HeadHunter Group PLC (HHR) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by and welcome to the Second Quarter 2021 Financial Results Conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a 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 Arman Arutyunian. Please, go ahead, sir.
Arman Arutyunian: Hello, everyone, and welcome to HeadHunter Group second 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. A press release containing our second quarter 2021 results was issued earlier today and a copy may be obtained through our website at investor.hh.ru. Before we begin, we would like to remind you that 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 Annual Report on Form 20-F for the year ended December 31, 2020. 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 to 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’d like to turn the call over to Mikhail. Please, go ahead.
Mikhail Zhukov: Thanks, Arman. Hi, everyone. Thanks for joining us today. Halfway through 2021, I'm increasingly optimistic about the strength of our business. Driven by fundamental market trends, we are currently seeing dramatic corporate activity in the current market. This is evidenced by historical highest number of vacancies on our platform and the record intake of new customers. As a result, our total paying customer base in the first half of 2021 exceeded 300,000. Along with customer base expansion, we have completed migration of our users to the new pricing model for subscriptions, allowing us to improve monetization and set the ground for its future enhancement. I'm also excited about our product development in the second quarter. For example, we released to millions of our users and in-platform functionality of direct and instant communication between candidates and employers. Chats and messengers are becoming an increasingly important way people consume various digital products. So we're focusing here on integrating recruitment into broadly used interfaces. And as an example, we launched cross posting options for our clients to advertise their vacancies across their broad platform, thereby extending their candidate outreach. All these are crucial steps in order to help our clients to succeed in this challenging labor market situation. Now let me turn it to Dmitry to walk you through the key highlights over second quarter. Thank you.
Dmitry Sergienkov: Thank you, Mikhail and good afternoon. Thank you for joining us on this call. As Mikhail said, we are very happy to report that our business continued to gain strong momentum and significantly accelerated in the second quarter, delivering across all strategic priorities. Again for a little comparison base, last year, our revenue in Q2 was up 165% year-on-year, driven by average consumption growth, accelerated intake of new small and medium businesses, monetization rollout and full consolidation of newly assets acquired. Despite some diluting effect from Skillaz as product consolidation, we improved over profitability with adjusted EBITDA margin came above 57%, our CapEx comprised just 2.3% of revenues, contributing to our strong cash flow generation over the quarter. Turning now to our results by customer segment; as a result of our guiding growth and acquisition of Zarplata, we have increased our customer base by circa 125,000 customers and yet over the first half of 2021, we already have more clients than the entire pre-COVID 2019. During the second quarter, almost all client categories demonstrated triple-digit revenue grow, with small and medium business segments being mostly driven by customer base expansion, both organic and inorganic, while key account segments also reported strong ARPC growth, this growth will be explained by target . Revenue in Moscow and St. Petersburg increased by 145% year-on-year, while revenue from other regions of Russia went up by 170% year-over-year, now our region is reaching nearly 36% share in total revenue. In terms of product dynamics, we're seeing tremendous growth in job posting categories soaring by circa 240% year-on-year and capitalizing on unprecedently high demand for labor and labor supply. In small and medium segment, the consumption growth explained circa 70% of total job posting growth, while on key account segments consumption growth and pricing were nearly equal contributors. Our key database access and bundle subscriptions demonstrated 133% and 95% growth year-on-year respectively. This quarter, we completed transition of our clients to a new subscription model. And we see that circa 75% of CV DB revenue increase in key account segment is explained by purchase of additional contacts, actually exceeding our original expectations. So overall, in terms of top line performance, it was arguably the best quarter in our recent history. Having this strong historical numbers, coupled with a very robust leading indicators, such as long-term subscription bookings and packaged vacancy purchases, we decided to significantly upgrade our official guidance on full year revenue growth basis to the range of 53%, 68% year-on-year. Of course, resumes continued its recovery trend in economy and now major restrictive measures in the second half. Now, here's Grigorii to talk about our profitability and our other financial metrics.
Grigorii Moiseev: Thank you, Dmitry and hello, everyone. Let me give you some detail on our expenses and margins first. As Dmitry said, our adjusted EBITDA margin has increased to almost 58% in the second quarter of 2021, compared to 43.4% in the second quarter of 2020. This improvement was mostly due to the increase in our revenue. Consolidation of Zarplata and Skillaz diluted adjusted EBITDA margin by circa 3 percentage points. Therefore, the increase in margin in our organic business segments was even steeper than on the consolidated basis. Our operating costs and expenses increased by 93% in the second quarter of 2021. There were three key factors to this growth. First, we added expenses of Zarplata and Skillaz, which explains about one-third of the growth. Second, there was a low base effect, as our expenses in the second quarter of 2020 were quite low on the back of COVID and related cost savings. And third, we increased our headcount, wages, and marketing expenses in accordance to our 2021 budget. Let me briefly discuss the key expense buckets. Our personnel expenses increased by 95%, compared to the second quarter of 2020. The latest driver here was the addition of Zarplata and Skillaz personnel expenses, which explains circa one-third of the total growth in this bucket. The growth was also driven by the low cost base. Our cost savings program in the second quarter of 2020 has saved us about 60 million Rubles for induction and bonuses. Also, our performance based sales teams bonuses increased by circa 65 million Rubles in the second quarter of 2021 on the back of all our performance in the internal sales team’s targets; while in the second quarter of 2020 these performance sales -- performance based bonuses were quite low. And finally, not including Zarplata and Skillaz consolidation, we increased our headcount by circa 13% or 120 people over the last 12 months, primarily in customer support, development and sales teams, and they also increased wages by circa 10% in the second half of 2020 and by circa 7% in the second quarter of 2021. As a percentage of revenue, personnel expenses, excluding share-based compensations and other items have decreased from 31.4% in the second quarter of 2020 to 23.1% in the second quarter of 2021 or by 8 percentage points, mostly due to the increase in revenue. Moving on to our marketing expenses, they increased by 53% year-on-year. The growth was driven mostly by expansion of our marketing expense across various channels in accordance with our annual budgets, while approximately one-third of the growth was due to Zarplata consolidation and there was also a moderate low base effect for our cost savings last year. As a percentage of revenue, marketing expense also decreased quite sizably from 15.3% in the second quarter of last year to 9.2% in the second quarter of 2021 or by circa 6 percentage points; again, mostly due to the increase in our revenue. Our other general and administrative expenses increased by 141.6% compared to the second quarter of 2020. Key driver here again was the addition of Zarplata and Skillaz which contributed approximately one-third of the growth in the bucket. And the other factors were the SPO-related expenses of 76 million Rubles in the second quarter of 2021, the low base effect of the COVID-related cost savings program in the second quarter last year, and the increase in cost of sales on the back of the increase in revenues from other value-added services this year. As a percentage of revenue, other general and administrative expenses, adjusted for various non-operational items were at 9.9% in the second quarter, flat compared to 10% in the second quarter of 2020. Margins achieved in the second quarter of 2021 are explained by a significant revenue increase, while cost base being somewhat conservative level, taking into account yet the unstable market environment. So we don't think these high margins are sustainable in the short term and expect them to trend down towards 50% plus rate over the year. Moving on to other key indicators, our CapEx in the second quarter of 2021 was 88 million Rubles compared to 41 million in the second quarter of 2020 and this increase was mainly due to our investments in server and infrastructure on the back of increasing user traffic. As Dmitry said, CapEx was about 2% of revenue in the second quarter. Our net working capital as of June 30, 2021, was negative 4.8 billion compared to negative 3.8 billion, as of December 31, 2020. The change was primarily due to customer advances we received over the last six months. Income tax expense in the second quarter of 2021 was 414 million Rubles compared to 75 million in the second quarter of 2020. This increase was driven by the increase in revenue and consecutive increase in the taxable profit. Our effective tax rate in the second quarter was 24.5%, relatively flat compared to 23.9 in the second quarter of 2020. Now turning to cash generation metrics, in the second quarter of 2021, we generated 1.7 billion Rubles from operating activities compared to 105 million in the second quarter of 2020. The growth was primarily driven by the increase in sales. We used 803 million Rubles in investment activities compared to 20 million used in the second quarter last year. The increase was mainly due to the consideration paid for acquisition of additional 40% ownership interest in Skillaz. We used 205 million Rubles in financial activities compared to 572 million used in the second quarter of 2020. This decrease was mostly due to timing of bank loan repayments last year due to COVID related periods of non-working days. Our net debt decreased from 5 billion Rubles as of December 31, 2020 to 2.6 billion as of June 30, 2021, primarily due to the increase in cash balances from operating activities. On the back of the decrease in net debt and the increase in adjusted EBITDA, leverage decreased to 0.4 times adjusted EBITDA as of June 30, 2021 compared to 1.2 times adjusted EBITDA as of December 31, 2020. Post period end, in July 2021, we settled earlier announced dividend for the year 2020 of circa 2 billion Rubles. Therefore, our net debt and net debt-to-adjusted EBITDA ratio increased in July compared to the quarter end measures. And finally, in July 2021, we established a new restricted stock units plan to provide a more competitive long-term motivation model to our key talent. Prior to this, our management incentive programs included the 2016 Unit Option Plan and the 2018 Unit Option Plan. Our 2016 Option Plan focused mostly on our top management level. It is now fully granted and the outstanding awards vest through May 2023. Part of the awards issued under the legacy 2018 Option Plan will be replaced with awards under our new RSU Plan The maximum number of shares provided under the new RSU Plan is 6% of the total shares issued and outstanding from time to time. The awards are expected to be granted in treasures over the period of four years, until August 2025. Each individual grant will be subject to approval by our Board of Directors upon recommendation of the management and the Compensation Committee, based on certain selection criteria. Vesting period for each transfer will be four years commencing on the grant date. The new RSU plan will be reasonably wide in its coverage and will reward among others, our key personnel and development, product, sales and marketing teams. We believe that with the new RSU plan, we will be able to better attract, motivate and retain our key talent. This concludes our presentation of the results of the second quarter of 2021 and we are now opening the floor for your questions. Thank you.
Operator: Thank you. And the first question comes from the line of Vyacheslav Degtyarev from Goldman Sachs. Please ask your question. Your line is now open.
Vyacheslav Degtyarev: Thank you very much for the presentation. A couple of questions. So firstly, can you share your thoughts on the medium-term monetization plans? Are you looking to do any new steps with regards to the monetization this year or it is more for the next year? And how would you qualitatively assess how much of the upside from the April price increases as well as the last August price increases were not yet reflected in the second quarter results and will be reflected in the coming quarters? And the second question is more technical, it looks like you increase the stake in Skillaz further. Are you considering the full 100% ownership ultimately? Thank you.
Dmitry Sergienkov: Hi, Vyacheslav. Sergienkov here. I'll try to answer your questions. The first one on the monetization, we are very pleased with the results of the transition because of the implementation of our new subscription monetization model. So this year, we've actually moved all clients to new monetization models. And, yeah, it actually kind of was executed quite smoothly without any churn, spike, etc. At the same time, as you can already see in the results and you'll be observing this in next quarters that the result and the impact on revenue is quite significant. Looking kind of forward, of course, we believe that there is really a huge opportunity and a lot of -- various areas, we can actually explore our monetization ideas. So every year, we plan to actually kind of move to our longer term target. This year, we are -- as we migrate clients to new monetization model, we'll try to get the actual realized price for the contact be closer to the target level. To remind you, we sell the contact for six Rubles per contact, we are giving it. Now the realized price is over 40 Rubles, so we'll try to get closer to 60 and then we'll kind of inflate further that number. We're -- at the moment, kind of, technologically, we are very focused on getting the infrastructure and data structure in place by the end of this year to kind of match of course the actual willingness to payroll clients. So we will focus on -- we will be focusing on regional differentiation. First of all, differentiate Moscow price from other regions, because at the moment, there's a lot of uniformity in that. We also pay attention to kind of differentiation by role and by profession also see that at this point of time, tariffs are not flexible enough, and we will see a significant upside from that. In terms of April impact, I'll say the growth was quite moderate, right, because major initiatives on monetization were actually implemented before COVID and then we also announced the new subscription model. So we didn't actually plan to make the kind of April as a major pricing, right, therefore I will say it's quite more, this year, already in the second quarter. Yeah, of course you will be kind of seeing the impact throughout the year, right, because of the kind of tariffs changes that are not affected in any particular quarters, kind of, evenly spread throughout the year. But I wouldn't call April has some somewhat one-off event. In terms of Skillaz, yeah, it is a separate transaction from the acquisition of the additional control. And to extend it was the kind of act good gesture towards the founder, who had been riding this business very successfully over the last five years, so, again, certain liquidity. At the same time, he remained the significant stake in the company at 25% and he is fully motivated in long-term success of this business. So we also very much interested in him being fully invested and involved for kind of consolidation of 100% is possible. Maybe it's the kind of ultimate end game, but we're not seeing it in kind of shorter term, definitely.
Vyacheslav Degtyarev: Okay, thank you very much.
Operator: Thank you. And the next question comes from the line of Ivan Kim from Xtellus. Please ask your question. Your line is now open.
Ivan Kim: Yes, good afternoon. Two questions for me, please. Firstly, just on the longer term growth, regarding high demand, that's a fairly high base for next year. So we're just wondering, How confident are you the company will be able to maintain this sort of 25%, 30% growth in ‘22? And my second question is on profitability and the marketing spend, so the marketing spend has been fairly modest vis-à-vis revenue, but not in absolute terms to the very revenue definitely this quarter. What would you expect for the second half? And on your marketing spend, is it driven by competition? So basically, that more you're responding to the competitors or it's kind of normal, let's say, course of business? Thank you very much.
Dmitry Sergienkov: Thanks, Ivan. I will answer the first one. On the growth, I think it's a little bit premature. Now, I think, discussing growth for next year, right, we still have two quarters. But at the same time, part of today's growth is definitely unsustainable, right, so the last year comps are quite favorable and we also have some acquisitions affecting our revenue line, but at the same time there are certain sectors that we believe are definitely sustainable. And they will be having significantly impact next year, for example, monetization and new subscription model. We expect to have at least two times bigger impact on revenue next year than this year, just because of the full year effect. That's first thing. And then there'll be new monetization initiatives. There'll be a significant customer growth that we expect. And therefore growth, as you mentioned, is not our preferred guidance at the moment, it has been planning good now, but it looks quite sensible. And we believe that we can sustain this level of growth next year, as we see the situation at the moment unfolding. And I'll hand it to Grigorii to comment on marketing spend.
Grigorii Moiseev: Yeah, thanks, Dm. Hi, Ivan. This is Grigorii. So on the profitability, as I said, we kind of expected to trend down a little in the second half of the year. Of course, first unknown is what the revenue trajectory would be, whether the Q2 high demand and high number of job postings will continue into Q3 or into Q4 as well, right. Secondly, on the cost side, we kind of expect to increase investments because we were on somewhat conservative sides in the first half of the year, just being unsure of what the full year revenue performance would be. We're now heading into autumn, right, which will probably be quite favorable in terms of marketing spend, for instance, as this is typically a busy season for recruitment. Also Zarplata and Skillaz, which we consolidate now fully in our P&L, they do have the dilutive impact, we estimate it to be about 3% on full year results as well, just as it was in the Q2. So basically given all these factors, we think in kind of conservative revenue scenario where we can have up to 50% adjusted EBITDA margin for the full year, maybe more if revenue will be performing better than conservative, of course provided kind of no severe COVID-related lockdowns or etc occurring in the second half of the year. And then I think on marketing, as I said, we're looking forward to increase in the second half. Percentage wise, you saw that it was about 9% in Q2. I think it will be kind of closer to the last year, about 30, and maybe 12 – 13 -- maybe 12% of revenue, as we saw in 2020. I think we will see something like that in 2021 as well, maybe a little bit less. As for the how it is driven, I wouldn't say that it's kind of entirely competition wise. We can still see the kind of positive effect from marketing investment in both just brand awareness and performance based. So we are kind of targeting marketing level as percentage of revenue, for instance, as well. But in some instances, here we are responding to competition as well. I think in the second half of the year, it will be pretty much increase in kind of every marketing channel, including performance based and online brands awareness and offline as well.
Ivan Kim: Great. Thank you very much for the detailed answers.
Operator: Thank you. And the next question comes from the line of Dmitry Vlasov from WOOD. Please ask your question. Your line is now open.
Dmitry Vlasov: Hi. Thank you very much for the opportunity to ask questions. And congrats on impressive results. So my first question would be on your revenue growth, if you could break down your second quarter revenue growth, like how much of this growth came from the base effect, overall politics like labor market dynamics, improved business performance and consolidation of acquired assets? That would be my first question. And my second question would be, maybe if you could provide some comments and some color on the July and early August trends into how you see the overall market is performing, whether this positive labor market trends are changing or even accelerating? Thank you.
Dmitry Sergienkov: Thanks, Dmitry. It is Dima here. Okay. So, of course, our second quarter revenue worth decomposing in the sustainable factors in the – like less sustainable, of course. Our estimate that it is around 80 percentage points are actually attributed to just the low base effects from last year and circa 20 percentage points attributable to acquisitions we made, Zarplata and Skillaz. So effectively, you can kind of take out this 100 percentage point and that remains 55%, 60%, that could be kind of called are getting or driven by underlying fundamentals. It's still quite phenomenal growth for the business on scale, like ours. And that 60% you can also kind of decompose in the three major factors that Zhukov already mentioned, 25% of those 60%, like one-fourth kind of relates to monetization of existing business and as I said already, we see ample opportunities in the coming years here. So the shift to new monetization scheme was kind of exceptional event, but it opens up a lot of opportunities for further monetization. So we have a lot of monetization ideas to operations that I already answered this. So this part is quite robust, and we don't expect any deceleration or kind of a diminishing impact from this. Another factor is actually average consumption per client. So at the moment, we see that small and medium businesses consume a circa of 50% or more than they did historically, and key accounts consume almost 100% more. So they doubled the heck of their consumption on average. We believe this area where we actually may have some kind of temporary effect that may actually fade away, not entirely, but to the extent, as we see the rational labor market can stabilize when life get to normal; people can start moving again and most people movement generally improves. So this is the part where circa probably encompasses the highest kind of unsustainable fragment. And the major 50 that explains half of that growth, 60% is attributable to kind of intake of new customers. And this is what we call digitalization and -- acceleration and digitalization. And more and more companies get involved in online transactions on the back of this COVID circumstances. So we believe this is actually what drives the fundamental trajectory, and the debt accelerates our long-term growth. So, last year, we also significantly improved our client on-boarding experience that gave pretty impressive immediate effect. That could be hard to replicate or it is not always was to come up with such a great interface improvements. That gave us around 7% of total growth. But the remaining is what actually belongs as accelerated digitalization. In terms of trends, they remain very strong. I think that that's one of the reasons why we upgraded guidance in July, and just quarter-to-date, we see that these fundamental factors did not accelerate and we see still even kind of accelerating import from our monetization, stable consumption and the market is still pretty tough. And if you look, broadly the market think all our competitors face very similar challenges with kind of shortage of supply of candidates. And in this environment, we believe that we held up pretty well and we are required 2 million UCDs. So we sustain candidate delivery level so that most likely resulted in market share gain until we can delivery. So, the market remains to be tough. We don't expect this .
Operator: from Alfa-Bank. Please ask your question. Your line is now open.
Anna Kurbatova: Yes, thank you very much and also congratulation with great numbers. I have two questions. First of all, could you elaborate a bit on your future or approach to pricing? So you mentioned in your speech that you are considering some price differentiation by region by profession? So maybe you could tell a bit more, what professions are in the most demand now, where do you see like the most potential to the average check? Now what like categories or industries are more or less, I don't know, performing or where budgets have more such opportunities, so the more, well, points of growth? Yes. And the second question will be on your RSU plan and the buyback. So, you tell us that there a few plan is equal to 6%, yes, of your number of shares and that you will be funded it by both buyback, new share issue and allotment. So could you provide more information, how much of RSU plan will be backed by buyback? And a bit more if it's possible on the buyback techniques, buyback program techniques. So, do I understand correctly that you will be like from time to time buying your shares from the markets during the next 12 months period? Thank you.
Dmitry Sergienkov: Thanks, Anna. It is Dmitry again. On the pricing, well actually there are various angles how you can differentiate. And we believe that we should end up having a fully dynamic pricing that is not kind of bound by certain logic, but it just responds to the actual labor supply balance in the market, because some professional, they may actually look quite kind of knowledge intensive and attractive. But there there's oversupply of candidates in a circle, vertical, right, and so the price and our pricing should reflect the actual station, not only the kind of potential salary. What we see as kind of biggest opportunity, I think, for us is of course, to differentiate the kind of low skilled labor and blue collar and this is the area where we even actually foresee certain price reduction right, just being in this market, which is really huge and growing firsts. And for the other hand, we have kind of high on the market, white color professionals, where at the moment, our pricing thing is not anyhow tied to actual value in this and the importance of such professions for businesses. So I think that the end goal would be probably important also, IT professionals will see it in the highest and growing demand. That's another area because, at the moment, whether it's a career or engineer, you kind of -- for most product, you're just paying the same price and we think that's not really fair. In terms of the impact, we're at the moment we are entirely going to re-engineering our role catalogue in the company, and that actually entrench quite deeply into our service. So by the end of this year, we should have fully kind of brand new professional catalog, which will be a kind of ground for this differentiation. And starting from Q1 next year, we will start and launch experiments kind of finding this differentiation points and as we see opportunities, we will kind of get it implemented on our tariffs. That's the first question. And the second, yeah, I think we will just give it to Grigorii.
Grigorii Moiseev: Yeah, thanks, Dima. Yeah, hi, Anna. So I just wanted to reiterate again, that this new RSU plan, size of 6% is actually quite deferred in time, right. We were going to grant these awards, not kind of immediately, but over the over the period of when this program remains valid. It is four years, so it's expiring in August 2025. And we expect these awards to be granted over this period. Specifically, I think in this year, we would grant about 10% or 15% of this total program in the remaining -- in the next three years. As for the buyback, yes, the primary purpose of the program is to fund the share-based incentives without diluting existing shareholders. At this point, I'm kind of not ready to give you any indication or specific on when and what volumes we are going to buyback. As you saw, the program is kind of framework. It assumes the maximum 10% of equity to be bought back. That's the kind of statutory limitation. Well it is for 12 months and the buyback price results should not exceed the average, five day average, by more than 5%. So we'll kind of occasionally do the purchases from the market, as you said and we'll inform accordingly as soon as we decide on any specific kind of buyback tranche. Just as an indication right, we, of the buyback size, maybe it's useful we estimate with, in next year, we will issue -- we will have to issue about 400,000 shares under our 2016 option plan and the new RSU plan. And all the shares will probably be purchased from the market might be in some part this year and next year.
Anna Kurbatova: Thank you very much very clear. Thanks.
Operator: Thank you. They're no further questions. Please continue.
Arman Arutyunian: Thanks a lot for joining the call. Bye, bye.
Dmitry Sergienkov: Thank you. Bye, bye.
Grigorii Moiseev: Thanks. Bye.
Operator: Thank you. This concludes our conference for today. Thank you for participating. You may all now disconnect.
