New Work SE

XETRA:NWO

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the XING Quarter 3 Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas Vollmoeller. Please go ahead, sir.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Hello, everyone, and welcome to today's conference call. This is Thomas speaking, and next to me is Ingo. Today, we would like to run you through our results and achievements for the third quarter of 2018. Just to remind you, before I jump into detail, all of the 2017 financial KPIs had to be adjusted retroactively on the back of IFRS 15 and 16 to make them comparable with the 2018 numbers. That's it for the housekeeping. Most of you who are following the stock market these days are probably a little bit concerned when companies are about to publish current trading updates and talk about their full year targets. In fact, we have seen quite a few guidance cuts and downgrades just recently. This is why I would like to start my presentation with a clear message of our 2018 targets. We are fully on track. Both our quarterly financial results as well as our main operating KPIs continue to grow strongly and steadily. Our major financial KPIs improved between 15% and 22% compared to last year's Q3. Also our key nonfinancial KPIs grew nicely. And last but not least, we successfully launched and introduced a new integrated Prescreen XING E-Recruiting solution at XING's biggest HR fair, Zukunft Personal, in Cologne 2 months ago. Let's have a look at our financial KPIs for Q3 2018. Our like-for-like revenues came in 22% higher than last year and totaled EUR 59.5 million. This is slightly above our communicated top line growth ambitions and lift group revenues to EUR 170 million for the first 9 month of 2018. Quarterly EBITDA grew by 15% to almost EUR 20 million. Net income developed in line with EBITDA and also grew by 15% to EUR 9.1 million. Moving on to our net member growth. We had a very strong first half in terms of net member additions and continue to achieve very solid growth when it comes to XING platform members. In Q3 2018, we had added 449,000 business professionals. As a result, we added 1.4 million net new members in the first 9 months of this year. And just recently, we crossed the 15 million-member mark in our core countries. Besides our continuing platform growth, we're also happy with our InterNations business that adds a broader geographical footprint to our overall B2C business. InterNations added around 120,000 net new members in Q3 and now manages 3.2 million experts across the globe. Let's have a quick look at paying members development on the C side. On the back of continuing high basic member growth during Q3, we added 7,000 net new paying members during the quarter. And in the first 9 months, we were able to generate 23,000 new paying B2C customers, resulting in 1.02 million paying members, whereas about 1/3 opted for the 3-month plan and 2/3 went with the long-term 12-month plan. So for us, it remains a very predictable and solid business although it's not posting double-digit growth. I already mentioned InterNations. When we look at payer growth outside our core markets, InterNations is doing fairly well in terms of absolute and relative net payer growth. They added 4,000 net new paying members out of 120,000 total net additions in Q3. That's clear double-digit growth rate in terms of members, paying numbers and revenues. So we are really happy about that. Moving on to our most important B2B key performance indicator. The current lack of skilled labor is a frequently covered topic on German talk shows. And for a recruiter, it's a very real problem. Their time to hire is getting longer and sometimes vacancies even remain unfilled. A recent forsa study conducted on behalf of XING E-Recruiting shows just how acute the situation on the German labor market has become. More than 3/4 of the 200 HR heads surveyed stated that they need up to 6 months to fill managerial positions. 73% of those surveyed said that they had seen a general increase in their time to hire during the last 5 years. And around the same number said they expect this trend to continue over the next 5 years. This is exactly the structural backwind we have been talking about for quite a few years now. And our current growth in B2B customers is a great indicator of our strong position in the modern recruiting solutions market. During the first 9 months of 2018, we added 2,300 net new B2B subscription customers for a different E-Recruiting solutions, i.e., more than 3,000 over the last 12 months. This is an increase of 41% compared with the previous year's quarter. And there is still so much more room left for growth, and we are not resting. In September, we launched our new recruiting offering with Prescreen, our most recent acquisition. In order to help recruiters overcome these difficult conditions, we launched an integrated applicant tracking system, providing access to 15 million potential candidates. We want to enable companies to speed up their recruiting process significantly, in turn reducing the time to hire considerably while also giving recruiters the edge in the war for talent. Recruiters use such systems, which are commonplace in most large companies, to track an applicant's progress throughout the entire hiring progress. Recruiters can use applicant tracking systems to post job ads on the company's career site as well as on networks and job boards. They are also a great way to document job applications and sort them by applicant criteria while also enabling the recruiters to build up a talent pool for filling future vacancies and even providing the option to offer assessments to determine whether candidates are suitable for a vacancy.With the deep integration of XING and Prescreen, the system is clearly distinct from other applicant tracking systems in terms of its feature set. Usually, recruiters have to add candidates to the system manually. But Prescreen enables recruiters to shortlist and get in touch with potential candidates from within the system, provided the candidates have granted their permission. This spares recruiters the hassle of adding candidates manually, and they no longer need to use separate recruiting and applicant tracking systems. As a result, recruiters no longer need to spend hours scouting the market for good candidates, meaning that they can focus more on their main task, the selection progress -- process.Prescreen's technology is built on innovative matching technology that compares candidates with various criteria set out in the job description and then shows how good a match the candidate is for the vacancy. Furthermore, we integrated our TalentpoolManager as well as our ReferralManager into the new solution. Now recruiters can also access and shortlist candidates in a talent pool from within Prescreen. In addition, employee referrals received via the XING ReferralManager are automatically shortlisted. Experience shows that candidates from such talent pools are far more likely to be interested in the vacancy than other candidates. HR departments will also be able to use Prescreen to post their vacancies on more than 300 job boards and they can already post them free of charge on XING. And last but not least, if companies receive an application via email or other platform, as it is often the case, Prescreen now offers the option of linking those applications to the candidate's XING profile so that their details are always up-to-date. We are really excited about this integrated solution, and we will continue on our path to help companies hire the best.That concludes my presentation. So now I'll 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 Q3 numbers. All in all, and Thomas has said that already, we are all progressing according to plan, and we continue to be well on track to achieve our full year goals. So let's start with a look at the key message points. Firstly, we continue to grow our member base. Secondly, we continue to grow our revenues. Revenue growth came in at 22% year-over-year. Thirdly, EBITDA came in at EUR 19.9 million, which is according to plan. And lastly, we've had, as usual, strong operating cash flows, which came in at EUR 17.3 million. Now let's have a look at our Q3 P&L. Revenues came in at EUR 59.5 million. That's up 22% year-over-year. With that, our growth is fully in our target range. Growth was lower than in the first half of the year because now it's purely organic as we had started to consolidate our acquisitions, InterNations and Prescreen, in the third quarter of last year. You will see this in many year-over-year developments of our KPIs. EBITDA amounts to EUR 19.9 million. That's up year-over-year and up quarter-over-quarter. With that, we're fully on track for achieving our 2018 full year goals, and we confirm our full year EBITDA outlook for this year of EUR 74 million. Q3 EBITDA margin came in at 33%. Depreciation amounts to EUR 6.3 million. That is up year-over-year. And you all know that this includes approximately EUR 1 million in depreciation from purchase price allocation from our acquisitions. Financial results came in at minus EUR 0.2 million and includes mainly noncash interest according to IFRS for discounting future earnouts and fees for all lines of credit. This quarter, there was no impact from our U.S. joint venture as cumulated losses are higher than financing so far. Now we are still investing in that activity. However, according to IFRS, we do not show the resulting start-up losses. There will be a catch-up of the start-up losses with the next financing round, which could happen either this year or next year. Let me give you one additional update on kununu US. We have decided to terminate the joint venture agreement with Monster, Randstad and to buy them out at the beginning of 2019. With the takeover of Monster by Randstad, our partner had reprioritized their activities. And with that, the joint venture become less important for them. We are -- we as XING, we are going to run the business on a full control on a stand-alone basis in the U.S., and we're going to provide you with more details beginning after next year. Net income amounts to EUR 9.1 million, which is up 15% year-over-year. And with that, EPS came in at EUR 1.62. Now let's have a look at profitability by business unit. In Q3, the B2C segment contributed EUR 10.4 million in segment EBITDA. As announced, that's down year-over-year in absolute terms and in margin. As you know, we are investing in new products on the B2C side, be it in the network, on news activities or the jobs market or be in at kununu or InterNations. The return on these investments will come from either existing or new forms of monetization, especially on the B2B side. The B2B E-Recruiting segment contributed approximately EUR 18.7 million to profitability. That's up year-over-year. Return on sales is slightly up, too, despite the dilution from the investment into our ATS business, Prescreen. We're very well on track here. The B2B Advertising & Events segment contributed EUR 1 million to profitability. That's more or less constant level. That is also according to plan. We have started growth initiatives in marketing solutions business, focusing on new formats as well as on improved go-to-market. And the same goes for our Events business. In Q3, the segment kununu International is EBITDA-neutral as it should be. The revenues from service -- these are revenues from service to the JV and it's not the JV itself. The revenue is cost-based, so there's no profit expected here. Now let's have a look at the revenue development. The B2C revenues amount to EUR 25.2 million, which is up 8% year-over-year. This segment is developing according to plan. Approximately 50% of the growth was contributed by InterNations now organically. And approximately 50% of the growth was contributed -- of XING paid memberships business, most of that growth came from unit growth and we had 7,000 net payer adds in Q3. Let's have a look at our E-Recruiting revenue development. Again, we are very happy with the development here. B2B E-Recruiting revenues came in at EUR 28.2 million. That's up 38% year-over-year. Key growth of drivers continue to be our unique, modern E-Recruiting solutions, Active Recruiting and Employer Branding. And also our 360 packages are being taken up by the market very nicely. And if we look at the B2B advertising segment, revenues amount to EUR 4.7 million. That's up 20% year-over-year. Here, again, we also have a nice development driven by both the Advertising & Events business, which are both up double digit. On the next slide, you see an overview of our cost structure. In Q3, personnel costs amount to EUR 22.2 million, which is equivalent to 37% of revenues. That's up year-over-year. And this development is fully in line with our expectations. We added 279 full-time equivalent employees year-over-year. Out of that, 135 in the B2C segment. And out of that, 29 at InterNations and 106 in XING B2C business. Investments went mainly into product and engineering. And also you know that there's one important factor that we are substituting freelance programmers by employed programmers in our new development center in Portugal. 74 full-time equivalent employees were added in the B2B E-Recruiting business. Out of that, 25 at Prescreen and 49 in our core E-Recruiting business, mainly in sales and marketing but also some in product and tech. We've added 24 full-time equivalents in the B2B Advertising & Events business across all functions, and we've added 46 in the rest of the organization If we look at marketing, from Q3, overall marketing costs came in at EUR 6.4 million. That's 11% of revenues. That's up year-over-year, especially due to increased performance marketing spend at InterNations and XING E-Recruiting. Now the last cost line is other operating expenses. You all know it includes, as usual, external services, legal, audit, consulting, payment processing, server hosting and other costs. As you know, unlike before in 2018, this cost line does not include cost for rent anymore. According to the new IFRS rules, the right to contract has to be shown as a right to use asset on the balance sheet and then written off and assuming fictional financing. In Q3, other operating expenses amount to EUR 11 million or 18% of revenues, which is up year-over-year. Next slide, our cash flows. Operating cash flows, excluding organizer cash, amounts to EUR 17.3 million. That slightly down year-over-year mainly because of fluctuations in cash flows from net working capital. Cash-outs for operating investments amounted to minus EUR 7.5 million. That's back to lower levels after Q2, when Q2 have been impacted by a software asset deal we had done to accelerate our freelance and marketplace initiative. Cash-outs for interests paid, foreign exchange and rent amounts to minus EUR 0.7 million. These are mainly our cost of rent according to the new IFRS rules. And with that, free cash flow, excluding organizer cash, amounts to EUR 9.1 million. Overall, we're fully on track. We're keeping up the strong member growth. We have strong revenue growth. The bottom line develops accordingly. And we confirm our full year EBITDA outlook of EUR 74 million for this year. That's it for the numbers, and now we're happy to take your questions.

[Operator]

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

[Sarah Simon, Analyst]

I have two questions, please. First one is on -- well, they're both on the B2B side. Can you give us an idea of how much of the B2B revenues in total are coming now from 360? That's the first question. And then the second one is on seasonality. Axel Springer was highlighting they had a slower Q3 in terms of growth, but they expect it to reaccelerate in Q4. I mean, clearly, I haven't seen any slowdown. But do you expect a reacceleration in Q4? Or do you think we're kind of talking steady-state growth rates here?

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Sarah, this is Thomas. Taking the second question first. Well, we had a -- we obviously had a slowdown between Q2 and Q3 because in Q1 and Q2, we still had the nonorganic growth of InterNations and Prescreen in there. So when you look at the organic growth rates over the last quarters, we're always in this area of 21%, 22%.

[Ingo Chu, CFO & Member of Executive Board]

Exactly.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

So -- and that's -- I mean, without having the -- the fourth quarter, nothing different from that in the fourth quarter. Obviously, in -- on absolute terms, the fourth quarter is a little bit higher than the third quarter. But in year-over-year, that's pretty much what we see. Does that help you?

[Sarah Simon, Analyst]

Yes. No, that's good.

[Ingo Chu, CFO & Member of Executive Board]

Okay. And the first question, if you look at the first 9 months of the year and if you only look at the E-Recruiting revenues, 360 is between 10% and 15% of total E-Recruiting revenues.

[Sarah Simon, Analyst]

And looking -- obviously, the growth in that is really strong in terms of the members signing up. If you could hazard a guess, by 2020, what do you think that percentage could be?

[Ingo Chu, CFO & Member of Executive Board]

Oh, we're having many guesses, but we are not telling you yet. I'm sorry.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

But it's -- I mean, what would -- the only thing we can tell you is it will be significantly growing, and it is growing already. I see -- I mean, having started the whole project last year, we are now at 10%, 15%. That's what Ingo was saying. We obviously expect a significant part of our 20,000 customers or 10,000 subscription customers one of these days being 360 customers. But having said that, certainly, not for all of them 360 is suited. What we also see is there's a big need for 360 and -- but there's also smaller companies that are bundling. So they take, for instance, job ads and an Employer Branding Profile or they take XTM seats and a Talentpool. So there are smaller mini bundles as well besides 360. But bundling and -- is name of the game. And 360 will certainly increase significantly over those -- over the next years, whether it will be out of the 10,000 we have today, will be 5,000, 3,000 or 7,000, to be very honest, we don't know yet. And I think we didn't even plan that yet. But obviously, 360 is something that really helps us bind B2B customers.

[Operator]

E[Operator Instructions] Our next question comes from Simon Heilmann from equinet Bank.

[Simon Heilmann, Former Analyst]

I've got a few question for B2C. Taking a look at your member growth for this quarter, so we've seen 15% year-over-year. This was quite a bit weaker compared to the 9 -- to the Q3 last year. Could you give us maybe a bit additional background what you maybe have as a reason here? And -- or is it just that the -- your focus of management is a bit lower in terms of B2C member growth? And taking a look at your guidance 2020, so the guidance was here, EUR 18 million to EUR 20 million until 2020. With that numbers, where do you see yourself within your guidance, so more in the lower end or at the upper end? And then I've got another question on the -- taking a look at the subscription growth. This growth maybe half from 6.5% last year to 3.2% this year. This was also a figure where I was a bit wondering why it decreased so much on that point. And then another question, which came just up a few seconds ago due to your interview in the Handelsblatt, Thomas, where you were talking about freelancer at XING. You had talked about around 150 employees so far in your business or in your company. Could you maybe give us a growth rate how the part of freelancers developed in the last, let's say, growth rate year-over-year? This would be helpful.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

Yes. Simon, this is Thomas. I'll take questions 1, 3 and 4. Well, the absolute growth number that we had in Q3 was 449,000, I think, which is pretty much the size that we always have in Q3. We're growing -- over the last years, we're growing every year about 2 million, 1.9 million, 2 million. So if you divide that by 4, you're in the area of 500,000. Q1 is always a little bit bigger. So you remain in this area. I just see the numbers we had in 2015, we had 400,000. In 2016, we had 440,000. Last year, we had 500,000. This year, we had 450,000. So there's -- it's really always in this kind of area and magnitude. So it's -- there's always a kind of, how you call it, variance, which is a seasonal variance, which can be -- I mean, obviously, the summer was hot and people aren't going to the Internet, so there's always different arguments. But this kind of size seems -- is the kind of magnitude you get in the last years. So 400,000, 450,000, 500,000, somewhere in that area. It depends also a little bit on the measures, whether we do a little bit more online marketing or whatever we do. So there's -- this is the kind -- I would say that's normal variance that you have over the quarters. On the third question on subscription, yes, I mean, we always said that, obviously, we are slowing down because we have a bigger base. So we are in the single-digit numbers now in growing the B2C side. We believe we can still remain in this kind of size. But obviously, the -- we don't expect that to grow double digit on the classical premium business in the future because that's our vision. We're managing on this kind of, let's say, around 5% growth over the next few years, but nothing -- I mean, that's how -- I mean, that's where can manage again with funnel management and all these other things. The 150 freelancers that I -- and Patrick already showed me. That was the number by the end of last year. As a matter of fact, we already reduced it, and we are now lower than 100 because we built Porto this year as a new site and Porto takes off some freelancers. So the 150 was the end of last year. Currently, we have less than 150.

[Ingo Chu, CFO & Member of Executive Board]

Okay. So the second question was about our membership guidance or membership outlook in 2020, where we had 18 million to 20 million. We're currently at 15 million. We're growing at 2 million per year. That puts you in that range and somewhere in the middle. So I think that's a good assumption for you to take going forward.

[Simon Heilmann, Former Analyst]

Yes. Okay, maybe one short additional follow-up and-- just take a look on your other operating expenses there. I was wondering, just 2 positions for, on the one hand, the IT costs; and on the one hand, the server costs. We've seen here an increasing figure, around about 40% both positions. Could you maybe give us a little bit more color what's behind that significant growth year-over-year?

[Ingo Chu, CFO & Member of Executive Board]

Yes. Surely, I can do that. So what has happened here? If you look at the IT service, that IT service, management service, that also includes consulting. It's a mixture. It's not just IT service and it's not the freelancers, okay? Just for clarification what is behind the numbers. And what you see in the development in the first years, in general, if you have -- we do have some one-off costs this year, which, for example, we have just with coping for our growth. And so one example would be we're looking at how we're going to develop our workspaces and our offices, and we had some one-off costs in looking into that because that's important to be attractive as an employer. To be able to attract the talent, we need to achieve our growth. And then the bigger part of it though is that what you do see in general is a trend that you have IT services which usually you find in CapEx, you find now in OpEx because the model is moving from buying hardware or buying licenses, which you -- which are shown as CapEx, towards more cloud services or SaaS services. And that's into OpEx, okay? So the general trend of that going up is there. Usually, you have an offsetting effect in your CapEx, in general. And we are currently, actually looking into our IT strategy going forward. And we are looking at how much we do want to move into cloud, how much we want to keep our own servers and stuff like that. So once we are done with that work, and it's not easy work because it's a very fast-changing technology environment, I'll give you an update on that.

[Simon Heilmann, Former Analyst]

And maybe about to server things?

[Ingo Chu, CFO & Member of Executive Board]

That -- what I said about the move towards cloud refers to IT services as well as to server hosting, to both lines. It adds a little bit of volume.

[Operator]

[Operator Instructions] It appears there are no further questions at this time.

[Thomas Vollmoeller, Chairman of Executive Board & CEO]

All right. Everything seems to be clear. Thanks for listening to us. Have a great day, and keep your trust and your faith in XING as we do. Okay. See you around. Bye-bye.

[Ingo Chu, CFO & Member of Executive Board]

Bye-bye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.