New Work SE

XETRA:NWO

Earnings Call Transcript 2020-Q2

[Operator]

Good day, everyone, and welcome to the New Work SE Q2 Results 2020 Call. Today's conference is being recorded.At this time, I would like to turn the conference to Ms. Petra Von Strombeck. Please go ahead, ma'am.

[Petra Von Strombeck, Chairman of Executive Board & CEO]

Good afternoon, everyone, and welcome to our Q2 update. I hope you and your families are safe and healthy. You hear a new voice. It's me, Petra Von Strombeck. And I'm the CEO of this fantastic company since the end of May, and I'm very happy to be here and speak to you for the first time. Some things do not change. Obviously, I'm not alone, and Ingo is sitting next to me. Today, we will provide an update on our second quarter, which is the first full quarter impacted by the corona pandemic.Before I talk about the results, let me briefly introduce myself. Most of you probably read my CV, so I'm just going to give you a snapshot. After graduating from an international business school and a career start as marketeer, I have been working for more than 20 years in the online world, an eternity, focusing on developing successful business models in the battle to make them work for the customer. The last 7 years, I have been developing Lotto24, a publicly listed company you might know. It's a nice success story.Probably, as we do not yet know, you wonder what kind of personal manager I am apart from the entries in my CV. So I introduce myself to you with a couple of very brief statements. Looking back at my career, I've always had a spike on people, being it customers or internal team. The happiness of both creates performance and success. This clearly resonates with New Work because at the end of the day, it all comes down to people. Also, I'm a person of clear focus. This comes together with clear, direct communication and transparency, and they will also stick to this principle in our communication to you.In a complex world, one of my core beliefs is that every company has to train the muscle of flexibility and constantly do, learn and adjust. Given the current economic framework, this is probably more true than ever.Last but not least, another cool belief of mine is that data is key. Data-driven decisions, data-driven optimization, data-driven businesses, data to take the right decision for the customer. Enough of me, I'll leave it to this. But I'm very happy to introduce myself properly to you one-on-one. And of course, I'm looking forward to hearing more from you and your perspectives in the future.One more quick comment to manage your expectations. This call is not going to be a strategy update. This will be done in the beginning of 2021. But I would like to take this opportunity and share my initial view based on the observations during my first few months.You'll probably agree that New Work SE is an extremely strong and financially healthy company. We have very solid business models, both in our B2C as well as B2B segments. 80% of revenues are based on subscriptions where either members, B2C, or customers, B2B, pay their fees upfront. XING, kununu as well as InterNations built extremely strong, powerful brands and the #1 position in their respective markets, but also active sourcing solutions, like the TalentManager, are #1 in the German-speaking region.By running and serving the largest white collar seaside community as well as pioneering the field of digital recruiting services in Europe's largest economy, we are benefiting from structural employment market mega trends. Thus, once the corona crisis is easing further and the DACH employment market starts to recover, we are in the right position to benefit from talent scarcity in a tight labor market.Last, not least, I want to let you know that despite the current obstacles, where most of the employees are working remotely, I discovered a great team with a strong entrepreneurial culture and high intrinsic motivation ready for the next step. Hence, not much to do for a new CEO? Well, with continuing competition from our blue friends and some other players in the German e-recruiting space as well as a slowdown in growth, which has to get back on track, I won't get bored, no worries.As mentioned, we will update you on the how and what beginning of next year after finishing my first budgeting and planning process and after digesting the learnings and the impact of the corona crisis.Now let's have a brief look how New Work SE went for the first full corona quarter. In a nutshell, obviously, we are negatively affected by the crisis as our strongest growing B2B E-Recruiting business is negatively affected. Nevertheless, given our solid subscription businesses also in B2B, on group level, we were slightly up compared to last year. Also, our B2C business shows at least stable financials and solid growth in members and content. Our B2B business is impacted but still growing, mainly due to last year's growth of corporate customers. And to make it clear already in the beginning of our call, we stick to our updated outlook that we've given out beginning of May.So how do the 2 main KPIs look like for Q2? Our service revenue grew by 3% to EUR 67.5 million. Our EBITDA almost through at the same rate to EUR 22.3 million, which actually shows how quickly the organization adopted to the new situation. We've done our homework and ended a few initiatives that were struggling already pre-corona and have taken quite a few measures to stop and shift planned investments in new employees, marketing, et cetera.Taking a closer look at our 2 main KPIs for our B2C businesses, we are still performing nicely. Our member base grew by 11% to 18.1 million. That's an increase of around 1.8 million net new members during the last 12 months. That is 400,000 members in Q2 compared to 480,000 in Q2 last year.Looking to our employer branding destination, kununu, we continue to significantly enrich the available information on employers. In Q2, kununu continued focusing on its mission to create workplace insights that matter. Overall, kununu collected more than about 4.1 million insights from users, being it reviews, salaries or cultural interests.The main focus in Q2 was creating relevant workplace insights to support employees and employers in the challenging times of corona. In order to do so, we added dedicated questions regarding how employers are dealing with the crisis to our review flow and also provided employers the chance to share their best practices and learnings. Overall, we were able to generate 91,000 reviews containing corona insights and dedicated 54,000 corona survey results on top of that. Based on these insights, the kununu corona employer transparency ticker was launched. For the first time, users were further able to access all the kununu corona data via publicly-available, real-time dashboard.Let's have a brief look at our core B2B KPI. I think this slide does not come as a surprise to you. Our B2B E-Recruiting subscription customer base is still up year-on-year, but already growing significantly less than previous quarters. And given the current demand situation, we do not expect reasonable growth during the second half of 2020 either.Now let me give you a little snapshot on just a few topics worth mentioning. Let's start with our B2C initiatives. We relaunched our premium membership offering by adding a self-assessment test, exclusive content like the Harvard Business Manager and a further educational content. Thanks to corona, our XING News traffic was up 20% year-on-year, and we reached more than 9 million followers on 800 different news pages.Our flagship event, New Work Experience, has unfortunately been canceled, but the virtual format called NWXnow, with content and interviews, took up nicely with almost 25 million impressions.In B2B E-Recruiting, we further improved our XING Talentpool and XING TalentManager with new KPI areas for project and talent pools, and also improved user experience of our JobManager.You may recall from our Q1 call that we did a lot to engage and support our recruiting customers during the crisis, offering free trials, webinars, et cetera. As a result, we saw a significant uptake in customer satisfaction which internally is measured through an NPS.In addition, we carried out a survey on 1,200 recruiters on numerous topics. One finding was quite promising, in particular. Still more than 50% of HR managers expect talent shortage to remain unchanged within the next 12 months, which kind of fits to our more general view on the German labor market itself. Last but not least, our colleagues from the Marketing Solutions team launched the self-booking tool for videoed.Our Events business is obviously still the most negatively affected of all our businesses, yet the team managed to successfully transfer the business online. Virtual events experienced a significant uptick by a factor 6, and there may also arise some opportunities as we see a few players who withdraw from the German market. We've just been able to sign a great deal for a major event in Munich, which was originally done by one of our competitors.Despite the fact that COVID-19 is everywhere right now, I'd like to repeat what Thomas pointed out regarding the long-term outlook for the German employment market and why New Work SE is perfectly well positioned post COVID-19. Pre-COVID, Germany's unemployment stood at about 2.3 million with around 1.4 million vacancies, so unfilled position. Pre-COVID, Korn Ferry estimated that the number of unfilled positions is set to grow to 4.9 million by 2030, putting talent scarcity to a new record high. As we are now seeing short-term COVID effects, the situation has obviously changed. But even if we assume that another 1.2 million people lose their jobs within the next few years because of COVID, this will not put our employer branding and e-recruiting businesses at risk. This is due to one stable and very predictable aspect within this hypothetical view, and that's the change in demographics. The statistical office expects the working population to be declined by 4 million to 6 million within the next 10 to 15 years. And even if you deduct the estimated increase in unemployment from the Korn Ferry estimation of 4.9 million unfilled vacancies, you still end up with 3.2 million to 4.4 million unfilled positions, which will rise year-by-year since a few hundred thousand workers will leave the labor market each year. In a nutshell, we are actually more likely to run out of people than of job. And this is precisely why New Work SE will continue to have long-term growth potential once the COVID situation eases further.So let's sum it up. New Work is in good shape, and we acted fast and prudent to secure our relative profitability, even if revenue growth is significantly down year-on-year. Our business model remains resilient, given the high share of subscription revenues. Our brand positioning is probably more relevant than ever. New forms, performance of working and new leadership approaches are required to run an organization today. The structural driver, demographics and skilled labor talent scarcity will support our long-term strategy. This company does not need a revolution but rather an evolution. Again, we will present the how and the what beginning of next year. Hence, as repetition doesn't harm the prayer, we confirm our revenue target range between EUR 275 million and EUR 285 million and our EBITDA target margin of 30% for 2020.Before I hand over to Ingo, let me just add that I will start doing road shows and conferences, starting with our strategy update in the beginning of next year, and I really look forward to meeting you and have fruitful discussions with all of you in person.And now I hand over to Ingo. Thank you.

[Ingo Chu, CFO & Member of Executive Board]

Thank you, Petra. Hi, everybody. This is Ingo, and I will talk to you about our Q2 numbers in more detail. And I'm happy to sit here for the first time with Petra. Now all in all, we've had a good and stable development in Q2. Let's start with a look at the key metric points. Number one, our nonfinancial suggested team member base or the kununu workplace insights continue to grow, that's important as it's the basis for our business. Number two, revenues developed in a stable manner with year-over-year growth of 3%. Number three, EBITDA also develops in a stable manner with growth of 2%. Number four, operating cash flow came in at EUR 11.6 million, impacted by our significantly lower growth trajectory. And number five, we are confirming our full year outlook of revenues of EUR 275 million to EUR 285 million of revenues and an EBITDA margin around 30%. I'll give you more details on the following charts.Now if you look at the P&L, you can see that revenues came in at EUR 67.5 million, up 3% year-over-year, that's all organic. Down quarter-over-quarter due to the COVID impact on our transactional and off-line driven businesses.EBITDA amounts to EUR 22.3 million, 2% up year-over-year, up quarter-over-quarter. Q2 EBITDA margin is 33%, slightly down year-over-year, up quarter-over-quarter, and it is in line with our current full year guidance.Depreciation amounts to minus EUR 8.2 million, that's up year-over-year. You know that this includes nonoperating depreciation for purchase price allocation assets from acquisitions of approximately minus EUR 1 million. Also in this quarter, it includes an extraordinary write-off of software for some activities that we have stopped as part of our countermeasures with an impact of a little over minus EUR 1 million.Our financial result came in at plus EUR 2.8 million. It includes a nonoperating extraordinary effect of plus EUR 3 million. It's basically 2 parts, plus EUR 1.9 million, an adjustment of earnout liabilities and plus EUR 1.1 million of quarter-over-quarter book profits on investments of our cash. You will remember, that we had a corresponding negative quarter-over-quarter book loss in Q1 when all markets were down. If you take those effects out, financial results would be minus EUR 0.2 million, which is basically accounting only noncash cost for discounting future earnout liabilities according to IFRS.Net income amounts to EUR 12.1 million, that's up year-over-year. If you take out the positive extraordinary effects in the financial result, net income would be EUR 9.4 million. That's slightly down year-over-year because of the extraordinary write-off from stop activities, it's up quarter-over-quarter.So if you look at Q2 overall, which is our first, full COVID quarter, our operating development is stable with revenues and EBITDA growing 2% to 3% year-over-year. This underlines the resilience of our business model, which is based on subscriptions and has a very diversified user and customer base.On the next chart, you can see profitability by business unit. Let's start with B2C segment. In Q2, the B2C segment contributed EUR 8.4 million in segment EBITDA, which is up year-over-year and margin is up as well.The B2B E-Recruiting segment contributed approximately EUR 26 million to profitability. That's up year-over-year, and return on sales is also up. And the B2B Marketing Solutions & Events segment contributed EUR 0.5 million to profitability. That's down year-over-year. Margins down as well. This is clearly the segment which is impacted most from COVID, given that the marketing solutions is a transactional business and that events are, by nature, off-line and therefore, directly impacted by lockdowns and social distancing.kununu US has been closed down. We're showing a small loss in Q2 from winding down activities. And eventually, the segment will [ manage ].So we look at revenues. B2C revenues came in at EUR 25.3 million, that's slightly down year-over-year. The reasons is our InterNations business. InterNations revenues are basically paid memberships giving access to expat off-line events, which in a lockdown scenario are directly impacted, of course. Our XING paid membership business has grown in Q2.We look at E-Recruiting. B2B E-Recruiting revenues came in at EUR 37.9 million. That's up 11% year-over-year. Growth was driven mainly by subscription revenues and employer branding, Active Recruiting, 360 and Prescreen. Passive Recruiting is down year-over-year.Finally, let's look at B2B Marketing Solutions & Events. Revenues amount to EUR 4.3 million, down year-over-year. As expected, so far, the strongest impact from COVID in this segment. Both businesses are transactional and not subscription, and Event depends on people meeting off-line. The majority of the year-over-year revenue reduction in the segment comes from the Events business.If you look at costs, you can see an overview of our cost structure. To adapt to COVID, we have reduced investments. We have postponed investments, and we've also stopped activities in order to adapt our cost to top line development. You will see an impact across all cost types.In Q2, personnel costs before capitalization amount to EUR 36.9 million. That's an equivalent of 55% of revenues. Costs are up year-over-year, which is basically due to the hiring up with the start of the COVID crisis. Quarter-over-quarter cost and especially quarter-over-quarter headcount are flat since we have significantly reduced our hiring.If you look at marketing, Q2 overall marketing costs amount of EUR 5.9 million or 9% of revenues. That's down year-over-year. We have reduced marketing spend according to the situation and cut spend, especially in our B2B businesses. The last cost line, other expenses, our operating expenses is, as you all know, external services, legal, audit, consulting, payment processing, server hosting and other costs in Q2. Our operating expenses before capitalization amount to EUR 10 million or 15% of revenues. That's down year-over-year. And we mainly cut software development freelances, external services and also add savings, of course, in travel and entertainment.If we look at cash flows, operating cash flow, excluding organizer cash amounts to EUR 11.6 million, that's down year-over-year and quarter-over-quarter. Well, here, you clearly see the impact of a different growth trajectory. With new business being significantly reduced because of COVID, we do not generate cash from changes in net working capital at this point in time. Now it's important, the reason for this development is a different growth trajectory. Our business model itself, consisting of prepaid subscription revenue, is unchanged. So that we expect cash in from net working capital again once growth picks up.Cash outs for operating investments amount to minus EUR 9.5 million, up year-over-year. Cash out for acquisitions amount to minus EUR 0.7 million, which is an earnout payment for InterNations. And cash out for interest paid, foreign exchange and rent amounts to minus EUR 1.6 million. These are mainly our cost for rent. With that cash flow before dividends, before organizer cash amounts to minus EUR 0.1 million.In Q2, we've also paid minus EUR 14.6 million out as our regular dividend, so the cash flow after dividends and before organizer cash amounts to minus EUR 14.6 million. On a full year basis, we expect positive cash flows.Now to sum it up for Q2, revenues developed in a stable manner and grow 3%. EBITDA also developed in a stable manner of growth 2%. And we confirm our outlook for the full year with EUR 275 million to EUR 285 million in revenues and approximately 30% in EBITDA margin. That's it for the number. And we are now happy to take your questions.

[Operator]

[Operator Instructions] Our first question will come from Sarah Simon with Berenberg.

[Sarah Simon, Analyst]

I've got a few questions. First one was on the components of the B2B revenues. Can you give us a bit more color on the kind of quantum of growth/decline in the various bits within them? I'm kind of thinking what Passive's done, what kununu has done. And maybe a bit of color around the rest of it.Second one was on B2B subs, obviously, down sequentially. Can you give us any sense for how things have been evolving since Germany kind of started to reopen? If that number is starting to pick up again or if we should expect more production in Q3. And then the final thing, which kind of relates to that is, obviously, your B2B business is growing, as you said, because of subscription, and it kind of reflects the subs you're adding pre-COVID. So as we think about next year, is it reasonable to think that the subscription revenue is going to be growing more slowly even if the subs growth -- let's say, net adds picks up again because you're going to have the drag of not having added subs in this period.

[Ingo Chu, CFO & Member of Executive Board]

Next -- okay. Hi, Sarah. So yes, I can give you a little bit more color on our E-Recruiting revenue. So if you look at stand-alone Passive Recruiting, okay, so that's down year-over-year in Q2, approximately 20%, which from what we know, and you probably know a lot about it as well, is in line with market development that we see. If you look at the other subscription revenues, so 360 but also Prescreen and Employer Branding and Active Recruiting, what you see is that the gross contribution of Employer Branding is very strong. All of those subscription revenues are growing. The gross contribution of Employer Branding though is strongest. Active is very well and also Prescreen on a lower base is growing very, very nicely, okay? So that maybe as a color on the revenue streams within the B2B E-Recruiting business.The third question was on our subscription businesses in general and what's going to happen to next year. So -- I mean there's still a lot of uncertainty in the market. I mean there's still a lot of uncertainty what's going to happen with the virus. You don't know whether there will be a second wave or not. There's still uncertainty about what's happening in the macro economy due to what's happening in the -- with the virus. And therefore, also, there's still a lot of uncertainty for us. You are right in the mechanics in that our growth next year will depend on how new business and our subscription revenues will pick up over time. And that is, it's still too early, still too early to make a statement on that at this point in time. Okay?Now the second question. Acoustically, I wasn't sure, was it about the B2B Marketing Solutions & Events business?

[Sarah Simon, Analyst]

No, no. It was more about -- you had 13.2 million B2B subscription customers and that's obviously dropped on Q1, and I'm just wondering about the shape of the drop. And if it was down in April and May, but then Germany started opening up and it's growing again, or if customers are so cautious and -- I'm basically asking you to help us with how we should think about where we end up in Q3 on [ customers for B2B ].

[Ingo Chu, CFO & Member of Executive Board]

Yes, yes. It's -- well, it is -- again, there, it's also a little bit early to make a clear statement. I mean -- I think it's quite normal that sequentially, in a situation with such a drastic change on the economy overall, subscription customers fluctuate because, I mean, even in great times, we've had some regular normal churn in our E-Recruiting customers. So -- and then it is a question of how it balanced with our new business, right? Again, it's very difficult at this point in time. I mean we are working internally with scenarios. And as we've done before, we are preparing for the worst, and we are working to get the best but we'll see.

[Sarah Simon, Analyst]

Can you say you're starting to get net positive in July? Or...

[Ingo Chu, CFO & Member of Executive Board]

[ Negative ], at this point in time. Sorry.

[Operator]

Our next question will come from Marius Fuhrberg with Warburg Research.

[Marius Fuhrberg, Analyst]

Actually, I've got 2 on the cost side. The first one with the personnel expenses, we saw that these were stable from Q1 to Q2. Is this also what we should expect for the remainder of the year? Or is it more like that you link the investments or ramp-up of FTEs, more towards the top line so that you react more proactively here or also that you react on how the top line has been?And secondly, with regards to the other expenses, marketing and others, what is the potential for further cost reductions you could take in H2?

[Ingo Chu, CFO & Member of Executive Board]

Okay. Let me take first -- the first one first. So in personnel costs -- I mean you know from our company in the past that we have continuously increased our personnel costs approximately 28% year-over-year. You won't see that now. Basically, we've had a hiring freeze. We only hire some exceptions. And so if you look at personnel costs, it will be a completely different growth trajectory as long as the situation remains uncertain as it is. You might not have flat personnel costs because there are also always other parts in there which might fluctuate such as application accruals, such as accruals for bonus payments, et cetera, but the trajectory will be completely different than it has been in the past. If you look at other costs and in marketing cost, of course, marketing cost is -- marketing costs are very easy to cut. If you look at our other costs, some of them are short term, not so easy to cut. Others are short term, easy to cut. We will have a look at it, and we will do what's right for the company looking forward.

[Operator]

[Operator Instructions] We'll go next to Nizla Naizer with Deutsche Bank.

[Fathima-Nizla Naizer]

Great. I just have 3 questions from my end. Firstly, on Passive Recruiting, can you tell us how -- what's the percentages of B2B E-Recruiting that Passive currently generates?And secondly, on Honeypot, how is it performing? And during the COVID-19 crisis, was there a scenario where it was -- activity was more intense on Honeypot and people are actually looking for sort of developers, et cetera, that may have benefited the business? And what sort of an annual run rate are we looking at for Honeypot in 2020 in terms of revenue? Some color there would be great.And lastly, on the XING B2C business, you mentioned that paid membership grew, although InterNations did not. Could you give us some color on that breakdown? How much growth did paid membership see on the core XING B2C platform?And one final question, if I may. On advertising and events as well, could you kindly give us the breakdown as to how much -- how -- what was the decline for events versus advertising? And have events started to pick up now in the sense, would we see a sequential improvement meaningfully in Q3 with lockdowns easing?

[Petra Von Strombeck, Chairman of Executive Board & CEO]

This is Petra. I'd like to answer your question concerning Honeypot. Honest answer, we booked an impairment in Q1 on the back of the corona applications because Honeypot is a purely transactional business for the time being. So we actually see the business hit quite hard because it's transactional. And although it's in the field of developers, we saw a drastic reduction, both from the company side, also from the talent side, we are more reluctant to actually change jobs. Although I was not the person acquiring Honeypot, I'd like to underline that I still fundamentally believe in their value proposition and in their revenue potential going forward, and they have an enormous community of developers that is very attached to the brand. So once the crisis is over or the business picks up again, I don't see any further problems. Right now, they have some homeworks to be done because it's a transactional business.

[Ingo Chu, CFO & Member of Executive Board]

Okay. I'll take the other questions, Nizla. So first of all, on Passive Recruiting, without giving out too much data also for our competitors, the stand-alone Passive Recruiting as a part of overall E-Recruiting revenues is smaller than 20%, okay? It has continuously declined over the past -- even although before COVID, it was also still growing, but the other revenue streams, including 360, have been growing much faster.If you look at the XING -- at the B2C segment, basically -- I mean XING paid membership has been growing but -- I mean if you look at the segment overall and without breaking it down in a too detailed manner, growth has been low, I mean, for the past quarters anyway. So -- I mean take down a little bit for InterNations, put up a little bit for XING and your assumptions will be right, okay?Now if we look at B2B Marketing Solutions & Events business of the year-over-year reduction of the segment, about 2/3 are from the Events business, okay? So that gives you an order of magnitude of the -- it's -- clearly, both are impacted. Also Marketing Solutions is down, but the strong impact comes from the Events business. If we look at Q3, we do not really see a pickup in revenues yet. I mean there has clearly been a shift to online businesses, and that might be an opportunity, but monetization in online events is much more difficult than it is in off-line events. And as long as there is still strict distance rules -- social distancing rules, on the one hand, you don't have organizers organizing events. On the other hand, even if there are events organized, event participants are reluctant for safety purposes. So we are very cautious in this segment at this point in time.I mean the good news is only a small, small part of our overall business, right? So the [ rate ] is growing -- is small.

[Operator]

[Operator Instructions] We'll go next to Simon Bentlage with Hauck & Aufhäuser.

[Simon Bentlage, Analyst]

I would have 2. The first one is on the B2B E-Recruiting segment. You've been talking about a bit slower growth. I'm wondering if you could share a bit more detail on how churn has developed, i.e., if it's rather churn-driven, the slower growth, or rather driven by less new customers? And the second question would be a bit more technical. On the financial result, I'm wondering what you are expecting here for the second half of the year with regards to the earnout write-ups that we've seen in the first half of the year.

[Petra Von Strombeck, Chairman of Executive Board & CEO]

Hi, Simon, this is Petra. Let me answer your question concerning the B2B E-Recruiting part. Our churn situation is quite stable and unchanged. There are no significant uplift. So it's purely a new business part that, in fact -- or has an influence here. And I hand over to Ingo for the second part.

[Ingo Chu, CFO & Member of Executive Board]

For the financial results, at this point in time, we haven't -- we are not foreseeing any positive impacts from earnout adjustments at this point in time. But the next -- basically, the next time -- point in time to actually look at this will be Q4. And then they're nonoperating anyway, so we'll always flag them out. But at this point in time, I don't see anything.

[Operator]

[Operator Instructions] And it appears we have no other questions at this time. I'd like to turn it back to our presenters for any additional or closing remarks.

[Petra Von Strombeck, Chairman of Executive Board & CEO]

Well, thank you very much for your attention and your interest, and see you in our next call. Looking forward to it. Bye.

[Ingo Chu, CFO & Member of Executive Board]

Bye-bye.

[Operator]

That does conclude our conference. Thank you all for your participation. You may now disconnect.