hipages hits sweet spot as home improvements boom

Roby Sharon-Zipser is the co-founder and CEO of hipages, which is an online trade platform that connects tradies and trade businesses with residential and commercial consumers looking to do home improvements. hipages listed in mid-November last year at an offer price of $2.45 and since then it’s maintained that level, currently trading at $2.34, so a bit lower than what it listed at. But as we discussed, some analysts think that it should be valued at higher than that.

As Roby explains, their recent half-year report highlighted some impressive figures, including making a profit which they didn’t in the previous period and that they are cash flow positive. Some of that success has come from the tailwind provided by COVID and the boom in home improvements and Roby tells us a bit more about how the company plans to improve its offering as a software as a service model.

Here’s Roby Sharon-Zipser, the CEO and co-founder of hipages.

Table of contents:
Cash situation
Platform description
Company history
Revenue sources
Subscription fee & average spend
Profit
COVID tailwind in home improvements
Competition & differentiation 
Software as a service platform
Share price performance

Roby, hipages listed on the ASX in November last year, raising just over $100 million dollars in the IPO, so could you start by telling us how much of that funding you’ve gone through and where that leaves you in terms of cash in the bank?

Yeah – a bit of history on hipages, we typically, like many other technology companies, we’ve had to raise money over the years and so, of the $100 million, about $60 million was taken as what we would call secondary to go to original investors that had been in the business for seven or so plus years, circa around that. Then $40 million went into the business and some of that was used to payout – we were carrying some debt in the business. Today, we have a very healthy balance sheet, we’re sitting on over $30 million in capital, $31.5m capital, and no debt. We’re in a really, really strong position and as per the prospectus, the business was going in with healthy growth, we’re getting close to 19 to 20 per cent growth and we can probably talk more about that later in the discussion, and profitable and cash flow positive.

Are you viewing that as enough cash for the foreseeable future or do you foresee needing to raise some more?

The capital is sufficient for the opportunities that are in front of us today in terms of delivering the strategy and investment in technologies and marketing and brand awareness, pretty much standard stuff, so that’s more than enough for that. Then in the future, as more opportunities start to present themselves, we’d probably need to explore that, but for now, the capital is sufficient.

Could you explain to us what hipages does? Would it be as simple as to say it’s a platform that connects people wanting to do home improvements with tradies?

At its simplest – we’re more than that and we’re definitely evolving as a platform. Yeah, you’re right, for many years we connect consumers, commercial customers, home owners with tradies. Effectively, what you would do is you would go onto the hipages app or go onto our website, you enter in a few details around the type of trade work that you want to do, maybe you need an electrician or a plumber. Just say it’s a plumber, you would say, “I’ve got a blocked drain…” where you live, a little bit more information about the problem and then our algorithms would kick in, and very quickly you will be connected with three verified trade businesses. What I mean by verified, we check that they’re licenced, that they’re registered businesses. We use CreditorWatch to do credit checks on them and then those businesses also over the years have accumulated recommendations and ratings on their businesses so that you as a consumer or customer that wants to get this service done can check that on the profile that we connect you with. The typical experience for a person that’s posted a job request on hipages, usually within a few minutes if you’re in a metro area, you’ll be connected with one trade within 10 to 15 minutes, probably two and within the hour you’ll have your third connection. We limit it to three connections to make it also fair for the trade businesses.

Then from that point, is the consumer then choosing which one between the three that they’re going to pick?

Yeah, we really want to make that connection happen as fast as possible. We allow the consumer and trades to connect with each other. The nature of the industry that we operate in is quite bespoke for each trade and so a lot of work has to happen by assessing the customer’s needs, so measuring, understanding materials and requirements, timeframes… That’s very hard to do in a closed system. I would call us an open system and what I mean by that, is the consumer and trade will then usually go off platform and work with each other to work out what they need to get done and then they go and get the job done.

Our business model has evolved to be a subscription model and what we’re doing is we’re adding more value for the trade businesses so they can become better business operators. Software as a service is really where we’re evolving as a platform and we will be providing trades with tools to help manage and run their businesses better in the future, rather than participating, even probably extracting as much of a commission as possible from the transaction that materialises. That’s not necessarily where we see the longer-term strategy and opportunities in their category in Australia.

I thought it might be a good idea for you to explain a bit about the history of hipages in terms of how it got to the position of floating last year, because it’s been around a long time, 16 years or so I think, founded by yourself and David Vitek and the initial idea was to be a home improvement directory, wasn’t it?

That’s right. We’ve had a number of incarnations. We’ve been around for a while, you’re right. I think we had a rebirth of the business in probably 2011-2012, where we changed the underlying product. We originally were a directory and what I would call a content hub and that came out of a problem that personally I experienced renovating a home that I’d just purchased with my wife, we found that process quite fraught with a lot of friction, it wasn’t easy to get information on how to do things so we created this content and directory hub.

But in 2012, we transitioned the directory to be what we would call a request a quote type services, where effectively you as a consumer tell hipages what you need to get done and then we would find trades that are ready to do the work for you there and then, and we would do it very quickly and make sure that they’re verified and checked. The business changed in 2012 really significantly. We still carry legacy products like the directory. We also made a decision to be completely focused on the on-demand tradie economy. What that means, is we only focus exclusively on home improvements and home services, we don’t go broad on other services like maybe makeup services or wedding services and things like that, but we do everything that’s around the home for the simple cleaning job all the way to building a new home. That’s our focus.

Then, over the last eight or nine years, we’ve evolved the business model a number of times, we’ve tried pretty much everything and I feel we’ve nailed the business model which is a subscription service.

Yeah, you mentioned that trades businesses that list on there are paying a subscription fee, is that the main source of revenue for hipages?

Yeah, about 88 per cent of our revenue today is subscription and around 12 per cent is what we would call transactional revenue, which is the legacy products that we’re migrating customers off from to being 100 per cent subscription. We were taking a slow and steady approach just to make sure that we transition customers from legacy products in more of a carrot rather than stick approach to it and then eventually having 100 per cent of subscription which ties into the strategy of the business. Subscription is not an all-you-can-eat version of that. I mean, there’s a numerous number of variations of how subscription works.

We have what’s called a credit or a utilisation subscription model. We provide a customer, they pay a fee, say $99 dollars a month, and they would get a certain amount of value incorporated in that and if they need more than that value they would go up to a higher tier subscription product. That’s quite common nowadays with a lot of subscription products that are coming to market both from a consumer and business side of things.

What did you say the average cost per trade business is that they’re paying?

The average is around $120 or so dollars per month. We have customers that are on products that are like $49 dollars per month, up to thousands of dollars per month, so it’s really varied. It just depends on the requirements of the business and in terms of their needs as a business, like how much work do they need? If they’re getting started, they might need more. If they’re already established, they might only need a little bit to fill their books up. Some organisations have very large networks of trades that work for them, so they might have a bigger need, like maybe 20 or 30 vans on the road, and they need to have a constant supply of work so they might buy a higher package.

Then, also, different trades have different pricings for things. If you’re a cleaner, for example, the fee that you would pay would be a little lower because the value of the work whilst it’s recurring, is relatively lower. Whereas, if you’re a builder and you’re getting an extension or a renovation job, you might need to go on a higher package because the underlying product that you’re buying is a little bit more expensive because of obviously the value that has been presented by the leads that are coming from those consumers. The cost to build an extension is significantly higher than cleaning a house, is what I’m trying to say.

How many paying trade businesses do you have subscribed to the platform at the moment?

What’s interesting is that hipages is the largest network of trade businesses in Australia. We have just under 35,000 trade businesses that are in our platform that are paying customers and we’re across the entire of Australia. Every major metropolitan and even regional area, we have coverage and that’s one of the reasons why brands such as Bunnings and New South Wales Department of Education has partnered with us because we’re able to provide them with quality verified trades businesses in pretty much anywhere in the country.

What’s your margin like?

hipages is obviously a growth business. We’d publish this, we’ll do around $54m in revenue this year, that’s all in the prospectus, we’re well on track to deliver that and our EBITDA will be over $10 million dollars.

Just looking at your first half performance for the 2021 financial year, the most obvious thing to point out, and you mentioned it before, was you made a $1.5 million dollar profit as opposed to a $5.3 million dollar loss in the same period last year. What do you attribute that to?

Just to join the dots from the previous question, hipages is actually a very high gross margin business, we’re in the 80 percentile range in terms of gross margin. What we’re seeing is accelerated growth in our top line in revenues and we’ve managed to contain the costs through a major efficiency program where we introduced a lot of automation and self-service for our customers over the last 24 months. What we’re seeing now is those high gross margins washing through into profits in the business. Obviously, we’re going to use some of those profits to reinvest to accelerate growth, to tap into what is an incredibly huge category in Australia. I’m not sure if the audience knows, but home improvements and home services in Australia represents about $83 billion dollars, which is a very significant part of the GDP of Australia.

And so we’re doing a few percentage points of that in terms of work that we fulfil through our platform and what we want to do is grow into that even further, whether it’s fulfilling more work for consumers and commercial customers in the future or providing additional ancillary services to trade businesses to help them become better business operators.

How much of that profit do you think – I mean, we saw a massive boom in home improvements during COVID lockdowns. How much of a tailwind has that provided for companies such as yourself?

I think the way to answer that question is that there are certainly tailwinds that are happening in the home improvement sector in Australia, it’s without a doubt. We all see it, you see the armies of trades coming into people’s homes and the fact of the matter is that online adoption has been increasing, I think definitely COVID accelerated that, you can see that in some of the home improvement retailers and of the listed entities out there you can see their results are very strong. We also have not been travelling and we’re staying at home for longer, so obviously, Australian households are investing in their home and that’s also driving more trade requests, more service requests for improvements in the home.

The third element that I think is going to endure for us in this category or in the home improvement space, is that structure of work is really changing. I’m not talking about how people work in terms of casuals or part-times. I think flexible work is what’s changing and I think people are working from home more and more. What COVID demonstrated was that we can actually work at home effectively and I think the nature of work is it’s going to be more of a hybrid structure where organisations are going to adopt a 50-50 approach to things. Why that’s good for home improvement is that if people are spending more time at home, typically you’ll invest more in your home.

What we’re seeing is that people will make a deck where they might want to work outside, they might build a home office or improve their lighting, as an example, and we’re seeing that come through and I think that’s going to happen over the next couple of years. Probably to top everything off, is the property prices across the country are just going crazy. Cost of money is really low and so naturally some of that’s going to go into making homes better – a renovated home sells for higher margins than an unrenovated home. We’ve got a lot of opportunities and tailwinds that are coming into the category that I see will be very good for our business for at least two to three years.

In terms of competition, we also saw Airtasker recently list on the ASX which seems to provide a sort of similar offering. Is your main differentiation that you’re supply people with specialist tradespeople rather than anyone who’s just willing to do a specific job?

Yeah, in terms of how we’re differentiating ourselves, I would say that we do have areas that we do cross-over. We would certainly offer cleaning and gardening services, there are other platforms out there that are very broad in the service offerings, but I think fundamentally – and this is really important and obviously, we are working to explain this differentiation to the market, but hipages at its core is servicing businesses, registered businesses, and a number of those, a large proportion of those, particularly in home improvements, do require licencing. We are probably the authority or one of the main authorities in terms of the fact that we do all the verification for the licencing of those trade businesses.

We’re about enabling those businesses to become better business operators, so we don’t work in the labour hire space, we’re not the gig economy, we are primarily a business, a marketplace that connects consumers and commercial customers with trade businesses that are appropriately vetted and licenced. We provide support to those customers if things need to be supported. Home improvement is not the standardised thing, there’s different expectations, we provide the support structure there.

Over time, we will be rolling out more and more technology to help those trade businesses become better business operators, which is a very, very different strategy to some of those other marketplaces that you’re referring to.

You’ve mentioned a few times, the technology and the algorithms behind the platform. I noticed in your half-year report there was a particular emphasis on continuing to evolve the marketplace into a software as a service platform. Can you explain a bit more about the technology behind it and how you’re investing in it to make it better?

We do have a considerable investment in our technology. hipages is a product and service-led organisation, the product representing the R&D and innovation. What we’re doing is, first of all, we want to make that experience with the consumer or the customer and the tradie, both the customers but let’s refer to the people that have the needs to get work done which is what we call demand and the trades would be supply. We want to make that connection and interaction between them as seamless as possible, so there’s a lot of investment in the communication technology, the messaging that goes on between the two…

We’re about to roll out some really, really nice enhanced features on the connection piece and then underlying all of that is our algorithm that identifies those trade businesses that are in the area, that have the capacity or the ability, that want that work done to connect them to the consumers as fast as possible. That’s a perpetual game, it never ends, it’s always trying to match out supply and demand. We have what we call the marketplace efficiency program and that’s got a lot of data science and innovation around the algorithms in that.

But more importantly, we talked about it earlier around software as a service, we are rolling out a technology, it’s called Field Service Software. We’ll be in market in the next month or two with that product. Essentially, what it is, is it allows trade businesses to do scheduling, quote, invoice, integrate into accounting systems like Xero and MYOB, then provide those businesses with the tools to understand their profitability but also their marketing ROI. Obviously, hipages being a lead sourcing platform, ROI is going to be critical for them and we’re very confident about our ROI, we know that we provide the best ROI in terms of marking channels that are available for businesses and so we want to demonstrate that numerically, with a simple communication method to those trade businesses using that type of technology.

Just on the share price as well, you listed at $2.45 and it’s now sitting a bit lower than that, it was $2.34 when I last checked. Do you think the market is valuing hipages fairly given it seems to have stayed around that $2 dollars to $2.45 mark, or do you think there’s a bit more growth to be priced in? I saw there was a Goldman Sachs report on you guys with a price target at $3.10, so do you think there’s quite a bit more growth to be priced into the share price?

I think it’s important that we should realise, we literally listed four or so months ago, it’s not been that long. I think the analysts are seeing the value, like the Goldman Sachs report, they’re seeing the value that’s there in the stock. But, to me personally, I’m just going to keep executing with my team on our results, deliver on our prospectus numbers and continue to accelerate the growth of the business. I have all confidence in the market that they’ll understand that hipages is the largest marketplace for home improvements and home services in Australia, significantly larger by the way; and interestingly, is profitable which is unusual for a technology company to be profitable. We’re actually cash flow positive.

I believe the market will, over time, see what we are delivering as a business, understand our position which is very synonymous to the Carsales and the REAs of the world. We have a very similar strategy as those organisations and we see ourselves as wedging ourselves as that fourth vertical in that space in Australia – I’m also referring to Seek as the third one. We see ourselves being the specialist in the tradie economy and I think the market will identify that opportunity over time.

Just looking ahead, what’s planned for the rest of this calendar year and what should investors be looking out for?

We’ll be making some announcements with regards to – we’ve been talking about it for a few months now so it’s not new news, but we were talking about our Field Service Software, there’ll be some demos of that coming to market. If you haven’t used the product, you’ll see over the year some new innovation coming through with our messaging so that you can identify the trades when they call you back, there’ll be some enhancements in the way trades will be seeing our products. They’ll be able to identify whether consumers read their messages and see their quotes. We expect to have those ROI calculations available for trades in the Field Service Software product.

There’ll probably be some interesting extensions, adjacencies that we talked about in our prospectus, which is those added value services that we want to provide to the ecosystem. We’ll be coming to market and talking about when those things will be happening and things like that, which has been all disclosed already. We’re looking at a variety of different opportunities, particularly around the fintech space and insurance and data… There’s just so much opportunity in the category and we’re going to be really excited to talk to the market about those things as they eventuate and we prioritise them in our strategy.

Thanks, Roby, very much for your time.

Pleasure.

That was Roby Sharon-Zipser, the CEO and co-founder of hipages.