New Work SE

XETRA:NWO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, and welcome to today's earnings call of New Work SE following the publication of the half year figures of 2024. New Work is represented by the CEO, Petra Von Strombeck; CFO Ingo Chu; and Patrick Moller from Investor Relations.

[ Operator instructions ] Having said this, I hand over to you, Mrs. Petra Strombeck.

[Petra Von Strombeck, executive]

Hello, everyone, and welcome to today's capital markets update call. Today, we are presenting our results and insights for the second quarter 2024. Let me start with the obvious. This will be our last analyst call because our company is going to be delisted soon. You know the reasons, and you are aware of why we choose to pursue this path after Board approached us in April and asked us to examine the potential delisting. I can assure you that we have put the same effort into this call as always. And let me add from my side that I've always appreciated talking to you, get challenged from you and get inspired by your perspectives and views. Thanks so much for your trust, and this is especially true in the challenging times.

While we faced significant macro headwinds since beginning of 2023, which put pressure on our HR solution business, we also started a significant repositioning of XING brand from a social to a jobs network. During this period, our stock price suffered a lot given the limited debility of when the business will recover and starts growing again. Therefore, we work on orders commitment to increase their stake in New Work to more than 74% during this period and thus showing confidence in our long-term strategy.

And precisely because we are consistently working on implementing our long-term strategy even at the expense of short and medium-term profitability, the Executive Board, together with the independent members of the Supervisory Board, has thoroughly examined the pros and cons of being publicly listed. We have ultimately concluded that delisting is the right step for our company at this stage. We have detailed our reason in a joint statement, which is available on our Investor Relations website under the delisting section. Therefore, today, we will not be answering questions regarding this content of the joint statement from the Executive Board and the Supervisory Board. Instead, we will focus on the current results and development.

Let's start with a look at the general economic climate and the trends in the German employment market. Unfortunately, the developments, particularly in the labor market, which is crucial for our core business are far from encouraging. Recent news are packed with companies announcing job cuts like Bosch cutting 7,000 jobs, [indiscernible] cutting 14,000 in the next 3 years, Continental cutting 7000, Deutsche Bahn cutting 30,000 jobs in the next 5 years.

In addition, the number of insolvencies is up by almost 30% versus previous year. Therefore, it's not a big surprise that the key employment market indicator continues to trend downward. The BAX connects, which measures demand for employees is down to 109 points. That is actually closer to the all-time low during COVID slightly below 100 points versus its all-time high in 2018 and 134 points.

Another far more tangible KPI is the number of open vacancies published by the federal employment agency, down by 9% against an already weak last year. When it comes to the development of paid job in Germany, the situation is really worse. The number of job ads advertised on online drill ports is down by almost a quarter. How do we interpret this? That's the current situation. This is actually negatively affecting our recruiting business, both active and passive. At the same negative trend probably affect our competitors as well. It's not an excuse. It's just a fact.

So how does this translate into our core financial and nonfinancial KPIs. Regarding financials, the weak macroeconomic impacted our business. Q2 ago was quite stable compared to Q1 in terms of HR customers and even nicely growing workplace insights and members who will provide more details later. So here are the key financial achievements in Q2.

Starting with revenues. The worsening employment market as well as the ongoing transition of our B2C business have led to a decline of around 14% in revenues in Q2 2024. That is EUR 11 million less revenue versus last year and would usually lead to almost EUR 11 million of EBITDA given our high gross margin business. But we already started to [indiscernible] last year and successfully concluded our go-wide restructuring in April '24. We spent almost the same amount for marketing versus previous year and achieved EUR 17 million pro forma EBITDA in Q2 with a 27% margin. Pro forma net income came in on previous year's level.

As stated in our previous call in May Q1. So Q1 is always the least profit quarter given investment in marketing at the beginning of the fiscal year. You can see the progress in Q2 already. And with our successful restructuring, we are confident to meet our full year guidance of EUR 55 million to EUR 65 million pro forma EBITDA. So let's have a look how the weak employment market has impacted our HR business solutions.

As always, we present the quarterly development of our HR solution subscription customer base and the quarterly revenue development for the segment. I stated earlier that the B2B HR subscriber base is almost stable in Q2 versus Q1. It's down both by around 300 customers compared to last year. That's, of course, not a big surprise given the accelerated rate of insolvencies and muted hiring demand during the last 12 months. As a result, revenue in our core segment is down by 10% in Q2. This is mainly attributable to the fact that we experienced declining customers for our 360 solution, which has a strong job-ad component and the deteriorated -- deterioration of classical job ads.

Another reason for the slight revenue decline is the fact that with discontinued and profitable offerings such as [indiscernible]. On a positive note, our employer brand new business based on kununu delivers more than 1/3 of segment revenues and generated an above average EBITDA margin, while the business continues to grow also in Q2. On the product side, we've been busy shipping additional AI features to our HR clients. After having introduced AI optimization features for existing job ads, we improved the recruiter workflow in Q2 by launching smart messages, a feature that helps particularly low maturity recruiters, draft messages to candidates that will actually get them in response.

Let's now have a look at XING. As you know, we are heavily investing in our efforts to reposition the platform from being a social network to a dedicated job focused network. Of course, such a repositioning is a process that will take several years, but we are committed to embark in this journey. While discussing the numerous marketing and brand initiatives carried out in the first quarter to promote our new positioning, I'd like to present two examples of how we continuously change and improve the user experience in line with our new job focused positioning.

As a quick reminder, the new same mission is to empower everyone to find the jobs that's just right. This is not only addressing active job seekers, but also everyone passively looking for greater job satisfaction, which is certainly a large part of the working population. And this certainly does not come as a surprise. We're very much focused on leveraging AI to launch new offers and features to our XING users.

For example, our new AI-based job summarizer. The tool provides a brief summary of the Job Act to allow faster decision-making to apply, and people like the short and crisp summaries a lot. User reviews show the relevance. We received a lot of positive feedback and ratings. The next big thing, we beta launched just a few weeks ago. It's a conversational job search. Now what do we mean by conversational jobsearch. Our traditional job search engines asks you to express very specifically what you are looking from an exact job type that scribes everything you wish for.

But what if we allow people to express what it is they want in simple human language. This is exactly what XING's conversational search does. In your own words, you can describe exactly what it is that you are searching for and you get magically good results. I hope this provides a glimpse into how we are constantly increasing value for our leaders. The perception shift does not happen in city, but we are deliberately working on it to make the most out of the product, vision and make it tangible.

So we are quite happy with the nonfinancial and performance-based XING KPIs that we are tracking regularly. Among others, we regularly analyze these 3 performance indicators we've seen. Basically, what you can see here, instead our new job positioning drives job relevant engagement. Job visits up almost 60% year-over-year. The number of applications up almost 40% and also the response of reply rate include is continues to grow by 25% year-over-year.

As said, the XING transformation is a long-term process, but we do have numerous data points as well as qualitative user feedback, which indicate our progress and make us feel confident about continuing in the strategic direction.

Now let's have a look at what kununu is up to. As you know, kununu is the leading destination for workplace insights in the German-speaking region. This serves as the foundation for our B2B employer branding monetization, where we still employ branding profiles to corporations. During the last couple of months, we carried out a major brand campaign. The campaign first kununu, then apply concentrated [indiscernible] failure. It was rolled out through analog and digital billboards and infoscreens and [indiscernible] Cologne, [indiscernible] as well as five digital channels, radio and social media.

The aim of the campaign was to increase brand awareness for kununu and encourage users to gain insights into workplaces via kununu in order to take it from decisions. The local campaign was highly successful and the results we achieved and awareness uplift of 20% were much higher than expected, and we will most likely scale this campaign [indiscernible] as well.

And on the product side, you might remember that we also started to include job ads on kununu basically and we actually further improved the jobs-related features for kununu users during the second quarter as well. As you can see, kununu is really broadening its offering and expanding its aggression on market by going from company units only to review its culture and [indiscernible] data and now also to jobs.

And the respective KPIs for kununu also continued to develop nicely. The Factor VII kununu clearly confirms its leadership in overall traffic compared to the next biggest P&L. The number of Workplace Insights grew by EUR 2.4 million or 25% year-over-year. Salary data funds contribute over proportionately 36% to the growth in workplace and sites. Almost 12 million valuable insights like we've used Culture data and salaries and hundreds of thousands of employees have been added to the platform, thus further growing the attractiveness of the kununu platform when it comes to making important career decisions.

This was from my side. And, I now hand over to Ingo.

[Ingo Chu, executive]

Thank you, Petra. Hello, everybody. This is Ingo, and also from my end, a very warm welcome to this call. Talking to you, analysts and investors has always been important and special for me. And of course, this call today is particularly special. But before we get into that, let me start with the usual update on our financial performance. As Petra said, we have prepared this call as diligently as ever because we think this is important.

Now when we look at our business overall, while the macro economy and especially the labor market remain weak, we are on track with our plans. After having restructured the company in Q1, you can see already significant effects in our Q2 figures. At the same time, we continue to implement our investment program.

So let's start with the key message points. Number one, revenues came in at EUR 65.5 million, as expected, down year-over-year on the back of a weak environment. Number two, we continue to improve our access to talents on the sea side. Both XING and kununu have grown their relevant non-fin metrics, and that's important because our talent access is the necessary foundation for our winning aspiration. Number three, our continued cost management and our successful restructuring has improved our cost base significantly. Number four, pro forma EBITDA came in at EUR 17 million. That's down year-over-year, but significantly up quarter-over-quarter given the restructuring that we have executed successfully as per April 1st.

And number five, we do confirm our guidance on pro forma EBITDA of EUR 55 million to EUR 65 million. I'll provide more details on the following charts. Let's have a look at our P&L. As I've said, numbers overall came in according to plan. They are, of course, characterized by a difficult macro and revenue situation and our investment program. But you can also see the positive effects from our cost measures from last year and especially from the restructuring, which we've announced in January. Revenues amount to EUR 65.5 million. That's down 14% year-over-year driven by all segments. Reported EBITDA amounts to EUR 17 million, down year-over-year, key driver being our revenue decline and our investments, which we partially compensated by our cost-saving measures.

Pro forma EBITDA came in at EUR 17.5 million, also down year-over-year. Pro forma EBITDA margin came in at 27%. And if you compare Q2 margins to Q1, you will see that we have increased pro forma EBITDA margins from 13% in Q1 to 27% in Q2. Of course, some of that is cost seasonality. However, the majority of that margin improvement is driven by the restructuring. Also, you will note that we have significantly reduced our structural cost compared to last year, which is good because it gives us flexibility. Reported depreciation amounts to minus EUR 8.7 million, that's down year-over-year and pro forma depreciation equals reported depreciation.

Reported financial result amounts to plus EUR 0.5 million, that's flat year-over-year. And if you take out the revaluation of financial assets effect, pro forma financial result amounts to plus EUR 0.4 million, which compares to plus EUR 0.2 million in Q2 last year. This is explained mainly by getting more interest on our cash reserves. We bought the net income amounts to EUR 9.1 million. That's down year-over-year and pro forma net income amounts to EUR 9.3 million, that's also down year-over-year.

Now let's move on to segment reporting. As usual, we are showing reported figures. The HR Solutions and Talent Access segment came in at approximately EUR 11.5 million in segment EBITDA that's down year-over-year. The development is driven mainly by the revenue decline, but also by our investment in marketing. B2C segment had EUR 7.6 million in pro forma segment EBITDA segment -- reported segment EBITDA, that's down year-over-year. As you know, this is XING memberships business and the respective costs as well as our business unit InterNations. And this is our former historical core business, which is now a cash cow. The development is driven by planned declines in revenue.

The Marketing Solutions segment came in at EUR 0.3 million, that's up year-over-year. This is our advertising business and respective costs. On the next slide, you can see our revenue development by segment. HR Solution revenues came in at EUR 48.2 million. That's down 10% year-over-year. Revenue development is impacted by the difficult macro situation. Our economy is not growing and especially labor market data continues to be weak. As you know, the number of unfit position is down year-over-year and labor market sentiment is still declining. Clearly, this impacts active and passive recruiting revenues.

Revenue development is also driven by our portfolio cleanup. As you know, we are phasing out Honeypot, which impacts revenue development negatively. Our employer branding revenues, however, which are based on kununu continued to grow even in a difficult environment. B2C revenues came in at EUR 15.2 million, that's down 18% year-over-year. You know that this development comes as planned. The key driver behind this development is direct B2C monetization at XING. With our refocused strategy, we concentrate on building our access to talent fusing and we monetize our talent access to e-recruiting on the B side.

Now, finally, let's look at B2B Marketing Solutions segment. Revenues amounted to EUR 2 million. That's down year-over-year and flat quarter-over-quarter. On the next slide, you can see an overview of our cost structure. In Q2, personnel costs before capitalization amount to EUR 30.9 million. That's significantly down year-over-year and down quarter-over-quarter. Year-over-year, you can clearly see the effect from our continued cost management in the past year and of course, the impact from our restructuring as per April 1st this year. Quarter-over-quarter, you can see the effect from the restructuring.

As a reminder, we expect full year savings from the restructuring, which you will see in 2025, that will amount to EUR 30 million in cash cost versus 2023. Now please remember that this is the cash cost effect. Accounting cost effect will be lower given that capitalization will also reduced with lower personnel cost. If you look at marketing in Q2, overall marketing costs came in at EUR 10.7 million, that's 16% of revenue, that's slightly down year-over-year. We do have invested more in brand marketing for XING and kununu as part of the investment program that we've announced in January. We spent less in performance marketing.

Last cost line is other operating expenses. As you all know, it includes, as usual, external services, legal audit consulting, payment processing, server hosting and other costs. In Q2, reported other operating expenses before capitalization came in at EUR 9.9 million. That's slightly up year-over-year. As you know, we have more cost to cover new regulatory requirements such as NIS 2.

Let's move on to cash flows. Operating cash flow came in slightly negative at minus EUR 1.1 million. And the main reason is that we have paid out severance payments in Q2 that we have shown in our accounting P&L in Q1. Cash outs for operating investments amounted to minus EUR 3.7 million, that's down year-over-year. And the development is also driven by the restructuring because there's fewer people in the product and tech function, of course, we also have less capitalization of self developed software. Cash out for interest paid, foreign exchange and rent amounts to minus EUR 0.8 million, that's down year-over-year and quarter-over-quarter.

As you know, in this slide, we show mainly lease cash outs. The development is driven by a limited rent-free period in one of our contracts and also by some surface reductions in the context of our cost management measures. With that free cash flow before dividends amounts to minus EUR 5.5 million. And out of our cash reserves, we have paid out our regular dividend of EUR 5.6 million. And with that, total free cash flow including dividends amounts to minus EUR 11.1 million.

Last but not least, we confirm our pro forma EBITDA guidance between EUR 55 million and EUR 65 million, which we have given in January. So, to sum it up, overall, we are on track in a difficult environment. The macro economy, the labor market and our revenue situation remained difficult. However, our initiatives are developing well. Our investment program is on track. And the restructuring, combined with the cost saving measures from last year has significantly reduced our cost basis year-over-year and quarter-over-quarter. This was a key driver for increasing our pro forma EBITDA margins from 13% in Q1 to 27% in Q2. Based on these developments, we confirm our guidance of a full year pro forma EBITDA between EUR 55 million and EUR 65 million.

Now these are our numbers. Let me please add some personal remarks. As you've read in our press release, I have informed Petra and the Supervisory Board that I have decided not to extend my current contract, which runs until summer 2025. My reasons are purely personal. I've been with this company for more than 15 years. I have prolonged my contract 3 times. And more importantly, I'm now 53 years old. Next year, I will be 54 years old. And if I prolong for another term, I will be 58 after that. 58 years in a company that has so many young colleagues here to them, it seems like death. So for me, this is really the right time for something new. And I have informed Petra and the Supervisory Board early on so that we can start the search for a suitable successor and to ensure a smooth transition. I'm confident that you will understand this.

To be the CFO of this company has always felt and still does feel to me to be a privilege. When I started in 2009, the company made EUR 44 million in revenues and EUR 12 million in EBITDA. Last year, we did more than EUR 300 million in revenues and about EUR 100 million in EBITDA. In these past 15 years, I've always enjoyed building and strengthening the relationship to you, investors and analysts, and I have considered our dialogue and discussions as an inspiration and I still do.

Next to me and Petra is sitting Patrick Moller, our VP, Investor Relations, whom I want to thank as well in this moment for his very good work. Together, all of us, we've always tried hard to earn your trust. We put a lot of effort into keeping you informed in an open and transparent way. And we did this in easy times as much as in not so easy times. And we did this because we've always believed in the high value of good Investor Relations.

My last day is still far away. As I've said, we've initiated the search for a suitable successor. You, investors and analysts and I, we may see each other again in a different setup. But for now, let me just say thank you very much and take care. And with that, I hand back to Petra.

[Petra Von Strombeck, executive]

Actually to the moderator, come for questions. But let me add into that, I'm really sad that you we have been a perfect team. And although I am optimistic that we find a suitable successor, it would be a hard time replacing you.

[Ingo Chu, executive]

Thank you.

[Operator]

[ Operator Instructions ] [indiscernible] you should be able to speak now.

[Unknown Analyst]

I hope you can hear me okay. Just quickly wanted to wish Ingo all the best on his next big adventure, and it's been a pleasure working with you and Petra and Patrick and the team. So all the best to you. But firstly, my question is on maybe the delisting process. I'm not sure if you mentioned it already, but if you could give us an update on what the situation is there, that would be great.

I guess, my second question on the overall macro environment after all the volatility we've been seeing, again, not sure if you touched on it, unfortunately I jumped a bit late, but what [indiscernible] in Germany right now and are you still optimistic that you can find avenues of growth going forward?

[Ingo Chu, executive]

Actually, thank you, [indiscernible], for your words. Regarding the delisting process, the offer is out. Our joint recent statement is out. As per Monday, the acceptance rate was 77%, a little over 77%, which is already now in the hands of order. So that's the total capital, okay. And then the offer runs until, Patrick?

[Patrick Moeller, executive]

26th of August.

[Ingo Chu, executive]

until the 26th of August. That is the process update. And then the second part of your question as to our business, actually, the quality of the tone was really low volume. Maybe can you repeat it, please?

[Unknown Analyst]

Sorry. I hope you can hear me better now.

[Ingo Chu, executive]

Yes, great.

[Unknown Analyst]

It was more around sort of the macro environment in Germany, given all the volatility we've been seeing over the last couple of days. We're getting mixed messages that the German economy is actually staying robust. So I wanted to understand from your perspective, given the conversations you have with HR departments, the corporates directly, how are you feeling about the macro environment going forward? And how confident are you that there are pockets of B2B growth out there that you can go after.

[Petra Von Strombeck, executive]

Actually, we are quite careful when looking at next year and doing our budgets because although there is a small macro growth predicted right now, we've seen in the past that actually those predictions have always been corrected and downward -- corrected than in the following months. So when doing our planning, we are actually quite careful looking at the next year. Nevertheless, we are confident that there will be pockets and segments where we can grow. And kununu is still a growth case, although the times are difficult. So we will certainly have a mixed picture of our different revenue streams.

[Operator]

Thank you so much, [indiscernible]. And we don't have any questions yet. Still invited to speak now, Mr. [indiscernible].

[Unknown Analyst]

Yes. One question from my side regarding the times post delisting. Do you still expect that management will be available for investor discussions, assuming that there will be minority shareholders left?

[Petra Von Strombeck, executive]

We will never exclude and talking to our shareholders for once, but obviously, we will stop quarterly calls and stop quarterly reporting. They will also continue to be annual shareholder meetings as we will continue to be in SE. So we will follow the full requirements that there are, and we will certainly not refuse to speak to investors.

[Unknown Analyst]

Okay. And then on the operational side, you didn't name explicitly the sales target. You didn't also mention in the Q1 report, but is it still a value to your initial EUR 270 million to EUR 280 million target?

[Ingo Chu, executive]

At this point in time, yes.

[Operator]

Thank you so much, Mr. [indiscernible]. And the room is open to some more questions. We have received no further questions. We, therefore, come to the end of today's last earnings call of New Work SE. Thank you for joining and your questions. Should further questions arise at a later time, please feel free to contact Patrick from Investor Relations or us. A big thank you also to the management for your presentation and the time you took to answer the questions. I wish you all a lovely remaining day and all the best for New Work SE. Bye-bye.

[Petra Von Strombeck, executive]

Thank you. Bye.