Earnings Transcript for RMV.L - Q4 Fiscal Year 2023

Johan Svanstrom: Good morning, everyone, and welcome to the presentation of Rightmove's full year results for 2023. I'm joined today by Alison Dolan, our CFO. So I have now been CEO of Rightmove for 12 months. And I'm thoroughly excited about our team, our platform, our execution and our opportunities ahead. We've accelerated our product innovation and the organizational capability, and we also outlined new strategic ambitions at the Investor Day in November. So today, I'm going to start talking through the 2023 highlights. Alison is then going to go through the more detailed financials and outlook, and finally, I'm going to spend some time with an update on the housing market, examples of our ongoing platform and product innovation and a few notes on our strategic developments. 2023 was a challenging year for the housing market overall with elevated interest rates and economic uncertainty. Now with Rightmove's platform model and strength, we are pleased to communicate a set of very strong results for 2023. We saw strong revenue growth of plus 10%, the highest in over five years. We had ARPA growth of GBP117, which surpassed our expectations right until the end of the year as especially developers spend strongly with our marketing products. Membership was broadly flat. We saw a reduction in hybrid agencies, and developments reduced a little as developers look to cut their build rates given weaker demand. Alison will describe these moving parts in a moment. Traffic came in at 15.4 billion minutes spent with Rightmove, down for the full year over previous year due to a more hesitant consumer market. But our engagement remains very strong, and it's solidly growing in the longer-term context. We have five core pillars for the business, and we saw positive and accelerated progress across all of them during 2023. Here are just a couple of examples. For consumers, we launched an instant valuation tool called Track-a-Property, which grew very fast out of the gate. We already have hundreds of thousands of properties tracked by our consumers. For estate customers, we launched our new top package Optimiser Edge and saw a strong uptake also out of the gate with over 600 sign-ups. And across our strategic growth areas, we crossed several early product milestones, all part of our announced five year growth plans for additional revenue and additional profit. In the platform and people pillars, we continue to upgrade our overall position as a strong, modern and attractive technology company. We launched these two efforts of AI and Go Greener in 2023 with engagement and structure right across the entire company. As a market leader, we believe both of them will have major positive impact over the next five to 10 years for a leading position as a company and, indeed, the industry itself. They are both strategic in nature, certainly complex and perhaps of the type hyped in the short term, undervalued in the long term. But they are, therefore, really suitable for us as the U.K.'s most scaled tech and data property platform. We're now setting internal targets for both, and it is quite exciting to look ahead. All right. And now over to Alison for some of the financial details.

Alison Dolan: Thank you, Johan. Good morning, everyone. I'm delighted to present our financial results for 2023, which highlight once again the strength and resilience of our business. Revenue has increased by 10% on December 2022, the highest annual percentage revenue growth since 2018. All areas of the business grew well, although we have seen some standout successes, which I will come on to. As we committed at the Investor Day in November, we are increasing the transparency of growth across a number of business units. Estate Agency revenues, which now comprise 72% of total revenues, increased by 6% or GBP14.7 million to GBP262 million. The increase was delivered through a mix of customer package upgrades, particularly to the top package; continued use of digital products; and good outcomes from our annual price increase process. Agency customer numbers were very marginally down with a corresponding small negative impact on revenue growth. In the lettings side of agency, the revenue sources are subscriptions from lettings-only agents, the rental element of the dual-agent subscriptions, build-to-rent listings revenues and rental services. As a side note, for rental services, we have also shown the stand-alone year-on-year growth within the strategic growth areas below, although it does not contribute to the total within strategic growth areas. Revenue from lettings overall has increased in line with the sales side of Agency at 6% year-on-year. This is a market in which the dynamics have changed quite materially as a number of private landlords have left the market, build-to-rent as a source of supply has emerged as a growth area, and the overall imbalance between supply and demand is even more pronounced than in the sales market. Our utility to our lettings customers has increased with our Lead to Keys product, helping them with both enhanced lead qualification and a more efficient digitized process. New Homes revenues have materially increased year-on-year, up a record 26% on 2022 to GBP66.4 million. The strength of the revenue growth has meant that it now represents 18% of total group revenues, up from 16% in 2022. Growth was almost entirely driven by ARPA growth as developers increasingly upgraded to the Advanced top package, continued to increase their use of products, native search adverts in particular. We also had a higher average number of developments listed on the site across the year than during 2022, which contributed materially to revenue growth. Revenue growth in our strategic growth areas increased by 24% to GBP14.3 million. Within that, we saw notable growth in commercial real estate revenues, which increased by 15% to GBP12.2 million. Growth was driven by a 4% increase in ARPA to GBP1,114, and commercial customer numbers are now around 930, up 12% on 2022. Mortgages revenue was up 133% year-on-year, although still small at GBP2.1 million. All of the growth in 2023 came from an increase in the number of MIPs sent via us to Nationwide, for which we generated 60,000 MIP leads during the year. We have seen really good growth in MIP volumes during the year, doing in 1 month in 2023 the sort of volumes it was taking us 3 months to do in 2022. The broker proposition that we talked about in November is only just live, and so was not a factor in 2023's revenue growth. RLTS revenues are up 29%, driven mostly by the number of references sold, which increased by 15% year-on-year. The Lead to Keys Enquiry Manager product launched in the second half, with just under 150 branches now live. Combined other revenues across data services, overseas and third-party advertising contributed a further GBP400,000 of annual growth. ARPA overall grew by 9% across the year, up GBP117 to GBP1,431, comfortably exceeding our guidance range of GBP95 to GBP105. New Homes was the primary driver of this growth, delivering a record GBP312 of ARPA growth within the year, over double what had been record New Homes ARPA growth in 2022 and closed the year at GBP1,825. New Homes has now seen two stellar years of ARPA growth, a combined total of 34% or GBP450 across the two years. We saw a massive increase in the use of product in New Homes during the year, including a 40% increase in the use of branding products, Native Search Adverts, in particular, as developers looked to the property and developer carousels to really show off their developments. Usage of Native Search Ads increased to 35% from 19% of developments since December 2022. Closing products also saw significant growth as developers increased spend on products such as Spotlight and Featured New Homes to increase their sales rates. The contract renewal process for New Homes delivered 35%, GBP110 of the GBP312 of ARPA growth and 33% of revenue growth with package upgrades and increased product use delivering the rest. Agency added GBP78 of ARPA during the year, up 6% on 2022 to GBP1,356. We saw notable growth in vendor lead products as customers continue to see them as crucial to winning vendor instructions. Despite the cooler market in 2023, these products delivered a further 5% increase in leads relative to 2022. The use of branding products increased by 7% as customers leveraged Sold By Me and the new Native Search Adverts to increase their share of voice. Typically, we find that agents with more than 20% share of voice in their local market win double the number of instructions as those with less. It is no coincidence that over 70% of branches who are ranked top five for market share in their areas are also ranked top five for share of voice. But we did also deliver our normal program of contract renewal price increases through the year, which contributed 46% of overall ARPA growth in line with prior years. As is typical for us, roughly one-third of independent agents went through this process in 2023. Once again, agents and developers choosing to use more product and to upgrade their packages remains the primary driver of ARPA growth. And this year, as in previous years, these discretionary choices contributed 58% of total ARPA growth. For 2024, we reiterate our previous guidance for growth of GBP100 to GBP110. At this early stage of the year, we would generally guide towards the low to mid-end of that range. For context, as I said, we've reported record New Homes growth over the last two consecutive years, which is just more difficult to sustain. Agency customer numbers were very marginally down on December 2022, a net reduction of 93, and the slight revenue impact is similar in quantum to that of 2022. The second half of the year saw the expected unwind of the increase in hybrid agents we reported at the half year. Total agency numbers are now just over 15,800 and relatively stable, and we continue to see a retention rate of about 90%. Interestingly, the distribution of agents across dual sales and lettings, resale-only and lettings-only is broadly unchanged on previous years, with just over 50% of agents now doing both sales and lettings. 2023 saw the fewest lettings-only branches leaving the market than any year since 2018, when the tenant fee ban was introduced, and we saw close to 500 new lettings-only joiners. As our Lead to Keys flow is rolled out for lettings agents, materially increasing their ability to efficiently match renters and properties, we will remain focused on ensuring our offering for lettings agents remains of premium value. Within New Homes, the average number of developments live at any point was higher throughout 2023 than in 2022, although the closing number was lower by 136 as build rates slowed in the second half of the year. For 2024, overall, we expect customer numbers to remain broadly flat. It's really difficult to start out as a new agent in this current environment, and we have continued to see headwinds on new joiners. Levers remain lower than prepandemic. And as I said, we continue with a circa 90% retention rate for agents. A pickup in demand and sold subject to contract levels alongside ongoing consolidation at the large agent end of the market is likely to mean a small reduction in the number of Agency branches likely to be broadly offset by a small increase in the number of available New Homes developments. Operating costs increased by 14% or GBP12.5 million, two-thirds of which was an increase in people costs. We successfully recruited 87 new heads during the year, of which, over half were in our tech and product teams. We also put through a company-wide salary increase of 8% for 2023, which accounted for about GBP2.5 million in the year. Total headcount stood at 787 heads at the end of the year, and headcount costs now represent 57% of total costs. Our tech and product teams represent one-third of those heads and 45% of the cost. Tech costs also increased by about 30%, contributing GBP2.5 million of the GBP12.5 million increase, largely due to an increase across security and cyber protection, hosting data centers and connectivity costs, additional software and licenses in line with increased headcount and consultancy for the first time around AI. Total costs for the year, therefore, were GBP99.7 million. And we delivered an underlying operating margin of 73%. Costs in 2024 will increase in line with our previously announced investment in our strategic growth areas and ongoing investment in the core business. This would primarily impact headcount costs, particularly in the product development teams. And as previously guided, we expect the corresponding underlying margin for 2024 to be at 70% as we increase our investment in both the strategic areas and ongoing investment in the core business. We remain highly cash generative during the year, with GBP268 million of cash generated in the year, a cash conversion ratio of 104% of operating profit, up from 101% in 2022. A total of GBP201.7 million was returned to shareholders, GBP130 million via the buyback and GBP71.7 million via the dividend. Cash tax was GBP15.4 million higher than in 2022, in line with increased profitability and with the increase in the corporation tax rate from 19% to a Rightmove-blended rate of 23.3% in 2023. CapEx of GBP3.4 million was in line with the prior year and related primarily to the ongoing implementation of our new ERP system, the capitalization of the development team for our mortgages software and incremental computer equipment for new staff. We ended the period with just under GBP40 million of surplus cash. Distributable cash was GBP11 million lower than it otherwise would have been due to a combination of the increased tax rate and our increased investments and was the primary driver of EPS growth of 6% of underlying operating profit growth of 8%. Just a few words on capital allocation, given our increased investments. For 2024, our policy of returning all-cash to shareholders post organic investment will remain unchanged as will our progressive dividend policy. We are also announcing a 2023 final dividend of 5.7p per share, which will amount to about GBP45 million and will be paid in May, subject to final shareholder approval. This will mean a total dividend of 9.3p per share for the year 2023, 9% growth on the prior year. We have looked through the increased tax rate in setting the dividend and plan to continue to do so for 2024. We will resume our share buyback program in March having posted for the close period. The program has delivered accretion of 1% in the year. With respect to 2024 financial guidance, therefore, we expect revenue growth of 7% to 9%, fueled by ARPA growth within the core business of GBP100 to GBP110; broadly flat customer numbers, as I said; and continued growth within the strategic areas. The core business will remain the strongest absolute driver of revenue growth as we set out clearly at our Investor Day. Margin, we expect to be 70%, consistent with previous guidance, and with 2024 being our biggest investment year-to-date. I'll now hand back to Johan. Thank you all.

Johan Svanstrom: Thank you, Alison. I'll continue by briefly covering what happened in the housing market in 2023. As you can see in the top graph, in 2023, the U.K. saw its lowest home transactions level in over a decade and just over 1 million transactions, coming off 19% year-on-year. The year started poorly, with the impact of the trust budget in Q4 2022 disrupting sales volumes. There was a continued unsettled and uncertain economic environment throughout the year and significantly higher interest rates compared to the years before. The Rightmove House Price Index showed house prices down minus 1%, which is the first fall since 2008, but much less dire than most predictions at the start of 2023. Sales commission revenues for agents fell year-on-year but, in total, generally remained above 2019 given the 18% increase in house prices since then. Strong rental revenue proved valuable to dual agents this year. I'll come on to lettings later. So overall, we're encouraged to see the strength and resiliency of estate agents during 2023 and the role that our products clearly play in supporting them. In the bottom left graph, we've outlined some key metric movements over the last seven months indexed against 2019. By late summer and Bank of England halting its rate rises at 5.25%, lenders continue to lower their mortgage rates. Supply came on, and sentiment and activity improved towards the end of 2023. It then got markedly more positive in early 2024, so we saw very healthy demand of leads at 23% over 2019. Sales agreements are now plus 3% versus 2019. And remember that deals are typically three to six months ahead of completion dates. From a listing supply side, the number of new listings is now again flat versus 2019. Total available listings, i.e., choice for consumers, is down 8% versus 2019, yet up a strong plus 18% versus 2023. Lastly, just a reminder of that you need to qualify what stats get quoted out there. From December 2023 to January 2024, we saw, at Rightmove, an increase in leads of 74%, following the usual seasonal uptick at this period. In absolute terms, that's a very large number of Rightmove leads. You got to love it. So in summary, people want and are increasingly looking to move. More choice is welcome for a healthy market. More consumers look for and find options, agents get more potential instructions, and house developers get potential buyers. Rightmove is their platform for full confidence to do so. So looking ahead, we do see green shoots, and we hear as much from our customers. Three things to mention here. The interest rate outlook has materially improved, yet uncertainty remains, and the higher-for-longer has been the mantra of central banks for the past few months, ever vigilant to combat inflation. We see limited house price movements, likely marginally down similar to this year as there remains price sensitivity and buyers and sellers close in on each other's expectations. So our early transaction predictions for 2024 is therefore that the year will be slightly better than 2023 probably around 1.1 million transactions. Now let's move over to look at the rental market. As you can see in the top graph here, the mismatch between demand and supply remains significant, and it is still imbalanced in comparison to prepandemic times. Supply levels remain over 40% lower than longer-term norms and where it was in late 2019. However, during 2023, there is a bit of improvement in stock levels of close to plus 10% year growth compared to the historically low levels of 2022. Landlords continue to be challenged by the reduced tax incentives, various legislative measures and the anticipation of further regulation, for example, the proposed Renters Reform Bill. These factors, coupled with the increase in mortgage rates, have impacted the economics for landlords and our research showing particularly smaller landlords feeling this impact. The government has postponed some of its EPC upcurve requirements as a result. There is a trend of larger and professional landlord companies who can better handle the headwind factors mentioned, buying up some of that stock, and the build-to-rent sector indeed continues to grow. So with affordability issues for buying home, the demand for rentals and overall rent levels increased yet again in 2023. Rental fees were 9% higher in 2023 versus the previous year, and they remain 40% higher than 2019. From an outlook perspective, consumers might now have reached a bit of a pain threshold for rental fees. And with the slight improvement seen in supply, we expect the pace of rent fee growth to dampen and finish 2024 at roughly plus 5% outside of London and plus 3% inside London. If mortgage rates continue its reduction path, some of the demand will swing back to the sales side. So let's move over to an update on our business and strategic progress. Just a reminder that over the past years, we have more than doubled our pace of delivery through investments in platform, systems and people. Next year, we expect three out of four of all new joiners to be in product development. With our raised strategic ambition, we are accelerating product innovation and shipping code. We're promoting industry digitization through more and smarter products for both consumers and customers in our core business as well as in our strategic growth areas. And as you can see on the right-hand side, when it comes to demonstrable value to customers, we are, by many multiples, number one in the U.K. property market. We're investing in and delivering more value through product, data insights and relationships than ever, all of it 100% fit for the U.K. market specifically. It is backed by very strong consumer stickiness and love of the Rightmove platform. At our Investor Day, we outlined many details of the resiliency of our core business platform and the accelerating innovation we do on it. We divide that into six main segments, three on each side the platform. The product developments increase our network effects further. Rightmove's data signal universe grows every second, every minute, every day. And I think what's very important to remember is that we can deploy and see potential traction on things much faster than anyone else. This is the scale effect, and it builds our moat. So let's start looking at the consumer side of the platform. Rightmove remains by far the largest and most instinctive place that home hunters turn to and return to, with market share up 1% since December 2022 to 86% by end of 2023. Importantly, over 85% of that traffic comes organically to us, with consumers actively seeking the Rightmove brand. And whilst high traffic volumes are good, the quality of traffic is also critical. Our serious home hunters and app users, for example, visit us 21 times a month, generating strong lead volumes. Bottom left, you can see that with the subdued market activity in 2023, there is a year-on-year reduction of 5% in traffic. Yet the Rightmove platform is still very strongly up 27% on traffic and 38% in time spent since 2019. In the bottom right chart, you can see that leads have similarly reduced with market normalization, yet they posted a very strong 50% increase from 2019, partially helped in 2023 by the fact that we cover most of the rental listings market, which still saw very strong consumer demand. Our vendor lead products, Local Valuation Alert and Rightmove Discover, actually sent a record amount of leads last year, up plus 5% year-on-year, which is impressive given that market transactions fell by some 19%. So as you saw, we already operate at large consumer scale and with existing quality consumer relationships. We are now accelerating further on top of that position. We're focused in these three key segments, which deepens and expands our role with consumers. I'll give just a few examples here. Number one, on the left, knowing more about our users. So last year, we doubled the number of serious home hunters using the site logged in, and we captured more than 2 million enhanced profiles, giving us more precise information about our users' current situation and their future goals. This rapid scaling of better user data gives us several opportunities. And two, it enables us to increase the relevance and personalization of the consumer journey. So we're turning our homepage into a home-moving hub, delivering useful and personalized content and making it easier for you to pick up where you left off. Naturally, we're starting to enhance this even further with AI power. And in three, perhaps the most exciting area of focus for us long term is starting to play a broader role beyond what we call find as you may remember from our Investor Day strategic model. In late Q4 last year, we released the first iteration of Manage My Move Sent Enquiries, which allows consumers to digitally organize their Sent Enquiries according to the many steps of the home-moving journey post lead sending. It's an early but important step also laying the foundation for useful tooling that can enhance and speed up work for our customers. Our North Star is to try and reduce time and barriers in the moving process, providing a simpler consumer experience and facilitate our customers' processes and, ultimately, to improve their cash flow. It's very early days, but so far, 82% of signed-in lead senders are visiting our new Sent Enquiries module. In summary, we're very excited by these early steps of creating smarter and more connected digital experiences. And we're indeed in a scaled and strong position to do it from. So let's move on to the customer side of our network. Also here, working across three key segments in the platform wheel. First, a quick update on Optimiser Edge, our new top package. We launched it in the second half last year, and we've seen successful sign-ups with over 600 customers by December. Optimiser Edge gives exclusive access for customers to, a, Native Search Ads, our most advanced marketing product to date; and b, to the Premium Price Guide, a tool that supports customers beyond marketing. On the left here are some stats of the improvements we've seen to date. The graph on the right showcases how the price guide innovation facilitates data insights and connectivity between customers and consumers, thus facilitating both sides of the Rightmove network. We have built these products because we listen to what our customers wanted and we have the data scale to make them useful, including linking them to consumers. It is the success of these products that helped drive early adoption success of Optimiser Edge. We expect to likely exceed our guidance of 1,200 branches of Opti Edge by the end of 2024. So let's look at how we tailor some of our product enhancements. Our Advanced package penetration for New Homes customers increased successfully from 42% in December 2022 to 53% in December 2023. It was driven by the 50% uplift in leads compared to our standard New Homes listing and, of course, by developers' needs to improve their weaker sales ratios in a more challenging market. So we spend a lot of time speaking to and listening to customers as well as analyzing our own data to understand where to take products next. We call it pathfinding. So sometimes, rather than entirely new products, enhancements or segment tailoring of our current product suite across various customer types becomes the value-generating result. Good examples are these multiple components of Native Search Ads across both estate agents and New Homes developers. The homes developers ask for video functionality, which we added in Q4 to their Native Search Ads. In the first half of 2024, the video functionality will be added to the Spotlight product and will also enable more customer product control through various self-serve tools. Such product cross-leverage is another reason why our strategic ambition have us expand across the sector. It's like a multiplying vector-to-sector effect and, indeed, returns. So just finishing with two examples of segment tailoring. For housing associations, we heard a need for a basic package, suiting more limited marketing budgets. This launched at the start of the year, and we already have 50 new housing associations live. For the build-to-rent sector, we made a complementary product acquisition, teaming up with HomeViews, which we're now very happy to have on board. HomeViews just ran their Residents Choice Awards last week in Birmingham, with over 300 industry participants and lots of buzz. The BTR sector growth prospects are exciting for the long term, and we're happy to be a meaningful supporter of it. We also have a number of products and solutions outside of more direct marketing products for our customers. They include things like Lead to Keys, Premium Price Guide and the Rightmove Hub for training, webinars and CELA certification. Our Rightmove Plus customer platform is at the core of interaction and access for customers. We now invest further in this best-in-class tool, driving up insights, usage, product management and workflow ease, all still, of course, served by the largest sales and customer support team in the U.K. industry. More than 90% of our estate agent branches already used this platform at least once a month, a great base to build on. Rightmove Plus gives customers access to data that only Rightmove can provide. Our market share information goes back 20 years, with over 1 billion rows of property data at their disposal. On the left-hand side are some example of what is coming in 2024, and there are plenty more following that, all aimed at driving more value and more efficiency to our customers. This is truly agent-friendly innovation. So let's touch on the strategic growth areas. We went into quite a lot of detail at these at the Investor Day, which was not long ago. So I'm doing just a quick touchdown here. Now as a headline, things are tracking really well. And we're very pleased with progress, yet it is early days towards our longer-term goals. In mortgages, we continue to optimize the MIP application flow, and we're scaling the broker proposition during this year and onwards. We are also now taking aim at the remortgage market for next year, which significantly increases the TAM as we go into the future. In rental services, our key focus is scaling our Lead to Keys solution, an end-to-end digital journey making lives easier for agents, landlords and tenants as well as preparing the industry for the Renters Reform Bill changes. As Alison mentioned, we already have 150 branches live on Enquiry Manager. And lastly, for commercial, we already started development for an even more commercial real estate-tailored site, data set and product environment. Meanwhile, of course, our ongoing commercial real estate business continues to grow as before. And lastly, from an outlook perspective, the headline really is one of confidence. The macro stabilized, and Rightmove has scale across many vectors of the property market. We have true scale of data and platform. We're accelerating our product innovation and property market digitalization on top of that base, and AI is now an element of it. We have an 800-people strong, high-quality team, solely focused in the U.K., and we're growing that team even further for even further strength. And as the largest platform, we're here to support and educate on the green transition, which will be an increasingly important economic parameter for the industry. The Board finally indeed has confidence in Rightmove's performance in 2024 and our strategy outlined from before. And that concludes our presentation. Thank you very much for listening. And I just want to extend a big thank you to our team for a fantastic performance in 2023. We have an exciting future ahead of us.

End of Q&A: