular.
Dmitry Sergienkov: Thank you, Grigorii. We're pretty excited to announce the acquisition of additional 40% stake in Skillaz. This week, we finally triggered our rights that we received at the time of the original transaction two years ago. We had the pretty convenient final decision time line or which Skillaz without help expanded their revenue base by almost 10 times and evolve from a promising technology start-up to one of the leading SaaS platform in the market. We acquired 40% in Skillaz from various financial investors for RUB 623 million, a building company at circa RUB 1.5 billion and planned over 60% discount to HeadHunter revenue multiple. So the implied price is quite attractive due to the way we structured the Co-option. Post-closing, HeadHunter will own 65%, while the remaining 35% will stay with the founder and the CEO. To remind you, Skillaz develops a cloud-based HCM software allowing it to automate many integral parts of the recruitment process and significantly improved speed and cost per hire. This product strategy, Skillaz target large enterprises with complex recruitment processes and high customization demands.
Operator: 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. Couple of questions. Firstly, can you share your thoughts how much of the recent spike in vacancies is attributed to a temporary one-off factors, like the lack of migrants for example? And how much of the structural developments like the -- like demographic problems in Russia or digitalization across the industry that is happening on the back of COVID? And my second question would be, if you can elaborate how you approached the addressable market definition basically this RUB 10 billion opportunity for Skillaz? Thank you.
Dmitry Sergienkov: Thanks Slava. I'll take these questions. On the first one kind of trying to decompose this the outperformance happen in Q1. Well first of all circa 10% growth is driven by Zarplata consolidation, right? And is -- in our estimate around 5% growth due to low basis debt that kind of was said two weeks last year on the end of March. The rest is in our view is gaining growth. And largely that is caused by intensifying competition for labor and just general online market consolidation. You rightfully mentioned that -- actually the market is not really driven now by the kind of existing lease balances. We believe that they are quite, I would say, fundamental and well entrenched and long lasting. Because at the moment, of course, the market has kind of misbalanced and unprecedented employer activity and reactive shortage of the candidates, we see business confidence generally is going up on the back of vaccination rollout and just general growing consumer activity. So, a lot of demand from new economy, especially for low-skilled labor, such colliers, drivers, et cetera. And so, employer activities in January in our estimate grew by circa 60%, while candidate activity grew by single-digit the same time, right? So the major trend that is kind of behind this and why we believe, it's quite fundamental is a kind of negative demography prevailing in Russia over the last 10 years. That was kind of amplified by the kind of alterations caused by lockdowns and the current situation, employment population, especially in certain categories like 20-24 age declined by whopping 50% over 10 years. In the age 24-25, the decline was circa 25%. So, this is actually the core labor force, the target of the new economy, right? And obviously, the demand that is coming from the mobility from e-commerce. They're mostly the target in these categories that are in the sharp decline. And now, you -- as you also mentioned, you're adding to this circa million immigrants all four that hit the contraction industry first of all but also e-commerce, and new economy. And also, there's a general of employees. We see the job in this environment. So probably that will kind of, roll back over time. But the overall macro and demographic situation, I don't think it will change. And we're probably just entering the phase of a very kind of candidate-centric market. And so, that is kind of forcing large companies advertise a bigger number of vacancies more intensely use new channels and its immediate turning to online in kind of expedite manner. And so we see this kind of structural tailwinds. And some of it may actually disappear over time as the kind of situation normalizes, right? And employees become more -- again, more willing to leave, but the vast majority of course, will stay for some years. That's the answer to the first question. And second the addressable market. We actually did a certain kind of bottom-up research. We look at the companies in the market their profiles. We kind of created their target profile for systems like Skillaz caters. So we ended up having circa 1,500 companies, kind of the biggest 500 from every K list, and then somewhat smaller but still quite big enterprises. And we look at their existing solutions and the potential kind of average check that these companies could pay just for the best example in the industry, right. Because we see actually how Skillaz as effects improves costs be higher at the company. So we believe that the others would just follow suite. So strictly we just did it bottom-up, multiplying the number of clients by average check. So we end up having this RUB10 billion. In our view it's quite a conservative estimate we believe that this total recruitment spend would grow further cost. We applied to a pretty small check. I think the check would be even big over time.
Vyacheslav Degtyarev: Thank you very much.
Operator: Thank you. The next question comes from the line of Stephen Ju from Credit Suisse. Please ask your question.
Stephen Ju: Okay. Thank you so much. So will you talk about the overlap of the Skillaz client versus the HeadHunter client? It seems like the overlap should be among your -- perhaps the larger key accounts. And I guess from an integration perspective, when do you anticipate that your salespeople will also begin to sell the Skillaz product as well? Thank you.
Dmitry Sergienkov: Thanks Stephen. This is Dmitry here again. In terms of overlap, it's actually 100% overlap because they really target the blue chip clients. And we think very small exemptions. We actually serve that market in its all entirety. So we don't expect the any clients over Skillaz to not using basic HeadHunter services. It's rather actually more for us to upsell Skillaz product. We actually been working with Skillaz for two years already right? We I think quite in good shape in terms of understanding the differences between selling our marketplace and access product versus SaaS product and automation product because the later actually requires quite a lot of client work for maybe months or two. Although even technically it's a lot of automated on the Skillaz side as I said, but still it actually requires a very strong customer success team. So from that perspective I think it would be up to Skillaz to build up that capability mostly, and we see our sales force rather as lead generation for Skillaz, right, because we have pretty deep end client dialogue. We understand their needs. We identified the need first. And then we transfer that to a very professional, very focused to own SaaS sales force by Skillaz. I think that's what we have already been doing and some successful upsells on our side and we'll just roll it out further.
Stephen Ju: Okay. Thank you.
Operator: Thank you. The next question comes from the line of Ivan Kim from Xtellus Capital. Please ask your question.
Ivan Kim: Yes, hi. Just -- can you talk about the longer term outlook? So I guess it's just building on what you've been talking before, but you reached impressive one million job postings on your platform. But what is next so to say? So do you see over these or next year a significant upside risk to this number? So can or cannot increase significantly further from here? That's the first question. The second question on Skillaz, when do you expect it to reach positive EBITDA and what could be the steady state EBITDA margin in that business? And lastly, just the marketing expense, so that was 16% of revenue. So I was just wondering what should we expect in the remainder of the year, or if you're comfortable just providing some estimate of marketing to sales for the year as a whole? Thank you.
Dmitry Sergienkov: Yes. Thanks, Ivan. I think -- Dmitry here. I'll take the first two and then Grigorii will comment on marketing. Look, I think we're clearly kind of revising at the moment our longer-term targets, right? Because it was always a bit of a kind of unknown zone where is the potential in this especially small and medium businesses penetration and where the market is going to saturate. Now we see with the dynamics that have been kind of absorbed last half year that this target definitely should be revised upwards. And we believe that with the level of digitalization in Russia among the population. We should be actually exceeding even the kind of European benchmarks set by companies like StepStone or -- in some US examples just because of the pace of adoption at the moment and candidate interaction which is most important. So I think that should result in kind of accelerated adoption, especially from small and medium businesses, right? I think on the kind of general growth upside. This is a big chunk of and key accounts monetization. And I think in the environment that as I said, we are entering -- it's kind of -- it's much more favorable to execute our amortization strategy. So I think from that perspective, we're also now kind of revising the -- our monetization plan towards acceleration. And then the third one, I think the kind of third pillar of our growth is entering other areas of HR. And I think that the situation that is happening at the moment that should also spur the high demand not only in sourcing of the candidate, but also in the processing and just the increasing overall efficiency of the process. I think that's highly beneficial for HR that market. And that's why I think that in the longer run, we should also benefit the solutions like Skillaz and others. So I think we actually see that -- of course that, we may not be experiencing this type of growth quarter-over-quarter for long-term right, but at some point, it will be small deceleration as I said as market normalized. But I think the -- in terms of kind of achieving longer-term targets, I think we really -- we'll be kind of a few steps ahead of our own plans two years ago. And on EBITDA from Skillaz, I think a quick answer. We -- it's going to be kind of dilutive for this year probably two percentage points and Skillaz of course is focused on developing their products, so they are hiring a lot of R&D and sales. And so they are a bit less concerned about the profitability in the short-term. But I think as per our internal models even last -- from next year the Mail.Ru Group is on break-even. They've actually done really a great job over the last two years on this front. But I don't think we will kind of squeeze their growth potential just to kind of feed some EBITDA margin on the Skillaz level. Because as I said even now on a group level it's not material right 2% and it will go further over time. Here I’ll hand over to Grigorii to comment on marketing.
Grigorii Moiseev: Yes. Hello, Ivan. I think I kind of mentioned during the presentation that we do see the decrease in marketing as a percentage of revenue in our main business in the first quarter, right? Basically, we expect the same decrease in marketing as a percentage of revenue for the full year in the core business. But at the same time in Zarplata, marketing is slightly higher as a percentage of revenue than in the HeadHunter. We think the kind of on consolidated level, it will be essentially probably flat compared to the last year. I understand the – I don't know if that answers your question.
Ivan Kim: Yes. Thank you.
Operator: The next question comes from the line of Anna Kurbatova from Alfa-Bank. Please ask your question.
Anna Kurbatova: Yes. Good afternoon. Thank you much, everyone for the call and for a great top line performance. I have actually three questions. The first one, you indicate on your chart with the total addressable market for Skillaz that Skillaz has 51% share – the market share. And there is another big rival with 18% share and which is more or less three times bigger than the all remaining participants. So it would be great to understand who this player is advantages or strong and – strong parts of the business or disadvantages? The second question would be, what preserves you now from giving us profitability guidance? Because if I'm not mistaken, when you – right after the IPO two years ago that was a common practice that you gave top line growth guidance both – and EBITDA guidance. And just the third question is technical one. Did I understand correctly that Skillaz will be consolidated in your P&L statement and financial results from 1st of April, 2021? Thank you.
Dmitry Sergienkov: Thanks, Anna. I'll answer the first one. Yes, the second player in the kind of special CTS market that we carve-out is a company called is entirely private-owned company. We obviously tracking their performance. I think they are a bit more kind of positioned in the lower end of the enterprise market. And our – in our view there – their capabilities of delivering complex enterprise solutions are not that strong as Skillaz. And a few years ago, when we actually decided to go after the best kind of bet horse in the market, we are obviously considering both assets. And at the time these companies were more or less equal size. And now, actually we see that the Skillaz is much more just scalable because of the kind of addressing the – probably part of the market that is the most advanced in their demand because they're really struggling now the most. And they – it seems like they kind of reached the point when the budgets for HR are easily -- more easier to kind of accept within such enterprises than say five years ago. If it answers your question. I hand over to Grigorii comment on profitability on Skillaz consolidation.
Grigorii Moiseev: Yeah. Thank you. Anna, this is Grigorii. Frankly, this year -- so on the first question, right about profitability. This year, we're kind of more focused on business expansion, because as you can see the market is quite turbulent. And we saw the tremendous demand for labor force in the Q1, right? We would like to kind of keep our options open on this kind of market in terms of expenses and do not target kind of specific EBITDA margin in 2021. But what we see from conceptual Q1 results, right we saw expansion in our main business in our adjusted EBITDA margin, as I -- as Dmitry said before I think. And we probably expect it to kind of go on in the rest of the year. As we said, the quarter will dilute this, but we expect this dilution to be absorbed kind of fully by this operating leverage in the main business plus Skillaz will also have a smaller dilutive effect, right. So basically, overall for the full year, we're kind of looking at margin in the ballpark of 50% as we said on the call last quarter, which is slightly above the 2020 adjusted EBITDA margin. But again, it's a ballpark right, it could be a slight less, could be slightly more.
Anna Kurbatova: Yes. Thank you. Thank you very much. And on the exact date of consolidation of Skillaz?
Grigorii Moiseev: Yeah. Yeah, it's -- you're totally right. The -- we will consolidate the company from the April 1 from the second quarter. So second quarter, we'll have the full Skillaz results for the fourth quarter.
Anna Kurbatova: Thank you, Grig. Thank you very much.
Operator: Thank you. The next question comes from the line of John Kim from UBS. Please ask your question.
John Kim: Hi, everybody. Two questions please. Can you comment on business velocity in the April and March months? Are those sustainable levels for you, or is there a bit of time in place in here? Secondly, are you seeing anything new or innovative from competitors on any of the core products? Thanks.
Dmitry Sergienkov: Hi, John. Well I will start with the second. I don't think we see any significant changes in the -- on the competitive front the product voice. We see that they are obviously trying to kind of exploit the existing market opportunities. Generally, the whole market is kind of benefited from this situation and we see the vacancy -- vacancies are -- vacancy base is also growing. Although, if you look at the kind of gap against the number two between us and competitors, I think that the gap was growing both on kind of content side and also on candidate side, if you look at the traffic dynamics. Again, the whole market is going to struggle for candidate in this environment, but disproportionately. And so we believe that our traffic market share also keeps growing. But for product-wise, we don't really see that any of the competitors coming up is anything that is kind of very unique to the market. It's more now to kind of addressing that that is coming up in the market from the audience perspective and client perspective. And the first one, could you – John, please repeat? Because I was really hearing you very hardly.
John Kim: Sure. So just about the business velocity in April and May, I seem to be backing out growth rates around 50% to 40%. Does that make sense? And is that sustainable?
Dmitry Sergienkov : In the first quarter, I think we were more or less discussed this question before, right? Because there were some sectors that were kind of helping, right, we're coming into the low business sector at the end of Q1 that will continue and accelerate as you may expect in the second quarter, right, because I think we are kind of consistently seeing our double-digit growth numbers in the back of very low base last year. There are some say kind of features in the market that are -- we believe that may not -- the met change over time especially kind of candidate behavior at the moment. There are maybe too relaxed and they may be kind of more active in the -- with the kind of high confidence over time. But what drives at the moment the kind of the market is a demographic situation. And we don't see how this can be really resolved in a short pace. So from that perspective, I think that growth driver will just remain for quite a long time. And also monetization, obviously, was a really strong factor. And in our numbers, you see very limited impact from our last year change of subscription model, right, because as I said most of the clients already migrated to new subscriptions, but they're still using kind of the packages that are included in the basis of. So in April, for example, we saw that the review from these contacts they kind of exceeded the revenue for the preceding three months. So that effect will accelerate I would say the fourth. It's a very strong environment for monetization improvement. And so we believe that may even enhance from current level over time.
John Kim: Okay. Thank you.
Operator: Thank you. The next question comes from the line of Ivan Kim from Xtellus Capital. Please ask your question.
Ivan Kim: Thank you for the opportunity. I just wanted to follow-up on the margin dilution effect from Skillaz. I'm not sure I heard it right. That it's going to be a three percentage point impact on margin. It seems a little high. So if you could elaborate on that would be great? And then secondly, just on the key accounts ARPC. So what was driving the acceleration in that in the first quarter, which was quite significant even before the price increase in April, and also as Dmitry mentioned before paper contact effect kicks in this year which is later? Thank you.
Grigorii Moiseev: Ivan, this is Grigorii. I think, I'll take the first question. No, actually the estimate is much lower, I think potentially maybe around one percentage point, on our full year results. Yeah. Ivan and maybe here on the on your second question on RPC, actually there are two major centers. The first is the consolidation of Zarplata right, because we really acquired a lot of regional key accounts. That shouldn't required but actually those who were -- and if you're not uniquely added there on top of ours, so that's kind of quite a technical. And I think but that does not the major. The major one was essentially the initiatives that we rolled out last year. First of all, if you remember, maybe a year ago we were discussing lends our differentiated approach towards key accounts right? And obviously, all the initiatives that are kind of proposing in the market, they're having sort of delayed effect. And starting from January, we kind of started reaping the rewards. And I think that was probably the major driver, especially given the dynamics in the key accounts job posting right because, I was first the intensified competition. So they started consuming more and also side effect of our new subscriptions, because they are kind of trying to optimize their budget and replacing our contacts with job postings. And at the same time, we don't see a real impact on contract revenues. But on the job posting side we see incremental demand and revenue.
Ivan Kim: All right. Thank you very much.
Operator: Thank you. The next question comes from the line of Maria Sukhanova from BCS. Please ask your question.
Maria Sukhanova: Yes. Hello. Just a quick one, what is your message about the revenue growth guidance? Is it -- would you say, based on conservative assumptions, or you think that it's risen reflects what you see now? Thank you.
Dmitry Sergienkov: Yeah. Hi, Maria its Dmitry. We're -- well I would say that kind of the range that we're pretty much confident at this point. And we as I said the 2% would expect to be added from Skillaz consolidation. And the remaining kind of we upgraded guidance by 8%. Remaining 6% actually stems from our business outperformance. We see very strong year-to-date or quarter-to-date results. And there are no signs of deceleration at this point of time. But kind of bear in mind, that current situation is not over yet. And it won't be over in the second half, right? We're not safe from any potential lockdown, on this popular nonworking days, announcement all of a sudden. So we I think at this point of time we're pretty much confident. And hit this range. And we also reserve the right to review it, later in the year.
Maria Sukhanova: Thank you.
Operator: Thank you. There are no further questions at this time. Please continue.
Dmitry Sergienkovd: Thank you everybody for joining. And take care. Bye-bye.
Operator: That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.
