RTMVY - Rightmove plc (RTMVF) H1 2023 Earnings Call Transcript
2023-07-28 04:49:09 ET
Rightmove plc (RTMVF)
H1 2023 Results Earnings Conference Call
July 28, 2023, 02:00 AM ET
Company Participants
Johan Svanstrom - Chief Executive Officer
Alison Dolan - Chief Financial Officer
Conference Call Participants
Presentation
Operator
Good morning, everyone. And welcome to the Rightmove First Half Year Results Presentation for 2023. My name is Johan Svanstrom, CEO, and I'm joined by Alison Dolan, CFO.
Here's the content we're going to go through today. So by way of a short introduction, I've now been in the Rightmove role for five months. I've got 25 years of experience in general management positions in tech native companies, typically with platform characteristics in the form of marketplace or B2B2C operating models. I've been an investor and board member in both private and public tech companies, many with digital subscription business models.
To date, at Rightmove, I spend a majority of my time understanding the business and operations, learning about the industry and starting to meet customers using our platform. My overarching impression is that Rightmove is a strong business in a very solid leadership position. It's resilient and it exhibits strong and deeply seated network effects. I'm very impressed by the teams in both what and how they execute to deliver value to consumers and customers alike.
Based on my observations, I'm certain there's a long runway of growth in the core business. I also see clear opportunities to accelerate both revenue and profit over the medium and long term.
In short, I'm bullish on the opportunity to grow Rightmove to an even larger digital platform in the UK property market. I will get back to this briefly at the end of the presentation.
Now let's move over to our results for the first half. Revenue growth came in at plus 10% year-on-year. Rightmove's consistency and resiliency is again evidenced. This is the highest first half growth rate since 2018. We've seen ARPA growth of over £121 compared to mid last year. We saw record new homes ARPA growth.
Membership is at just over 19,000, up 182, showing the resiliency in the estate agency market and of our platform. Underlying operating profit has increased 9% year-on-year.
We continue to be successful in our recruitment plans, and especially in product development teams as we continue to accelerate innovation.
Consistent with a long established progressive dividend policy, we are increasing our interim dividend to £0.036, up from £0.033 in 2022.
We'll get back to more details on the strong operational and product related delivery to date and for 2023 as a whole. First, though, as I intend to scale up our purpose-led approach and drive business benefits through it, Alison will highlight some of the progress across our three ESG pillars. Please, Alison.
Alison Dolan
Thank you, Johan. Good morning, everyone. The ESG agenda has always been a priority for us, but we are now stepping up our emphasis on the environmental element, the E of the three elements.
The real estate and construction industry stands for substantial 25% to 30% of all CO2 emissions. So reducing the carbon footprint of this sector is critical to the UK hitting its 2050 target emissions.
Later in Q3 this year, we will launch our Go Greener initiative, which is designed to accelerate the information and data we make available to operators, planners and government as they think about actions that can help to hit UK targets.
Rightmove has a unique set of assets to contribute here. We have a strong market position, therefore huge datasets and extensive consumer and industry reach. We want to use the insight from this data to help to inform the industry and policymakers to facilitate discussion and to play an active role in accelerating the green transition. There is a key role for us at the heart of this transition, and there are a few other companies with the same wealth of data.
We have launched our Greener Homes report 2023 today, which is full of consumer behavioral insights and thoughts on potential consumer incentives for policymakers, lenders, and developers to encourage them all to play their part. You will continue to hear us talk about this. We are passionate about using the advantages we have to drive the whole agenda forward.
We are also very pleased with progress on our social and governance initiatives, making a difference for employees, investors and our broader stakeholder groups.
Now on to the financial details of today's results. Relative to the first half of 2022, revenue has increased by £16.8 million, 10%, our highest percentage revenue growth in a single reporting period since 2018.
The biggest driver of growth was ARPA in both the Agency and the New Homes operating segments. ARPA increased by £121 and drove £13.7 million of the £16.8 million total revenue growth.
Estate Agency customer numbers were very marginally down on the first half of 2022 at 16,093, which in turn reduced agency revenues by £0.3 million. But within New Homes, increased development numbers added a further £1.7 million of revenue out of total new homes growth of £7.9 million. In fact, New Homes revenue growth in this first half is over three times New Homes revenue growth for the whole of 2022. We have continued to see developers market strongly with us throughout the half.
Other revenues also grew by 11%, the biggest driver of which was the commercial real estate business, which grew by 14% and the mortgages business which, although small, grew by 150% on the prior year. I will give further detail on these businesses in a later slide.
The first six months of 2022 have seen very strong ARPA growth. In fact, this first half has seen the second highest total ARPA growth in any six-month reporting period, with ARPA increasing by 9% to a total of £1,411.
By far, the most significant element of that growth was New Homes ARPA, which grew by 23%, £330, to £1,776, our single highest increase in any reporting period for New Homes ARPA growth. The growth was driven primarily by developer upgrades to the advanced package, with 49% of developments now in that top package. The revenue uplift from these upgrades alone totaled £4.4 million.
ARPA growth within Estate Agency was more modest at 6% or £79 to £1,314. As we said in March, given the migration last year of Optimiser 2015 subscribers to Optimiser 2020, ARPA growth in 2023 was always going to be more modest and more price driven than in the recent past, but we have continued to see strong product purchase from Sold By Me and a number of the other branding products, which drove a third of this growth.
Given this momentum across both operating segments, we feel comfortable with raising ARPA guidance for the full year, adding £2 or £3 to our previous guidance of £100 for the year, closer to the upper end of the guidance range.
Overall, increased product take-up and package upgrades have remained the primary driver of ARPA growth, both within Agency and New Homes, and products now accounts for 60% of total revenues across both operating segments.
In Estate Agency, top-of-the-funnel agent branding products remain our most popular products. Sold By Me has been the primary driver of the 100 or so net upgrades to Optimiser that we saw in the period.
As agents continued to compete to win new vendor mandates, we also saw strong take up of our vendor lead gen products, Local Valuation Alert and Rightmove Discover, both of which generated double-digit revenue growth in the period.
Featured agent remains our strongest selling product overall. As is usual for us, roughly one-third of all independent agents will go through the contract renewal process in 2023, of which 80% are now done, a similar position to the one we were in last year.
The average associated price increase was about 9%, almost identical to 2022's, and delivered £26 of ARPA growth, £2.3 million of the £7.2 million revenue growth within Estate Agency.
In New Homes, as I mentioned, 49% of developments are now using the advanced development listing. We also saw strong take up of the Native Search Adverts video product across all packages, with usage increasing in a year from 9% to 31% of developments since June 2022.
The contract renewal process for New Homes developers delivered 35% of the £330 of ARPA growth and 27% or £2.1 million of the £7.9 million New Homes revenue growth.
Membership numbers have remained largely flat over the period since December 2022. The changing market in the second half of last year, which slowed the pace of sale of new homes and which led to an increase of over 250 developments on the site in the second half of last year has remained broadly the case in this first half.
On the agency side, branch numbers increased by 161 over the six months, with the increase driven by our stock braced branch equivalent refactor of hybrid agents. We do expect some of this to reverse in the second half and means that we expect agent numbers to fall slightly year-on-year.
And for this reason, we have introduced over the last year a couple of new packages to encourage both newly established agents or longtime agents on the essential package to trial our digital products and to experiment with different products to experience their effectiveness.
Agent Accelerator is for agents who have been established for less than six months and who have less than five properties to sell. And the Essential Extra package sits between essential and enhanced, allowing customers to use products without the cost uplift to the enhanced pack.
It's very important to us both to nurture the agents of the future and to help essential members to engage with products. Our experience is that, when they do, they tend not just to retain those products, but to increase the range of products that they use and to continue to upgrade their packages.
We are breaking out other revenues for the first time here and will continue to increase the level of transparency on these businesses going forward. Altogether, there are five business units in this other segment. Our primary focus is on three – commercial real estate, data services and our mortgages business – as we see a significant addressable market and increased revenue and profit potential in each of these areas.
Starting with commercial real estate, which is both the largest and the fastest growing. Revenues for the half were £6 million, growth of 14% on the prior period. As with the Estate Agency, commercial customers ARPA increased, mostly pricing driven this year, and we anticipate full-year growth to be about 16% on 2022.
Data services delivered just under £5 million of revenues for the period, flat on the comparable period, but we expect full year growth of about 13% on 2022's revenues of £9.5 million.
Our mortgages business delivered just under £1 million of revenues in the period, which is a significant and very encouraging step up on the same period in 2022. Notwithstanding the growth already delivered, we expect to maintain it in the second half of the year as consumers continue to want to understand how much they are likely to be able to borrow when market conditions are so volatile.
Cost inflation on last year has been relatively limited. In fact, costs in the first half of 2023 were actually lower than in the second half of last year. Relative to the comparable period, underlying operating costs have increased by £6.1 million or 15% to £46.3 million.
As is normal for us, the vast majority of the increase is headcount related, either in salaries or number of heads. We also saw a small increase in G&A costs from inflation in training and premises and utility costs.
Average headcount is now up 12% on the first half of 2022, and we now have 711 employees. The increased headcount drove £2.9 million of the £4.3 million payroll increase, and the uplift in average salaries and associated costs was 6%, which accounted for a further £1.4 million. Headcount costs represent about 60% of our total costs now, which is up about 2 percentage points on last year.
Costs overall are consistent with the guidance we provided in March at 26% of revenues. And margin, therefore, was at 74% for the half. Consistent also with our guidance in March, and with prior year's, costs are weighted slightly to the second half as we continue to recruit throughout the year and to upweight marketing spend. On that basis, therefore, we continue to expect a full-year margin of 73% for 2023.
Operational cash generation remains strong at 102% of operating profit, and absolute cash generation is up 8% year-on-year at £131.7 million.
Corporation tax was 19% for the first quarter and rose in April to 25%. The impact on earnings has affected EPS, which increased by 6%, but which would have increased by 12% absent the tax increase. All of the post-tax cash generated in the half was returned to shareholders, with £55 million returned via the share buyback program and £42.6 million for the final 2022 dividend, which was paid in May.
We entered the period with £43 million of cash, entirely consistent with the past couple of years.
As Johan mentioned earlier, we are also announcing a 2023 interim dividend of £0.036, which will amount to about £30 million and will be paid in October. We reiterate our policy of delivering dividend growth in line with underlying earnings growth.
Our policy of returning substantially all cash to shareholders post organic investment remains unchanged, as does the allocation within that of broadly one-thirds dividend/two-thirds buyback.
So our financial outlook is a positive one. We have performed in line with our expectations in the first half. And looking out across the remainder of 2023, we expect to continue to perform in line with all of the guidance we've given and in line with existing consensus.
We are particularly excited by the multiple opportunities ahead to invest in order to accelerate both revenue and profit growth, not just in the core business, but across the other business units that I called out already.
Our ambition is to consistently deliver double-digit revenue and profit growth, and this investment will enable us to do that, not just over a long term horizon, but in the medium term also. And we will talk to you in more detail about the specifics of those plans in an investor day, setting out the growth opportunities and what it is that we will do to take advantage of them.
Even more positively, we intend to do all of that while continuing to earn an operating margin of between 70% and 72%.
I'll now hand back to Johan. Thank you, everyone.
Johan Svanstrom
Thank you, Alison. Before I go on to an update on the housing market and business highlights, I thought it is worth showing this long term view. Two things really stand out in this slide.
One, there is an always-on healthy sales volume in the residential property market. A large population of 67 million needs to move and that population is also growing every year.
Two, volume can move a bit with external factors like economic cycles, government policy changes, Brexit and industry changes. But you can see here that we continue to grow revenue on a very consistent basis.
The foundation for that is quite simple. We've achieved very strong and expanding network effects. We plow through cycles, bar anything extreme and unusual, like the pandemic.
At year-end, we talked quite a lot of this countercyclicality of our business between Agency and New Homes. Those segments are both important revenue drivers in themselves, but also act as a natural hedge. This year, we have again seen that resilience play out with a combined 10% year-on-year growth in total revenue in the first half.
It is likely 2023 will not be seen as a good year for the property market, given the macro and rate levels. We predict relatively normal year transaction volumes in the range of 1 million. It's too early to tell what lies ahead for next year.
On that note, I would like to give you a little bit more color on the housing market using our proprietary Rightmove data. Since 2022, quite prominent inflation and interest rate dynamics have played out after the previous two years' pandemic bounciness.
The top chart shows two factors over the last few years indexed back to June 2019. There's a healthy demand of leads at plus 2% over the period versus 2019. Now given the very rapid rise of interest and mortgage rates since last year, this might be surprising to some, but it simply goes to show that people both want and need to move.
Two, it's also positive that, from a listing supply side, the number of new listings tracks along the 2019 levels. More choice is welcome for healthy market, by buyer seeking options and, of course, agents looking to win instructions.
The bottom chart shows a further zoom in on the last few months. The optimism that we had in February through April tempered down because of the stickily high UK inflation and a stronger-than-expected Bank of England rate rise of 50 bps to 5% in mid-June.
The market saw the rate of sales agreed falling, and that trend continued in July. Fall-throughs are up marginally, plus 15%. But they still represent the small proportion of the overall pipeline.
So let's look at some further data. Prices of property and the cost of financing, obviously, affects the residential homes market. We saw strong price rises of over 20% and, historically, ultra-low transaction times over a two-year period, which was likely unsustainable.
You can see from the chart here that house asking prices have actually held up fairly well. And it's important to remember, they still sit 20% ahead of 2019. That means agent commission levels were up roughly 15% if you take into account the reduction in transaction levels.
The huge price drop off that was expected by many earlier this year didn't happen. It's worth flagging that, in the last 50 years, we've only seen three years where average house prices fell by more than 5%. And that's when there were a lot of for-sales, which is not the case now.
However, sellers have started to adapt their expectations of value. The number of price reductions on properties, the blue line, from 2019 first decreased due to the strong demand and low supply. But then these price reductions started to increase back to more normalized levels and compared to 2019. It's plausible, and likely we'll see prices adjust further.
But, of course, a reduced sell price also means a reduced buy price. It's the same two-sided transaction value effect that consumers find in a rising market.
Estate agents play an important role. They win seller instructions on a combination of achieving a strong sell price, yet also by valuing realistically and for a successful transaction.
Financing cost is, of course, a factor. Much is written and analyzed about the mortgage rates. It has become considerably more expensive for buying mortgage takers with current swap rates at 5.4% for two years and 4.6% for five-year mortgages. But it's worth remembering that only 45% of owner occupied houses have mortgages at all, and almost 40% of transactions are made without mortgages.
Now lenders also want the land. They're adjusting and supporting the mortgage needy market through payment holidays, pauses on repossession, innovation on product, et cetera. The government has come up with a mortgage charter working with many of the lenders on these measures. So buyers and sellers are in a period of heightened reassessment and doing some deeper good old analytics.
Importantly, last week's inflation number finally came in lower versus expectations at 7.9%, which is a welcome trend break. Most markets prefer certainty and we will get a better visibility on the mortgage rate peak and timing of the curve during the fall. We still expect some of the hesitation and cost of financing challenges to last and we see that in the elongated transaction times in 2023.
In summary, the property market finds a way to function. Overall, the levels of engagement and interest remain healthy. And Rightmove continues to provide value to consumers and customers alike. Through the platform model, our offering and value is very resilient.
As you can see on the graph here, there is a growing mismatch between demand and supply in the rental market. Mortgage challenges and hesitations have recently pushed even more demand into rentals, driving up the rent levels, which are now 10% higher than last year and 36% higher than 2019.
There has been this undersupply in the market for a long time, but this is exacerbated more recently by several factors. There's less new landlord formation and some smaller landlords are also leaving the market. Landlords are challenged by way of reduced tax incentives, higher financing costs, various legislative measures or anticipations like the proposed Renters Reform Bill, stricter EPC requirements, and so forth. There are ongoing policy plans and announcements on these topics.
We can see that landlord challenge in our resale listings, with 12% of new listings coming to market from buy-to-let landlords. There is, however, also a trend of larger and professional landlord companies, who can better handle the various headwind factors mentioned, buying up some of the stock. We see the build-to-rent investment trends continue, and we already have a business unit up and running catering to this very segment.
We are firm believers in delivering value through great products. For us, it's a parallel innovation track for consumers and customers of different kinds and in different segments. As you can see in the graph here, we continuously release meaningful features and products. And of course, we also make thousands of small improvements along the way.
Our whole goal is to drive value from our scale and provide that back to the market, so that everyone can operate as effectively as possible using the Rightmove platform. We drive this innovation through three vectors. It continues investment in our technology platform, an expansion of our product development team, which is now one-third of our total workforce, up from being one-fifth five years ago, and through leveraging our ever-expanding datasets. Development velocity and distribution reach is a very meaningful competitive advantage. And I want us to continue to pursue it fully.
Our very significant market lead with consumers is something we work for continuously. You can see top left that Rightmove remains by far the largest and most instinctive place that home hunters turn to, with market share ticking up 1% since December to now 86%. Over 85% of our traffic comes direct.
Bottom left graph, you can see that with some more normal levels of market activity this year, there is a 7% reduction in time and traffic versus 2022. Yet it's still very strongly up 27% and 45%, respectively, on 2019, demonstrating both the behavioral increase in going more digital, but also our feature developments for consumers, including the mobile apps.
Bottom right graph, similarly, the leads have reduced with market normalization in this year, but it also exhibits a very strong 50% increase on 2019, partially helped by the fact that we cover most of the rental listings market and that has seen very strong consumer demand as I referred to earlier.
In the first half of 2023, we have both built on existing consumer features and launched new ones. Some examples are listed here on the left side. We do these with a mission of helping home hunters, buyers and renters to be more informed, experience more effective flow, and thus we create a closer and more informed relationship with them.
This builds our signal universe of interactions and needs out in the market, which in turn informs our roadmap for what further features and products we build to both customers and consumers.
One of the more exciting launches, which we're very proud over, is a product called Track a Property within this whole price list feature. We've seen a great take up rate to date with over 30,000 registrations per month, which shows that consumers are really keen to understand the potential value of their own property as well as properties they have an interest in moving to.
The way we built the Track a Property product is relevant because we provide a valuation range to induce interest for consumers to contact an agent, so agents can play their important role of providing the final valuation based on his or her expertise and local market knowledge.
Now with that, let's go and look at the customer side of our platform. Given some of the headwinds seen in the market, it's pleasing to see how our services support the business goals of our customers. In a tougher market, customers look even harder at their various cost lines, including how to allocate marketing. So the increased take up of Rightmove services is a strong testament to what we offer.
In the graph top left, you can see that New Homes customers or buyer leads are most important to developers. Those developments that are on a top advanced package generate over 35% more than the middle package, gold, which in its turn is a step up on the standard package on the left side. It's why we see so many coming on to our top package advanced and also stay there. This drives the 49% advanced package penetration Alison referred to earlier.
Now in Estate Agency, the main objective of agents, especially in this market, is to win vendor leads. In the graph, you can see that leads from these products, Local Valuation Alert and Rightmove Discover have increased 16% year-on-year against the fall of total leads of 14%. These two products now generate leads which represent up to 12% of all new listings in the UK market, showing how valuable they are for our customers.
So in conclusion, buying one product often leads to buying other products. That leads to the very strong product penetration, which we expect to continue to grow.
We're very excited to tell you about Optimiser Edge, which is our new top package for estate agents. We'll launch it officially later this year, and it will be sold over several years.
It has two main components the build and work and test that we've done for a while. In the marketing solution space, we launched our Native Search Advert product during the first half to our larger customers. It has come with better audience targeting, video support, and it's seen with 20 times more consumer engagement. It's really a step change in branded advertising compared to traditional banners. In June, we started to scale NSA to our wider Estate Agency customer base.
The other part is that we have revamped one of the most used reports by customers, the Best Price Guide, first by making it digital, so it's interactive between both seller and agent, and thus capturing much more data in a way the old version couldn't. We provide a better report and tool for agents, but we also increase our own visibility of consumers as they're in the market. This aligns to our ongoing strategy to know more about the consumers and help our agents with that information. The pre-launch sales and feedback of Opti Edge have been very promising, and we'll go to full launch during the fall.
As Alison referred to, we've seen very strong growth together with our New Homes customers in the first half. They are, of course, also affected by the market conditions and they have a continued interest to shift the product.
The growth is driven by what you see in three graphs here. Old trends that we see continue to drive adoption and uptake into the future. Top left, you can see that we increased product purchase penetration to around 30% for native search advertising and to 49% for our top package, advanced.
And as an example, we made NSA available to independent new homes customers only in January this year. And already 45% of those indies have purchased it after six months. We believe this penetration can increase further, given the overall still low mix of new homes listings compared to the resale market listings volume.
On the top right, here you can see that advanced customers, once they have upgraded, continue to generate ARPA growth as they choose to engage and buy more product. On the bottom left, obviously, the lower sales ratios experienced by new homes developers in this current market is affecting how long their product needs to be advertised and how hard to push it.
So in summary, we have one of the most effective tools for new homes developers in the market. We therefore see continued healthy revenue opportunity in the segment.
Now let's look at what we do on the rental side. Earlier, I mentioned the mismatch of very strong demand and under-supply in the rental market. We are hard at work building technology to enhance the experience and efficiency for all involved stakeholders in this market.
Market is pretty substantial, with roughly 4.5 million addressable rentals, if you exclude housing associations and student lets. Those 4.5 million tenants turn around on average every four years. So it's a continuous stream of events and transactions, equating to a little bit more than 1 million every year.
Our main focus historically has been via the core listings for letting agents advertising properties on Rightmove. The listings product with letting agents generate around £40 million of revenue per annum. To grow that opportunity, we early launched Lead to Keys, where we build up the true end-to-end digital service offering for the three stakeholders of agents, landlords and renters.
We're now adding an important feature to Lead to Keys called Enquiry Manager, which will be launched in the second half of this year. The agent can handle this process through a Rightmove plus site and invite tenants to viewing and order reference from us in one click. Initial trials with Enquiry Manager have been promising. Agents have received 30,000 prequalified leads in our short trial period, saving an estimated 11,000 hours of administration.
So technology at scale can indeed drive productivity, which leads us to the next topic. There's a lot of discussion on AI in the news. I follow it keenly having been an investor in tech companies and also as an operator using the early versions of machine learning, NLP and AI since many years back.
On the left are a few examples of how Rightmove already deploys machine learning and forms of, shall we say, old generation AI and automation across several functions in our business. We are convinced that the generative AI models and platforms hold a lot of opportunity for Rightmove, building on what we already do. We want to generate true and high quality value from AI as an enabler technology, and we're very actively exploring it at the moment.
Exciting aspects for us specifically is around leveraging our large and proprietary data set, progress consumer search to next level, and see how we can potentially help orchestrate useful services to our customers. From an internal perspective, we look at the velocity and productivity gains across a range of different functions.
We also announced just yesterday that we're delighted to welcome Kriti Sharma, Chief Product Officer at Thomson Reuters legal tech, as a new board member of Rightmove. She brings a wealth of product tech and AI specific knowledge to the company.
So in short, this paradigm shift in computing and assisted computing will be leveraged by Rightmove. I'm very excited to see what the next years will bring, and we definitely consider it an opportunity.
So I want to finish with a high level outline of where I see us going strategically. First, though, let me really underscore that we set out from a real position of strength. This is accelerated evolution rather than revolution.
We will focus on the UK property market, which is a massive opportunity in itself. And I don't see any imminent reasons to look abroad for growth. We're essentially in the leads and advertising side of residential home sales today. We've identified a number of growth vectors with TAMs worth many multiples of the revenue we generate today.
My modus operandi is to lean into this growth, but in a balanced way, and leverage further the assets we already have. We want to strike a solid double-digit growth and profit trajectory for the next 5 to 10 years.
So there I gave you the why. Here are some key tenets of what we'll do. We'll continue to focus strongly on our core business segments and the commercial model. There's plenty of runway across the residential sales and lettings market.
I know for sure we can go deeper on consumer services, which will expand our dataset, drive further stickiness, and also generate revenue. There are some real consumer pain points to still solve in real estate. And in my book, that means business opportunity.
We already operate some smaller business units where we have solid insights and execution in the market, such as commercial real estate. We'll go after growth in those. It's a matter of accelerating our effort.
And as a wrap around those first three points, we started to envision how we build the platform and Rightmove ecosystem of the future. I think we can race away on data and tech scale in ways that no one else can come close to.
Finally, I'm personally convinced we all need to do a better job moving the world closer to the 2050 climate goals. This needs to be an effort from consumers, agents, builders and policymakers. At Rightmove, we have leadership on information. Information leads to power. Power leads to responsibility. We want to take that responsibility and I think we have quite a unique role we can play and that makes us very excited.
So with that, we say thank you very much for listening today.
Question-and-Answer Session
Q -
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Rightmove plc (RTMVF) H1 2023 Earnings Call Transcript