Welcome to the Trustpilot Half-Year 2023 Results Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session through the phone lines, and instructions will follow at that time. I would like to remind everyone that this call is being recorded. I will now hand over to Peter Holten Mühlmann, founder of Trustpilot Group PLC. Please go ahead.
Good morning, and welcome to everyone joining on this webcast and conference call, where we shall be discussing Trustpilot's H1 2023 results. Peter Holten Mühlmann, the founder, and joining me on the call today is our CFO, Hanno Damm, and I'm delighted to introduce our new Chief Executive Officer, Adrian Blair. Given that Adrian has literally just taken up the position a few days ago, we'll follow the same format as usual for today's call. I shall take you through the strategic and operational highlights. Hanno will provide the details on the first half financial performance. Before we move on, I'd like to give Adrian the chance to introduce himself.
Thanks, Peter, and good morning, everyone. I'm thrilled to join the call today as Trustpilot's new CEO, and I'm really looking forward to meeting many of you in person in the coming days. I believe Trustpilot is a uniquely positioned business with a tremendous global opportunity, and I'm excited to play a part in its future success. Now, over to Peter and Hanno to take you through today's results.
Thank you so much, Adrian, and welcome on board. This was a strong start to the year, with continued growth across all regions. We achieved profitability faster than originally forecast, with Adjusted EBITDA ahead of expectations and positive free cash flow, as we continue to proactively manage our business to focus on efficiently supporting top-line growth while delivering sustainable operating leverage and profitability. Annual recurring revenues increased by 21% to $180 million. Adjusted EBITDA was $5.7 million, and we generated $6.2 million of free cash flow. Network Effects continue to underpin our organic growth, with good momentum across all our strategic KPIs in all regions.
As we just discussed, we're delighted to welcome Adrian, our new Chief Executive Officer, who brings with him a highly relevant skill set, having had many years of experience in growing platform and SaaS businesses. Given the strong start to the year and the fact that we have achieved profitability faster than we originally forecast, we now expect further operating leverage in the second half of the year and Adjusted EBITDA ahead of the current range of analyst expectations. Now, let me take you through the H1 strategic highlights. These are some of the key metrics we use to help us assess the progress we're making against our strategic goals to be the most used and trusted online review brand globally. To begin with, let's look at our progress in driving adoption and usage.
The total number of cumulative reviews grew to 238 million, an increase of 25% year-on-year, with an additional 48 million reviews posted in the last year alone. We now have almost a million reviewed business web domains on our platform, with 106,000 promoting our brand through inviting reviews, displaying their TrustScores, and engaging with their customers. These businesses sent an average of 61 million review invitations each month last year. With an average of 9.4 billion monthly TrustBox impressions, up 15% year-on-year, the annualized run rate now exceeds 112 billion.
On average, during the period, we saw an average of 52 million unique visitors to our website, and we have a range of initiatives underway to drive even more consumer engagement on our website, encouraging more people to leave and consult even more reviews, as well as experiencing additional features and content. We've seen continued strength in adoption and engagement from both consumers and businesses in all regions. We achieved 25% growth in the total number of cumulative reviews and a 21% increase in the number of reviewed business domains. To add some more perspective, on average, each month in H1, an additional 15,000 business domains were added to Trustpilot, and during the period, an additional 25 million new consumer reviews were posted. We added just over 1,000 subscribers year on year, ending the period with over 25,400 paying customers after churn.
We were pleased with this performance, given the pressure on new business and retention that many businesses are facing due to the uncertain macro environment. As our customers display their TrustScores and invite reviews, they help to amplify our brands and propel the network effects that support our organic growth. We continue to develop and enhance the tools to help businesses to integrate their TrustScores across all of their marketing channels, and to do this with the greatest ease and achieve the highest impact.... You can see some examples here that clearly demonstrate that Trustpilot is just as relevant in the offline world as we are online. As you consider our consumer brand and reach, it is worth noting that while we can measure TrustBox impressions and monthly review invitations, we cannot measure the enormous number of consumers and businesses we reach via the offline world.
Consequently, our brand exposure provides a significant competitive moat that would be very hard for others to replicate. We talk about the virality that exists between the consumer and business sides of our platform, where one drives and reinforces the other, powering Trustpilot's organic growth. The charts here show this in action, with the exciting growth we saw in both total cumulative reviews and the number of reviewed domains. As you can see, this was the continuation of a trend that has been sustained over many years now. In fact, you'll notice that since we became a public company in March 2021, the Trustpilot platform has effectively doubled in size.
Ultimately, it's this dynamic that drives our future financial performance, which is why we're so encouraged by the continued growth and adoption by both businesses and consumers that we saw in the first half of the year across all regions. We also continue to invest in innovation to improve the features and functions within our products and platform. By doing so, we're successfully driving retention, new business, upsell, and further consumer engagement. Here are examples of some of the key features, functions, and integrations we delivered during the first half of the year. A couple of highlights are: we introduced Single Sign-On for enterprise, which allows customers to use their existing corporate login to access their Trustpilot account. This improves the user experience, reduces support requests, and improves security.
We introduced a new relevant sorting algorithm that includes text length, readability, and information richness to determine the quality of review to aid prioritization when sorting by relevance. And we're particularly excited about our recently launched Salesforce integration, which is now available on the Salesforce AppExchange and enables seamless review management, including consumer insights and reporting from within the Salesforce platform. Many of you will have seen this slide before. It shows that we have an enormous global market opportunity, and that we're only just getting going, even in our more developed markets. It also shows that while we're right to be excited about the opportunity in North America, we should be just as excited about the outlook for Europe and the U.K. And as we seize the opportunity, we do this with several key advantages over competitors.
We benefit from the fact that we're an open platform with a powerful consumer brand. We already have a global presence, which helps us win and retain multinational customers as they deploy Trustpilot in all their territories. Our business model is highly profitable and resilient. To summarize, we've had a strong start to the year. We believe these results show that our strategy is working. We continue to see network effects that reinforce our organic growth. We are successfully innovating to drive retention and net expansion over time. We have a massive market opportunity, and we're uniquely differentiated in how we address it. Now I'd like to hand over to Hanno for a detailed look at the financials.
Thank you, Peter, and good morning, everyone. In line with our July trading update, we delivered a strong financial performance in the first half of 2023. Revenue increased 18% to $85 million. Bookings at $99 million, grew 16% year-over-year, and we ended June with $180 million of ARR, up 17%. You'll note that ARR is calculated using the spot exchange rate on June 30, and on a reported basis, grew by 21% year-over-year as sterling strengthened versus the U.S. dollar. Please note that for consistency throughout this presentation, all the growth rates I refer to are provided on a constant currency basis, unless otherwise specified. The growth in bookings was supported by a resilient net dollar retention rate of 99%.
Our balance sheet was strong, and we ended the period with a net cash position of $83 million and 0 debt. I will now spend a bit of time on regional trends in bookings, revenue, and retention rate before going through the income statement and cost items in detail. Let me remind you that the bookings and revenue numbers we report are group numbers, and that we see different levels of performance in different countries and regions, depending on how developed our market penetration and network effects are. In the U.K., we achieved another period of good growth, with bookings and revenue up 15% and 17% year-over-year, respectively. We should bear in mind that this growth was achieved against a very strong prior year comparator. You will recall that in the first half of 2022, the U.K. grew bookings and revenue by 27%.
Net Dollar Retention Rate in the U.K. continued to be above the group average, and there was a further improvement in the contribution margin for the region. U.K. continues to be a great example of the strong Network Effects and unit economics that our business can achieve at scale. In Europe and the rest of the world, bookings were $39 million, an increase of 21%, and we reported $33 million in revenue, up 24% over the prior period. Again, this was achieved against a strong prior year comparator. At $70 million, Europe and the rest of the world now contribute roughly the same ARR as the U.K.. In North America, bookings were $21 million, up 11% year-over-year, and revenue of $18 million grew 9%.
Bookings growth in North America accelerated in Q2, helped by an encouraging improvement in the net dollar retention rate, as well as new customer acquisition. We are focused on efficient growth in all regions and implemented a new go-to-market strategy in the U.S. in 2022, focused on high customer lifetime value vertical market segments. This strategy is central to our ability to accelerate bookings growth and an improving retention rate in the region. North America continues along a similar trajectory to the U.K. with respect to the proportion of new customers that have existing unprompted reviews on Trustpilot, and we have now exceeded 40 million reviews of over 320,000 business domains in the region. Notably, in the first half of the year in North America, 61% of new customers had existing unprompted reviews.
This compared with 48% in 2020 and 26% in 2017. For comparison, in the U.K., the proportion were 82% in the first half of this year, compared to 69% in 2020 and 47% in 2017. We track this metric as we see it as a key indicator of our ability to improve sales efficiency and drive conversion to paying customers over time as a result of network effects. Now, let's turn our attention to the net dollar retention rate. A large part of our revenue comes from a high returning customer base, many of whom have been with us for multiple years. Our high retention rate supports our visibility into future bookings and revenue. We aim to consistently improve our retention rates over time, both by improving gross retention and by improving net account expansion.
Our Gross Retention Rate declined by 1 percentage point to 85%. We find this encouraging given the uncertain macroeconomic environment, and believe that it highlights our compelling value proposition and the return on investment businesses gain from our solutions. The last time we saw a small decline in Gross Retention Rate was in 2020 as a result of the pandemic, but as you can see, this quickly bounced back to trend. In 2023, we're focused on delivering pricing initiatives and a scalable, repeatable price and packaging model and strategy, and we made significant progress in the first half of the year. For example, the introduction of our new growth and scale pricing plans helped contribute to an increase in the average new business contract value year over year.
We also have developed a more structured and automated approach to pricing on renewal, tailored to each customer, in addition to multiplier enhancements. As a result, we were successful at implementing price increases reflected within the 14% net expansion component of our retention rate. You will recall that the retention rate is a group number and comprises different levels of retention in different markets. So you should assume that in our more developed markets, like the U.K., for example, we already exceed 100% net dollar retention rate for the last twelve months ending in H1 2023, whereas in other markets, we have lower penetration, the retention rate is lower. However, we have reported today that we saw an improvement in the retention rate in North America in the second quarter of 2023, which helped with bookings growth in the region. Switching to the income statement.
Focusing on the first half, we already talked about our revenue growth of 18% to $85 million. Revenue growth reflected the 20% constant currency growth in bookings and ARR we achieved in 2022, as the revenue from those bookings is subsequently amortized over the contract term, usually 12 months. H1 2023 revenue also highlighted an increase in the average revenue per customer and further growth in the number of paying customers. Average revenue per customer, calculated by dividing the revenue in the period by the number of paying customers at period end, was $3,300, up 10% year-over-year. Bearing that in mind, as we think about H2, we have good visibility of our revenue as it largely reflects prior period bookings and ARR growth.
Sales and marketing expense in the period declined by $5.3 million compared to H1 2022. There are a few factors at play here. Notably, we're now required to capitalize certain sales commissions and amortize these over the customer's expected useful life. These capitalized commissions reduced sales and marketing expenses by $2.3 million in the period. Stripping this out, the underlying decline in sales and marketing expenses year-over-year was approximately $3 million. This was largely driven by the absence of non-recurring consulting service fees and other expenses that were incurred in H1 2022, as well as a reduced pace of hiring, given the uncertain macroeconomic environment. You'll also note that G&A declined by $1.2 million year-over-year, which was principally driven by lower professional service fees relating to recruitment, legal, and office buildouts compared to the prior year period.
Cash flow from operating activities in H1 2023 of $9.2 million, compared with a cash outflow of $7.7 million a year ago. free cash flow improved to $6.2 million in the period, compared to an outflow of $13.1 million a year ago. There has been no impact to either operating cash flow or free cash flow as a result of capitalizing commissions, which only affects sales and marketing expense on the income statement. As a result of the nature of our customer contracts, which tend to be annual and on average get paid six months in advance, Trustpilot is operating a very capital-efficient business. Capital expenditure continues to primarily consist of capitalized development costs, and in the period, decreased to $1.5 million.
Note that H1 2022 included $1.2 million of non-recurring CapEx related to office fit-out costs. Trustpilot has a strong balance sheet, and the business is now cash flow positive. We are determined to run an efficient balance sheet, and as we consider our capital allocation policy, our priorities include continuing to invest in people, innovation, and go-to-market to drive organic top-line growth and retention, maintaining the flexibility to engage in targeted M&A, assessed against rigorous return criteria, which we may use to accelerate our product strategy or to strengthen our presence in specific regions. However, we are committed to returning excess capital not required for other priorities to shareholders. So to summarize, this was a strong start to the year, with continued growth across all regions, underpinned by network effects.
We achieved profitability faster than originally forecast, with Adjusted EBITDA ahead of expectations and positive free cash flow, as we continue to proactively manage our business to focus on efficiently supporting top-line growth while delivering sustainable operating leverage and profitability. Retention rates remain steady, our balance sheet is strong, and we've signaled to our intention to run an efficient balance sheet going forward, returning excess capital not required for other purposes to shareholders. This result has been achieved against an uncertain macroeconomic backdrop, demonstrating that our value proposition is strong, our business is resilient, and our strategy is working. Our business delivered a strong first half performance, enabling us to move to Adjusted EBITDA profitability and positive free cash flow earlier than originally forecast. While the uncertain macro environment in Q1 affected our new business and retention bookings, we subsequently saw a stronger performance in Q2.
Furthermore, this positive trend has continued into Q3. Consequently, we maintain our outlook for mid-teens constant currency revenue growth for the full year. But with further operating leverage anticipated in H2, Adjusted EBITDA before the impact of capitalizing sales commission, is expected to exceed the current range of market expectations. The board remains confident in the business, delivering sustainable growth and operating leverage over the long term, and in the significant and growing long-term market opportunity. Now, I'd like to hand it over to Adrian before opening the call up for Q&A.
Thanks, Hanno. Before we hand over to Q&A, I want to say a few words about why I'm here. I joined Trustpilot because of the importance of our mission and the fact that we're still early in, in the journey to deliver on it around the world, whether it's product innovation, greater market penetration, or international expansion. With high gross margins and a product that's useful in any vertical, there's clearly a vast commercial opportunity ahead for Trustpilot. My background combines two-sided marketplaces with SaaS. I joined Just Eat as Chief Operating Officer when it was a loss-making start-up. When we IPO'd in 2014, three years later, my team comprised two-thirds of global headcount, including all sales and operations teams. Over the next four years, we built Just Eat into a profitable FTSE 100 company.
After that, I became Chief Executive at Dext, a cloud accounting platform, where we tripled the number of users around the world before a successful sale to Hg. I see elements of both those businesses in Trustpilot and look forward to getting stuck in and meeting many of you over the coming weeks. Now back to Peter for the Q&A.
Thanks, Adrian and Hanno. So, operator, we'd like to open the call up for Q&A now, please.
Thank you, sir. We will now begin the question and answer session of the event. To ask a question on the phone line, please press star and then one now. We'll pause a moment to assemble the queue. The first question we have comes from George Webb from Morgan Stanley. Please go ahead.
Morning, Peter, Adrian, and Hanno. Two questions from mine, please. Firstly, maybe one for you, Adrian, touching on your last comments, and again, appreciate you've only just joined the business. But when you look at Trustpilot from a bird's-eye view, are there any specific areas in particular that you want to focus in on, or areas that you think you can optimize based on those roles at previous companies that you mentioned? And then secondly, more broadly, you've talked about being committed to returning excess capital for the first time. How do you think about defining that, and is there an evaluation process you're currently doing to determine that? Or ultimately, when might we hear more on this topic and any decisions, is that something we should expect at year-end? Thank you.
So just to start with your first point, and good to meet you. If I think about my previous incarnations that I mentioned just now, Just Eat, Dext, I really brought three things to those situations. The first was strategic clarity, the second is disciplined execution, and the third is improving profitability. I did that, you know, clearly in both of those businesses, internationally, in very different contexts. That's essentially what I plan to do here. You asked about specific opportunities. I mean, actually, you know, the exciting thing about Trustpilot is how many opportunities there are open to us. You know, as I mentioned, around the world, with a product that's applicable in any vertical.
What I obviously need to bring to that as CEO is clarity and discipline and focus around execution, so that the whole team knows what it needs to achieve, and all our different stakeholders understand what it is that we're aiming to do. But I'd much rather be in that situation of having so many options available and having the luxury of choice rather than sort of feeling I've been forced down a particular path. So it's early. You know, it's literally day five for me. I'm not going to opine at all at this point on, you know, which of those opportunities I find the most exciting other than to say, you know, I will bring discipline, clarity, and great execution to this business.
Yeah, George, and then, thanks for the question on the, on the capital. Obviously, you will, you will have—you picked up, clearly that we, for the first time, mentioned that we're looking to potentially return excess capital to shareholders, which is, new in our capital allocation priorities. But given that we are now solidly profitable and cash flow generating, it's... I think it's something we, we will look at, and we'll come back to you in due course in terms of what a potential quantum could look like, what that would—could like, could look like in terms of, methods and means. I think fundamentally, we would believe, given the share prices, or the company's undervalue, we would probably look towards share buybacks rather than dividends. But we'll come back to you in due course on that.
Understood. Thank you.
Thank you. The next question we have comes from Jessica Pok from Peel Hunt. Please go ahead.
Hi. Good morning, everyone. I hope you can hear me okay?
Yes. Morning.
Great. Morning. I've got three questions, if that's okay. The first is on the gross dollar retention rate. Can you talk a bit about the development of the gross dollar retention rate between Q1 and Q2? And also, you know, do you expect that to improve in Q3 or actually probably remain a bit subdued given the macro environment? The second one is on the U.S. If I'm right, the go-to-market strategy was launched in around autumn time, around October. You're already seeing improvements in the net dollar retention rate, but given we're lapsing the anniversary of when you started the go-to-market strategy, we may see a step-up from now on with the retention rates and the bookings, given that, you know, the clients which you hopefully have brought on with the go-to-market, will be of higher quality.
And then the third one is just, can you give us a sense of, on average, how much the price rises were, so we can understand how much of the growth is driven by price versus people taking more? Thank you.
Yeah. So I think... Let me try to tackle them in order. On the development of the retention rate, Q1- Q2, I think we, we, tried to allude to the fact that we did see some sequential improvement. You will recall when we spoke in March, we had a couple of months of the first quarter under our belt and were somewhat more cautious in our macro outlook, and fortunately, those trends slightly improved. But, but we're also-- I mean, as you, as you can see in the results, we're at 99%, so that's slightly down from the 100% we reported last year. And we continue to see the pressure there that we attribute to macroeconomic factors. And this kind of ties back to your, your third question on pricing.
We have been able to offset some churn with higher pricing. We've been a lot more prescriptive in the way we implement price increases, based on analytics and product usage, and so we've basically enabled our customer success team, the account managers, with good data that supports a price rise that they then can confidently communicate, and we've seen good success in also then being able to renew at these higher prices. This has helped us in the U.S. with the retention rate in the second quarter, particularly, which was better than in the first quarter and sort of is now approaching more the group average.
But on your question on the U.S. go-to-market strategy, that was actually launched in the second quarter of last year, so we're starting to see the anniversary of some of those deals now, and they tend to renew at a higher rate, so that's very encouraging.
Thank you.
Thank you. Ladies and gentlemen, just another reminder, if you would like to ask a question, please press star and then one now. The next question we have comes from Ciarán Donnelly from Berenberg. Please go ahead.
Hi, guys. Thanks for the presentation. Just three from myself. Firstly, just on the Italian brand campaign, could you just give us a sense of how it's performed and any kind of key internal KPIs or quantitative measures that you could share with us in terms of how it's trended versus pre the campaign in Italy? Two, just on your comments around the capital allocation, could you just give us a sense of what you think it or you deem the capital excess threshold to be, just to give us a sense on when we would expect something to happen?
And three, just on the pricing initiatives, I guess, retention rate or net expansion has been consistent at 14% for a while now, but just could you give us a sense of what you anticipate steady state net expansion could be? Is there any upside from 14%, or should we expect it to stay around this level going forward? Thanks.
Okay, if you don't mind, I'll start with the pricing question, 'cause it kind of dovetails into the prior question. You're right, it was at 14%, but I think what we have seen in the first half of this year is a little bit of a shift. We mentioned we had seen slightly higher churn. We've also seen slightly lower expansion, given the macro pressure, and more downsells, and we've been able to offset that through pricing. Fundamentally, we believe over the longer term, we should be able to drive, reduce churn, as well as improve account expansion and upsell, through product development and then maintain the pricing component in the net dollar retention rate that we've seen.
So sort of into the future, aspirationally, we would expect to drive a higher net dollar retention rate. And then on the capital allocation, just coming back to that, that we're doing the work right now. I mean, Adrian has just joined, and he certainly has a point of view on where we want to invest as well. So I think we'll have to come back to you in due course on more detailed numbers or quantum. I can tell you that we do intend to run a robust balance sheet no matter what. So I think that sort of sets an upper bound for sure. And then on the Italian brand campaign, look, I think that was a campaign that was devised in a time when we didn't anticipate the macro environment to be as challenging as it was.
We did see some good uptick on the consumer side. We did see a bunch of sort of demo requests from smaller businesses. But by and large, it drove awareness, but I don't think it's been a campaign that has been able to drive, convert awareness into a demonstrable return where we would say we wanna repeat this near term. But we do continue to track inbounds in Italy. We have seen anecdotally more enterprise or larger customers come to us in Italy on the back of that campaign. And so I think long term, it has driven awareness up in the market, which will benefit us in our positioning there.
But it hasn't been something where we said this was a slam dunk that we need to sort of repeat in a different market or in the Italian market for the sake of the argument.
Okay, perfect. That's really clear. Thanks.
Thank you. Just a final reminder, if you would like to ask a question, please press star and then one now. The next question we have comes from Joe George from J.P. Morgan. Please go ahead.
Yeah. Hi, guys. Thanks for taking my questions, and welcome, Adrian. I just have two, please. The first one would just be on the cadence of bookings growth through H2. So could you just give us some color on the comps through both Q3 and Q4? Essentially, just trying to work out what's the easier comp to lap as we go through the period, please. And then the second question would just be on the strong leverage that you guys saw through sales and marketing. So 28% of revenue versus, you know, 40% last year. Even if we strip out the capitalized sales commission, this is still at, like, 31%.
So I guess my question is: Is this level the new normal, or should we expect this to tick up before it ticks down, particularly, you know, as normal hiring patterns resume? Thanks.
Yeah. Thank you, Joe. Let me start with the question on sales and marketing leverage. So as you... You're right. I mean, you have to strip out the impact of the capitalized commission, which kind of distorts it. There are two things. On the one hand, last year, we spent the money on the Italian campaign. In H1, there was sort of the campaign design, agency fees, et cetera, and then in the second half, there was media buying. And so that gives you sort of natural leverage if we don't repeat this kind of campaign. We also talked about this since basically a year ago in September, that we weren't going to aggressively invest into a potentially softening macro environment.
We felt that, I mean, when we came back to you in March, that that was kind of indicated. But we would like to have the flexibility to invest into growth, and, for example, spend more money on marketing if we see the environment changing or if we feel we're gonna get good return on this. I don't think we want you to sort of hold us to those levels in the near term if we see a more positively demand environment. So I think what we're overall committed to is operating leverage and increasing profitability, but at the same time, we also wanna achieve top-line growth. In terms of the sequential growth rates, we did have a pretty strong Q1 in 2022.
And so the growth rate relative to that was lower in Q1 of this year, and then in Q2, we saw sequentially improving growth, in particular in the US. I think the comps in Q3 and Q4 are not materially different than in, in Q2. And so overall, given we're still facing some macro headwinds that we're seeing in some of the regions and sort of not meaningfully changing comps, we have kept our top-line guidance in place.
Perfect. Thank you.
Thank you, sir. There are no further questions at this time. That concludes the question and answer session. I will now hand back to Peter Holten Mühlmann for his closing remarks. Please go ahead, sir.
I just want to say, thanks to everybody. This was 17 years of me being CEO. It's been an experience of a lifetime. I feel enormously fortunate that I'm able to hand over a company that, in very uncertain times, is performing really well, and I feel extremely thankful that you're here, Adrian. I feel very good about you as the future leader of the company, and I'm personally really excited about staying involved, so for a bright future.
Thank you, Peter, and I should say, you couldn't have been more supportive through my onboarding, and I know you'll continue to be in future, so I'm very grateful. Well done.
Thanks.