New Work SE

XETRA:NWO

Earnings Call Transcript 2018-Q2

[Operator]

Good day. Welcome to the XING SE Analyst Call Q2 2018. Today's conference is being recorded. And at this time, I would like to turn the conference over to Thomas Vollmoeller, CEO. Please go ahead.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Hello, everyone, and welcome to the latest conference call. This is Thomas speaking and next to me is Ingo. I'm very happy to talk about our Q2 results today because the first half of 2018 has been fantastic for XING. Just as a reminder, before I jump into the details, all 2017 financial KPIs have to be adjusted retroactively on the back of IFRS 15 and 16 to make them comparable with 2018 numbers. That's it for the housekeeping. Now let's have a brief look at what we have achieved in Q2. First things first. Our performance was strong, as always. Across the board, all financial KPIs have been growing strongly. Even if you adjust growth rates for M&A transactions, which is Prescreen and InterNations, our organic performance is going strong. Revenues, EBITDA and operating cash flow, we see growth around 20% in all of the KPIs. The development of our most important nonfinancial KPIs is also very satisfying, and we've been working hard on our core products as well as on new and fruitful endeavors. Let's talk about the financial KPIs for Q2 2018. Our revenues came in 28% higher than last year and totaled EUR 56.6 million. If you look at organic performance only, so excluding our newly consolidated M&A transactions, Prescreen and InterNations, we grew by 21%, which remains fully on track and even slightly above our communicated top line growth ambitions. EBITDA grew by 16% to EUR 18.6 million. Operating cash flow developed nicely to EUR 16.8 million, up 24% on the previous year. As you can see, our growth continues. Moving on to our net member growth. We kicked off 2018 quite strongly in Q1, and Q2 has been showing very nice results. Retrospective to our highest number in member growth back in 2017, we are more than happy with 416,000 new members in Q2. In the last 12 months, we were able to generate 38,000 new paying B2C customers. In the first half of 2018, 16,000 were subscribed to our new products. As of April 2018, we had more than 1 million paying customers. InterNations is doing a great job in supporting our B2C segment, showing a disproportionately high member growth. If we have an isolated look at Q2, we see that our numbers in paying members remained stable, while our revenue grew 6% and is, therefore, on track. Now I'd like to give you a snapshot of another recently introduced, nonfinancial KPI, our B2B E-Recruiting customer growth. The extension of our position as HR department partner has been very successful. Sophisticated human resource managers use XING products, such as the XING TalentManager or the XING TalentpoolManager or go one step further and book our full recruiting suite, XING 360, to boost their chances in the battle for talent. Our tailored software solutions help them to find the right candidates for their vacancies and create a pool of potential applicants. Over the last 12 months, we added over 2,200 new corporate customers who booked license subscriptions for at least 1 XING product, counting more than 9,000 B2B subscription customers at the end of Q2. That's growth of 32%. It's fair to say that we are becoming a standard in many HR departments. Anyone looking to succeed in the war for talent can't afford to overlook our modern solutions. That's also fantastic news for our members, as the more HR departments use XING to look for talent, the higher their individual chances for advancing their career. Before Ingo talks about our financial results a little more in depth, let's have a look at some changes in our XING family and how our strategy towards handling the GDPR worked out. As of July 2018, Patrick Alberts is the new Chief Product Officer at XING, and thus, succeeding Timm Richter in this role. We are all sad to see Timm leaving, who left XING to start his own company. But at the same time, I'm happy to have a XING veteran overseeing our B2C segment and developing the XING platform further. Patrick was our Senior Vice President Premium Network, and is therefore one of the best candidates to oversee our product strategy. He received a doctorate in geophysics, and is a graduate of the renowned INSEAD business school, where he received his MBA. Before joining the company in 2012, he had various positions at the Boston Consulting Group. Patrick becoming our new CPO is not the only change in our XING family. In June, we added a new company to our portfolio, asap.industries. I'd like to talk about how their freelancer solutions help our B2B segment. During the war for talent, freelancers become more important for companies to cope with the lack of skilled employees, but freelancing is also a way to determine one's work-life balance more independently and focus at what one really wants to do. Companies want to hire freelancers, and freelancers want to be hired by companies, but often, this process is cumbersome for both sides. With asap.industries on our side, we will support freelancers and companies to make matches with one another more easily. asap.industries has already developed a freelancing management platform as well as solutions to integrate existing self-made lists and Excel sheets into the asap framework. With joint forces, we are working on bringing the freelancers and companies together. Let's talk about another topic that is very important for us, security. I'd quickly like to cover the GDPR legislation and which actions we have concluded from that and how we successfully implemented the new regulatory framework into our communication and product strategy. As you probably know, the General Data Protection Regulation, GDPR, provides EU-wide standards, designed to protect users of digital products and services, and came into effect since the end of May. We introduced our privacy app to create end-to-end transparency and provide clear answers to a wide range of questions surrounding data protection and privacy. Users can also request all of their saved data with a single click. Our strategy paid off in every sense because we are also able to improve our user privacy settings and establish a security council. We are happy that the results also pleased the Commissioner for Data Protection, Hamburg. The representatives of the administration, they're very positive towards our latest developed offer about data protection at XING, especially its transparency for the users was highlighted. This confirms our engagement for the protection of our users' data, and also serves as motivation for the future. To sum it up, XING is geared towards growth and with a clear focus on developing our business. Our products are oriented on the changes that the modern labor market undergoes and help members benefit from these changes. They also enable companies to find the talent they need to drive innovation and succeed in the market. As a network based in Germany, we also comply with the standards in place there, which also extends to our members' data. This is an additional key advantage over American competitors. That concludes my presentation. So now I hand over to Ingo.

[Ingo Chu, CFO & Member of Executive Board]

Thank you, Thomas. Hello, everybody. This is Ingo, and I'm going to talk to you about our Q2 numbers in a little more detail. All in all, Q2 has been a very good quarter. We're progressing according to plan, and we continue to be well on track. So let's start with a look at the key message points. Number one, we're keeping up our strong member growth, which is good, as it is proof of our solutions' customer value, and it is the basis for our business. Number two, overall revenue growth came in very well at 28% year-over-year. Organic growth was also strong at 21% year-over-year. Number three, EBITDA amounts to EUR 18.6 million, which is according to plan; and number four, we've had strong operating cash flows at EUR 16.8 million. I'm going to go into more details on the following chart. Let's start with our Q2 P&L. Revenues came in at EUR 56.6 million, up 28% year-over-year. Out of that, 7 percentage points came from acquisitions, approximately 6 from InterNations and approximately 1 percentage point from the Prescreen acquisition. Organic revenue growth amounted to 21%. So we're keeping up our strong growth, and with that, we are fully in our target range. EBITDA amounts to EUR 18.6 million. That's up year-over-year, up quarter-over-quarter. And also, with that, we're fully on track to achieving our 2018 goals. Q2 EBITDA margin was 33%. Depreciation amounts to EUR 5.3 million. That is up year-over-year, and please remember this includes approximately EUR 1 million of depreciation from purchase price allocation from our acquisitions. The financial result is positive with plus EUR 0.2 million. The financial result includes, as usual, mainly 4 elements: one, the joint venture, which we have in the U.S., kununu US, which has incurring start-up losses according to plan; two, there is noncash interest according to IFRS for discounting future earn-out liabilities; three, there's some fees for all lines of credit; and four, then we do have extraordinary nonoperating adjustments of earn-out liabilities. The main reason for the positive financial result in Q2 is the one-time extraordinary non-operating effect from adjusting earn-outs for eqipia and the Jobbörse acquisition. Net income amounts to EUR 9.2 million. That's up 16% year-over-year, with that, EPS came in at EUR 1.62. On the next chart, you can see our profitability by business unit. In Q2, the B2C segment contributed EUR 11.4 million and segment EBITDA, as announced, that's slightly down year-over-year, and the main reasons, as you know, our investments in new products, which we're doing in kununu DACH in the job market as well as in the platform and the network. The B2B E-Recruiting segment contributed approximately EUR 16.7 million to profitability. That's up year-over-year. The return on sales is slightly down, mainly because of the dilution from the Prescreen acquisition, our ATS business. We are very happy with this acquisition. It's high growth. Revenue is developing very well, and so we are very good on track here. The B2B Advertising & Events segment contributed EUR 1.1 million to profitability. That's down year-over-year, and that is also according to plan since we started growth initiatives in both businesses. In Q2, the segment kununu international is EBITDA neutral. That's as it should be. You will recall that, here, in this segment, we show the revenues to the joint venture, not the joint venture itself, and the revenues are cost-based, so there is no profit expected here. On the next slide, you can see the revenue development by segment. B2C revenues amount to EUR 24.2 million. It's up 18% year-over-year. They're of 12 percentage points and organic from InterNations. The segment is developing according to plan. 2/3 of the growth are driven by InterNations, and 1/3 is driven organically by paid memberships as a whole. Small note on our paid memberships development in Q2 and some additional context. After a very strong net payer adds in Q1, we had a flat payer base in Q2, as you will have noticed. That development is okay and expected. You all know that our net payer adds fluctuate. Key drivers are seasonalities and promotions, and in Q2, we had significantly fewer promotions than in Q1. On top of that, we also tested a new form of user communication, which adversely affected gross pay adds in Q2. That's why we had a flat payer base. With the same amount of promotions as in Q1 and without the communications test, which was limited in time, we would have increased our payer base. Going forward, we will grow our payer base in the next quarters, and we will grow our B2C business double-digit this year. Now let's have a look at our e-recruiting revenue development. Again, we are very happy with the developments here. B2B E-Recruiting revenues amount to EUR 26.1 million. That's up 42% year-over-year. They're of 3 percentage points and organic from the Prescreen acquisition. Organic revenue was 39%, which is very good. Key growth drivers, our unique modern e-recruiting solutions, active recruiting and employer branding and also our 360 packages continue to sell well and support our growth. Finally, let's look at B2B Advertising & Events. Revenues amount to EUR 4.6 million. That's up 18% year-over-year. Here, also, we have a nice development, driven by both Advertising & Events, which are both up double-digit. On the next slide, you can see an overview of our cost structure. In Q2, personnel costs amount to EUR 22.2 million. That's an equivalent of 39% of revenues, up year-over-year. This development is fully in line with our expectations. Year-over-year, we added 329 full-time equivalent employees. They're of 143 and organic, and out of that, 93 from InterNations and 50 from Prescreen. 186 full-time equivalent employees were added organically. Out of that, 92 in the B2C business, mainly in product and engineering. And please remember, one important factor here is that we are substituting freelance programmers by employed programmers in our new development center in Porto, Portugal, which is overall less expensive if you look at it from a cash cost perspective. We've added 50 full-time equivalents in B2B E-Recruiting, mainly sales and marketing, but also some in product and tech. We've added 18 in the B2B Advertising & Events business, and we've added 26 full-time equivalents in the rest of the organization. If we look at marketing. In Q2, overall marketing costs amount to EUR 5.8 million. That's 10% of revenue. That's up year-over-year, and it's back to normal levels after our big branding campaign in Q1. The last cost line, our other operating expenses. You all know it includes, as usual, external services, legal audit consulting, payment processing, server hosting and other costs. Please remember, unlike before, in 2018, this cost line does not include cost for rent anymore. According to the new IFRS rules, a rental contract has to be shown as the right to use asset on the balance sheet, and then written off in depreciation, and assuming also some fictional financing. I had explained that issue in more detail in our last call. In Q2, other operating expenses amounted to EUR 9.9 million or 17% of revenues. That's up year-over-year. On the next slide, you can see our cash flows. Operating cash flows, excluding organizer cash amount to EUR 16.8 million. That's up year-over-year. Key drivers were higher EBITDA and to a smaller extent, more cash-ins from changes in net working capital. Please remember that according to new IFRS rules, operating cash flow now does not include rent anymore. Rent now, in a cash context, has to be shown as financing cash flows. Cash-outs for operating investments amount to minus EUR 9.6 million. That's up year-over-year, and is in line with our plans. It includes a little over EUR 1 million in cash-out for the small tech and team acquisition, asap, which we structured as a software asset deal. The rationale of the acquisition was to accelerate our freelancer marketplace initiative that Thomas has talked about earlier. Cash-out for acquisitions amount to minus EUR 4.6 million, which are an intermediate earn-out payment for InterNations and the final earn-out payment for eqipia. Cash-out for interest paid, FX and rent amounts to minus EUR 0.6 million. These are mainly our cost of rent according to the new IFRS rules. With that, free cash flow, excluding organizer cash, amounts to EUR 1.6 million. Out of that and out of our cash reserve, we paid out dividends to our shareholders in the amount of EUR 9.4 million, and with that, total free cash flow before organizer cash amounts to minus EUR 7.8 million. To sum it up for Q2, overall, we're very happy with Q2. We're keeping up our strong member growth. We're showing strong revenue growth. Our bottom line develops accordingly, and so, all in all, we are progressing as planned. That's it for the numbers, and we're now happy to take your questions.

[Operator]

[Operator Instructions] And our first question comes from Sarah Simon from Berenberg.

[Sarah Simon, Analyst]

I've got 2 questions. Thomas, on the last call, you said that 360, you were almost kind of holding back in terms of growth. I wondered if you could give us a quick update on where you are on 360. And then also a question just on Passive, because when you were talking about what really drove the growth, it was talking about employer branding in 360 and Active but not Passive. StepStone, obviously, has seen very strong growth and Passive in Q2 as well, so I just wondered if you can comment about market share or growth in Passive, please.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Sarah, this is Thomas. I'm not sure I got all your questions because the connection is extremely bad. But I know one was about 360, the other one was about Passive Recruiting. I'm talking, and you tell me later on whether I fixed your questions, yes or no, okay? But 360 is doing very nicely. Again, we are not giving out numbers on how many customers we're having, but we are -- I mean, we are in a good 3-digit number of customers who have taken it already now. We see that the uplift in price is higher than anticipated earlier. When we started the project, we thought we could uplift the revenues of each customer by about 30% -- 30%, 40%. It's significantly higher than that, so we are very happy with how 360 works. Obviously, it's part of the 39% growth -- or organic growth in e-recruiting. It gets more and more difficult to really say which part it comes from because, obviously, we are giving away Passive Recruiting for free with a flat rate. We are including as many XTM seats, if you want to, you get your Employer Branding Profile plus. So allocating 360 revenues to the different lines is becoming more complicated for you, but as well for us. But overall, the development is very nice. We are very, very happy, and we're very bullish that there will be more and more companies taking this 360 suite as the kind of standard suite for their company, and they are -- our pipeline is filled. We will see, there's obviously new products coming up. Whether we also will integrate them into 360, yes or no, needs to be seen. But today, we have 5 products in 360 now, and that's working very nicely. What else? In Passive Recruiting, yes, we see good growth. We also see double-digit growth in Passive Recruiting. Again, you have to deduct that part of the Passive Recruiting, we don't see anymore because it's going in 360. So obviously, the war for talent is on, as StepStone is gaining market shares or -- is gaining revenues, we are gaining revenues. So everything is very positive. We feel with our, what is it in the meantime, 90% -- 80% revenues that we make in e-recruiting with the subscriptions, we feel we are very well suited for any kind of downturn, -- economic downturn as it comes. So we feel well equipped. Did you get -- did I answer everything you wanted to have or any other questions? Okay.

[Operator]

And we'll move on to our next question from Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer]

I just have a couple. The first one is on the B2C revenue going forward. Are there any more verticals that we can expect, like XING executives, et cetera, towards the rest of the year that may accelerate organic growth? Or are we going to see similar trends where the member base is increasing and maybe a slight ARPU uptick, and that's sort of where the growth is going to come from? Secondly, on the asap acquisition, are there any earn-outs that we should sort of anticipate, going forward, and when that would sort of materialize? And how is the product being offered to corporates in terms of pricing, et cetera? Has that been determined already? And my third question, just on 2018 guidance, could you remind us again what you expect for the group and in terms of revenue and profitability?

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Yes, this is Thomas again. In terms of B2C, there is no new development or membership to be expected in the second half of this year. We see a continuous going forward on the B2C side. What you do see and what you will see probably not this year, but next year, is that we do strengthen our positioning in the freelancer market, and that's also not only B2B part, but also B2C part. asap is a B2B offering, and we will come with that offering probably middle of August, and you will see that as a service of XING. The pricing currently is EUR 300 per month per license. That's how we would go out with, but that's a B2B offering only today. What we want to do is integrate our B2C side to our freelancers that we do have on the platform with this tool. So we will have a matching service from the B2B side and the B2C side, and you might see then next year also revenue sides on the freelancer side on the B2C side, together with the asap business. In terms of earn-out, yes, there will be a small earn-out also for asap. The guidance for 2020 is EUR 300 million, EUR 100 million, so: EUR 300 million revenues, EUR 100 million EBITDA. Nothing to be changed here.

[Ingo Chu, CFO & Member of Executive Board]

No, and for '18, EBITDA, according to the new IFRS rules, incorporating IFRS 15 and 16, we confirm what we've said in last quarter and that was EUR 74 million as EBITDA, and we had not given out any revenue guidance for 2018. But in terms of revenues, it's the EUR 300 million for 2020 -- in revenues, client.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Just a short reminder. Obviously, the EUR 300 million, EUR 100 million guidance we gave out for 2020 was before IFRS 15, 16, so there is a slight update of EUR 6 million probably for the rent part, so you have to...

[Ingo Chu, CFO & Member of Executive Board]

In EBITDA.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

In EBITDA.

[Operator]

[Operator Instructions] And it appears we have no further questions at this time.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

All right. Then thanks, everybody, for listening to us and trusting in XING, and hope to hear you again at latest in 3 months. See you then and hear you then. Bye-bye.

[Ingo Chu, CFO & Member of Executive Board]

Bye.

[Operator]

And this concludes today's conference. Thank you for your participation and you may now disconnect.