Why do you own so much HomeToGo stock, Steffen Schneider?

Please enjoy the second part of my conversation with Steffen Schneider of HomeToGo, where we covered HomeToGo Pro, M&A, and his investment in the company.

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We have discussed the following topics:

Recap

[00:00:00] Steffen Schneider (HomeToGo): You can and with a higher share of repeat customers we can decrease sales and marketing as a per cent of revenues. We want to do that until we are, you know, maybe by the end of this decade at a sales and marketing range of 30 to 40%. When it comes to M&A it really is, you know, we look at a wide range of potential targets. In HomeToGo Pro, we have all the services around the supply side and the services are subscription-based services. For example the software.

Introduction to part 2. Please check out part 1

[00:00:37] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back for the second episode of our HomeToGo series again with Steffen Schneider at the same place in my new home studio in Berlin, you can see it isn’t fully finished, but I’m working on it, so stay tuned to be part of this process. But the more interesting thing is HomeToGo now.

HomeToGo competitors

[00:00:59] Tilman Versch: We already talked a bit about your competition for HomeToGo and maybe as a small repeat question. Who are your competitors in solving the problems of your customers and maybe also with especially this Smoobu thing, the Smoobu software thing, is there any competitor people should watch out for?

[00:01:22] Steffen Schneider: So when we look at our overall business, then you know looking at the marketplace to start there and I’m coming through to the software, but when we look at the marketplace, we of course have the three big OTAs, booking Expedia and Airbnb.

Below that you have a tonne of property managers, some of them offering more than a hundred thousand units like an Interhome. You have a Novasol with close to 50,000. You have in the US, the Vacasa, with 40-something thousand properties, but it also goes down to smaller ones who only have a few thousand or few hundred properties and then it goes down to the actual host.

On the software and services side for the supply side, there are various competitors offering similar solutions. There are channel managers who offer their own channel manager software, they are channel manager service providers who are, you know, doing the whole channel management for companies. So it’s a pretty wide range of competitors. Each of them with their certain pros and cons.

Smoobu competitors

[00:02:40] Tilman Versch: And with Smoobu?

[00:02:42] Steffen Schneider: With Smoobu, there are also other software that are offering similar features. You know, maybe I’m not objective here, but we think nothing–

[00:02:58] Tilman Versch: You have to be objective. It’s a competitive goal. No chance that you can’t.

[00:03:04] Steffen Schneider: Now, so we see this move offer as a really compelling offer and therefore we really– There are other competitions. I don’t have the names now ready. But it would make sense to maybe add a few items. But even if not, we can go do it on our own.

[00:03:29] Tilman Versch: Were you solving problems better than your competitors? You don’t have to blame them or shame them, but more like where you think good.

[00:03:45] Steffen Schneider: Starting with Smoobu, it’s really easy to use. It’s easy to implement and then easy, easy to manage. So we really have a solution which is very easy. When we look more at some of the other solutions, we have there’s like constant competition with other competitors where they offer a new feature and that new feature is maybe better than what we have. And then we offer a new feature and ultimately, it really comes down to what is important for the respective customers.

As some say they want to channel to multiple channels. Others say only want to channel to a few channels. So it really depends on what the customer is doing and what is the best offering them. When it comes to the marketplace, again, there is, you know, unfortunate to repeat myself, it really comes down to the breadth of the offering and the easy-to-use product we have.

So to find things to do the cheque out, to do the payment, et cetera. And the big OTA is like a booking like an Expedia. They also have great technology, great platforms, et cetera. But it’s nothing that they have that we don’t have. So we would say, oh, their product is so much better. Yes, they have a better brand, they have a better reach. Of course, they have much deeper pockets than we do. But there’s nothing we are afraid of.

[00:05:15] Tilman Versch: Is there anything or any problem solution of competitors you admire or even fear?

[00:05:30] Steffen Schneider: What I admire is their brand. So like in the case of Airbnb, I really admire their brand. It’s a great brand. When I look at Booking.com, I mean the genius loyalty programme they have is a great programme. It’s something we hear very often in investor talks that investors who, you know, took all their business travel with bookings.

They collect genius points and yeah, it’s a good programme. When I do short-term trips and I stay in a hotel, I usually book them via Booking.com, so it’s a great programme and I admire them for that, but I wouldn’t say that we fear anything. Sometimes it’s even the other way around. For example, flexible search date or something we already introduced a few years ago and then Airbnb was presenting it as something really new.

The complexity of problem-solving within the business

[00:06:25] Tilman Versch: Let me drill down a bit on the complexity in your business. So maybe let’s take a look at the past and can you explain based on this why you have built so many different problem solutions for your customers? Or why are we having different business lines as a business?

[00:06:44] Steffen Schneider: So when you think about when we started was a pure meta-search machine for vacation rental. It worked out really well. We quickly got to scale. We got a lot of demand, we got a lot of supply, et cetera. And we always have like a case study, which we already show now since being a public company of a property manager who was telling us, like, “Oh, I get all this traffic from you, that’s great. It just doesn’t convert.”

The reason why it doesn’t convert is because the respective internet page of that property manager was just bad. If you were a native speaker of their language, you could find your way around. If you were not a native speaker, it would be really hard to find where you have to click in order to book that property.

So what we said to that property manager, that’s just an example that happened to many others as well that we said, “Well, why don’t you come on-site and be part of our own OTA and we complete the whole booking to us?” And we could show within like one year, 50 times or more bookings. Now it’s like 160 times more bookings than what was at that point in time. And the reason just is that when we talk about our product, it’s the core we do.

As I mentioned before in the first part of the session with these hundred A/B tests, we constantly make the product better to make it more user-friendly to see what’s working and what’s not. And for many of the property managers, they are just too slow. So by the time they have upgraded their web page, it is already outdated. And for them, we really have created that on-site business because the big OTAs, they don’t need it, they have a greater product than themselves, but for them, that was a win, win, win situation because the traveller was now making a booking they didn’t book before.

The property manager was happy because he was getting many more bookings and we were happy because A) we got the data of the travellers which enabled us to generate repeat business. We get a higher take rate than what we got before. So everyone was happy. And then the subscription and services around the marketplace and around the supply side were really to think about, okay, what other services can we provide and some of these services were already out there. So you know some of these services we have acquired like Zika we have acquired as they have already provided many services to local tourism, offices, et cetera. And these are the things that our partners are using. They need them and we are best placed to offer them.

[00:09:33] Tilman Versch: So short story TLDR as you started to throw spaghetti at the wall, none of them really stuck. Then you decided to develop a spaghetti wall glue, make the wall stickable and throw more spaghetti at the wall.

[00:09:51] Steffen Schneider: I wouldn’t say it like that.

[00:09:54] Tilman Versch: No, we are very serious here.

[00:09:58] Steffen Schneider: So we just saw that there are certain parts of our initial business which worked well for certain parts of the supply side but didn’t work so well for the others. So there we developed the product further to also offer them something which was working there and then we saw that there were, to stay with your picture, we saw that there were people eating spaghetti which we didn’t offer yet.

So that’s when, you know, we saw, okay, there’s an opportunity. Let’s see. And like in the past whenever we haven’t seen an opportunity to acquire a profitable business which is growing and which is enhancing the overall value of our business. We were looking at opportunities to acquire them and if we could agree on price and terms. We did acquisitions like we did in ‘22 and we maybe want to do in the future.

What investors love

[00:10:52] Tilman Versch: So looking at the complexity in your business structure, investors love to ask this question: What is your child you love most? Or to formulate the investor terms: Which of the businesses has the highest quality you own? So what is your answer?

[00:11:11] Steffen Schneider: I mean when you just pure look at it and what investors love, it’s the sticky software business because I mean that’s the reason why you have high multiples for software as a service business because it’s just so sticky. So from that point of view, I could imagine and that’s also the feedback we get in investor meetings that they love the Smoobu business, but it’s just one part of our overall service offering which we now call HomeToGo Pro.

It’s not everything. But many of the service offerings we are doing, they’re also the value add because we also have the marketplace and the knowledge of the marketplace. So when I said in the first part, we could for example enhance the Smoobu offering by also offering price information, i.e. increase the prices during peak season. Maybe lower the prices during the shoulder season. That’s the information we generate from the marketplace. So these businesses together, they also generate value.

HomeToGo Pro

[00:12:17] Tilman Versch: So maybe define what’s HomeToGo Pro? Because it was just yesterday introduced into capital market space.

[00:12:24] Steffen Schneider: Yeah. So in HomeToGo Pro, we have all the services around the supply side and the services are subscription-based services. For example, the software. But also, we have subscription-based services in Italy, in France, in Spain where hosts can offer their properties on a platform and then they can basically get bookings of it, and we also have what we call volume-based services where then it’s more like that people get booked, it could be bookings via channel manager via a third party.

We have what we call the doppelganger where we also offer our existing inventory to other parties. We work together with, for example, TUI, with HolidayCheck and this is more of a volume-based business.

Doppelgänger

[00:13:19] Tilman Versch: And what is Doppelgänger and why this strange German word? And have to copy the German podcast?

[00:13:27] Steffen Schneider: So in Doppelgänger, it’s basically like a white label solution where we offer our technology, our inventory to third parties and then they can also offer their customer base on our inventory via that Doppelgänger solution.

[00:13:45] Tilman Versch: So it’s kind of the twin solution or a white label solution?

[00:13:47] Steffen Schneider: Yeah, yeah, yeah, yeah.

[00:13:48] Tilman Versch: Solution to put in an English word. And how does this complexity help you? You answer this question already a bit, but like can you maybe outline this a bit because you could maybe use some data from the small business to feed the other business or they help each other to play together?

[00:14:06] Steffen Schneider: Sure. So having like a big marketplace is a feature for also users of the software or of the subscription services. So for example we use that in our Italian business that we also offer them to get bookings via the marketplace. So they subscribe to present their properties and it’s a nice stable growing profitable business and we also get paid if we generate bookings for them. So it’s a direct connection.

When you look at the Smoobu side, to have a direct connection to the host and to enable the host to go on our platform and enable us again to maybe show even exclusive content. So in our industry, there’s very little exclusivity, but there’s a little bit of exclusivity and to for example have certain property exclusive on HomeToGo again could be a benefit for the marketplace.

Overlap in customers

[00:15:05] Tilman Versch: And maybe with Smoobu, is there a customer acquisition advantage because it’s easier to sell Smoobu to existing customers that, you know, that they have a holiday place or is it not like?

[00:15:20] Steffen Schneider: So, you know, Smoobu we address mainly the owners while the majority of our customers on the marketplace are travellers. So if the travellers are also owners, then that would be an ideal solution but the majority of our customers on the marketplace are not owners of vacation rentals.

[00:15:44] Tilman Versch: And you don’t have the direct connection of them to these owners because they are the volume of other partners?

[00:15:50] Steffen Schneider: Sometimes we have, but not always. So the majority of the properties we get through our partners and sometimes we know the ultimate owner, sometimes we don’t.

[00:16:03] Tilman Versch: It’s a bit of the meta-observation from the investor. Does it help to build a stronger mould because you combine these business lines under the HomeToGo umbrella?

[00:16:16] Steffen Schneider: You know, mould is always a big, big word and I would say it makes the business overall stronger. Is it already the mould which no one can surpass? I don’t think we are there yet there. We still need a little bit to get there.

Building on data

[00:16:38] Tilman Versch: How does the data you gather through different businesses help them to play together? You answered this a bit.

[00:16:47] Steffen Schneider: Yeah. I mean imagine you have a house in Greece and you’re offering that house for €1000 per week. Just imagine that. We know that all your neighbours during the peak season are charging 1500 and we know from all our data that they’re booked out. So except for the few weeks they use it themselves, they’re completely booked out.

So we basically know that you leave money on the table and we can provide you with that information, while in the off-season. Maybe still charge €1000 and you won’t get any bookings because all your neighbours are now charging only €800. So up to you, if you say, oh, you know, I don’t need that time anyway.

But to get an additional three-four weeks in the shoulder season and make 800, but getting a booking makes a huge difference. So that’s just one piece of example and we have similar information we could use for the more professional property managers where we can help them to manage their properties better.

So there’s a tonne of data and we have data specialists and you know if they would be here on the podcast, they could easily talk for hours about all that. For us, it’s always important to get the real-life business impact out of it because the data itself it’s all nice, but we need to have a real-life business impact and that ultimately comes down to revenues and profit.

[00:18:24] Tilman Versch: Before we jump into the serious topic of capital allocation, maybe let’s finish the data topic. Do you maybe have three or a few interesting fun facts you can tell us about what you learned about the travel market in general and travellers’ behaviours?

[00:18:40] Steffen Schneider: You know, we do that for the end of the year. We have an all-hands meeting with all the employees and then we always have the kind of best property. So what was the property we made the highest take rate with? What’s the property which had the highest bookings? What was the biggest group at? Etcetera.

You know we showed a little bit at the Capital Markets Day, but to see for example a property which was booked 50 weeks in a year and you look like and you don’t understand why is this property particular working so well, but it is what it is or you have like a property where you see where we made a huge amount of money and you wonder who was that person who was able and willing to rent that property for this price. But there are these people. And it’s that’s the nice thing about the industry we’re working in and also you know nice about the products we look at.

[00:19:47] Tilman Versch: And is there anything you’ve learned about the differences in the markets you’re in? Like, for instance, the German market, how it is different to the French market or the Italian market?

[00:19:57] Steffen Schneider: I started in 2020 when we were still in COVID times and in 2020 most of the people stayed in their own country. And like French consumers, also after COVID stay mainly in France. Americans due to the size stay in the US but, for example, the Dutch, the Germans, et cetera. They usually travel outside, so you know to Austria, to Denmark, Italy, et cetera.

So that was interesting to see how the share of international travel for German customers during COVID went down and now it’s up again like as if nothing, nothing has happened. Travellers in the US tend to book bigger houses than they do in Europe, so when we all wanted like this year, we had our basket size going up. But when we looked at the regions, so North American basket size stayed the same, European basket size stayed the same. It was just that the US had a higher share and therefore the overall basket size increased.

Another fun fact is when the people are actually booking. So, you know, German, Dutch, they usually book in January. So December traffic is usually flat comes to the 26th and traffic goes up and then in January people are booking and then the Dutch market goes down while the French and British are going up. In the US, you never know, sometimes they book early, and sometimes they book late. So these are the things which are really interesting.

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[00:21:40] Tilman Versch: Hey, Tilman here. It’s great that you have made it that far into the video and I think it shows a certain passion for investing you’re having. If you want to dive deeper and go further down the rabbit hole, you’re invited to apply to my community, Good Investing Plus, it’s a place that’s very helpful to people who are ambitious about investing. It’s helpful to investment talent as well as experienced fund managers. So if you’re interested, please click on the link below and now, without further ado, enjoy the conversation.

Skin in the game for Steffen

[00:22:15] Tilman Versch: That’s also interesting. Now let’s talk a bit about capital allocation and a very important topic for investors. And so you are the CFO, not the CEO, but with the F. How much of your own money is allocated to HomeToGo?

[00:22:30] Steffen Schneider: Oh, might be personally? Quite a lot, quite a lot, so you know, when I started, we were still a private company and we had like a virtual share option programme and when we had the IPO all that claim got translated at €10 per share. So I feel all the pain of investors who have invested €10.

[00:22:56] Tilman Versch: It’s good to hear for investors that invested a 10.

[00:23:00] Steffen Schneider: So I feel you, as I always say the tax authorities are the ones who have really benefited because I had to pay taxes on €10 and now the share price is where the share price is. But I don’t want to complain about that. And then I also have under the new programme options. I haven’t exercised them yet because I don’t think it’s the right share price to exercise them. But if I take everything together, I will say quite a significant part of my “net worth”, I wouldn’t say worth, but you know out of my capital allocation is within HomeToGo share. So I have a very personal interest in getting the share price to increase.

[00:23:52] Tilman Versch: Let’s go to the C-Suite. How are they positioned with this question? So how much of their wealth is?

[00:24:00] Steffen Schneider: So you know, we are four members of the management board and two of them our CEO, Patrick and our CSO, Wolfgang have also co-founded us and Wolfgang has like close to 5% in the company. Patrick has like close to 4% in the company. So for them, it’s also I would say a very significant, if not the biggest part of their net worth in the company and then the fourth management board. He also was hired a little bit earlier than me and so all together we significantly have significant skin in the game here.

[00:24:46] Tilman Versch: So you will win when HomeToGold wins?

[00:24:48] Steffen Schneider: Hopefully, yes.

[00:24:50] Tilman Versch: Yeah. It’s not the worst setup for the management team.

[00:24:52] Steffen Schneider: Yeah.

How capital is allocated

[00:24:53] Tilman Versch: So maybe walk us a bit through the capital allocation decisions you do with the bit of complexity with the different business lines. So how is the process, how do you decide to allocate capital in between?

[00:25:09] Steffen Schneider: So again, starting with the HomeToGo Pro side of the business because that’s a very stable business, it’s nicely growing. We will particularly in the next year invest in certain parts because there we see opportunities to grow and to grow significantly. So ‘24 will be a year where we will invest in order to, for that growth and as always, you invest in one year and the real benefits are coming a little bit later. When we look at the marketplace, we have already continuously invested over the years and there it’s more like a working capital question.

So as I have explained before, in Q1, we get the majority of our bookings we have to pay Google, Bing, et cetera. But since we only realise revenues when we have a check-in. It usually takes until Q3 and then thereafter until we get paid. So that’s the kind of working capital we have to finance. The requirement of this working capital is going down because we also do now more and more payments for our customers and we get prepayments.

So that’s money we first can get on our balance sheet. We do that with a payment partner so that everything is done in a proper way. And that is easing our working capital requirements. So in ‘23 was already better than in ‘22 and we expect the same thing to continue. But there I always keep a bigger part in terms of capital just to be ready, because if there’s a great opportunity for us to invest, we want to make use of it.

So we can usually plan the year pretty well. As I said, depending on where the traveller’s coming from, we know they’re early. More Q1 bookers or Q2 or Q3 bookers, but there are always exceptions to the rule and we just want to be ready if there’s an opportunity in a pocket and we can see we can get bookings with a high contribution we will go for it. So that’s the biggest part of it.

And then we have a share buyback programme out there. It’s a 10 million programme and so far, we have not even used a million yet. And there are still 9 million earmarked for that. And then the overall remaining biggest position is the M&A. We have a new colleague, Bodo Thielman. He also presented at the Capital Markets Day and outlined our strategy to go for a profitable growing business and there we have more than 70 million earmarked for M&A. And that excludes any share or that to include and we just want to be very disciplined about it. So it doesn’t mean that we will spend next year 70 million on M&A, but if there’s a good opportunity to add value, we will go for it.

[00:28:11] Tilman Versch: So maybe to clarify it a bit, you’ve already mentioned this a bit, but how much room do we have for capital allocation, like how much free capital there is like cash? And how much do you think will come in over through free cash flow?

[00:28:26] Steffen Schneider: Yeah. So by the end of Q3, we had net cash of 130 million and we expect that amount to be a bit higher by the end of this year. And so calculating with 135 million to go into the year a little bit more than half would be earmarked for M&A. Close to 10 million would be earmarked for the buyback. Not sure if we need all of that, but we have it earmarked, then we have about 10 million of operating cash from Adjusted EBITDA to free cash flow that would still have a gap and then the remainder of that amount is what I see as breathing space, networking capital. We don’t need that for the year, but it just makes me sleep better.

[00:29:19] Tilman Versch: So is there a minimum amount of cash you should keep at hand to have all these working capital requirements or is this 130 million just in case of what time you do very well fully disposable?

[00:29:34] Steffen Schneider: So for the operating side, we won’t need more than 40 million and that’s already generous.

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Gut feeling vs. Data-based decisions

[00:29:43] Tilman Versch: Okay, that’s a good answer. And how do you balance your entrepreneurial gut feeling in capital allocation and your data and KPI-driven information?

[00:29:58] Steffen Schneider: So again, when you look at these various buckets. So the share buyback programme we have announced and you know it’s ultimately something which you know we can only buy back a certain amount of shares which is a percentage of the daily et cetera trading volume and then there are certain uptick rules.

So we can’t, you know, increase the prices so we can always only go with the flow. There are certain ways to maybe do a tender offer within the share buyback programme but to see the kind of money we need in terms of cash between the Adjusted EBITDA and free cash flow, which is something we know from this year and you know we have a pretty good idea what it will be for next year.

So again I feel comfortable with that number. The operational part, the networking capital part is something we can base on historic behaviour and it’s usually pretty stable, but there’s always an element of surprise in the way if certain markets open up, if there are certain good things to do, then we would just want to be ready. Like for example, this year, in September and October we had very good bookings which is not so usual. In September, we had more than 40% than in the in the prior year. So these are the little things we want to be flexible about. And data is helping us to spot these opportunities early on and then you know we want to have the flexibility to go for it.

When it comes to M&A, it really is, you know, we look at a wide range of potential targets. And then very early screen them on what makes sense in terms of product. How does it fit into our company? Et cetera, et cetera. And then once we decide on okay, this is really interesting, we then go on making an indicative offer and then do real due diligence spending money on it. So then it really comes down to hard data. Is it really worth it or not?

Moon shots vs. being down to earth

[00:32:17] Tilman Versch: It’s a big word, but does a HomeToGo maybe have a bit of a moonshot culture that you have some things that you dry out that could be interesting business lines, but you don’t know or is it just operating on the existing pockets you have?

[00:32:38] Steffen Schneider: I’m always careful when I have these, you know, moon shots. Yeah, I think in general we, we are rather down to Earth and to, you know, ultimately it’s relatively easy you want to have a growing business you want to have a profitable business which is generating cash and then Wolfgang Heigl, founder, co-founder always says, free cash flow means freedom and as one of our shareholders has said, you know when they were he was following Booking for quite some time and he says for a long, long time that share price wasn’t moving at all.

But at some point, investors started to see how the profitability was coming, how the free cash flow was coming, et cetera. And I would rather see us in that camp, which doesn’t mean that if a great opportunity comes by we would immediately discount it. I just rather see us, you know, constantly improving than shooting for the moon.

Focus on mergers and acquisitions

[00:33:45] Tilman Versch: Yeah, David Hasselhoff, maybe has texted a new song. I’ve been looking for free cash flow at a certain point. I’ve been looking for an M&A is also an interesting topic. We called it was one of the larger headlines from the Capital Markets Day. Is there a recording of it available?

[00:34:01] Steffen Schneider: Yes, it’s all available on our Investor Relations side. So you can see all the slides and also the full recording.

[00:34:08] Tilman Versch: Feel free to send me a link and I’ll put it in the show notes. So it’s easier for people to find it. And like, who’s this new M&A dude you hired? Why is he qualified to do M&A for you?

[00:34:22] Steffen Schneider: I have to tell them that you call them like that.

[00:34:24] Tilman Versch: Yeah. Next time he gets a chocolate as payback for dude.

[00:34:28] Steffen Schneider: So Bodo Thielman, he is like in the industry for a very long time. So he just joined us from HISDS, which is also active in the area. And he worked for a very long time for Axel Springer doing M&A and investing there. He worked for, for oil, which is a player in the industry and you know, he’s also active in the Vacation Rental Association, so he’s basically a person who knows everyone.

But besides being a deal maker and facilitator, he also, you know, has a very hard business background, has a PhD in business administration. So he also knows what he’s talking about and also, you know to make sure that the diligence teams are performing that everything is then put into a sale and purchase agreement. You know all these nitty gritty things which make an M&A transaction complex and he’s a really great addition to have on board and I really enjoy working with him.

[00:35:45] Tilman Versch: Nothing against Bodo. Sorry if you’ve seen this, but you already have a complicated business model with different business lines. Why do you add M&A on top of this now?

[00:35:57] Steffen Schneider: Because there are still things, we can do in order to make the business better. So, unfortunately, I can’t go into more detail. But they are on the HomeToGo Pro side, certain things would be great addition additions. There are certain things on the marketplace side which would be great additions.

For example, to increase the share of repeat customers. So there are certain things we can do and we see they’re adding value by itself. Because we’re only looking at profitable M&A, as we see that as a better fit, because you can let that company run on its own, you don’t have to integrate it and it’s also helping our overall profitability. And there are certain things which then combined with our business can also help and therefore we just see M&A as an opportunity to accelerate growth and to accelerate profitability and therefore get or become a bigger and more profitable business faster.

[00:36:59] Tilman Versch: So on the artwork creation side it’s still like the phase, “Trust us, we know what we’re doing.”? Or is there anything you could maybe give us a little teaser?

[00:37:13] Steffen Schneider: I really wish I could. You know, if our in-house capital markets lawyer Christoph would see that he wouldn’t like it, so I wouldn’t say anything.

[00:37:25] Tilman Versch: I already teased the board. No, no issues with Christopher Sterling. I have to stay on the safe side, but maybe give us some confidence that you don’t overpay or how or walk us through the framework you think about like value creation when doing M&A.

[00:37:41] Steffen Schneider: Yeah, so already very early on, we have set ourselves certain limits where we just say, okay, if the potential seller is asking for and we mainly look at EBITDA multiples as the main metrics. If certain sellers are looking at EBITDA multiples which are beyond our threshold. We just say, okay, thank you very much. And let’s talk again in, in the years’ time.

Yeah, so already very early on, we have set ourselves certain limits where we just say, okay, if the potential seller is asking for and we mainly look at EBITDA multiples as the main metrics. If certain sellers are looking at EBITDA multiples which are beyond our threshold. We just say, okay, thank you very much. And let’s talk again in, in the years’ time.

So we have seen that and you know we have that also in other industries. You have it in the real estate market where you know people still thinking of 2021 prices when you’re in ‘23 or in ‘24, so we just have to say, okay, it would be a nice addition to our business, but not for this price because I would have difficulties to explain it to our supervisory board. I would have even more difficulty explaining to investors why this business is worth that price. And if I can’t explain it, we just don’t do it.

Price development since 2021

[00:38:44] Tilman Versch: Maybe give me a bit more detail if you, just of allowedness, how the prices have changed from 2021 to 2023 and like how this dancing process to accept lower prices is going.

[00:39:02] Steffen Schneider: I’m here when you looked at ‘21, the mainly Internet businesses were valued on revenue multiples and only using EBITDA multiples as an alternative metric. Now everyone is looking at EBITDA multiples. Also looking at free cash flow, you can clearly see that we are going down in the P&L and it’s all coming more towards free cash flow.

And in our case, it’s you know one thing when you say, okay, that’s maybe cheap on the revenue multiple side, but still expensive on the EBITDA multiple side and how basically no one really cares about revenue, but everyone is looking at an EBITDA multiple and then you can see how also the multiples have come down to the overall industries. I mean, it’s no longer the same kind of multiples we saw two years ago and that just needs to reflect.

There are some potential sellers who are aware of it and are willing to look into that and there are others who just say, look, I don’t care, it’s my business is running well. And I don’t see any need to reduce my price expectations and then just say, okay, that’s fair enough. You have to make the best decisions for your business. We have to make the best decisions for our business and for our shareholders. And at this point in time, I just cannot justify these kinds of prices. And then let’s see, you know, we always, I live under the impression that you always meet twice in life. And if you explain that well then let’s see you meet in the marketplace. You meet otherwise and maybe then we have a new situation in a few weeks or few months or few years’ time and then take it from there.

Growth in the holiday rental market

[00:41:09] Tilman Versch: Marketplace is a good bridge to my next question or the last topic of our conversation. It’s growth. Maybe you can give me some insights into how the holiday homes market is called like this, you can correct me, is growing in general like outside of HomeToGo.

[00:41:29] Steffen Schneider: So finding good reliable data on the market and on the growth of the market is quite a challenge because you have that range. So for example, for our IPO, we found some research reports which came out after the Airbnb IPO, which said that the overall accommodation market including hotels and everything was 1 trillion U.S. dollars and was supposed to grow within 10 years to 1.7 trillion. So that’s one way.

There are other things which are more towards the vacation rental market which say that within the overall accommodation market, vacation rental is the fastest growing market. It’s not so easy and one of the reasons is that think about you own a property in Italy, you have a property manager. So you used the help of a property manager. The property manager may use the help of Expedia. Expedia is using the help of HomeToGo.

Now let’s assume you are renting it out for €1000. The traveller is paying €1000. Now, I guess your reporting wouldn’t show up anywhere, but maybe the property manager’s reporting would show up. The Expedia reporting would show up and we also would show €1000 of gross booking value and that is, I would say one of the reasons depending on how much consolidation you have and that on a global scale is not so present, but all in all, we see that the market is growing and you know, we were benefiting from COVID and we are benefiting now that working from home, working from anywhere is something which is more or less established as people can just say, look, I go two weeks on holidays and I just add a third week and work from Italy and my family can enjoy the beach in Italy and I just worked there.

We have seen that during COVID when suddenly fast Internet was the number one filter that everyone was looking at, which wasn’t the case before.

Online vs. offline business

[00:43:58] Tilman Versch: In e-commerce, you often talk about the shift from offline to online, like how is it in your industry? It’s hard to get data on this, but is there still a large offline chunk? Or has it already moved online?

[00:44:15] Steffen Schneider: So I think from the travellers more and more is online on the supply side. There’s still a significant chunk. I mentioned it in the first part a few years ago. We were expecting it to be 50/50, maybe now it’s more like 55/45, maybe 60/40 online to offline. But with every new generation. You then are using it more online.

And now the question is how much online, so coming again to this mobile software, you don’t need to connect to any of the big booking platforms, you can just have your own website and maybe you get sufficient traffic out of it. Is this online? Yeah. On the one hand, it is online, you can book everything online. And you don’t do it by phone or by fax even, but to have it like real online is, I think, when it comes to the big platforms like HomeToGo, like Booking, like Airbnb.

HomeToGo growth

[00:45:16] Tilman Versch: Yeah. No Germans, no fax. It’s hard. How should I read your growth against the market or your peers? So the last time we talked, you said that some people were surprised that Airbnb did grow more than you. You’re a smaller player. So how should people read your growth? What is your personal hurdle with growth?

[00:45:41] Steffen Schneider: Yeah, so when we, Airbnb and Booking, Expedia. They’re always reporting a few days before us, which is always helpful and when I saw the headline numbers from Airbnb and Booking, I thought oh, it will be. It’s not so easy, but then when you look at the next level, where did their growth come from? It came from Asia and Latin America.

We are not present in Asia at all. In Latin America, we have a very tiny business in Brazil, which is not even 1% of our revenue. So it’s minor. When you compare their European business and their North American business to us, we were pretty much even in some cases we were even growing faster.

Nevertheless, I mean there are much bigger companies. So to grow in the same way as them being a smaller company should not be our benchmark. But it’s important to see like last year, also to some extent where with the help of acquisition, we were growing more than 50%. This year we are growing towards 10%, but the reason is we very clearly from the beginning onset that we want to reach Adjusted EBITDA break even. That’s our number one priority and we will reach that goal and therefore have compromised on growth.

[00:47:02] Tilman Versch: So it’s now growing, but with this profitability baseline, I think you’ve formulated it like this or how?

[00:47:12] Steffen Schneider: Yes. So you know we will grow about 10% this year and by that time and reaching Adjusted EBITDA break even, we have improved our EBITDA from last year’s Adjusted EBITDA to this year by around €20 million and that’s something we are proud of. You know, it’s Adjusted EBITDA break-even can’t be the end of the story. We need to make real profit margins. We need to generate real free cash flow, but it’s a big step and to improving profitability by 20 million is not too bad.

[00:47:45] Tilman Versch: So for investors that like growth companies and now really want to have profitable companies, you will give a kind of like not promised, but goal to have always this Adjusted EBITDA.

[00:47:57] Steffen Schneider: Yeah, we said that in our capital markets, you know, ’24, again, we want to have a more focus on the growth and we would reinvest the improved profitability into additional growth. For example, building up a good backlog to then go into 2025. But we ensured investors and made sure investors here that the break-even is the floor, so we won’t go below what kind of profitability level we have achieved this year. It will be the floor and from there, we improve going forward.

Hypothetical scenario: No more marketing expenses

[00:48:30] Tilman Versch: So how much effort do you need to grow or let’s make the crazy experiment that you stop marketing expenses, what would happen to your business in the next year?

[00:48:41] Steffen Schneider: Well, if we stop the marketing expenses completely, of course we would make huge profitability because marketing and paid marketing is the biggest factor on our whole P&L, but then again if you stop it completely, the business would become smaller, smaller, smaller. So it wouldn’t make sense. You can and with a higher share of repeat customers, we can decrease sales and marketing as a percentage of revenues.

And we want to do that until we are, you know, maybe by the end of this decade and then sales and marketing range of 30% to 40%. That is something more or less like 80 and so still some way to go but we see 30% to 40% long-term as a sustainable level. Nevertheless, we don’t want to cut back in absolute terms. So you know we still want to grow sales and marketing in absolute terms. We just want to grow faster.

[00:49:52] Tilman Versch: Is there any ratio you’ve experienced in the past, like every per cent of marketing rate to growth or the interlink?

[00:50:04] Steffen Schneider: In our Q3 results we showed the year ‘23 in three phases first phase. The first four months we had really nice growth. There were still some acquisition-related factors in it, but even if we had taken that out, we would have seen growth of around 30%. Then the next four months, May to August. So basically no growth in a few months even below ‘22.

And then in the last, by that time we reported in November. So we had data for September and October, which was again way above the year before. Now given our seasonality, Q1 is much more important than the end of the year in terms of the absolute booking revenues.

Nevertheless, to be like as I mentioned in September, 40% above the prior year is a big step. So with all the data, with all the knowledge we have, there are still some things which are surprising. And this year we could have made much more revenue. You know if we would have had a little bit more space on the Adjusted EBITDA target, but we said two years ago when we went to the public market that we want to reach within two years Adjusted EBITDA break even and we will achieve that.

We also mentioned that within two years we want to have 20% subscription and services what we now call HomeToGo Pro, we will achieve that and have that kind of, you know, the stability that also the capital markets can see what we promised to the capital markets we take very seriously and we do everything to achieve that should hopefully give them comfort and then put us from the not profitable bucket into the break-even bucket and then to the full profitable bucket.

Outlook on the next 5 years: Revenue or profitability

[00:52:08] Tilman Versch: Looking like five years out, what do we expect to grow? Have grown stronger than the revenue than profitability?

[00:52:18] Steffen Schneider: Well, so five years out, that would be ‘28. I would see us, you know, maybe at an EBITDA margin or around 2025, you know, I maybe regret that when I look at that video in five years.

[00:52:41] Tilman Versch: We have it on tape.

[00:52:45] Steffen Schneider: But I would expect that we have grown revenues much faster than this one.

[00:52:50] Tilman Versch: And maybe give us two or three reasons why we should trust with this? You gave a lot in the video already, but…

[00:53:03] Steffen Schneider: Number one reason is we have said that we would achieve Adjusted EBITDA break even this year and we will achieve it this year. And, you know, we have compromised in terms of growth, but for us, it was just important to achieve that milestone also to ensure investors that we are serious about it.

Number two is that I mentioned it when we talked about M&A, you know, we are not shooting for the moon. We just constantly want to improve profitability, improved cash generation, et cetera. So we see that as a long-term commitment, but also as a long-term, you know like a marathon. We are not hoping for any special events to happen which helps us.

We rather see that as something where we continuously develop the business and then come to something in. Finally, the good thing about the industry we are in, I mean people make money in the industry, the businesses we have acquired, they have made, you know, 20% plus EBITDA margins for many, many years while still growing. The big OTAs are growing and they have a 35% EBITDA margin. So that’s a really good thing in our industry. People make profit. They generate cash and that would also what we will do.

People make profit. They generate cash and that would also what we will do.

Closing thoughts

[00:54:30] Tilman Versch: So as a last tradition at the end of the interviews, and I’m coming to my end with my questions and my quirky comments, do you have anything you want to add? We haven’t discussed a fun fact that came to mind. A greeting to Christoph or something like that.

[00:54:52] Steffen Schneider: Usually, it’s, you know, getting so many questions, it’s always a little bit of exhausting.

[00:55:01] Tilman Versch: And bored you to death.

[00:55:04] Steffen Schneider: No, I wouldn’t say, you know, I usually, you know, when you have these investor meetings when you have like a full day of one by one. I always enjoy the meetings when investors are shooting one question after the other, because that way I make sure that I don’t forget anything. When I have to tell the same story eight times after the other or 10 times.

You know, sometimes make a joke in the morning and then in the evening I forget. Did I just make that joke five minutes ago or was it five meetings ago? So therefore I’m all fine from my side.

Thank you

[00:55:36] Tilman Versch: Okay, then you’re welcome to shoot a lot of questions at him if you’re more interested. On the Internet, you find him, Investor Relations, I think it’s also called. And then thank you very much for staying till here and thank you for coming to my next premiere in the newly upgraded home studio. It will change a bit.

[00:55:54] Steffen Schneider: Thank you for inviting us and thanks a lot for listening.

[00:55:54] Tilman Versch: Bye-bye.

[00:55:59] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like and a comment and be sure to subscribe to my channel.

Disclaimer

[00:56:08] Tilman Versch: Traditionally, I want to close this conversation with the disclaimer, so here you can find the disclaimer. It says, and please do your own work. This is no recommendation. What we are doing here is just the qualified talk that helps you, but it’s no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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