Hostelworld Group PLC

LSE:HSW

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Hostelworld plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. And if you could give that to your kind attention, I am sure the company will be most grateful.

I'd now like to hand over to Gary Morrison, CEO. Good morning.

[Gary Morrison, executive]

Good morning, everyone. Thank you for joining us. I'm joined here by Caroline Sherry, our CFO. I'm Gary Morrison, the CEO. And it gives us a great pleasure to talk about our first half results this year. We have absolutely fantastic growth, lots of interesting things around our Social features. And we'll talk a little bit about some of our future aspirations.

So with that said, I will take the usual disclaimers as read, and go straight into our highlights. So from a financial perspective, we had record-breaking first half GMV of EUR 340 million this first half year and also generated revenue which is EUR 51.5 million. The EUR 45.8 million is revenue that we recorded in our P&L. Some of that revenue we defer because we have a free cancellation product, Caroline will walk you through.

But just from a sheer generated revenue, net GMV, we've had the biggest half year on record. So obviously, immensely proud. That revenue was generated across 3.4 million net bookings, which is up 64% half year over half year.

If you look at the net ABV, how we generated the revenue, it's actually down 4% half year over half year. That sounds like a bad thing; in fact, it's a very high-class problem. The reason why it is down is we've seen such enormous growth from the lower cost destinations in the world, places like South Asia, Central America, and so on, that it is actually a geographic mix effect. There are very slight changes in our profile, which I'll talk about. But the net ABV is really driven by mix.

Then we come to net bednights. Net bednights are up 12.3 million. That's 53% half year over half year. Not as quite as fast as the net bookings, and there's really a couple of things sort of driving that here. One is the change in our customer mix. In pre-COVID era, about 60% of our bookings were made by solo travelers; this half year, it's actually 66%. So as you might imagine, if you have 1 person staying for 3 nights, that's 3 bednights. If you have 2 people staying, of course, that's 6.

So that's most of the change. There's been a very slight contraction in length of stay, but nothing of any material nature.

That great growth has been generated at the low end of our guidance range. You might remember in Capital Markets Day and also in our preliminary results, we had given the guidance for the year between 50% and 55%. Pleased to report that we're at the low end of that guidance range at 51%. Obviously, much more revenue at the low end of guidance, that's generated an awful lot of margin. That margin in terms of our OpEx space, on a like-for-like basis, our OpEx is slightly lower this half year than it was last year. So the business is generating unbelievable operating leverage.

That generates our EBITDA. A chunk of that EBITDA, of course, is revenue that is parked on the balance sheet because of the deferred revenue that we will recognize in second half. Again, Caroline will go into that detail.

We also did a lot of operations on our balance sheet in the first half. We started out the year with about EUR 19 million cash on the balance sheet. We generated EUR 8.4 million in operating cash. We retired EUR 34 million of our legacy COVID debt, which was very expensive. We paid down some of it and we refinanced the rest on a materially lower interest rate going forward. And that gives us closing cash of EUR 10.7 million, and our net debt position is EUR 16.2 million.

So I'm now going to turn it out to Caroline who will sort of talk about the geographic spread, go through all of the walks, net margin, EBITDA, cash and so on. And then I'm going to come back and talk to you about some of the strategic process, some progress that we've made over the first half. So over to you, Caroline.

Actually, my bad. I want to just summarize some of the things before we do that. In terms of the strong financial delivery, we pretty much covered most of that on the prior page. To note that we have robust bookings growth across all of the regions. But in particular, very strong growth in Central America, South Asia and Southern Europe. And actually, what we're seeing is it's the lower-cost destinations which have really had the high growth half year over half year.

We talked about the marketing efficiency, that's really powered by the Social strategy. The increased operating leverage come because we have so much more margin that's going on OpEx base, which is actually slightly less like-for-like. We capitalized very little. So most of that is now converting through into cash. We talked about the debt refinancing, materially lower interest rates.

In terms of how we think about the half year from strategically the progress we've made from a product perspective and also into the rest of the year and into the year going on, that growth that we talked about, that huge bednight growth, 53%, when you actually take out and divide it into how much was category and how much did Hostelworld grow on top, we think the category growth was about 14%, and our own growth was 34% on top.

So we really get materially larger market share half year over half year. And again, that's coming up at the lower end of our marketing as a percent of net revenue. So we are not buying that market share; our product is winning in the marketplace. Something we're very proud about.

And in terms of that product, we're not standing still. We're continuing to invest in our Social platform, both from a messaging perspective and profiles, that was the Social network that we launched in April last year. We built a new platform on top of that, which is called LinkUps. We think that has tremendous potential for the future. We have a few slides on that, which I'll cover off.

Broadly speaking, the business always has been and always will be very highly cash generative. We've now taken significant steps to deleverage the balance sheet. We will continue to do so over the next 6, 12, 18 months. We're reiterating the earnings guidance that we gave sort of in, I think it was early May time, so we were 4 months into the first half. We've moved the guidance up for the rest of the year at that point. We're a bit like a month and a bit into second half. So we're just seeing how things are going. But I can say we remain significantly ahead in bookings terms, ahead of where we were in 2022. So we're very excited for the future.

And clearly, in terms of the guidance that we gave long term in Capital Markets Day, over a 3-year basis, I can report even after the first 6 months, we are very much firmly on track to meet those longer-term targets. So overall, we're super happy with where we are.

And now I will pass it to Caroline.

[Caroline Sherry, executive]

Great. Thank you so much. Thanks, Gary. I will be with you all this morning to talk you through our results. So I'm just going to take a little bit of time to talk through the H1 performance. As Gary said, H1 2023 was a significant milestone for the business. largest H1 on record from both a GMV and a generated revenue perspective.

So looking first to the left-hand side of the slide, we can see that net GMV, which is the total value of the bookings posted to the platform is up 57%, EUR 340 million. Then in the middle block, we're looking at generated revenue, generated revenue being gross revenue less cancellations. That's flat to GMV, up 57% versus the prior year also. And that's very much we left our commission rate flat, so it has remained unchanged over the period at a very competitive 15%.

When we look at net bookings, the growth is higher again, up 64%. And the reason the booking growth rate is higher than the revenue growth rate is really because we saw a small contraction in ABV, as Gary mentioned. So ABV half year-on-half year is negative 4%. When we look at H1 '22 versus H1 '23, ABV contracted 4%. This is something we had expected, we flagged at Capital Markets Day. But actually, the component part of that contraction was slightly different to what we were expecting.

We had anticipated the level of bed price of deflation -- sorry, bed price deflation in 2023, given bed prices were quite elevated last year, and with cost of living increases, et cetera, we thought perhaps the hostels would reduce their bed prices. In fact, bed prices have continued to grow, up 15% versus H1 2022. And in fact the contraction versus H1 2022 was the resurgence of volume and demand and lower bed price destinations, predominantly Asia.

We're now going to look at how that growth has manifested at a regional level. So just taking a moment to describe this graph. The orange arrows represent -- pardon me, represent the revenue, and the green arrows represent bookings. So again, we're looking at generated revenue, which is gross revenue less cancellations, and then the net booking equivalent, i.e., gross bookings less cancellations. So really very much the revenue that was generated off of these bookings.

Looking at the middle block first, Europe. So Europe is our largest market from both a volume and value perspective. Europe has recorded significant growth year-on-year, and particularly in the Southern European destinations. So key destinations for us, which are one of our biggest destinations, Spain, Italy, Portugal, are all bigger now than they were in 2019.

Northern Europe, key destinations such as Paris, Amsterdam, London saw significant bed price inflation. And we feel actually that did have an impact on demand, and that's why those regions have not gotten to the 2019 -- or exceeded the 2019 levels.

Looking outside of Europe, and first looking over to the Americas and looking first at Central America. The rate of growth there versus last year is not as strong as the other regions, but actually Central America this time last year had already exceeded 2019 levels. And you may recall that in Central America, destinations such is Mexico, they have very relaxed travel restrictions and in fact had virtually none. So we saw a huge uplift in demand in Central America last year, being that it was a destination that people go to unencumbered about restrictions when traveling into the region. Very pleased to see that actually that region did not contract this year and in fact has continued to grow.

Latin America, another key destination for us, seeing strong growth. Bed prices are cheaper in destinations such as Latin America and Asia. And in fact, we actually think that, that has really, really helped demand there. And in actual fact, if you look over to the right-hand side of the map and you look at Asia, phenomenal growth. This time last year, Asia was beginning to reopen to international travel. We had seen that actually bookings were of circa 50% of where they were in 2019. So a real lag in last year's performance. And now is a real tailwind to this year's performance, growing, particularly in the Southeast Asia destinations, materially ahead of where they were in 2019.

So all in all, some fantastic growth across the different geographies.

Now moving on, we're going to look at how that growth in volume drove margin. So working left to right of the graph, we can see that huge volume uplift that we've talked about, it's driven very strong margin growth versus H1 2022. We talked about the big uplift in GMV, we talked about the regional growth from volume and a revenue perspective. But another really key driver in the margin improvement is, of course, marketing efficiency.

Marketing as a percentage of revenue reduced from 60% in H1 2022 to 51% in H1 2023. Our Social strategy is the key linchpin for that marketing efficiency. Gary will talk to Social in a little bit more detail in terms of what are the features of the Social customer that we're seeing.

The other element, other negative, just EUR 1 million, predominantly most of that is deferred revenue. So this is revenue relating to free cancellation products. The customer books free cancellation products, we take in the cash, we record the marketing cost associated with acquiring that customer if they came through paid channels. but we do not recognize the revenue until such time as the last day the customer has canceled has passed, i.e., the cancellation window has to have passed before we can recognize the revenue on the P&L. That's an accounting treatment of revenue recognition.

Typically, in the H1 P&L, deferred revenue is a negative number, and then a positive number in H2. So that revenue that we generated from bookings we received in H1 is written on the provision on the balance sheet and will unwind as margin in H2. A small proportion, typically about 10%, cancel, so that is upside margin to come through in H2 P&L.

Now working our way down through the P&L, looking at our cost base. As Gary said, we have kept a very tight lid on costs. Maintaining a tight cost base is something that's very important to us. We want volume growth, the margin -- marketing efficiency that's driving growing margins to fall through to the bottom line and not be absorbed by an increased cost base. So we've worked hard on ensuring that we continue to show improvements in our operating leverage. An OpEx discipline is a key component of that.

Looking after the different blocks. So we had shown H1 '19, which was our operating cost base pre-COVID, where we were last year, and where H1 2023 where we are this year. And working bottom up, the orange block represents wages and salaries. Now these are operating costs, they don't include paid marketing spend. Wages and salaries are circa 70% of our operating cost base. Naturally, like all businesses, we've seen an element of wage inflation. So we have managed our head count carefully, making sure that we are growing in the right areas that are going to be revenue-generating outputs. Year-on-year, costs have gone up, as said, an element of wage inflation, but also in H1 last year, we received EUR 400,000 of wage subsidy benefit from the Irish government's COVID relief support. And so when we take that out, that closes the gap versus H1 2023.

The pink blocks are contractors. Last year, we brought in a number of squads to help expedite the delivery of the Social features in the app. Again, it's bringing the product to market in the quickest and most efficient way. And then when that product has been delivered and we're satisfied with it, that cost then comes to the P&L. So contractor is down year-on-year.

The next piece, which is the yellow piece, is our in-house tech investments, predominantly our Google Cloud costs. Very pleasingly, that cost is going down year-on-year, despite the material increase in volume. And these are unit volume costs. So we have worked very hard to make sure that our Cloud consumption costs are as efficient as possible. So despite the fact that we have increased volume, the unit volume cost is actually reducing.

Finally, all other costs, which include rental rates, training, recruitment, legal and professional costs, et cetera, have all reduced year-on-year, and materially versus the pre-COVID days of 2019. Again, we were very cognizant of coming into a year of cost inflation and managing our cost savings as tightly as possible.

Now taking it all together, what has that delivered? Looking at our EBITDA performance, EUR 5.1 million of EBITDA positive profit in H1 of this year versus the loss of EUR 5.2 million last year. The big swing factor of that plus EUR 10 million EBITDA performance is the volume and ABV that we talked about. So huge resurgence in volume, huge recovery across all of the regions, very strong bed price inflation, driving our ABV as well.

Another huge upside has been the marketing efficiency. Getting that marketing as a percentage of revenue down to 51%, keeping it at the lower end of the guidance that we gave of 50% to 55%. Other being deferred revenue, again, that benefit will unwind as margin upside in H2. And then a slight increase in operating costs year-over-year. But again, stripping out the wage subsidy that we would have received last year, our costs have actually gone down year-on-year. An EBITDA margin in the first half of 11%, with EUR 5.6 million of revenue deferred to the H2 P&L.

Next slide talks to the balance sheet. So as Gary has said, very pleased with our H1 performance. Strong EBITDA generation, generating cash, allowing us to do significant work on the balance sheet. We have said at our Capital Markets Day presentation, key strategic priority for us this year was to repair the balance sheet, was to refinance the expensive debt that we drew down in 2021 in February at the height of the COVID pandemic. Very pleased to have made voluntary repayment of that -- of EUR 10 million on that in April, refinancing full balance in May, totally taking that off the balance sheet.

Then replacing it then with the new facility that we agreed with AIB, having won a competitive process with all of the main Irish banks, and indeed, international banks that have an Irish presence. We agreed a 3-year EUR 10 million term loan with AIB, a EUR 7.5 million RCF and a EUR 2.5 million overdraft, which remains undrawn. A EUR 7.5 million RCF has since reduced to EUR 5 million. So again, cash we're generating, putting it to work, deleveraging the balance sheet, reducing our interest costs.

Our net debt to adjusted EBITDA is now such that the interest rate has reduced from an initial 3.75% down to 3.25% because our net debt to adjusted EBITDA is less than 2x. And by end of the year, we anticipate that the interest rate will have reduced to a further 2.65%, again, the improvement in net debt to adjusted EBITDA being less than 1x.

We have a net debt position of EUR 15.2 million, being our AIB facility and the payroll taxes that we owe Irish revenue of just over EUR 9 million. on a cash balance of EUR 10.7 million.

So just to speak to the payroll taxes for a moment. So the payroll taxes were taxes that we were housed in 2020 and 2021. They were incurring 0% interest. In May of this year, Irish government started to charge an interest rate of 3%, and they will start the collection of this liability in May 2024. We have spoken to Irish Revenue. We continue to engage with them on the topic. They have -- they published guidance last December, communicating that all businesses, sole traders, SMEs, large corporates, privates, PLCs, would all be pushed out to May 2024 and they will begin the collection of this facility in May 2024.

And we hope by the end of this year that we will have come to an agreement with Revenue on the repayment of this facility. The standard repayment plan is typically an initial down payment of 15% to 25% of the outstanding liability, with a monthly installment thereafter for a period of up to 5 years.

So that is the balance sheet. A very, very strong cash conversion, as we've talked about. Adjusted free cash flow of EUR 9.3 million on an EBITDA of EUR 5.1 million. Excluding the impact of deferred revenue, our cash conversion goes from 183%, but again, we have an element to deferred revenue. So when I strip that out, cash conversion of over 80%.

The last topic I'm going to speak about this morning is with regard to ESG and sustainability. And it's just something that we wanted to take a moment to address because it's very, very important to us culturally, but also a lot of what -- at the core of what the hosteling category stands for. Hosteling is, by its nature, an extremely inclusive category. It is all about community. It's all about giving back. It is a low price point, so it is not exclusive. There is no barrier to entry from a price perspective.

We have done an awful lot of work with the hosteling category to help them find a way to surface of their sustainability credentials. Hosteling produces far less carbon emissions than any other accommodation type. So typically, 25% of the carbon that a hotel would produce on a per bednight basis. And this is the work we did with Bureau Veritas to substantiate this, and we published a report last year, which we are building on.

Very pleased we're working with the Global Sustainability Tourism Council on the sustainability framework, which we're calling Staircase to Sustainability. We will be launching it at our upcoming conferences Bogota and Copenhagen. And then it will go live starting next year. And this is really a way for the hostels to showcase their sustainability credentials in an accredited way. The only way they have at the moment servicing up sustainability is by using a framework that has been developed for the hotel category, which is not fit-for-purpose for the hostel community.

The slide then deals with other things that we are doing within our own local communities, what we're doing culturally within Hostelworld, how we are an inclusive environment and how our work and efforts we've been doing have been recognized by others. Very, very pleased with all the work we're doing. I'm very happy to take questions on it because, again, it's something we feel very passionately about. We have a fantastic series running called Sustainability Stories that you can see on our website, which showcases some of the work that the hostel community are doing.

With that, I am going to hand you back to Gary.

[Gary Morrison, executive]

Thank you very much. So let's talk about strategy. What have we been building? And what do we think the future potential is?

So I'm going to start with the format of a slide that I used in Capital Markets Day. As you might remember, I said over the 3-year period we would increase our bednights by 1.6x. And this, if you like, is the first half -- the first 6 months scorecard of how we are doing. So if I look at our total bednight growth half year over half year, it's 53%. Now if I unpack that and say, how much of this is category growth, and then how much did Hostelworld grow on top faster than the category?

So using an awful lot of our internal data, external data that we scrape, we're able to build up a picture of how much the category has grown in bednights, the same as the hotel industry would talk about room nights. And it's about 14%. So the 34% that we grew on top is pure market share gain. So let's deal with the category.

So what we saw with the category, lot of growth in South Asia, you've already seen that with what Caroline was talking about, how our growth was even faster. Also growth in Oceana, Middle East, Africa. Central America was well ahead of pre-COVID levels last year. It still remains very much higher than pre-COVID levels. And if I look at that 14%, roughly 50% of that growth is because there's increased capacity, new hostels coming into the industry. And the other 50% is a slight rise in occupancy rates. And I expect those 2 trends just to continue as we go through this year and go into next year.

Now turning to our growth, which is on top of that. What we saw is incredible growth in Central America, South Asia and Southern Europe. Central America already was higher than pre-COVID levels last year. It's continuing to grow. But what we can also see is that South Asia and Southern Europe are all above pre-COVID levels. So phenomenal growth in those lower cost destinations in the world. There was growth in Northern Europe and U.S. and Canada, but not at the same levels.

Now as I mentioned earlier, that Social strategy, we believe, is what is driving those share gains. We have a much better product in the marketplace, which is winning out. And part of the reason why I say that is because that growth is coming at the low end of our marketing as a percent of net revenue. We are not buying that market share. It's because our product is better and it's winning in the marketplace.

In terms of our own hostel supply, we added at least a little bit over 1,000 hostels half year over half year. The rate at which we are adding them is approximately the same rate that the category is growing. In Capital Markets Day, I talked about the fact that we would want to grow a little bit faster than that. We will seek to accelerate that as we go through this year into next year. So overall, strong market share gains, but also strong category growth as well.

So thinking a little bit about our strategy, I'm just going to recap a little bit about why the strategy is like it is, and then I'll go on to some of the progress that we've made. So recapping, our mission, totally unchanged, help travelers find people to hang out with. 66% of our travelers -- 66% of our bookings are made by solo travelers, up from 60% in pre-COVID times.

And the reason why we have invested so heavily in Social is -- really plays out as you think about the business model and the P&L. So this notion of helping travelers find others to hang out with, it's a highly prevalent need. It's a very powerful need. If you go on to places like Trustpilot or Twitter or Instagram, and you look at what people write about our company, it's all about the wonderful experiences that the Social platform is now delivering. And that generates its own word of mouth. And we are the only people in our category that are building these kinds of products.

What that means from a revenue perspective is we're seeing very strong new customer growth, stronger retention rates. We deliver those features through our app. So you can make a booking on any platform. But if you want to use the Social features, which deliver on that mission, you have to use them in the app. As a consequence of having far more apps out in the marketplace, and I'm talking about iOS and Android, more of the bookings are naturally flowing through our app. So the app bookings are growing at a much faster rate than the bookings that we are getting from all other channels, including paid. And of course, that reduces our customer acquisition cost and it lowers marketing as a cost of -- sorry, lowers marketing as a percentage of net revenue.

We operate our marketplace. It's very, very scalable. As Caroline has said, our OpEx base is actually down on a like-for-like basis half year over half year. So the combination of these 3 things: revenue growth, margin growth and operating model that scales very well, that gives increased EBITDA growth, we capitalize very little, so, therefore, increase free cash flow growth. So that's the essence of how the strategy translates into financial returns.

So let's talk about those Social members. I did want to give you another snapshot as an update to Capital Markets Day to continue to give everybody comfort that these people who are attracted to our mission, they want to find companies like ours that help them find people to hang out with. Those kinds of customers that are out there in the category are super profitable.

And the reason we can say that is that when we look at the customers that we acquire, over the last 91 days, and we look at customers who joined the Social platform versus those that do not, and it's a simple opt-in when you make your booking, the vast majority of people make that decision on their first booking, what we can see is people who are Social members who've opted in, they make twice the number of bookings over the first 91 days. They're 3x more likely to make the app. And they represent over half of our bookings.

So even with that huge growth half year over half year, we have 60% net bookings growth, we are continuing to grow both of those cohorts. The Social members and the nonsocial. And of course, the nonsocial members are continuing to grow because the inventory that we have in the platform is more competitive than our competitors do. And the reason that we have managed to do that is we keep our commission rates very low. We don't give opportunities for our hostels to buy their way up to the top of the sort order.

The only way that they can get to the top of the sort order is if they give us more competitive inventory than they do other distributors and if they have a better proposition than their local peer group in the destination. So the network is continuing to attract and retain those really high-value customers.

And that plays out into some fantastic recurring revenue dynamics. So you may remember this chart from the Capital Markets Day, very slightly different because we're only looking at first half generated revenue. So for each of these years, the first half generated revenue, let's take 2016 as an example. So the green bar at the top, above the dotted line, is the revenue that we generated from the customers that we acquired in 2016. And the green bars that you see in successive years are those customers, their contribution to the revenue in future years. So it's your classic cohort chart.

So I'd like to draw your attention to 3 things, if I may. If you look at the revenue that we generated from customers that we acquired in 2022, and that's the pink bar, now look at that pink bar in 2023. So this is the revenue from those customers that we acquired in 2022. And if you look at the proportions, you can see there's a much greater proportion of that revenue showing up in 2023.

And that proportion is far greater than any time in our history, which is another proof point that the product is more sticky, more people are coming back. And when they come back, they are spending more. So you can see how that revenue is going to start to compound in the future because the gradient of the dotted line between 2022 and 2023 is now much greater.

The second thing is just a bit of a comfort. If you look at 2019 revenue, the revenue on the blue bar, you can see that blue bar is coming back in 2022 and 2023. So even though there has been, obviously, the COVID years where nobody was traveling, still those customers that we acquired in prior years are now continuing to show up as we go forward.

The third point, if you look at 2023 and you look at the size of the gray bar, that's the revenue from customers that we acquired this year in the first half, that gray bar is bigger than at any time in our history. So put differently, you could get your rulers and pencils out and almost predict what our first half recurring revenue in 2024 is going to look like.

And when you look at this fact and you can see the strong revenue compounding, this is because we are choosing to continue to operate at 51% marketing as a percent of net revenue. We could bring this down, but the rate of revenue growth in the future would be less. And we think it's in the best interest of long-term value creation to continue this very strong revenue growth over a lower OpEx base. So this, I hope, will give you some real data that proves that the business model is also driving strong growth in recurring revenue year-over-year.

So let's talk a little bit about the Social features and what we've been doing over first half. So to put this in context, we now have 3 platforms. We have our core OTA platform, we had that pre-COVID, we have it now. We've obviously been working hard to make the pages better, check out better, the funnel better, the inventory is better. In April last year, we launched the Social network platform on iOS in April, in Android in June.

And this really comprises 3 things: First, much richer profiles. If you look on the first graphic on the left-hand side, look at Lucas, we're capturing his interests. We're starting to pull in some content from Instagram. You can message him directly. The second graphic in the middle, we've been spending a lot of time continuing to improve the messaging experience. It now is almost as good as you would see in WhatsApp. You can do -- send URLs, you can send photos, you can send videos, you can use emoticons, you can reply in line.

And the third piece, which is not on the page, which is exactly the same as before, is the only people that you can see in the messaging platform are people who are going to be in the same destination when you're there, overlapping stay dates. Nobody else has this capability. So if I'm booking Joe's Hostel in Barcelona, when I look at the Joe's Hostel channel, it will be all the other customers who are staying in Joe's Hostel on my stay dates. And then if I look at the Barcelona channels, it will be all the other customers that we have, who are staying in Barcelona. And we give separate segments, separate channels, people who are interested in drinks and dancing or walking tours or cooking or dinner tonight, a whole range of different interests.

The combination in this second platform of these features means that the monthly message center volume, people actually using it, is growing very, very fast. And without giving you absolute numbers, if you look at the volume of messages that were sent over the network in January, an index set to 1, and you look at the volume in July '23, it's now 2.6x the volume, which obviously is much greater than our bookings growth, much greater than our customer growth. So we can see that people are using this platform more and more and more.

Now if I turn to the next platform, so we now have 3, the third platform. At Capital Markets Day, we did say that we wanted to build a platform to give people opportunities to meet people while traveling in the destination. And this platform that we built, that we call LinkUps is like an event management platform. And we built this really in response to our hostel partners.

Before we go any further, it's interesting to note how hostels make money? How do -- what's their margin profile? They sell beds at pretty low gross margin. What they're trying to do is to get as many people in the hostel as they can. That generates a good atmosphere. It also gives you the capture customer base, people who are going to consume drinks at the bar, people who will go to events, people who will go to excursions. And they make a lot more gross margin of those than they do over the sale of the beds.

So the platform that we've built allows a hostel to load all of their event catalog, whether it's excursions, events or events in the hostel, and load that onto our platform. What we then do is broadcast, we publish that to everybody who is going to be in the city. And before this platform, if you, as a hostel, wanted to tell your customers, you basically had a blackboard behind the check-in counter. And as people are checking in, you would say, hey, this is what's going on today.

What we are now able to do is to take that blackboard, put it online, and share it to everybody in Barcelona. And you, as a customer, when you look at St. Christopher's and you're shopping on our site, you can see what Linkups, what events they're showing on the dates that you're shopping on. Once you booked, if you join one of those Linkups, you would see the second graph -- the second little graphic. St. Christopher's are having a walking tour. They call it Let's Meet in Barcelona. You can see the date, the time, where it is, whether it's free, whether it's paid.

Crucially, you can see who else is going. So remembering 66% of our bookings, and growing, are made by solo travelers. So it's not just the events that they are interested in. It's crucially who else is going? Are they looking like people like me? Are these people I'd like to hang out with, people who I'm going to meet and hang out with while traveling?

In terms of the inventory, how big is the inventory? If you look at January and February, we rolled out this platform in London and Lisbon. We added on a few more cities in March and April. In May and June, we extended it to a few more cities in Asia, all the while we're refining the product. We're taking our feedback from our hostel partners. We're looking at how our customers are using it. And we went global in July '23.

What does the 54% mean? So about 56% of our bookings are made by Social members. If you look at those bookings, in July, half of them -- every single customer, half of them can see already at least one thing to do on their stay dates. If I were to add August month to date, that's now 75%. So we're seeing a huge take-up from our hostel partners in terms of loading their inventory. And in many destinations, people who are going for a long weekend can see 20 or 30 things to do, which is a new high-class problem to solve. Because what we need to be able to do is to show our customers, I'm going for a long weekend, out of the 20 or 30 things that I could do, which are the ones that I should do?

So for the balance of this year, we're going to spend our time and think about how do we add a review system, how do we add themes, how do we add filters, how do we allow people to sort by the number of people who are going or sort by solo travelers? All of these things that would help people navigate that choice and make sure it services the events that are right for you.

As we go into next year, there are 2 things that we're thinking about. Obviously, when you look at the inventory, some of it is free and some of it is paid. Hostels are generating value from this product. So we're going to start thinking about how could we monetize it in a sensible way. Does it make more sense to take a commission from the paid events? Does it make more sense to just charge a platform fee, like a [indiscernible] fee or a subscription?

But we do feel that there is a significant monetization potential that we will realize in second half next year through monetizing the hostel inventory. And I would add one very, very crucial thing. The customers who are using this, we have already bought through our OTA platform. So any revenue that we generate from this product falls all the way to EBITDA. So it is a very rich product from that perspective.

And I think one of the other things we will do is we will start thinking about what other third-party inventory types could we add to this platform, to this captive network? And maybe a good way of thinking about that is, if you look at Amsterdam. Amsterdam, in low season, we have several hundred people every single day. In high season, we have several thousand people every single day. So we have more than enough density in, let's say, the top 500 cities of the world to be able to talk to a night club or a festival promoter or some other local business that has some quirky event or excursion to give our customers more choice and, of course, for our company, more revenue potential.

So we're very, very excited. It's very early days for this product. First, order of business, build out the hostel hosted inventory. Second, add reviews, filters, themes, sorting. Third, think about the revenue potential that we can generate from using your hostel inventory. And then fourth, what other third-party inventory types that we could add to the platform? But we do expect it to generate some revenue in second half next year.

So moving on. Just to reiterate the guidance. So as I said earlier, in May last year -- or sorry, not May last year, May in the first half, we changed our guidance and we moved it up to 16% to 17% range. We're now 1.5 months into second half. It's looking very good. We're still materially ahead of where we were in 2022. We'd like to wait a little bit longer to get through the rest of summer and so on. So for now, the guidance has remained unchanged from what we said earlier, 30% growth across net bookings, net GMV, net revenue.

Marketing as a percent of net revenue, the guidance was 50% to 55%. First half, it was 51%. It's going to be in the 51%, 52%-ish range on a full year basis. And that leads you to the EBITDA of EUR 16.5 million to EUR 17 million.

So summarizing what we've heard today. I do think we're super well positioned. The Social strategy is uniquely positioned to win in this category. It's a very powerful need, it's a very prevalent need. And we can already see in the first 6 months of execution that it's gaining market share and it is doing that at the low end of marketing as a percent of net revenue.

The team has done a fantastic job addressing the legacy COVID debt, repairing the balance sheet. We did that ahead of schedule. We thought it was going to be around summer; we managed to get it away by April. It's materially lower amount and also materially lower interest cost.

In terms of the business model, it's always going to be extremely highly cash generative. We're going to continue to deleverage that balance sheet as we go into the future. In terms of where we are in the year, definitely on track for the full year. And I hope you've gained a lot of comfort that we're absolutely firmly on track to meet our midterm ambitions that we outlined in the Capital Markets Day.

So thank you for listening to Caroline and I. I hope you're as excited about our prospects as we are. And with that, we'll throw it open for questions, David.

[Operator]

That's great. Thank you -- thanks very much indeed. David, we do have a video to play, which I thought might be useful to do just before we go into the Q&A session. So if I may, I'll just load that up now and bring that up for investors to watch. Thank you.

[Presentation]

[Operator]

Thank you very much indeed. I will now bring out your cameras. And if I may, David, I'll hand back to you, if I may, to moderate the Q&A. And I'll collect it from you at the end.

[Unknown Executive]

Yes. Hi, good morning, everybody, and thanks, Mark. Thank you, everybody, for your questions. We'll try and get through as many as we can now, and any questions that we don't get through, we'll post a response on the platform after this. But let's get through as many as we can now.

We've had a lot of comments and feedback regarding the contribution of our Social strategy towards the results that we're presenting today. So that's probably the best place to start. Gary, you might share some thoughts around how much of this you think is revenge travel and how much of it is actually the strategy in action, which is delivering the growth that we're seeing year-on-year here?

Maybe then looking specifically at our revenue cohort side, it looks like the 2022 cohort have returned this year, is returning at a rate which is significantly above the historic average. What do you think is driving this? And what do you think it means for future years?

And then finally, how is all of this affecting our CAC and LTV equation and impacting our customer acquisition bidding strategies?

[Gary Morrison, executive]

Okay. So we'll do the first one first. The revenge travel. From my perspective, the easiest way to think about that is the revenge travel would show up in category growth. There's no particular reason to presume that it would be materially greater than that. So we have a certain market share of the category. So the category growth incorporates all parts of revenge travel, if I may. The fact that we've increased our share within it so significantly is due to having a better product in the marketplace, because that growth has come with marketing as a percent of net revenue at the low end of the guidance range.

So I don't think that our results are exceptional because of revenge travel. I think 14% is category and the other 34% above us is really us.

In terms of the retention ratio, there's really 2 things that -- revenue retention, there's really 2 things that you generally see there. One is the number of customers that come back year-over-year. And then when you look at those customers, their purchase frequency over a defined period of time. What we are seeing is that more customers are coming back, number one, compared to prior years, and we're also seeing more of those bookings.

So the simplest way of looking at that is, obviously, as we are growing in the category, we are growing by acquiring customers that have a certain propensity to travel, multi-destination travelers, who are looking for people to hang out with. So we are naturally more attractive to customers who are looking for that who generally travel more frequently and also make multiple trips over multiple years. So that's the driver for the increased retention rate.

As a consequence, I feel very comfortable with the expectation that, that would continue. So those increased revenue retention rates we are seeing not just across 2023 versus 2022, but all of the prior years before that. If you look at each of those lines, which are the cohorts from prior years, they are also slightly proportionately larger. So we would expect a higher retention rate from the customers that we acquired this year to come back next year. And for the other customers that we've acquired in prior years, again, to show up more frequently.

So it is a consequence of the business model. And obviously, operating the business around the 50s marketing as a percent of net revenue does create that enormous revenue growth.

In terms of CAC, LTV, in interims I think last year, we started to give people a bit of a sense of what that looks like. What I would say is that, across a very wide customer base, in other words, thinking about some of the customers we see once and we never see again. Other customers are with us for years and years and years and book multiple times on every single trip. So there is a very, very wide dispersion. But if you collapse that all and you take it to an average, in general, we recover the cost of every customer that we acquire, if we take all of our marketing costs and divide by the number of customers, somewhere between 28 days and 91 days of their life. And in general, across that huge wide dispersion, we see that 50% of the value is normally in 28-day time frame. So I think I covered your 3 questions there, David.

[Unknown Executive]

Yes. You might stay on Social with the next question because there's quite a few questions around the messaging and LinkUps platform. You might, Gary, help people understand how you measure user engagement and longevity on those platforms. And in your view, the main KPIs that you follow for measuring the performance of a Social strategy that other stakeholders can keep an eye on them as well.

[Gary Morrison, executive]

So there's 2 such KPIs. If you look at the second platform, the social network, we look at a whole range of things like how many people opened the app? Did they send a message? Did they look at a profile? Did they -- all of those subcomponents we would track every day, every 7 days. And we use that to inform how we improve the product.

The data point that I gave you today was just an indicative data point to say, look, the volume of messages, if you just look at the Social platform, which is just one feature, is growing very substantially as a way of communicating that people are using these features more and more.

I think when you look at the Social strategy holistically though, I would say that's too detailed way to look at it. And I think the best way of looking at it is what does the retention rate look like in terms of those revenue cohorts for a certain level of marketing spend. And then the 2 other data points are, if you look at the first 91 days, how many bookings do they make relative to nonmembers? What proportion are on the app? And what proportion of the total bookings are being made by social members? So we will continue to report that.

But basically, the power of the Social strategy ultimately gives you really strong revenue growth at 50% marketing as a percent of net revenue. And as that revenue growth continues to accelerate, that is coming on a business model which is very scalable. So more of that drops down to EBITDA. So that's probably the best way of thinking about it, and those would be the KPIs that we would continue to report on.

[Unknown Executive]

Thanks, Gary. Caroline, I might turn to you for the next set of questions. We've had quite a few comments that have picked up on the combination of trading performance, the operating leverage that's come through, the cash conversion that's come through, and how the refinancing with that has meant that the business has been able to deleverage significantly and is there pathway emerging to a 0 net debt position. You might talk then a little bit about the balance sheet priorities for you over the next 6 to 12 months. And your thoughts then on capital allocation optionality, be that M&A, reinvestment in the business, dividends and buybacks.

[Caroline Sherry, executive]

Great. Thanks, David. Yes, a very popular question that has come up for us on our road show. Look, we are delighted that we were able to complete the debt in a time frame that was much earlier than we had expected. We flagged at Capital Markets Day, this is a strategic priority. We initially thought it would be something we would complete late summer, early Q3. There was a lot of interest, our peer banks. We had a competitive process. And our performance as such over Q4, end of last year, start of Q1 and into Q1 of this year, that we were able to complete the transaction earlier than we had expected.

We -- one thing that was very important to us actually with whoever was going to be the bank that we refinanced with, we wanted flexibility. So we knew that we were signing up to a term loan that was going to be 2 to 3 years typically, standard commercial debt terms, very much reflective of the strong performance of the business, where it was, strong recovery, strong cash generation, characteristics of the business.

But one thing we really wanted to make sure was with the flexibility that if we wanted to repay early, that there was not going to be an early repayment penalty, which can be quite punitive and adds up. So very pleased with that. What we agreed with AIB is allowing us that flexibility. So whilst the EUR 10 million term loan is over a 3-year period, we would see that we would get to a net debt zero position quicker than that.

The other piece that's out there as well is obviously the revenue liabilities. Again, they've been very -- they're very, I would say, slow and flexible on the repayment of the debt. Again, that's not reflective of our position and where we're at. It's very much trying to accommodate the wide cohorts companies that owe liabilities to revenue outstanding since the COVID period.

So I think if I kind of stack-rank in order of importance, first of all, it will be continuing to deleverage the debt that we reached with AIB. The interest rate there is very competitive, but it is more expensive than the interest rate that is accruing with the government liability. So we will prioritize that first. We'll deal with the government liability then second. Ideally agree [indiscernible] with them, we can expedite that and get that off the balance sheet.

And then after that then, as I say, David, there are options open to us. And it could be reinvesting in the business. There are so many things we would like to do. We know that there's a massive upside potential to LinkUps monetization opportunities. But building out beyond that. And so important to invest in the business as well. And when we say invest in the business, it's having people on the ground to build the features and expand the product portfolio. That is our CapEx, it's the development labor associated with these projects.

So I think there's an element of that fine balance between making sure we're investing in the business for growth, but also shareholder returns. And so what is going to represent the best shareholder value? Is it a share buyback, as you say? Is it -- is it the resumption of the dividend? Those are the things we're going to have to assess when the time is appropriate. But I think back to the original question of kind of the nearer term, 6 to 12 months, it's continuing to deleverage.

[Unknown Executive]

Thanks, Caroline. You might just -- I might stick with you for the next question, it relates to our financial performance and the EBITDA result for H1 '23, clearly very strong. But you might have walked people through the performance drivers, not just in that result versus H1 '22, but maybe bridge people from where we were in H1 '19 as well. And then your pathway in your view back to EBITDA levels on a full year basis in line with pre-COVID time frame, 2019.

[Caroline Sherry, executive]

Okay. Well, margin -- sorry, EBITDA walk versus H1 last year, we covered off in the presentation. The key headline items are huge resurgence of volume, bed price inflation also helping drive revenue growth, but materially volume recovery. We saw over 6% growth versus H1 last year. Marketing efficiency being at 51%, costs broadly class. An element of drag from deferred revenue, which will unwind in the second half of the year, is there was a loss of EUR 5.2 million in H1 to a profit of EUR 5.1 million in H1 of this year.

Then if we look at that versus 2019, in H1 2019, we made a profit of just under EUR 9 million, versus the profit in H1 of this year of EUR 5.1 million. And what are the constituent parts of that? So we, as we mentioned, have a flat commission rate of 15%. That's actually down 1.6% versus 2019. So the blended average commission rate in 2019 was EUR 16.6 million. So that tailwind -- or sorry, a headwind, I should say, for us in this half of the year. So we have a lower commission rate.

We also changed the cancellation window. So while we had the free cancellation product in 2019, the cancellation window was much longer. So you could only see -- it was 7 days. So you could only see the free cancellation option and could cancel 7 days out. Whereas now with the free cancellation product, you can cancel with whatever is the cancellation window of the hostel. So it could be 24 hours, it could be 48 hours, i.e., I'm traveling in 2 days' time and I can cancel up until 24 hours before my stay days. Whereas back in 2019, you could cancel 7 days before your stay date.

So that meant that there was less optionality. So the cancellation rate was lower in 2019, that the benefit of having a closer window of cancellation rate is there's far greater free cancellation volume in '23 than there would have been in 2019. But that is a drag to cancellation rates.

We've seen huge volume in ABV uplift again versus 2019, that then driving the performance back to H1 of this year. Marketing costs are up versus H1 2019. But again, I think there's some important points to make on that. Talked about the commission rates. So we had a higher commission rate. So we're making more revenue on that booking from a commission rate perspective than we are this year with it being at 15%. But we also had broad marketing spend in 2019.

So if we look at it on the marketing as a percentage of revenue, we're talking purely paid marketing. So that marketing percentage looks higher H1 '23 versus H1 2019, but that excludes the broad marketing spend that we were incurring in 2019.

So operating costs then are the other tailwinds. So if we think headwinds are commission rate, change in the cancellation window, deferred revenue because we're seeing more free cancellation products, and then marketing costs. They're all adverse versus 2019, but then the headwinds are volume, ABV and then operating leverage. So operating costs being down materially versus where they were in 2019.

I'm sorry, I think the last part of the question was, where do we see the full year, David, or?

[Unknown Executive]

Yes. The pathway back to -- on a full year basis, 2019 levels.

[Caroline Sherry, executive]

Sure. So just from an EBITDA perspective, we've -- our guidance for the full year is EUR 16.5 million to EUR 17 million. We will have a margin percent -- an EBITDA margin percentage that is in the high teens, close to 20%. So very, very close to where we were in 2019.

And I think we -- what we can see from the business is we've improved our operating leverage. So getting back to that EBITDA margin of 20% plus is something we're very, very close to.

[Unknown Executive]

Thanks, Caroline. Gary, I might turn to you with our next question, if I could. We have quite a few comments around market share. So actually, maybe just as a bit of a refresh for people, and you might have some new people to the story. You might just remind people how we define and measure our market share. And just some brief comments on the competitive landscape within it. And then just to maybe underscore how much of our top line performance has been the market, how much has been at Hostelworld, and the impact of bed price inflation on that.

[Gary Morrison, executive]

Okay. So just thinking about market share. We look at the entire hosteling category, all of the hostels. We have most of them. And we scrape, we simply make a core assumption. If you are a hostel, you are distributing either through Hostelworld, through Booking.com or both. So we form a picture by scraping Booking.com every single week of all of the hostels that they have, and we have all of the hostels that we have, and the hostels that we have together. When you look at the total category sales, because we know how much demand is, is going into each hostel that we have, we could also make a very good assumption about how many -- how much demand is going into hostels that we don't have, because they are in locations where we have other hostels. We're able to build up a picture of the total category bednights.

That was the underpin of the data set that we use that said that the category has grown by 14%. We could also see that our market share has grown because we have grown another 34% on top of that. Now if I look at the total number of beds that we sold compared to the total number of beds that we estimate that were sold in the category, that would be about 10% in the first half. Normally about 50% of the hosteling category sales come through OTAs, online travel agents, like us. So if you just take that 50% portion, our market share of that portion is 20%. And clearly, it's grown materially half year over half year.

We haven't actually reflected that as a GMV share or a revenue share because it's a little bit more difficult to be specific on what bed prices or what the prices are possible that we're not selling. So we can be very certain around the volume asterisks, slightly less precise on the revenue. So I can't give you how much of our revenue growth was driven by market share on an accurate basis. But at least from a volume perspective, I'm pretty comfortable, category grew 14%, we grew 34% on top of that.

I also might return a little bit to the question that was asked around 2019 and the P&L straight was different to what it is now. We have made an enormous amount of change to this business, improving the core eOTA, launching our social network and now launching LinkUps. And essentially, the proposition for our hostel partners is a lot better. We're giving them even more customers that they want. They could do excursions, they increase bar sales. And we're doing that at a lower distribution cost of 15%. So it's a much better proposition for our hostel partners.

It's also a much better proposition for our customers. We have built features that help them find people to hang out with, an incredibly powerful and prevalent need. By running the business at this marketing as a percent of net revenue, we can get much higher revenue growth rates going forward than the business ever enjoyed in the past. So it's important to place all of these things in context.

Frankly, in 2019 and earlier years, the business wasn't spending enough in the right way to be able to keep chopping up the funnel. And if you look at the revenue retention chart, you can see that. We have a much better proposition for our hostel partners, a much better proposition for our customers. We're operating the business now at a very tight OpEx base. And we're investing in marketing to get that huge revenue growth with a much better product. So I just think it's important to frame all of those decisions. So the shape of the P&L is different, but it's going to grow a lot faster.

[Unknown Executive]

Thanks, Gary. I think we've reached our final question now. Thanks, everybody, for your contributions, unless any other question comes in, in the next moment or so, I'll probably ask this question and come back, Gary, to you to close things out as well.

Gary, the last question then is around supply, and maybe your comments on how the overall category has been performing from a supply perspective, and how our coverage has moved with that. And then specifically at Capital Markets Day, you talked about Brazil and Poland as opportunity areas for us, that you're going to target over the coming period. You might talk a little bit about how that's been progressing.

[Gary Morrison, executive]

So start off by talking about what our market coverage is. So if you look at the total category, and you say that, let's say, this half year, it was 100 bednights. Obviously, it's a lot more than that, runs into millions, let's just say 100. If you look at all of the hostels on our platform, what they sold -- not just by us, but every channel that they have, what they sold was about 75% -- 75 bednights. We estimate that the hostels that are on Booking.com platform is very slightly greater than that, maybe 77, 78, something like that.

But what that means is we have a lot of hostels that they don't have, they have a lot of hostels that we don't have, and we have a huge overlap between the 2. So if I look at how much our coverage, that 75% has changed relative to first half, it's actually flat, it's 75%, even though we added another 1,000 hostels through our platform throughout the first half. So the way to think about that is as the category has grown and more hostels have come on board, we've added hostels at the same rate that the total category has grown.

Now in relation to the Capital Markets Day comment, you're absolutely right. The 3 kind of regions of the world where I felt that we -- the data says that we have opportunities to grow our hostel portfolio were Central America, Eastern Europe and North Asia. And then if you wanted examples underneath, you're absolutely right, Brazil, Poland, Japan.

Throughout the year, we have done a couple of things. So first, we've hired some contractors, some -- and local agents in Japan to be able to start building the inventory there. I'm also delighted that we're having our first post-COVID hostel conference in Bogota next month. It gives us a great opportunity to spend a lot of quality time with all of our source in that region. In part, these are the kinds of things that we do to stimulate more demand and sign on more hostels in that region. Also, we're having another hostel conference in Copenhagen in the latter part of September, and that gives us an opportunity again to reach some more of the hostels who come in and visit us from Eastern Europe.

So there's a whole variety of techniques, whether it's hostel conferences, in-market visits because hostel associations call us, or whether it's webinars or outreach, a whole sort of strategy around building that market coverage. And we'll be able to give you some more precise data about how each subregion is performing at year-end.

[Unknown Executive]

I think that we'll conclude.

[Gary Morrison, executive]

I hope you've enjoyed spending this time with us today. It's always a privilege for Caroline and I to present what is actually the incredibly hard work of the rest of the team that we have, those 240 people that make up Hostelworld. I'm hoping that the first half growth rates, the increase in market share, the incredible cost discipline, marketing as a percent of net revenue at the low end of guidance range, the exciting things that we're doing, all of the Social strategy, gives you the comfort that we have a tremendous opportunity ahead of us. We're certainly well ahead of where we wanted to be from Capital Markets Day projections.

And I think on that note, I very much look forward to seeing you all again at our full year presentation, which should be sometime in February and March.

[Operator]

Great, Gary. Thank you very much, Gary, Caroline, David, for updating investors this morning. Thank you once again for your time.

Please don't close the session. We'll now automatically redirect you for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company.

On behalf of the management team of Hostelworld plc, I'd like to thank you for attending today's presentation. I wish you all a very pleasant afternoon.