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Good day, and welcome to the New Work SE Q3 Results 2020 Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference to Petra Von Strombeck, CEO. Please go ahead.
Good afternoon, everyone, and welcome to our Q3 update. I hope you and your families are safe and healthy. This is Petra speaking, and next to me is Ingo. Today, we'll provide an update on our third quarter, which after tricky Q2 is another quarter that's highly overshadowed by the COVID-19 crisis. So what are the key messages this quarter? Our financials, both revenue and EBITDA, are up versus Q3 last year. This was a stable quarter for us in terms of key financials. When looking at our 2 core segments, B2C and B2B E-Recruiting, we experienced flat year-on-year development of B2C revenues but quite promising nonfinancial KPI performance when it comes to member growth and growth in workplace insights at kununu. For B2B E-Recruiting, we saw a further decline in year-on-year growth rates. Q3 posted mid single-digit growth rates actually, so the COVID-19 impact is quite obvious, but not really a surprise. Great news is the fact that Frank Hassler has been hired as our new Chief Sales Officer following Alastair Bruce's departure in April 2020. And last but not least here, given the current state of our financial and business performance, we're able to confirm our updated guidance from May this year. Let's briefly talk about people first before I move on to our business update. As probably most of you know, Alastair, our former CSO, and I had different views on how to move on and develop the B2B E-Recruiting business further, which is why we decided to part ways in April. While going about finding a successor, I reached out and sat down with the guy who built our B2B E-Recruiting business almost from scratch and made it a huge success before leaving us in 2019 to become CEO of a DuMont subsidiary. His name is Frank Hassler, 48 years old, and we are very happy about him joining us as our new Chief Sales Officer. Frank Hassler was previously CEO at Munich-based censhare AG, where he drove the company's growth and upscaled the business. In his former role with us, he was responsible for building up the sales organization and developing new products for business growth. Under his leadership, the e-Recruiting segment grew [Technical Difficulty] to become the company's largest growth driver. In total, Frank has amassed more than 20 years of expertise in international software business with previous CV entries, including Navision, Microsoft and SAP. He's an exceptionally successful manager and just the right person to continue developing New Work SE's B2B segment. He has outstanding market knowledge and a proven track record in building and developing its gaming growth business. The whole team as well as the Supervisory Board is delighted that Frank adds his expertise to the company's Executive Board. Let's return to our numbers now. As mentioned in the exec summary, our service revenues are fairly flat compared to the previous year. Here, we saw a slight increase of around 1% to EUR 67.5 million. Our pro forma EBITDA, where we take out the xo effects linked to M&A and restructuring costs and other, is up 9% to EUR 26.4 million. This is basically the result of a much more [Technical Difficulty] cost management and the restructuring carried out during Q3. This will put us in a position to invest in future businesses despite COVID-19 and its negative effect on our top line. Ingo will cover that in more detail later on. Even though our financial performance is kind of subdued, there are some promising KPIs in [Technical Difficulty] [B2C] business. Our member base continues to see double-digit growth of 10% with a total now standing at 18.5 million. That's an increase of around 1.7 million net new members during the last 12 months, i.e., 400,000 members in Q3 compared to 448,000 in Q3 last year. So despite the pandemic, this figure is only slightly behind that of the previous year. One of the drivers here is our reduced marketing budget in Q3 versus last year, which was down 20% year-on-year. Looking at our employee branding and [Technical Difficulty] [recruiting] we continue to significantly enrich the information available on employers in Q3. kununu continued [Technical Difficulty] [focusing on its vision] to create [Technical Difficulty] Overall, kununu hosted almost 4.3 million insights as of the end of September this year. It's insights on review, salary and culture, by the way, which is up 34% year-on-year. kununu's main focus during Q3 was to launch a product innovation, offering more value to its users. The relaunch of the kununu company profile makes it easier for users to find all relevant workplace insights, thanks to a simplified structure while companies [Technical Difficulty] present themselves in a much more authentic way. This new profile offers an overview of employer ratings broken down into categories such as working environment or career and salary as well as how the kununu score develops over time. The goal is clear. kununu wants to make it easier for employees and job seekers to make one of the most important decisions, choosing the right employer. That's it for our 2 main B2C KPIs. Let's move on to the most important B2B KPI, the development of our e-Recruiting subscription customers. This comes as no surprise given that I talked about the trends and drivers behind our customer base development during the half year back -- a call back in August. The pandemic [Technical Difficulty] slightly over summer, and it's now coming back into Q4 starting in a second lockdown. This is driving a general reluctance among HR departments to expand and invest in modern recruiting solutions. What you can see here is the sequential development of our most important B2B KPI, the development of our e-Recruiting [Technical Difficulty] in customer base. Just to recap, the subscription is usually a 12-month subscription. As you can see, when the coronavirus hit Germany, our growth in terms of net customer adds declined significantly. In fact, our customer base even declined slightly by around 400 customers since the end of 2019. If we look at the end of Q3, our customer base is still up slightly versus previous year. Here, it is important to understand the associated top line dynamics, which show a delayed impact in both directions: on the one hand, the deceleration in top line growth lagging behind the deceleration of customer growth as revenues are being deferred over 12 months; on the other hand, a potential reacceleration of net customer adds on the back of an easing of the current pandemic situation will result in delayed top line reacceleration as well. Please take this into account when forecasting a recovery throughout next year. That's it for the segment-specific KPIs and dynamic. Let's have a look what we ship to our members, users and customers. One thing is certain. We'll continue working on new and better solutions and offerings for our over 18 million members and more than 13,000 corporate clients. In our B2C division, we significantly expanded our content offering. We launched a new format called Zukunft.machen which probably translate into [Technical Difficulty] [shaping future]. This offering from the editorial team investigates key questions about the future. Here, experts, pioneer scientists and influencers post video interviews, articles, interviews and podcasts where they share their views and idea on how society can thrive in the future. Our new "Lessons Learned" video series is where we conduct online interviews with Board members at tax-listed companies who share their key learnings from recent months. The first interview was given by Audi Board member Hildegard Wortmann. Furthermore, at this year's leading HR trade fair, Zukunft Personal Europe, the New Work SE subsidiaries launched a number of new products and solutions. Alongside that, we rolled out at end, the NWXnow HR-special, what a name, in 1-week online event with brimiming with presentations by pioneers on a wide range of HR topics such as employer branding and recruiting. Moving on to the B2B E-Recruiting. Here, our team worked hard to introduce new HR solution called XING TalentService, XTS. XTS is aimed at companies that don't have the recruiting resources available to actively search and select potential candidates, and a business is simply looking for some additional support with their active recruiting work. Our customers get a hybrid recruiting service from us. We do the searches for our corporate clients, a mix of AI-supported search with our own tools like the XTM plus a manual candidate screening done by a new team, which we recently discussed. We make sure that every client receives a short list of 3 to 7 potential [Technical Difficulty] [candidates]. The price of EUR 3,500 is really competitive if you compare with other external recruiting agencies who charge 30% to 40% of the annual salary. Clients, by the way, pay for the search itself. It's not a success fee. In any case, we are able to charge the fee of EUR 3,500, even if the company was not able to convert one of the suggested and presented candidates. This is obviously an exciting new offering. Granted the timing for its launch is less than ideal as we enter our second lockdown in Germany, but we see a clear need for this offering. And by the way, the first customer feedback is really positive. Last but not least, let's have a quick look at our B2B Marketing Solutions & Events business, which has been the most negatively affected business so far during the pandemic. It's important to point out here that we are busy shipping new formats such as self-booking video ads through our XING AdManager. In our events business, we are still experiencing a double-digit revenue decline versus the previous year's quarter. But [Technical Difficulty] [active] number of online events and participation are high. It's the monetization of the online events that is lower. So we are still going at innovating and acquiring new customers like our new flagship customer called Bits & Pretzels start-up conference, which was hosted virtually for the first time ever. Let's sum things up. As you can see, New Work is navigating pretty stable through the crisis. This is a good thing. And our outlook for the future remains positive as we've aligned our offerings with long-term trends such as digitalization, demographic change and shifts in societal values. Also, the current pandemic accelerates the general discussion and awareness of the future of work, which is exactly our sweet spot. The world of work is changing like never before, and this is driving discussions on multiple fronts. It comes as no surprise that the original eases of New Work came about mid- crisis. On top of that, we are seeing a great deal of interest in exchange and guidance, along with purpose and perspective.Our brands offer platforms and home for such [Technical Difficulty] with examples, including the Zukunft.machen. offering from our editorial team at the NWXnow event. Our portfolio appeals to both members and corporate clients with the latter facing challenges with a view to transformation and digitalization in preparation for the future. Of course, no one really knows how long the crisis will have an influence in our financial performance. But as we remain highly optimistic in the underlying trends, we will continue to invest in new promising products and solutions. Having said that, we've introduced a range of measures, including cost savings in areas which are significantly affected by the pandemic, like events, Honeypot or HalloFreelancer, to free up funds, which can be allocated in new promising B2C and B2B offerings. And I now hand over to Ingo for a deep dive into our financial results.
Thank you, Petra. Hi, everybody. This is Ingo, and I will talk about our Q3 numbers in more detail. Overall, last quarter, we had a stable development, and we are on track regarding our outlook for this year. Let's start with a look at the key message points. Number one, our nonfinancials, such as the XING member base or the kununu workplace insights, continue to grow nicely. That's important as it is the basis for our business. Number two, revenues are stable with year-over-year growth of 1%. Number three, reported EBITDA is impacted by restructuring costs. Pro forma EBITDA is growing 9% year-over-year. Number four, operating cash flow came in at EUR 21.5 million. And number five, we're confirming our full year outlook of revenues of EUR 275 million to EUR 285 million and an EBITDA margin of approximately 30%. So I'll give you more details on the following charts. If you look at our P&L in Q3, revenues came in at EUR 68.7 million. That's up 1% year-over-year and up quarter-over-quarter. That's all organic. Reported EBITDA amounts to EUR 23.7 million. That's down year-over-year, up quarter-over-quarter, and it includes nonoperating onetime extraordinary cost for a restructuring of approximately minus EUR 2.7 million. Reported Q3 EBITDA margin is 34%, slightly down year-over-year and up quarter-over-quarter. Now if you take out the xo effect for the restructuring, pro forma EBITDA amounts to EUR 26.4 million, which is up year-over-year and up quarter-over-quarter. Let me give you some background on restructuring. You know that we are managing our short-term cost to assure our short-term financial health in a COVID environment. And for this year, this means that we are targeting an EBITDA margin of approximately 30%, and we're well on track here. Now also, as we've said before, we believe that our long-term outlook continues to be good. Digitization and demographics will drive our business in a post-COVID environment. And that's why we want to invest to the extent possible in the current environment into our long-term opportunities. And to finance these investments, we have looked at our existing cost base. And as you know, in the past, we've started many initiatives. Some of them have become successful. Some of them have not taken off as we expected. And so we've gone through our portfolio of initiatives, made an assessment and closed down some, reduced investment in some, and restructured others to improve the profitability. These savings measures crossed our restructuring cost, and they will finance our investments into our long-term health in the future. Now if we look at depreciation, in Q3, it amounts to minus EUR 7.3 million that's up year-over-year. And you know that this includes nonoperating depreciation for purchase price allocation assets from acquisitions of approximately minus EUR 1 million. Financial result amounts to plus EUR 0.2 million, and it includes positive nonoperating effects of plus EUR 0.3 million, and these are basically quarter-over-quarter profit on investments of our cash. Now if you take those out, financial result would be minus EUR 0.1 million, and that's mainly accounting only noncash cost for discounting future earnout liabilities and lease payments according to IFRS. Reported net income amounts to EUR 12.2 million. That's up year-over-year. And if you take out all the xo effects, net income would be EUR 13.8 million, up year-over-year, up quarter-over-quarter on a like-for-like basis. The over proportionate [indiscernible] development of pro forma net income is because this year's restructuring costs are tax deductible, whereas last year's impairment on kununu US was not. So if you look at Q3 overall, our operating development is stable. Revenues were slightly growing, and pro forma EBITDA is growing 9% year-over-year. On the next chart, you can see our profitability by business unit. These are all reported figures, so they include restructuring costs. Now let's start with the B2C segment. In Q3, the B2C segment contributed EUR 6.2 million in segment EBITDA, which is down year-over-year, and margin is down as well. The B2B E-Recruiting segment contributed approximately EUR 25.8 million profitability. That's up year-over-year with a constant return on sales. The B2B Marketing Solutions & Events segment contributed EUR 0.4 million to profitability. That's down year-over-year. Margin is down as well. You know that this is clearly the segment which is impacted most from COVID. All segments are impacted from restructuring costs, which influence margin development. If you look at revenues, on the B2C side, revenues came in at EUR 25.7 million. That's slightly down year-over-year. It's up quarter-over-quarter. This quarter, again, the reason is the InterNations business. You know that the revenues are basically paid memberships that offer expats access to off-line events, which in a lockdown scenario are directly impacted naturally. Our XING paid membership business has grown in Q3. B2B E-Recruiting revenues came in at EUR 38.6 million. That's up 6% year-over-year and up quarter-over-quarter. Growth was driven mainly by our subscription revenues and employer branding, 360, Prescreen and Active Recruiting. Passive recruiting is down year-over-year.Finally, let's look at B2B Marketing Solutions & Events. Revenues amount to EUR 4.4 million, down year-over-year, up quarter-over-quarter. Again, so far,in this segment, we see the strongest impact from COVID as both businesses are transactional and not subscription. And of course, events depend on people meeting off-line. On the next slide, you can see an overview of our cost structure. In Q3, personnel costs before capitalization amount to EUR 36.1 million. It's an equivalent of 53% of revenues. Costs are up year-over-year, which is basically due to the hiring up until the start of the COVID crisis. Quarter-over-quarter, costs are slightly down, and especially headcount is basically flat since we have significantly reduced hiring. Q3 personnel costs include seasonal positive effects from the release of vacation accrual and negative extraordinary effects from restructuring. The net effects are still negative. If you took that out, you could see more [Technical Difficulty] effects from our cost measures. Now if we look at marketing in Q3, overall marketing costs amount to EUR 5.9 million. That's 9% of revenues down year-over-year. We have reduced marketing spend according to the situation. And we've reduced especially in our B2B business. The last cost line, other operating expense. As you all know, it includes as usual external services, legal, audit and sizing, payment processing, server hosting and other costs. In Q3, other operating expenses before capitalization amount to EUR 8.4 million or 12% of revenues, which is down year-over-year. We mainly cut software development, freelances, external services and, of course, also had savings in travel and entertainment. Now if you look at cash flows. Operating cash flow, excluding organizer cash, amounts to EUR 21.5 million. It's up year-over-year and quarter-over-quarter mainly because of net working capital. Cash outs for operating investment amount to minus EUR 6.6 million down year-over-year. Cash out for interest paid, foreign exchange and rent amounts to minus EUR 1.9 million. These are mainly our cost of rent. And with that, cash flow before dividends and before organizer cash amounts to EUR 13 million. To sum it up for Q3, revenues develop in a stable manner. Our pro forma EBITDA is growing 9% year-over-year. And we confirm our updated COVID outlook for the full year with EUR 275 million to EUR 285 million in revenues and approximately 30% EBITDA margin. That's it for the numbers, and we are now happy to take your questions.
[Operator Instructions] We'll take our first question from Nizla Naizer from Deutsche Bank.
I have 3 questions from my end. Firstly, on the new service that you're launching, XTS. What's the sort of TAM potential for this business? And I'm curious to understand if there'd be any cannibalization? Because ideally, you're doing yourself what HR departments used to do with XTM. So what's the sort of threat of cannibalization there? Secondly, given what you're seeing on the ground and you confirmed your full year outlook, is it fair to assume that it's more likely to be towards the lower end of that range? What sort of parameters are you considering when you [Technical Difficulty] into that range? What needs to happen for it to hit the upper end, for example? And if the current base case scenario are trending more towards the lower end? So some color there would be great. And thirdly, within B2B E-Recruiting, could you give us some color as to how fast sort of kununu was growing? And did that sort of compensate for a lot of the restored growth in maybe XTM and passive, which decline that you mentioned? And how could we expect that to trend next year? Some color would be great.
Nizla, this is Petra, and I'm happy to answer your questions. So first of all, concerning the XTS, please bear in mind that we are in the first learning phase for the product. And so we definitely see a potential there, but it's really hard to judge because we are in the first trial phase of the market, but we do see a relevant potential for that product. Now coming to your question concerning the cannibalization, because we would expect our customers to actually use the XTM themselves. What we actually see is that HR customers have a different level of maturity and time available for active search. And what we try to offer them [Technical Difficulty] a new service is basically to profit from our network and from our candidates and everything we can offer without having themselves the time. So that's a perfect service for customers that have either not the resources available to do themselves or not the maturity to do active sourcing. And as I said, it's very well received by the market. Now your question concerning our guidance this year, you're perfectly right that we will probably go towards the lower end of the range we indicated, and that's also because we are just heading into the next COVID lockdown with unknown effect on the fourth quarter. So it will probably be towards the lower end. And your last question concerning kununu, I can confirm that the uptake we see in the employer branding business is related to the strong performance of kununu. And we see the highest increase in our e-recruiting sales in the employer branding field, that's right. But please bear with me, we don't give any guidance for next year for the time being. I hope that answered your question. Thank you.
Yes.
We will take our next question from Sarah Simon from Berenberg.
I've got 2 questions, actually. So on the B2B subscribers, do you think -- obviously, you saw a slower sequential decline in terms of customer numbers. Do you think it's reasonable to think you could be flat in Q4? Or would -- or do you think it's possible to grow? Because obviously, summer is seasonally kind of quiet for the selling anyway. So any kind of help you can give on sort of the year-end B2B sub numbers, that would be helpful. And then I know you don't kind of want to break out the numbers specifically, but can you give us an idea of how much passive sale, if not in kind of percentage terms during the quarter, then, let's say, relative to how it performed in Q2?
Sarah, this is Petra. I'm going to answer the first part of your question concerning the B2B subscribers. Knowing that we are driving right into a lockdown now, we consider that we will still see a very reduced new customer business in Q4. So our best guess at the time being, -- knowing that this period has just started and we have to see what the effects will be in the end, we expect either flat or even slightly declining subscription numbers. And I hand over to Ingo for the second part.
Yes. And if you look at passive recruiting, if you look at quarterly year-over-year development, it's down by approximately 20%, which is in line with what we hear from the market.
And -- but that's a little bit better than Q2, I think.
Yes, a little bit -- I mean it's marginally -- it's same order of magnitude.
[Operator Instructions] Our next question comes from Marius Fuhrberg from Warburg Research.
I actually have 2. First one is on the restructuring costs. We -- I recognize that you have [Technical Difficulty] the different sources in your company as you prepare for your [indiscernible] update in Q1. But what shall we expect for those costs to develop also in the midterm? Is it expected to increase it significantly over the next 1 or 2 years? Or shall we expect them to be rather stable? And furthermore, looking at the B2B membership numbers going down this year, and maybe if we expect a slight increase in memberships next year in the recovery year, maybe you said that there will be legacy in the top line, though, what kind of recovery do we have to see to expect, let's say, 7% to 8% top line growth from a B2B membership base?
Marius, this is Ingo. Now on your #1 question regarding the restructuring costs, what we meant by restructuring is a onetime restructuring cost for letting people go. And so I mean, at this point in time, we've taken the decision in Q3, we are currently negotiating with the employee committee. So we have not yet really -- we do not have yet really the final results, and we have not yet executed the restructuring. But the onetime costs, right, like for the severance payments, et cetera, that the expectation value is in Q3 in there. So it's onetime, and hopefully, it stays that way. When it comes to the B2B membership, and your question regarding the outlook for next year, please understand that at this point in time, we are not giving any indication for next year because there's still a lot of uncertainty regarding the pandemic and we are still in the process of doing our budget.
[Operator Instructions] Our next question comes from Heike Pauls from Commerzbank.
Yes, hope you're well. I have 2 questions or maybe 3. Your full year outlook, I just wanted to clarify, does the 30% margin target includes the extraordinary effects or exclude them? And second, Ingo, you mentioned that you had scrapped or scaled down some projects due to the cost savings. Can you give some examples for exactly what's affected? And then maybe a broader question to Petra. You plan a business update event early next year. And I just want to know, can you already give some insights what you will talk about? Will you provide product updates? Will there be a new medium-term guidance, for example? So just maybe whatever you can say at this point already.
Heike, this is Ingo. So actually, the 30% EBITDA margin target for this year is before restructuring costs. So it does not include restructuring costs. Okay? So it's a pro forma 30%. At least that's the way we meant it in May when we gave out that guidance. And if you look at the cost savings or the portfolio measures that we've taken, so for example,-- and you would see that impact in the B2C segment, we have been developing an employer -- employee survey tool with kununu engage. We've reduced that. You know that we've -- that's also in the B2C segment, which started to invest in a freelance marketplace. We're not closing down the freelance marketplace, but we're restructuring that to try out product market fit in a more cost-effective manner. So it's the kind of -- these kind of measures that we've taken. And regarding Petra's first capital markets, she's going to answer that.
Of course, I will. Heike, so what I can promise you is the strategy update next -- in the beginning of the year, where we'll actually outline how we envisage the future of New Work SE for all the rest what we will do, and the long-term guidance, et cetera, we will see next year.
Our next question comes from Simon Bentlage from [indiscernible]
Yes. I have 2 of them. The first one would be on the restructuring costs you mentioned, and actually you're saying that it's related to letting people go. Can you maybe point out when you expect the benefits of this? And sort of [Technical Difficulty] positive EBIT impact that you see from this next year? And then the second question would be on your tax rate. You might have explained this, maybe I missed it. I'm just wondering why it's so much lower compared to last year? And how we should think about it going forward?
The restructuring cost, basically, they will become effective. So we've taken the decision, that's when you have to book an accrual for the severance payments for the expected value. That's what you see in Q3. We are currently in negotiations with our [Technical Difficulty] [employee] committee, and we expect that you see the benefits of that next year. It's too early to say how much that will be. And then at the same time, we're doing that actually to create room to finance further investments into our future. So the money that we save, we will reinvest in growth projects, okay? So that -- we don't do it to structurally lower our cost base below this year's level. When it comes to the tax rate, if you compare Q3 to Q3, so Q3 this year to Q3 last year. last year, the tax rate was higher because last year included the impairment on kununu US and the impairment is not tax deductible. And that's why the tax rate is higher.
[Operator Instructions] It appears there are no further questions at this time. So I'd like to hand the conference back over to your host for any additional or closing remarks.
Thank you, everybody, for your interest and all your questions. We wish you a good time. Stay happy and healthy, and see you next time. Bye.
Bye-bye.