Hypoport SE

XETRA:HYQ

Earnings Call Transcript 2020-Q3

[Operator]

Dear, ladies and gentlemen, welcome to the Webcast Results Q3 2020 of Hypoport SE. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Ronald Slabke, who will lead you through this conference. Please go ahead, sir.

[Ronald Slabke, Co]

Yes. Thank you, and welcome from my side to the Q3 presentation of Hypoport. So as you know already, Hypoport is growing. We have a top line growth of 50% for the first 9 months in 2020. So we -- despite a challenging environment, the approach to digitalize the credit market, the housing market and insurance market in Germany is working well, and we are gaining market share in an overall more or less stable environment. Talking about environment first. So corona crisis was there through a major part of the first 9 months. Since March, we are as a society, as a country, infected with the corona crisis. And in these 3 industries, credit, housing and insurance, it happened -- it had an impact, not comparable with other industries, but let's say, the industries are stable, but they are operating in a different environment right now. So especially operations got tricky in this environment, while the P&Ls of our clients are, let's say, only minor affected during this crisis by now. Okay. When we talk about the first 9 months, then it's important to understand that, yes, there were some ups and downs by now during this period. Especially in the mortgage market, we saw a strong first quarter, including the March, which was already in a lockdown with a plus 10% reported by Deutsche Bundesbank, we saw a growing market compared to last year. Second quarter was still growing, plus 6%. And a clear sign that the interest of consumers in redefining the housing situation after the lockdown was a huge change in the society. You could see that how important the your own 4 walls got during the beginning of the crisis. So a little bit surprising for us was that third quarter was weaker from the market side. The total quarter ended with a minus 4% compared year-over-year to last year. We started weak, July and August were minus 5%, minus 6%. September is again on a level like last year or was.When you look on this in there are multiple options to explain this market situation in the third quarter. Maybe people were happy after the difficult second quarter to enjoy their freedom again to travel, make holidays with their children. So optimizing their living situation and financing a new home was not so important in this time. The last year third quarter was a strong quarter, especially July and August, thanks to some interesting prices. So it can be that, let's say, it all -- let's say, was just a slow start in the holiday season. And the September shows that we are back to normal. So that we can stay confident that the fourth quarter would not be affected significant by the corona crisis environment.So this stayed about the mortgage market. What stayed intact is that even in this environment, in the mortgage market, everyone understands that an increased digitalization of the whole value chain from consumer via adviser to the back office is needed more than ever and that it's a must have, if you want to survive future lockdown. We are working with our clients throughout this last half year intensive in pushing projects forward, but what we see is that banks are in a stressed environment right now and that they reallocate their resources on a short notice. Not that their P&L is really affected, but their organizations were not made for this environment. And so the stress of the organizations leads to a slowdown of strategic projects and this is what we drive forward with them to digitalize sales funnel after sales funnel in the industries and their businesses is slowed down by the virus as well. At discounts as well for other B2B partners that we have that in this environment, traditional organizations are not as agile as they would be in a non-COVID environment. So we -- even when the need increases during coronavirus, their ability to execute is weaker. And this, we see, as well in the mortgage market. So a number of new clients, the gross numbers of project -- of migration projects grows, but the transaction numbers are not as fast accelerating as they should with the progress that we do here. I will talk more about this later when we talk about our development in the retail banking industry. So before this, looking on other product areas and markets we are operating in, next to mortgages and the credit market comes to us, the corporate finance and the personal loan market. Corporate finance, you can say that German Mittelstand is hit hard by coronavirus. So demand went up during the last quarters, especially during second and third quarter. We could advise clients and broker some subsidies -- subsidized loans from KfW, but the typical project that we do during the summer were slowed down. So the additional fees from advising in the corona environment compensated the slowdown of the other projects, but didn't come on top as we expected earlier. So in the midterm, and looking forward, we expect that financing Mittelstand in Germany will be more complicated than it was in the past. The banks will be much more sensitive regarding external shocks and, let's say, after working out they're bad banks, they will be more picky than they were in the past. And because of this services like REM CAPITAL will be needed more because it will be -- it will get tough for Mittelstand to finance itself. So external head will be needed plus modern stance in the market. And the funding part, we are right now positioning a digital platform for especially this incremental increasement of the efficiency of markets and transparency in this credit market of German Mittelstand. So we are well positioned, but the market is fragile right now. For the consumer credit market is the third largest segment in the credit platform. We saw right with the first lockdown that banks, let's say, restricted their lending policies because of fear of losses because of recession. In the summer, it was weakened again and the restrictions were taken back partly. Now with the second lockdown coming, banks, again, get more picky in what they are willing to loan to consumers just on the solvency of a consumer. It sets without any additional collateral like mortgage. The long term, we expect that we will come back to the pre-corona situation. We have a quite healthy consumer lending market here in Germany, a very low default rate long term. So this sensitivity of the banks and the current environment will normalize again when the distress of the uncertainty regarding the length and the depthness of the recession is over. This market is the only one in the credit market. We don't see additional impacts from digitalization. It's an ongoing process for the last 5 years already with a high speed. So this is going forward, everyone knows that personal lending will be fully digitalized as well, and it will be actually the first and mortgages and corporate loans will be later. Okay. For the private client segment, operating in the mortgage business as well. You can add that the need of the consumers for remote advice via conference calls increased during the second quarter. During the first quarter, we see a bouncing back and normalization. There is a group of consumers who still want physical advice, face-to-face is preferred by a substantial number of consumers. So while in the third -- in the second quarter, a huge amount were closed remotely. Third quarter, we saw again offline business of our franchisees. So the -- what stayed is that especially younger consumers, well-educated consumers stayed with the remote advice because it's more practical for them. And so if you look forward from the way how consumers will interact with their advisers, the crisis will work as a catalyst and increase the speed, but we will not see that consumer advice and mortgage business will be fully digitalized within a couple of quarters. This will take decades until it fully changes to a remote advice process. So what stayed long-term as well in -- when you look on the consumer side, especially is that the crisis teaches everyone how important they own 4 walls are. So home ownership got much more importantly in Germany in the last 2 quarters. And we see an increase in demand on this side. And because of this increasing prices of properties here in Germany. So this is a healthy development. We are still far behind most of the developed world, when you look on the property prices. So there is still a lot of growth potential just from the price increase here in Germany. And even with the second wave coming right now and a soft lockdown which we see in November in Germany, we don't expect a too dramatic fall in a number of trajections. So it will be a little bit less during the soft lockdown, but the increasing prices were compensated partly already. So other industries, housing real estate market most of this, what I said about the mortgage market is linked to the housing market. So we saw that during the last 2 quarters, there was a slowdown in numbers of transactions. Third quarter was already getting better from the number of protection, prices increased, as I said. The digital part of the process increased and needs to be increased. Midterm, we expect that the demand will stay or even drive the prices up. And the digitalization especially in our target group, which are banks and their property sales agents will stay high even if it's, unfortunately, like this that during the third quarter, we saw that banks are still challenged by the environment and can't focus on this strategic project that allocate resources needed so that we are moving fast forward and migrating them faster, more about this later. Property valuations was an area which were hit more than everything else in our portfolio. Because of the inability to inspect homes of people during the second quarter under lockdown. This change in the third quarter. So from the consumer side and from the availability or accessibility of properties, we saw normalization. The only thing which stayed were that some of our partner banks were not able to process all the applications they had and request the audits and the valuations so this slowed down the growth rate there and creates such a stack of open valuations that need to be made in the next couple of quarters. So some growth potential for us near term. The regulator here in Germany allowed more digitalization in the process, which is fine, which is helpful, which speeded up the digitalization in this area and makes us more confident about the investments we are doing here. This is a market to be changed. The housing industry, so the renting market here in Germany saw a little impact during the first part of the crisis and the third quarter stayed the same. So really a small number of defaults some projects are a little bit delayed on the development side, but nothing major. So you can say that housing is, in general, not affected by the corona crisis up until now. Just minor issues here. And as well, like in other industries, our partners are distracted from strategic projects to keep handling their day-to-day work. This slows down something, but this is not a strategic or a sufficient change, which will stay. The same goes here for the future. Let's say, the pressure on digitalization went up a little bit during the crisis. They learned that it would have been easier with the ability that their workforce could work remotely, but it's an industry which is in general not under pressure because of their overall environment. And so let's not expect too much impact here on the speed of change and speed of digitalization in this industry. You can say this that it looks like this as well in the insurance industry, just the competitiveness of new players are here, more important. And so the drag to digitalization of insurance companies stayed during the third quarter. The impact on the industry, on the side of premiums or losses was low by corona, but realization how dependent they are still are from the physical contact and offline services to the client was high. So the insurance world learned again as well during the last 6 months that digitalization is needed. We are the offer there. We are the only one capable to do this. And so let's say, there -- we keep getting interest from the industry, but as well like in other industries, they are focused on day-to-day business and keeping the operation running away from strategic process slowed down a lot of projects with us unfortunately. Okay. So overall market environment, that did, you can say we are in a stable environment overall. Just partners are slowed down because of operational reasons. We are gaining market share in this stable environment, and we, as Hypoport, are growing. We do this in a different speed. So when we look on the different segments of Hypoport, you will hear some, let's say, some small news and small updates here. Let's start with Europace and the credit platform. We saw, for the first 9 months, a growth rate in average of 30% for all product areas. Mortgage business is up 34% over the first 9 months in a slightly positive market environment. Third quarter market was minus 4%, Europace was, again, double-digit in the plus. So we are gaining market share. Same goes for building society contracts, Bauspar and [indiscernible], which are typically linked to mortgage business, they are in line with this, just growing a little bit slower because of the attractiveness of this product. A little bit different, the product segment, personal loans because of the restriction on the lending policies. The overall market is down for the first 9 months. And especially for third quarter, minus 7%. We are slightly growing in this environment still gaining traction on new clients, but let's say, especially in our special feature that we are used as a [indiscernible] for risk profile of banks, so banks don't want to lend to their clients that they use Europace to outplayed this business. We see these restrictions, and we are hurt by these restrictions of other banks. So if one bank doesn't want to lend, a lot of other banks don't want to lend right now as well. So especially in this riskier target group, it got a little bit more difficult, and we are losing there some revenue right now. But as I said earlier, we expect this to normalize again after the crisis and that this business comes back to where it was before, which will give them a nice positive impact of the -- on the growth rate of our personal loan business. So you can say prime business and less prime business will grow together. Right now, only the prime business is growing on Europace. Okay. There was a phone call in this -- sorry, for the interruption. Okay. Back to mortgage business and to the development in the different segment of the German mortgage market. We see a strong gain in market share for Europace over the last 9 months and the last quarter in all 4 segments, but especially the cooperative banking sector and the savings bank sector is driving our growth forward. In the corporate spending sector, we gained 85% year-over-year by now. And if they would not have such a trouble with their operation and reallocate their resources, we would be up to 100% and more in this area. So corona slows us down here and slows our growth rate down here a little bit. Same goes for the savings bank side. Without the corona effect, we would not be up only 35%, we would be up more than 50% in this sector, but as I said, banks have an operational issue with this crisis and reallocate resources away from strategic IT projects right now. So in both sectors, we see a strong sentiment to work with us. They understood even better how important it is to digitalize, and we expect in both sectors for the next years, high-growth rates and a fast gain in market share for the Europace technology. So this sums up to a strong first 9 months for the credit platform, plus 20%, EUR 120 million in revenue, as a new record and clear double-digit growth rate. You see here that it's -- the growth rate is a little bit less than the transaction volume growth rate. You see the impact of the slowdown in corporate finance and personal loans, especially. On the profitability side, we increased our EBIT again, new record as well, EUR 25 million for the first 9 months, a little bit below expectation. We wanted to keep the growth of all 3 core KPIs in line. Weaker third quarter here, surprise as in -- let's say, our cost side is not dependent on the revenue side. So it described our willingness to invest in the future in key account resources and IT development. And this surprise of the weak third quarter environment resulted in an underperformance here for this quarter. We will adjust our investment willingness in the next quarters to make sure that this stays in light again. So sorry for this, coughing a little bit. It's my third call here today. And yes, it tickles in my throat. I'm pretty sure it's nothing to -- this has nothing to do with corona, different than when we talk about the business in detail. Okay. Nothing to do with corona. Private client business of Dr. Klein. Our franchisees did a great job in the first 9 months. We gained a lot of market share, plus 24% growth rate in the first 9 months, above the historic numbers. Here, paid back that we were much more digital than most of our competitors, let's say. You can say Dr. Klein was the most digital adviser network out there during the corona crisis. Here as well a slow down in the third quarter on the growth rate. On one side, thanks to the market on the other side, Dr. Klein had an extremely good third quarter 2019. And extremely strong quarters, first and second. So we expect that obviously that this slowdown is more a base effect than a real slowdown in gaining market share, but it's a good news. While in the second quarter, the -- it was getting difficult to recruit new advisers. This change in the third quarter, 26 new advisers in the third quarter, and we are close to back to our long-term growth rate of head count of advisers of close to 10%. And 10% is our goal as an annual growth rate in headcount. In addition, the productivity gains of Europace and the increased average loan amount brings this top line growth of 20% plus, which we are used to hear from Dr. Klein. So Dr. Klein finished the first 9 months with record numbers as well. Double-digit growth rate on revenue and the gross profit. Especially in the comparison that we did 24% of projection volume and only 17% revenue increase, you see the impact of corona in the accuracy and predictability of a closed mortgage. So the conversion loss because transactions of clients are culminated or banks changed their credit criterias is significant right now. So we see here that we lose some efficiency in this conversion loss because of the uncertainty around us, but still, let's say, double-digit growth rate on revenue. But let's -- when it comes back to normality, we will see a normalization of this conversion rate as well back to the pre-corona level. This means with the same number of transaction volume, we will increase our revenue even more. Huge jump in profitability here. We had heavy investments in the last 2 years in key account resources to establish a better relationship with these hundreds of regional banks that Europace integrating the system, to really work with them and drive their conversion rates up, you need to invest in key account resources. Dr. Klein did this. And because of this good close strike better deals with them. And this resulted in a historic high profitability of this business here right now. Looking forward, we expect Dr. Klein to finish with a record new high for this year and to continue growth rate in the next years. So continued growth rate. It's as well as something which is perfectly linked to the net segment and our real estate platform. We try to use our strong position in the mortgage market to gain strong positions in property sales and property valuation as well. Property sales, it's the same for us because the link between transaction and mortgage is strong. And as a consumer in the digital world, you can expect that with every offer for property, you get the information if you are able to afford it and what does it cost you actually. And with every mortgage transaction as well there is valuation needed. And in both markets, we see a high fragmentation and fragmented digital processes when they are digitalized at all. So we expanded both on the property sales side, we focus on the real estate agents of banks to leverage our long-term relations with banks. And they are quite special need and our USP to link the housing transaction and the mortgage with each other. And on the property valuation side, banks are the clients and the customers and this optimize integrated processes with the Europace system. And with our long-term trust and relation with banks, we see that we are able to gain market share here in this environment and gain from a lot of small intermediates, which operate here by valuators. Let's start with the savings side, we have a strong position in the savings bank industry already, incrementally increased it. Now 86% of all savings banks use FIO as their sales platform. They expand the reach of the sales platform, we expand the integration, and we expand the services which are available on this and this way, drive the transaction-based revenue models up. On the other side, and this was, let's say, long-term plan from us. And finally, we are able to execute this. We are not keen on one-offs and, let's say, project revenues and license revenues, which are onetime paid. So we transform one-offs to recurring revenue and increase our recurrent revenue base step-by-step in this industry, same goes for the ERP system for the housing industry, which is as well part of this segment here. And the combination of both that we are growing and transferring to recurring revenue that this partners are slowing down some of the projects because of their need to handle this corona environment and the debt interest in onetime revenues, unfortunately, resulted in a slowdown in total revenue that we are able to show to you. So minus of 6% to EUR 14.4 million only. We have expected to show a growth rate here even with the or without this project business. Unfortunately, corona didn't make it possible, but let's say, in front of us lays growth and based on recurring revenue and not one-offs. So recurring revenue, while we are quite strong in the savings bank industry already. There is a huge market open for us in the corporate banking area. We increased our reach there from 8% to 10%. So it's relative 25% growth, completely recurring. Our business model within the corporate banking industry. We have here huge potential. We see that the need is even higher, just the execution lacks, again, because of the current environment, but we expect this to continue to reach within the next years at similar penetration of the corporate banks like we reached already in the savings banks industry. And this additional connection, integration of the mortgage services and other linked services and integratable services, even like valuation, we see huge revenue potential here on this sales platform. So I said already that valuation is a strong product area for our real estate platform. We were able, even within the corona environment, to sign up more partners for the Value AG services. And based on the increasing numbers of business relations in the industry, drive the revenue up by 55% in the first 9 months. While the first quarter was very strong with a growth rate of close to 100%, second quarter was weak because of the lockdown and inability to access the properties that needs to be evaluated. Third quarter solid, again, nice dynamic development here. So the industry is keen on a reliable integrated valuation service that we are able to offer to them. We are investing here heavily in software development, in building this platform, in integrating this platform with Europace. Plus, we still have to scale still with a lot of workforce because of the lack of digitalization of this industry, and we can't build as fast as we scale right now, and this, especially in the corona environment, this was tricky as well because we saw quite a volatility in request by banks for valuations. And on the other side, we had a growing workforce to execute this number of request and the volatility costed us money. So corona and the crisis costed us real money here, but we see that the strategy to offer the industry a one-stop solution for all the valuations needs integrated in their sales platform and in the execution platform is a great opportunity for us. It's a huge market we are tackling here. Okay. Housing associations, our traditional target group here presents a stable success for the first 9 months. Transaction volume more or less exactly in line with the first 9 months of 2019. Revenue is slightly up. When you look at the quarterly results, you will see that we had a strong first and second quarter. Third quarter was weak. You can say, a more intense holiday season plus not a significant impact from the interest side, the interest rate were pretty stable during the third quarter. And this industry reacts on volatility on the interest side, interest rate changes and they are closing projects. So a slowdown in the third quarter not linked to any problems in the industry. It's a volatile market for us and it was for a long time already. So overall, for the total platform real estate means, let's say, still a pretty good revenue growth of 14% or gross profit at 30%, a little bit slower than the credit platform and private clients, even though this is a growth segment. So you see here the impact of corona on the growth rate. On the profitability, we already, end of last year, decided to invest heavily in the real estate platform because of the attractiveness for us, because of our strong position in the mortgage market. So let's say, we didn't expect to continue with this high profitability, especially driven by project business. On the other side, the plan was to stay more or less slightly profitable. So the minus EUR 1.9 million for the first 3 quarters were not expected and are attribute to the corona environment, which we see and which slows down too many of the projects or made it tricky for Value AG to execute the number of valuations which they could have done in the second and in the third quarter. Looking forward, this will be a major growth segment for Hypoport in the fourth quarter and in the next years, and we will drive the speed of growth here up. So expect this to outperform private client and better credit platform in the midterm future. So growth rate and outperformance coming to the second growth segment, which we have within our group for the last 5 years. We invest heavily in software development and given acquisition of software companies in the insurance value chain, we are successful in integrating their technology, in getting in contact with our clients, in convincing our clients that the future is for the whole insurance industry here in Germany is Smart InsurTech and the SMART INSUR platform. And we feel a strong sentiment in the market and corona made it even more clear to everyone, and the need is visible in a day-to-day work now that the traditional way of how the insurance business in Germany is run is not the future going forward. And there is no other future than fully digitalized platform for the 200 insurance companies. All the new incumbents, the InsurTechs, which try to compete are not sufficient and not successful when they try to operate as an insurance company as a whole, so the lemonades and ones of this world are niche players if even existing in the German market from there, number of contracts which they aim in China for. So the traditional industry, the 200 insurance companies need to integrate with these thousands of brokers and the millions of consumers on 1 digital solution, and there is only 1 digital solution out there, which is providing this and this is SMART INSUR. And the industry understands this. The industry is more and more committed on even migrating their sales on SMART INSUR, just the execution of the IT project is terribly slow. And this, again, in the corona environment, we see projects going forward, but slower than expected. And this results in a quite stable revenue and gross profit numbers for the segment. What you don't see here is that like in the real estate platform, we are right now exchanging onetime revenue to recurring revenue on a fast basis. We don't want to have any projects anymore with the target groups. We want their action volume migrated on SMART INSUR and paid depending on the volume which is on SMART INSUR, not paid by day or any other revenue stream. And so with the slowdown of the project on one side and the reduction in onetime revenue, you can't see our success in the market here in the top line figures. Yes. So this is -- it's a pity. We expect it to be a little bit further here as well already. And you can see this in the profitability, we guided that we will be breakeven this year. You see that the slowdown in the project and in the speed of the migration keeps us in a small negative number, minus EUR 1 million here for the first 9 months, but we are confident that there is no other future for the insurance industry. And there must be a moment where the players in the market, our partners, start to act faster than they do right now. They still -- it looks like that they still need more pressure from the consumer side or on more -- or new competitors. And let's say, the new market entrants on the sales side worked with us as a platform. And if they are gaining traction, the traditional players will get under pressure even more.So much about the 4 segments and the update there. Total numbers of Hypoport, you know this already double-digit growth. Profitability, let's say, stable for the first 9 months. This is in line with our long-time track of growing heavily, and we keep growing even in this current environment that we see here, the corona. We expect that we will end this year on these record numbers, top and bottom line and that we will keep growing in the next years. And for this, we invested in the last 2 years heavily in key account resources and IT resources and we keep the investment high even in this environment of corona. So from this, I would give back to the moderator to moderate the Q&A session, please.

[Operator]

[Operator Instructions] And we haven't received any questions at this point.

[Ronald Slabke, Co]

Okay. And it's back to me to finish this call. So around the world, and this is the English version of our broadcast, please stay healthy. Corona is -- the second corona wave is rising everywhere right now. So keep care of your family, we keep care of growing this business here. We will do this successfully. And when we talk in the beginning of March, we know better how we handled the second wave in the world, and we will finish this [indiscernible] year of Hypoport, and we'll update you on our expectation for 2021. And this will be a much clearer view how we go forward from there. So thank you, and bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.