Welcome to the Hemnet Q3 2023 Conference Call. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the speakers, CEO Cecilia Beck-Friis, CFO Anders Örnulf, and IR Manager Nick Lundvall. Please go ahead.
Good morning, and welcome to the presentation of Hemnet Group's results for the Q3 of 2023. My name is Cecilia Beck-Friis, and I am the CEO of Hemnet, and as always, I'm joined by CFO Anders Örnulf, and IR Manager, Nick Lundvall. We have a number of exciting updates to share with you, so let's dive straight into the presentation, and I will start, as usual, with a summary of the key updates on page 2. I'm pleased with the financial and operational outcomes for this quarter, during which we delivered stable results that underscore the strength of our business model, as well as the results of the investments in our organization and product development. We continue to deliver consistent and predictable results in an unpredictable market.
Our continued work with ARPL, supported by a normalization in listing volumes, meant that revenue from property sellers grew by 23.5% and ARPL by 27.9%, and this is despite listing volumes decreasing by 4%. A noteworthy achievement is the all-time high EBITDA margin of 57.4%, which highlights the operating leverage of our business model. Yesterday, we launched Pay When Listing Is Removed, and I will talk more about this later in the presentation. And finally, we are seeing signs of a more active and stable market, although we are not completely out of the woods just yet. Turning now to page three for an ARPL update. ARPL grew by 28%, while listings declined 4%. Premium has proven to be especially important for ARPL growth, with revenue from premium up 2x from last year.
We are seeing sales duration continuing to increase up to 37 days from 35 days in Q2. This has a negative impact on ARPL as listings are spread out across more days. Looking ahead, I'm encouraged by the launch of Pay When Listing Is Removed, as we believe this will create yet another tool for ARPL growth by making it easier for agents and sellers to make the decision to list on Hemnet, as well as to upgrade their listing. Now, turning to page four and an update on the property market. You have heard me say this a number of times in the past, but I believe that this is worth reiterating. Sweden is a buy-to-live market, and this is especially evident in the listing trend that we have seen during this year.
Listing volumes are now broadly in line with last year as we approach Q4, during which we saw a 10% decline in 2022. Also, transactions have recovered, with the latest data from Svensk Mäklarstatistik showing a decrease of 3% in Q3, compared with a decrease of 19% in Q2. We see no reason to believe that there have been any fundamental changes to the market, driven by uncertainty or the economic climate. In the past, we have seen periods of fluctuated listing volumes, which are usually followed by periods of higher than average volumes. Although the signs are encouraging, we have observed three months of decreasing price expectations, and it's too early to say that things are back to normal. We keep a close eye on the market and focus on that which is within our control.
I want to turn to page five and illustrate the current listing trends in light of historical trends. This chart shows rolling twelve-week average volumes of property listings going back to 2014. As you can see on the left side of this chart, 2023 was not only way below 2022 years, but also the lowest listing volumes for which we have data. That is in stark contrast to the right hand of the chart, where after the summer, volumes have normalized and are now above historical average and in line with 22 trends - 2022 trends. Now, turning to page six to talk about net sales by customer category. Despite the 23% growth in seller revenue, net sales was up 14% in Q3, largely driven by a challenging market for display advertising.
Notice that agents continue to be a focus area for product development, where we are creating win-win products for agents and Hemnet that makes their lives easier and more efficient. Here, we have managed to offset the decline in advertising spend with an increased demand for Hemnet's business-to-business products aimed at agents. We see this as a testament to our resilience and relevance to this customer group. Decline in revenue from property developers is driven by continued challenges for property developers, who are making cost reductions across the board, including on marketing spend. And as a reminder, new product development aimed towards property developers has been paused and allocated towards products for agents instead, until that part of the market recovers.
With regards to the broader advertising category, we saw that spend from media agencies in Sweden dropped 23% during August based on external data, and coupled with lower traffic than last year, this has resulted in an 80% decrease in revenue from other advertisers. Now, turning to page seven and an operational update. We continue to invest in our future growth through product and team. We added 6 employees in the quarter and are now 154 employees at the end of Q3. The majority of these additions are in development and product. Some consultants have been moved to full-time positions, which increases headcount by, but reduces other external expenses.
We continue to operate in a market that is favorable to Hemnet, being both a growing and profitable tech company, and our investments in technology and teams are yielding results, evident in the strong pace of product launches, as well as our ongoing work with ARPL. Now turning to page 8 for an update on corporate governance. Our corporate governance and management team structure has been largely unchanged since I joined Hemnet in 2017. However, we have grown a lot since then, and with the addition of Lisa Farrar as Chief Operating Officer on November 6, I have reviewed our corporate governance structure to see how we could improve alignment and execution across the company. The result of this work is a smaller and more focused management team, called the Group Management Team, consisting of all my direct reports.
This group will be the main decision body with responsibility for setting the company's direction and goals. It will also provide strategic and operational oversight to the company and employees, and ensure its success. For better alignment and priority assessing, we will also establish an extended leadership team composed of experienced key individuals representing important business functions. This group will act as a bridge between high-level strategies and operational execution, and ensure execution runs smoothly, as well as play an active role in strategy and planning. You can see the composition of both groups on the shown page. Now turning to page nine and a brief ESG update. We continue to actively develop our ESG agenda and have mapped out all of our indirect emissions within Scope 3 of the Science Based Targets initiative.
This means that we can now commit to a long-term net zero emission target, and the aim is to have this target approved by the Science Based Targets initiative by year-end. This follows our steps in 2022 to commit to a short-term emission target to reduce emissions in Scopes 1 and 2 by 42% by 2023. We are also preparing to step into the European Corporate Sustainability Reporting Directive regulation to report accordingly to ESRS from 2026. Moving on to page 10 and the product updates section. Starting with page 11 for a note on how we can create value to real estate agents. Agents continue to be our most important business partner, and creating products and services that empower agents is a key strategy for Hemnet.
This is especially important in the current market, which continues to be challenging for many agents and broker firms. Two examples of how we have done this in the last quarter is through the sticky bar and images on sold properties. These two changes have resulted in 150% and 50% more traffic, respectively. That is 150% more clicks than agents get in total by having Hemnet add the sticky bar in our app. Images on sold properties is a feature we debuted during last quarter, but we can now see the impact of this in that clicks to listings with sold properties received 50% more traffic. That is 50% more potential seller contacts to the agent.
Both products are free of charge to all agents, in line with our strategy to create products that offer a win-win proposition to Hemnet and our users. Now, turning to page 12 and an update on the Pay When Listing is Removed product. Speaking of win-win proposition, propositions, this is another example of a product that helps us realize this ambition. By connecting the timing of the Hemnet payment, we make it easier for both sellers and agents to buy and recommend the most relevant Hemnet listing product. Pay When Listing is Removed was launched yesterday on October 24, and is now live across Sweden. As a reminder, there is no change in credit risk from our current model, and agent compensation is paid once Hemnet receives the payment from the seller.
There are two different price points, one to pay directly and one for payment after listing has been removed. Like all other seller products, pricing varies across the country and depending on the asking price. Let's now move to page 13 and an overview of an upcoming new product. Sold By Us is a new agent product that leverages sold properties to attract new sellers. Through this product, we are targeting the SEK 1.1 billion in annual marketing spend by the real estate industry, much of which continues to be spent offline. The product provides exposure in Hemnet's result list and uses proprietary targeting and smart retargeting to maximize value. It is a low-maintenance product that will automatically self-populate with new listings as agent sells new properties. Sold By Us will be sold through a monthly subscription with an unlimited number of available slots.
Sales are currently ongoing, and we aim towards a January 2024 launch. We have taken inspiration from companies such as Rightmove and their Sold By Us product to create an exciting way for agents to further differentiate themselves on Hemnet. I want to finish off the product section with a quick word on our work in AI on page 14. I have no doubt that generative AI provides an opportunity for Hemnet and other real estate portals to streamline and improve products and features. We are today using AI for two purposes. Firstly, our automated valuations model trained, is trained using our dataset to provide valuations for property across Sweden. Secondly, we process and tag all images uploaded to Hemnet. Today, this is, is to determine which photo is the floor plan to make this easily available to our users.
We're currently exploring future use cases with the most potential, including search, data, customer workflow, and internal processes, to see how we can leverage off-the-shelf tools or build our own tools using the power of generative AI. We have a unique and comprehensive data set of market statistics, listing data, search patterns, and images that can be used to create powerful tools that empower our users, including agents, sellers, and buyers. With that, I'm finished with the product update and will now turn to Anders, who will give us a financial update, starting with page 15.
Thank you, Cecilia, and good morning, everyone. Let's turn to page 16 and the financial highlights for the Q3. As you know and heard today, H1 year started very challenging, but resulted in around 20% fewer listings published during the H1 year compared to 2022. Even though Hemnet performed strongly in the H1 of the year, we're seeing completely different financial development as the underlying volume listings return -4% in the quarter. So starting off on the left-hand side, on this page, we have net sales increasing 14% to SEK 272 million. As Cecilia mentioned earlier, we want to highlight a strong development for our property sellers' revenue, which increased by 23%.
Reduced investments in marketing and display advertising from our B2B customers, particularly property developers, is behind the decline of 13% in B2B revenue over the quarter. However, we continue to see increased revenue from value-added services to real estate agents and a stable demand from our bank customers. It is also worth highlighting that due to the increased average time on our listings from 35 days in Q2 to 37 days in Q3, and these are 12-month rolling figures, we have an accrual effect on net sales of SEK 3 million in the quarter, all else being equal. This means that already listed objects' income is recognized over 37 days instead of 35. That effect will return positively when the listing time comes down again. Our EBITDA came in at SEK 156 million, up 21% from last year.
We will dive into the EBITDA development on the next slide. The EBITDA margin came in at an all-time high, 57.4%, up 3.6 percentage points from last year. This is, in the current market conditions, a strong rating for our business model to be able to deliver the best EBITDA margin ever. Moving then to the right-hand side, we saw ARPL increasing 28% in the quarter. Cecilia talked about the drivers for this earlier on page 3, which were a combination of product updates, conversion to our more expensive value-added services, and 3, price adjustments across all seller products. As expected, we continue to see a high cash conversion, which was, 100% in the quarter, and it's further proof of our strong business model and ability to generate cash.
Leverage came in at 0.8 x, rolling twelve-month EBITDA, which is a slight improvement compared to the Q2. This is an expected development with current earnings and an effect of our dividend, and of course, due to the continued return of capital to shareholders via our share buyback program. And I will come back to that topic in a few slides. Let's move to our EBITDA bridge on page 17. As we have mentioned, very strong EBITDA development in the quarter, an increase of SEK 28 million. We have covered the drivers for the revenue earlier in the presentation, so let's instead look at the cost side. The compensation to real estate agents continues to grow at a pace similar to our seller revenue and is up SEK 12 million from last year.
It is, of course, recorded as an expense in our P&L, but we also view it as an investment in the agent's commitment to our business. As a proportion of seller revenue, this mean that, the compensation was, around 29% for the quarter. Other external expenses, excluding compensation to agents, is down SEK 9 million, despite increased costs for our new head office and other costs related to an increased organization. Lower activity is generally driven, by market conditions, but in this item, we also find, to some extent, an effect of successfully recruiting consultants as permanent employees for specific expertise, for example, iOS developers, which naturally has a positive impact on this cost item as well. Personnel costs have increased by SEK 4 million, as we have continued to invest in product development for future growth, which Cecilia talked about earlier in today's presentation.
In summary, good cost control, which is one important component when investing in future products and services, ultimately improving profitability for our growth journey ahead of us. Moving on to page 18, and a few additional words on the buyback program. If we start with the graph on the left, it shows a rolling twelve figure for free cash flow. You've heard me say this before, but being able to generate such a stable cash flow, around SEK 470 million, in the market conditions we've had in the H1 year of the year, is a very strong endorsement for the business and our model. We now live with the 2023 AGM decision to buy back SEK 450 million for the coming period. Hemnet's intention is to continue buying back shares and distribute excess cash to shareholders.
During Q3, we bought back 640,000 shares, equaling SEK 119 million. Please note that the buybacks for this year started in the beginning of May, so it's not a full quarter in Q2. The buybacks have also played a part in the increased leverage. This means net debt to EBITDA during 2023, to the current level of 0.8. It is, though, gratifying to see an improvement in the Q3, driven, of course, by the increased earnings. Before handing back to Cecilia to wrap things up, the final slide in this section is the financial targets perspective on page 19. Short recap on the targets. The company's financial targets for net sales growth are 15%-20%. When it comes to leverage, it is below 2x net debt to adjusted EBITDA.
In conjunction with our year-end report for 2022, we introduced a new long-term EBITDA target of exceeding 55%, but at the same time, reiterated the old profitability target of 45%-50% for 2023, considering the market conditions going into the year. In a more normal-like market, the company believes that the investments that are made into future growth, combined with operating leverage of the business, creates good opportunities for margin expansion going forward. Our growth rate, measured as an LTM, latest twelve month figure, is now at 8%. Our profitability, measured as an LTM EBITDA margin, is at 51%. Leverage was 0.8 , as previously mentioned.
Financial targets play an important role to transparently follow performance versus ambition over time, and a balanced assessment of the Q3 is a good return on our core business and gratifying to see the increased EBITDA margin in 2023. It's important to keep in mind that the decrease in volume began during the Q4 of 2022, so even though we never can predict how the market will evolve, our comparative figures will somewhat be easier from now on. So that concludes my section here today, and with that, over to you, Cecilia.
Thank you, Anders, and I will now turn to page 21 for a summary before going into Q&A. We deliver a predictable result in an unpredictable market, supported by a strong ARPL execution and the recovery in listing volume. We are seeing past investments bear fruit through a number of exciting product launches, including Pay When Listing Is Removed, pictures of sold properties, and the agent sticky bar. Finally, we saw an all-time high EBITDA margin of 57.4%, and we will continue to deliver new products and features that generate concrete value for our users, partners, and customers going forward. Thank you for your attention, and we will now move to the Q&A session.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Pete Kujala from Morgan Stanley. Please go ahead.
Hey, guys, thanks for taking my questions. A couple from me. Maybe the first one on the buy now, pay later product, which has now gone live. Can you give any kind of indication on what the price uplift is on average versus the upfront option? And what do the economics look like for the increased price in the buy now, pay later between you and Klarna? That's the first or two questions, I guess. Thanks.
I can start off by answering the first part of your question. It's too early to tell. As we said, it was launched yesterday, so how it will convert, we will have to come back to later on. So the results, again, we will come back to that maybe later. Then, of course, it's not about competing with Klarna. It's this is not an. You said buy now, pay later. It's for us, we present the packages with two prices, either when publishing or when delisting the listing. So, of course, we'll take consideration when it comes to pricing our packages, but that we will monitor how well it progressed and the uplift we will have in the different categories. So, yeah. Did that answer your question?
Well, I mean, the question wasn't really on conversion. I understand that remains to be seen, but I, I mean, because you do have the two prices now live, like, the first one is the pay when the listing is removed, and, and the other one is pay right away, and there's a different price for those two services. So is there some kind of average that you could give? Like, what is the difference on average between those two options?
No, we cannot, since we have a, you know, that we have a dynamic pricing, and we set our prices based on overall offering, including the pay option. So, so we have prices today, but they might shift tomorrow, depending how we progress and develop.
All right.
It's not fixed.
Understood. Yeah, all good. But then on the cost side, I'm trying to understand the personnel costs a little bit, like, because is there something happening with average salaries, or how are they developing? Because your headcount is growing quite a lot faster than what your personnel cost is growing. So that's the first cost-related question. And the second one is on, basically, like, other expenses, because as you mentioned, you've cut marketing and the consultant spend, but is this more like a short-term adjustment for this year, or is this the level that we could also expect into next year? Because the differences on costs, like, they're quite sizable. So I'm wondering, what should we think about in terms of next year for these lines?
So starting then with the first part, the personnel costs, the FD costs, you have to take into consideration that we have a full year effect of all the employees entering Hemnet, together with, of course, the wage inflation. So it's nothing, nothing funny there or nothing strange in that line at all. The second part of your question when it comes to the cost, yeah, it's a year marked by uncertainty, and we have been responsible in handling that. However, as you know, that Hemnet is not a cost-saving case and but instead, I mean, we should be smart and invest in the right projects and initiatives going forward.
All right. That's all. Thanks.
The next question comes from Andrew Ross from Barclays. Please go ahead.
Great. Good morning, everyone. Hope all is going well. My first question is on your margins this year, which are clearly running ahead of the 45%-50% guidance that you have given. Appreciate that the Q4 margin is seasonally lighter, so there are reasons why it might come down, but it's gonna have to be a lot seasonally lighter to come down to get into that range. So can we just touch on if there's anything we should be aware of in Q4 that means that range is realistic, or are you just being conservative?
So I think it's important, and I want to emphasize that we don't give any guidance, we don't give any forecast. We provide our targets, and those targets are on a longer term basis, so we don't adjust our long-term targets depending on one quarter.
But for this year, you do have a target of 45%-50% for the margin, and it's running, I think, at 53% the first 9 months of the year.
Yeah, but you know that the Q4 is also a weaker quarter, so looking to the LTM figures, is at 51%. So, so we'll see how the Q4 evolves, but, 51 compared to 45-50, I would say those are the figures you should,
Okay. Just to be clear then, it's not like that's something that we haven't understood, but you're factoring into the costs in Q4 might mean we end up, you know, anywhere near the middle of that range. That's just some conservatism, just to be totally clear about it.
Yes. So we will not comment on Q4 separately, but that's why we, we report the LTM figures. So that might be more relevant when it comes to a full year figure, at least. But we will, of course, come back to the full year when we report it, full year.
Okay, cool. And then my second question was, going back to the, pay later product that you launched yesterday. I guess we've touched a bit on the, our implications, but can we touch a bit on the listing volume implications and I guess directionally, you know, whether you think this might end up being a tailwind to listing volumes as well? I appreciate you won't put any numbers on that, but I'm sure you've done survey work or maybe testing work and would be interested to hear what you've kind of heard back directionally on, on that.
Yeah. So we don't give any numbers, we don't provide any numbers, but it's correct. Yes, we have been testing this function for quite some time, and we've seen positive signals, and we've also seen positive signals in that, when you pay later, you also tend to invest more in your marketing package. So that's a positive signal and one of the reasons also why we pushed forward.
So I would say that we aim to, it's two different things here with this function or this feature, that one is to make sure that we get the listings on the platform, and that's been a clear feedback from agents and sellers, that they want the flexibility, but also you know, to drive growth and also give the opportunity for sellers together with agents to also invest in their marketing spends. And we see that we have seen positive numbers during the test. And I maybe also would say that I know that we maybe ended up a bit, we're talking a lot about this product or this function during the year.
I would say that this is one out of many other improvements we are doing in order to make it easier for sellers and agents to list, and also make it easier for them to upgrade. So it's part of the overall ARPL growth going forward.
Cool, thanks.
The next question comes from Catherine O'Neill, from Citi. Please go ahead.
Great. Thank you. I've got a couple of questions. First of all, on ARPL, I think you said that the sort of longer days, listing days, negatively impacted again in Q3. I just wondered if you could provide a bit more detail there or quantify it in some way. And secondly, I think the new COO starts, and you talked about putting in place a new management team structure, starts in November, sorry. I just wondered if you could give us some idea on what Lisa will be focusing more on as you move into 2024.
I can start on the question about the listing time, since we had this similar issue in Q2. So this is an accounting principle, so it is what it is. Normally for Hemnet, this is not a question, since the base figure we use to calculate this is twelve-month rolling, so it doesn't really move that much. But in this market, with higher uncertainty when it comes to buying and the seller meeting each other and listing period, then we see some longer periods, and that's why we commented. So, the all else equal effect in Q3 is SEK 3 million.
On your question on the new corporate governance and the updated management team. So Lisa's role is to be the Chief Operating Officer. She will focus on our commercial development in the company. She will oversee the product pricing, packaging, and go-to-market. So it's an important recruitment, and we have been scaling the organization and grown, and also grown in complexity, even though we still are, we're still a quite small company. We, I mean, it gets more complex in a way, so she will focus a lot on improving the overall process and make sure that we also scale that part of the organization and deliver all the very exciting initiatives that we are working on.
Okay, thank you. I just wondered if you could actually talk a bit more about on the agent side, because I guess what we're seeing is sort of fairly flattish trends on agent revenue, but I know it's been an area you've talked about increasing product focus there. How should we think about trends as we move into 2024 and the proposition for the agents?
Yeah. One of the focus area also for Lisa is obviously to, she will work both on the business-to-consumer and business-to-business side, together with the team, respectively. We still have high ambitions when it comes to growing our business-to-business area and with the focus on creating great products for agents. And I think that we'll, if you look back a year, you can see that we have expanded our universe. We have built a Find the Broker product. We have launched the first commercial product within that part. We have also improved a lot of different features and functions, and now we will launch a new product in January, hopefully.
So we're moving in a direction where we want to make, you know, we want to build great products so the agents will, you know, so they will invest in those products, and going forward. I think it's fair to say that when you look at the business to business segment overall this year, is that we have seen the market, the overall market has put some pressure on that part, where we see that the investments overall are decreasing from our business to business customers. But under the hood, if we look at agents, we can see the encouraging, you know, strong demand for those new products that we have built, which is a positive signal.
But for sure, it's it has put the pressure on the disciplined advertising, the current environment. But we haven't changed. We haven't changed our ambition. We haven't changed the view or changed our strategy. We rather move to make sure that we kind of move with the market and make sure that we build and build great products and improve the products we have.
Great. Thanks very much.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
Thanks, everyone, for joining today. Have a great day. Thank you.