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Edited Transcript of RKET.DE earnings conference call or presentation 19-Sep-19 8:00am GMT

Q2 2019 Rocket Internet SE Earnings Call and Capital Markets Day

London Sep 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Rocket Internet SE earnings conference call or presentation Thursday, September 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bettina Curtze

Rocket Internet SE - SVP of Finance & Investment

* Oliver Samwer

Rocket Internet SE - Founder, CEO, CFO & Member of Management Board

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Conference Call Participants

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* Andrew Geoffrey Ross

Barclays Bank PLC, Research Division - Research Analyst

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Marcus Diebel

JP Morgan Chase & Co, Research Division - Research Analyst

* Nikolas Mauder

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Sarah Simon

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Alexander Schlomberg;Expertlead;Co-Founder

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Presentation

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [1]

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Okay. Thank you very much for joining us this morning in London for our Capital Markets Day and update on the company and its strategy.

So let's take first a look at the current state of selected companies. As you know, Jumia is still a big investment of ours. It's a company that we founded many years ago. It's now public in New York. I think we're going to talk about, second, the company. We own still roughly 17% of the company. We own about 11% of Home & Living. And GFG, that's listed in Frankfurt, we still own 18%. So those are kind of like our remaining larger public holdings.

If you look at how do they develop, I think Jumia, you clearly see with a very, very strong growth. Africa will continue to be a market where people come online, where a lot of eCommerce transactions. And I think what you should not underestimate, Jumia is extremely strong also in payment. They have such a strong position. And if you look what Alibaba did with Alipay and look what eBay did with PayPal, once you have a very strong eCommerce platform, it's very easy to push your payment solution. And Jumia Pay is making great progress, and the company is rolling out, if you followed the announcement, to more and more countries. And we feel very confident about the dominance of this company. I think the market share of this company is extremely high. And I think they're going to be just like other companies like Flipkart in India or Amazon in the rest of the world or Alibaba. I think, yes, those models are really a horizontal platform on which you can build more and more services over time, and I think that it's clearly the #1 in Africa.

If you look at Global Fashion, I think you see also very strong -- dominant, very strong business in Asia Pacific, Australia with Iconic and Zalora; very strong business in LatAm, Dafiti; and very strong business in Russia. So I think, again, I think what we feel very good about is the dominance of this business. I think the share price is very low, but I think basically if you look at it, the trading volume is extremely small. So I don't think that is necessarily representative of the performance of the company. I think the company itself had a 16% constant FX and the same time improving significantly its negative EBITDA margin. And I encourage you to have a talk with Patrick, one of the CEOs who before ran also Asia Pacific. I think you can also see the depth and the quality of the management when you talk to Patrick or Christoph. So I think we feel very good there.

Home & Living, I think it's all known about kind of the challenges the business went through. I think it's now on the recovery path. If one reads kind of what they -- what we also say in the public market, I think we feel good that the company will recover. It still might be in total, still maybe 6 to 12 months to get to its original strength. But also there, we feel the company is making good progress. So I think Jumia and GFG, clearly on a strong growth trajectory and strong progress. And I think Home24 after the recovery, also making progress.

If you look at kind of like EBITDA margin, I think you see Global Fashion at only minus 5%. I think Jumia is a different game because basically this is really about capturing the whole market. And Home24, I think if you look at the announcements, I think there's a positive trend despite what you see here. Yes, I think more future oriented.

Especially GFG, I think you should not always only look at revenue or GMV. I encourage you to look strongly in GFG, but also in Jumia for orders. Because orders, if you focus as a company more on relevance: how relevant can I be for a customer, it really matters more the orders, yes? And I think that many people underestimate because basically to be more relevant to the customer, you need to also give him access to lower-priced items. And therefore, it's much more important that kind of the customer -- out of all fashion orders, whatever gives 20% of the fashion orders to you and therefore, you also need to give them T -- access to t-shirts or short pants or something that might have a lower average order value than your traditional goods, but the relevance is extremely good. And I think that is also, when you later look at Jumia, I think in general, number of orders is extremely important because it shows there's dominance in market share. It's about the relevance for the end customer.

And you see that same thing when you look at Amazon. Today, they deliver you even a few pens or something, things that are basically, whatever, $10, $5, $15 items or something is missing for your computer or something because they want to be relevant. They want -- when you think of buying, they want you to think of Amazon, the same as when you think of buying something. And Jumia wants to think -- to have you think of Jumia, and GFG wants to have you think of GFG. So I think a very, very important metric.

Jumia, you see it in active customers, I think they didn't print here the orders, but I think the company makes its own announcements. I think also in Jumia, originally there was also some third-party business, you see the strong growth in marketplace revenues. I think the company has extremely -- when you look at their last presentation, has a very diverse set of revenue streams from marketplace revenues to advertising revenues, something that you see kind of Amazon driving also a lot, to logistics revenues, to fulfillment revenues. So I think the company has really a very diverse set, and you see the strong growth of almost 100% in the marketplace revenue and the GMV.

Home24. We talked about it, that I think the company is on a recovery mode. You see that also with a growing -- with an 18% revenue growth and a 20% -- 21% in numbers. And what most people don't know, it has a very strong Latin American business also and that is growing 38% at constant currency. The business is primarily in Brazil and extremely strong there.

So I think as we discussed in probably our last Analyst Call, I think the reality is and I think is that the pipeline of young companies is growing but kind of in the middle, I think the companies that basically are already medium-sized is rather small. So we do not expect to lift very soon a company to the selected companies because basically we have selected companies that went now public. But most other promising companies are small still in size. And therefore, there will be -- kind of if people ask us about what's your next public company, what's your next thing, I think people need to be patient. We do not expect in 2019 or '20 to list a company out of our young companies, because they need time to develop. And you will later hear Alex with expertlead, the leading freelancer community, and I think he will share with you those -- all wonderful models making extreme progress. But those are not 2019 or 2020 candidates for public listing or for a big M&A transaction or anything of that kind which can crystallize clearly the value for our shareholders.

You see, however, the overall activity is very big. We launched a large number of models since 2018. But all of those companies, like in the past, no different to the past, take a long time.

We do have complementary investments in private companies. And we, for transparency reason, will give you an overview here. At the same time, I would say the values, you should always take with a lot of caution because they are really subject to significant limitation. It should not be read as an indication for the price that third parties would be willing to pay in future financing round, the potential trade sale or potential initial public offering. Because you see with an Uber or with an WeWork, and on the other side with a Slack or a Zoom, that sometimes private valuations and public valuations are just very difficult to forecast. On the one side, with Uber and WeWork, you have valuations below the last private more or less. With Slack and Zoom, for example, you had valuations that were significant and public markets could be higher than the private market.

And therefore, I think in today's environment, it's very difficult to clearly put the value of a private company. And therefore, I think we look much more at the operational progress, at revenue, number of orders, GMV, SaaS revenues or whatever and less at those values. And I think we can tell you if the total cost is closer to the value of them or they're right inside because I think in the end, those companies are still young, have to prove their market, they have to prove their dominance, and we just will always quarterly update you there. And the most has to do with last funding round and fair value valuations. But I think this is the set of opportunities, but I think the total value of that is difficult to determine.

If you look at the consolidated IFRS, I think we all know that its representation is very limited. I think where do the profits come from? Obviously from the sale of shares, especially HelloFresh and others. So our expectation is not that you're going to see the same in the next 6 or 12 months because many of the assets that we had crystallized, and therefore, it's not that we have a constant flow of capital gains or constant flow of other operational strong income.

I think we have many small boats and we do have the capital to support them, to operationally support them, to found them, to help them on the IT, to also invest in them. And our position currently is that we have EUR 3 billion in net cash, roughly EUR 300 million to EUR 400 million public stock. Recently shares have gone down. I mean you can -- we showed you our main shareholdings. And since these are the numbers as of August 31, I think it can be EUR 300 million, it can be EUR 200 million, it can be EUR 500 million. But public stock I think is very transparent because we show you what we own. And then we have, in our complementary lending business, another EUR 200 million roughly.

So you look at roughly maybe EUR 3.5 billion, EUR 3.4 billion, EUR 3.6 billion of liquid -- relatively liquid cash. And I think going forward, like in the past, some of that money will go into our existing businesses. Some of that will be into new business that we found. Some of that will be into new businesses where we can take potentially like Delivery Hero or something like that, a significant position. Some of that potentially can also go into public companies. I think we will watch the market. And I think, yes, the strength of the team is very strong. We have a number of offices. I think we see more opportunities. But we find ourselves at a point where generally asset prices are not cheap. I think the likelihood that it gets better from here is maybe -- everyone is very subjective and nobody knows, but probably maybe the expectation or like the likelihood that it gets better from here, which is already very good times, probably a bit lower than the likelihood that it gets a little less good compared to today. But with all that quantitative easing and so on, you probably know more about it than me. I would say one doesn't know, so let's make sure we have always enough capital.

And I think it's less actually about the market for us. It's more about finding the right thing. I think it's -- did we look at many opportunities and just did not do them because of price? Probably not. I think most has to do that we just didn't find the level of conviction to put a lot of our capital yet or the need because many of the young companies are still young and don't need that capital. So yes, what it is, and we are always very transparent with our investors, is that there's -- I think last year, I compared it like a drug pipeline. We do not have these -- those drugs that are kind of very close to becoming the next blockbuster because kind of like we have lots of young companies that still need to be tested in the marketplace, that still need many years to develop. And we are seeding the ground to -- by building more companies for the future. But they're no HelloFresh or whatever company with hundred of millions of sales and so on. That's why we won't lift one to the selected companies for quite a long time.

So our strategy has not changed at all. It's the same strategy. We build companies so we are very focused on companies from scratch, building companies, putting teams together, putting ideas together, putting -- working with them operationally to make them better in our core markets. I think our core markets are Europe, Southeast Asia, Latin America, Africa, Australia, less -- a little less U.S. or -- and very little, very, very little, China. And in our network, we basically also make complementary investments, and we support the companies also through debt.

I think what has clearly changed in the 5 years, in our basically 5 years more or less public, I think what has changed is diversity. So whereas we were probably a very consumer tech -- 90% consumer tech business in 2014, in 5 years, we changed a lot, and we have now many B2B businesses. You see basically, by number of sector, B2B is as biggest as consumer tech for us today. I think our team built the skills.

In SaaS, in software, we were -- for example, also a small investor in Slack. We have invested in a great company called Personio in Munich, which is a software business, very fast-growing, very strong dominance.

In fintech, we are in Revolut. We were in Funding Circle. We are in many -- we are in [Ioboca]. So kind of we have a very strong, I think, horizontal knowledge base today so that's what also makes us confident for the future.

I think in the last 2 years, I feel we invested a lot in building the foundation for 2025 basically where we will have good companies across many, many sectors. Property tech, obviously another strong space of ours; food tech; travel tech. But I would say especially B2B, fintech will continue to grow, and I think we have the team to do that.

So I think we don't create stories, meaning we don't feel that in a transparent communication one should just kind of like put a big vision on something. I think our situation is very clear. We have a significant cash position. We have many, roughly, whatever, like 100-plus young companies. When I mean young, it means companies that are primarily probably between 3 and 5 years of age from crystallization of value, may -- sometimes even longer. But I think on average, probably more like 2 to 4 or 5 years on average. And that makes us feel confident for the long-term future.

In the midterm future, basically it -- there are a few things that can change but primarily, we will not have a lot of surprises there, and I think the rest will all be very opportunistically. If the markets change or if a great company comes across us, we will make the necessary decisions, investments. But I would say it's a continuous development and not surprises to come.

I think that's why we put -- didn't you up another 50 slides or something because I think the situation is very clear. And I think we delivered in the past, that's why we're also confident about the future. And if we make any large investment or if we make any -- or if you see any company completely outperforming and crystallizing value or something, we will report that to the market anyway. Otherwise, I think it's for the next 3 years, for sure, kind of continuous progress of our company.

So I think before we go and have Alex present expertlead, I think we have today more time to [go on [questions that you want to get answered and things we can help you better to understand our company.

So I think we open up for any questions. I think we have to use the mic so that people in the phone can also use it. I think the colleagues have a mic over here.

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Questions and Answers

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [1]

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Any question?

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Andrew Geoffrey Ross, Barclays Bank PLC, Research Division - Research Analyst [2]

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It's Andrew from Barclays. Maybe just 2 to get started. I guess the first one is, you sold out of quite a few of your listed stakes this year. So maybe just a comment as to why, the kind of company-specific view on valuations, kind of anything on that.

And then the second question, you clearly had a lot of cash. There's been a couple of press articles about the possibility of taking the company private. So I would be interested in hearing your views around whether that's something you're interested in doing or not.

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [3]

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Yes. I think fundamentally, we are not like -- we are not a core public investor, yes? I think in the end, we are in the business of building companies and influencing the companies strongly. And if then kind of our influence goes strongly down afterwards, I think then basically it becomes ultimately just a public holding, and I think that is really independent of the performance of the company which is not core -- I think fundamental core of our strategy, yes?

With regards to the question about the private, I think the -- we never took a decision to take the company private, yes? Obviously in kind of, whatever, there are 55,000 different capital markets that actually one can do every day. I think at this point of time, it's not the strategy of the company currently to take the company private. And we don't comment (inaudible) on all those rumors and so on. I think there are rumors all the time, and we never comment on them. Currently, at this point of time, there is no decision to take the company private.

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Nikolas Mauder, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [4]

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It's Nikolas from Kepler Cheuvreux. Two questions. The first one on your decision regarding where to invest, in which vehicle because we know that you closed 2 sort of massive funds. And at the same time, there's limited investment at the level of the holding. When you close those funds or market them to the investors, what do you tell them in terms of how many investments you can undertake? While at the same time, you tell the capital markets that you do like EUR 89 million in the first half year of 2019. That's the first question.

The second one on the debt growth capital. I think there was a small change in the number from EUR 0.3 billion to EUR 0.2 billion. Is that -- was that a repayment? Or did you have to write off something? Something there -- what's happening there in the team? Is it going along well?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [5]

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Okay. Start with the second. It's all fine. There wasn't any write-off or something. I think that just goes up and down depending on companies that we support with that, yes? So that is a good business in the current environment when you see sometimes less and sometimes more opportunities, probably currently maybe they're less. I think we primarily just report it to you so that we can put the total bucket of potential cash together.

With regards to the funds, I think 2015 we announced that basically we do certain investments with the funds. And we do have, as a Rocket shareholder, the Rocket basically has carry on that. So basically beyond the equity that the company invests, which is roughly 28% of every investment there, it has a carry. Together with the carry, that gets you to maybe 45%, 44%, depending on carry structures of the total outcome if you are above a certain hurdle rate.

Again, I think sometimes there are more rumors than reality. I think we recorded about one fund from 2015, '16. And I think then we made one announcement about the next funds, and I think it's very complementary to our core business and I don't think anything's changed. But I think everything basically is very much reflected in the numbers when you had the private company in those numbers. So I think that is reflected and basically takes everything in account. Obviously not the carry because you can only do a carry when you actually made the revenues and not when you may make them in the future. Any other questions?

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Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

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Sarah Simon from Berenberg. So this number you had, the 200-plus, does that include the companies you're incubating at the Rocket level? Or are there just sort of third-party investments? That's the first question.

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [7]

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No -- yes?

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Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [8]

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And the second one was Traveloka. Can you confirm that they're doing another funding round at the moment? And what kind of level of interest do you have in that business?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [9]

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So this one does not include the incubated companies. Because most of them, in incubated companies, we have a different -- it's not at fair value but at equity. So basically, it can be a company that we incubated then we basically diluted so much they suddenly changed into fair value. So -- but let's say, on average or kind of as a general guideline, this number does not include companies where we still hold a significant stake can be incubated.

With regards to Traveloka, it's unfortunately every year the same, we cannot comment. I think it's a company that is of significant size that is leading in Southeast Asia in the travel market and that is run by a wonderful founding team. And whoever reports what is kind of, we don't comment on all those rumors. But we do have a board seat in the company. But it's a company that is strongly -- and I think the best companies are strongly managed by the founding team. CEO is Ferry. One of the other cofounders is Henry. And they -- I encourage you, if want to learn about that company, you won't learn a lot to us, so basically talk to your Asian colleagues. And I think with all those reportings and so on I would really wait until the company itself reports their something, or if whenever the company reports but not to follow too much what blogs and so on say.

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Unidentified Analyst, [10]

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[Carter with Mossman]. I was wondering if you could just comment on your thoughts on buyback. Clearly, you did quite a bit last year and the year before. But I was just wondering what drives your decision on whether you want to buy back shares or not?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [11]

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Yes. I think if -- I think over time the -- over time, basically, I do think the company considers to buy back more shares. I think a decision has not been made. If their decision will be made, there will be a normal ad hoc and so on. So I think historically, we've been in a situation where we bought back shares.

I think if you look at the different values, I think it's basically at certain levels. You basically have as a company, the size, cannot -- doesn't make sense now to buy back more or does a buyback makes more sense to invest in new young companies. I think historically, probably the buyback was an easy answer. I think, whatever, at EUR 25 the market cap of the company is around EUR 3.8 billion. So if you look at basically -- if you look at -- take the cash level and so on, basically, that is, whatever, like $3.6 billion. And as I say, kind of that can fluctuate with the public market with, say, with current share price maybe -- might be more $3.5 billion. And then basically you have to form basically your view on the young companies. And this slide here about the private and then basically you know you come to the conclusion that it's not a must-do decision to buy back shares. So I think my statement is, is the company likely to buy back shares over the next 5 years? Yes. Does it have to happen this year or next year? I think it all depends on market conditions where we will act in the interest of the shareholders, but I think it's not a must-do for the company. It's not that necessarily a huge valuation gap or something that is a must-do decision.

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Marcus Diebel, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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Marcus Diebel, JPMorgan. Maybe following up on the question on cutting down your stakes. The current stake, Jumia, GFG and Home24, you mentioned, can you give any view on this, how such did you see this? I appreciate you can't tell us much in detail but how do you look at them as a really long-term core investment to you? Or do you think over the long run we'll see a potential reduction here as well?

And then secondly, you must get a lot of pressure from shareholders on the question of whether selling down and impacting the liquidity of this quite significantly with the share prices to follow. Is that really in the interest of Rocket shareholders to sell and keep the money short term on the balance sheet? Given what you said, it doesn't sound like there's a large investment to come from what is considered for now. So how do you justify this strategy?

And then lastly, in regards to Rocket and other players in the space. I mean SoftBank, clearly investing a lot in different companies these days. Do you feel that's the only way to get assets to repay up? And how can Rocket actually compare -- or compete against these kind of players in the current market of [inactive] interest rates?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [13]

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So we see Jumia and GFG has still a lot of potential. Remember, they are markets where the average penetration of e-commerce is so much lower than in Europe or U.S. or China. So the markets in Africa obviously have, relative terms, extremely low penetration rates but also GFG in LatAm, Southeast Asia, Russia, I think there's a lot more growth to come. So I do expect that the company's ownership is going to be very high also in the future. So I think it's a very, very fast growth market there.

With regards to balance sheet and cash levels and competition, so I think let's be very clear, we cannot compete with a SoftBank, yes? I think that is different league. That is a different business model. That is a different game. It's the same as you would certainly ask, whatever, who in Europe competes with Google or something? That's a different channel.

I think if you put things in perspective, for example, in Europe in itself, I think to have EUR 3 billion in net cash and to be able to create -- to support companies like historically Zalando or Delivery Hero or others, I think you saw, I think, with the success of Delivery Hero, with the success of Zalando, with the success of HelloFresh, that also a few hundred million [store] company can make a big difference. And if you look at the size of the funds that maybe traditional BCs have in Europe, EUR 3 billion net cash plus some funds from third parties is a significant position. And the honest answer, I think, is just a wide opportunity where management team is still convinced we need to come along. And the transparent answer, I don't know when it comes along. It can come out of the existing incubated companies. It can come out of complementary investment. It can come with a new opportunity. And that is also the answer with the shareholders. And I think our long-term shareholders feel very confident and don't want to buy back all the time shares or to distribute share -- cash to the shareholders or something. But obviously there might be a group of shareholders that say the company has too much capital. But I would say look at the cash pools of Apple, Microsoft and so on, they also keep a lot of cash still to be ready if they suddenly have to buy, obviously in their sizes, different leagues of companies. But I think we don't want to go back to the market if you suddenly want to invest, again, EUR 800 million in one business. And I think this independency of the moods of the capital market, the independent is for us a big value. We value highly that we don't have to go to outside capital, at the same time it could happen. Let's say -- I mean, I don't expect it but 5 years is a long time frame. If you look between here and 2025, maybe there will be one day an opportunity so big that we even go back to the public market. But I think, in general, we like the independence. We like the flexibility. We believe in a tech market that will grow still for 20 years to come. So there will be many opportunities. And maybe one day, there will be an opportunity -- will be even a situation where capital means something again. I mean in today's world, obviously, the value of capital has decreased. But I think we are in a fast-growing market and if something ever change on macro and kind of the groups that have significant cash reserves might be able to take advantage. But I agree and I clearly say that to our investors. It's a mid- to long-term strategy. So it might be not the right -- like the perfect strategy for the next 3 years. It's a strategy built more around 5 to 10 years, and it's now my 20th year in kind of building Internet companies. I have an intention to do another 20 years. So I think that's the way we look at this company and that I think where -- while it fits the mid- and long-term shareholders, but may not be perfect for the shareholders that have a 2- to 3-year window.

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Nikolas Mauder, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [14]

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Nikolas again. Following up on what we discussed. You said that often you don't have the conviction to make a large investment. Can you maybe name the top 3 reasons why you don't make investments like over the array of investment opportunities that you've seen in like the recent year? Yes, just that would be interesting.

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [15]

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I think one of the key reasons is the competitive set, so meaning kind of like the level of dominance that we think this company can achieve and that it can outcompete the others. I think it's often the reason why we don't feel [is it.] I would say then ends with, it's a can-do investment, whether or not a must-do investment. And I think this is always a very difficult question. But I think we feel if we deploy a lot of our capital, it needs to be a must-do investment. And I think that's what we felt with Zalando, HelloFresh, Delivery Hero and others. And I think we have a couple of them where we feel very confident and we already put significant capital in a company called Away Travel. You saw in the history of Traveloka, those are companies where we put significant capital already. To some extent, we couldn't put more.

But I think there is some company have that high-level conviction for us, I think we probably don't see enough or we cannot put enough in the ones that we have that high conviction. One of those 2, the competition I think is one.

What's the second most frequent reason? I think -- yes, I think the next is probably that somehow valuation doesn't get us there. They're basically can-do. The company is a must-do. But kind of like at this valuation, it feels like we're really betting that the market stays like today. And so we ask ourselves about that risk. And third, a lot of other things. Could be unit economics, could be not complete management team, many other things. I would say, number one is competition. I would say for the right company, we're willing to pay up. I think people, when we invested at EUR 600 million HelloFresh to build out our shares, people look at it, was that right? We need to deliver, people ask us, yes. So I think we are willing to pay up for the right company, but we need to have a very strong conviction that they have a huge market ahead of them, that they have a very strong competitive situation and do believe that they already own a lot of that market. And it needs to be at a valuation where we basically feel we can still make a lot of money. But I tell you, we've had that conviction and we had other co-investors, other people who did have a different conviction so that they did -- they ask -- so in the end, it's still very subjective. And we also have obviously a lot of companies where we made the wrong decision where basically we were not brave enough or didn't have the same level of conviction as others. And I think it plays in all ways. And I think probably we did not find enough -- with enough conviction or the few that we have high convictions couldn't put enough money in. Any other questions?

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [16]

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Operators, can you please open up the line to see if there's any questions from the phone?

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Operator [17]

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(Operator Instructions) First is from John King of Bank of America Merrill Lynch.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [18]

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Oli, just a question on -- I guess your focus, you mentioned the successes of things like Slack relative to Uber and WeWork obviously trading below their last private round valuations. I mean one thing that obviously unites those anecdotes is that software is, in some ways, outperforms the Internet names, and certainly, I think we've seen that in Europe more recently. And so, I guess, I wonder whether that's reflected in your portfolio and how you feel about -- you mentioned consumer Internet. Do you feel like going forward, we could see Rocket so much more as a Constaff investor than a consumer Internet investor? And I guess do you have the right expertise to make that transition, if so?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [19]

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I think it's a good question. Yes, that is our goal. I wouldn't say either/or, meaning not consumer or B2B or software. I think we also want to be a leading software investor. Slack, Personio, a lot of companies, I think, speaks for that itself. I do think we have the team and the competence. And last, but not least, we have for many of them the customers because many of our companies are customers for us to build a software company or to strategically invest in other. I think we can give them a lot of access to many of our companies and we have a deep understanding of, if their software performs or they have a good product market fit.

So I think the goal in the next -- until 2025 is to be a very strong software investor. I'm always careful with this trend. I think there will be great consumer companies also in the next 5 years. There will be great software companies. There will be great FinTech companies. So I think you saw in the presentation that we are very horizontally positioned today. And for example, expertlead is a B2B company with many of the leading Dutch companies, leading large German-listed companies being clients with very strong growth, with a very big market, and it's more of a B2B software community business than it is a consumer tech business. So I think we want to be both. And we would have no issue of putting EUR 100 million or EUR 200 million or EUR 300 million also in a software business or building a software business and supporting them on their way. So I think yes, as well as.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [20]

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And another question on your investment outlook. I mean you have been -- you have a strong track record in investing, obviously, in start-ups and young companies. But would you consider going forward investing in perhaps older businesses that essentially you think are underneath their fair value and that you could add value towards? I mean is that on the agenda now for you to principally branch out into more maybe mature businesses?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [21]

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I think we do have a situation that the company never had before, that we have a significant base of capital that, with our knowledge of operational companies, that allows us also for opportunistically invest in undervalued companies or mature companies or so on. I think we will always have a focus on growth. So I do think it's very unlikely that we are a value trader or that we say this company, that's a good bargain to make. I think in our DNA of this company is growth across many sectors. So I think it's more likely that we will pay up to a company, be it in private or public, that is delivering strong growth. I think it's less likely with really mature businesses. So I think growth is still very important. Obviously, growth can be 20% per year, but it can also be 50% or 100%. I think, overall, we are not a technology value investor. That's, I think, not our core DNA and what we're good at.

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Operator [22]

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And we do see another question arising from (inaudible) Asset Management.

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Unidentified Analyst, [23]

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Just a technical question on your outstanding shares. Because the difference between issued and outstanding according to your website is 1.7 million shares. But you have bought back in total 4.6 million shares in '17 and '18. Just wondering whether that number is updated and correct?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [24]

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I think it's correct. I think it has to do with some of those shares that have been canceled and others have not canceled yet. That's the German legal process that's happening. I think you have to generally assume everything what we bought back will it at some point of time be canceled. A big part is already -- the rest will be done at some point of time.

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Unidentified Analyst, [25]

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Okay. So if I take issued and subtract 4.6 million shares from that, that gives me the number -- the right number should you cancel all bought-back shares, is that correct?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [26]

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Yes. You should always kind of like -- kind of assume what we bought back is canceled and I think this 1.7 million, as you point out, I think is the uncanceled number. So basically you should subtract that, yes.

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Unidentified Analyst, [27]

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And the 1.7 must -- is obviously the canceled and the difference to the 4.6 is the difference which hasn't been canceled yet, I guess?

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [28]

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I think my colleague Bettina will sort that out. One second.

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Unidentified Analyst, [29]

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Okay. And do you include the bought-back shares which have not been canceled in your public stock?

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [30]

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So the right answer, so for the shares outstanding, we have 150.7 million. You'll find it on the website. And the issued share capital is EUR 152.5 million.

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [31]

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Right. But the difference being treasury shares.

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Unidentified Analyst, [32]

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Okay. You've bought back 4.6 million shares, so it means there's another 3 million which you could cancel potentially?

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [33]

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No. Some have been canceled and what's currently outstanding, so if you want to get to a market cap, you take the 150.7 million times the share price.

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Unidentified Analyst, [34]

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Okay. And the other 3 million shares, are they included in public stock or...

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [35]

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I mean the others are treasury shares, right? So the difference between the EUR 152 million and the EUR 150 million is treasury shares.

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Unidentified Analyst, [36]

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Okay. They are not included in your calculation of public stock?

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [37]

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No.

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Unidentified Analyst, [38]

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And they could potentially be canceled?

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [39]

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Yes.

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [40]

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I would always look at the 150.7 million or something. Yes, that is the number. If it's canceled or not, it's just a matter of time, but it will all be canceled. Either, they are held today in treasury.

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Unidentified Analyst, [41]

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Yes. But just to understand -- to make sure I don't misunderstand. If you cancel the other shares, you'll end up at 147.7 million shares? That's what I ...

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [42]

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I think we end up at 150 point ...

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Bettina Curtze, Rocket Internet SE - SVP of Finance & Investment [43]

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I think I'll call you back off-line. But if you cancel all the treasury shares, we will still have 150.7 million shares outstanding.

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Oliver Samwer, Rocket Internet SE - Founder, CEO, CFO & Member of Management Board [44]

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Okay. I think, take a look at expertlead to see kind of what kind, especially with the B2B focus, with the kind of a young fast core company as we do, that is our future. As I said, midterm, 2, 3 years. It's not the way you have to look at Rocket. We're having a mid to long-term strategy based on our past success and based on our competence that we have in the company. And we will update you whenever we feel there is a strongly outperforming company, there is a huge opportunity, there is any change in strategy. But I don't think there is an expected change of strategy to come in the next 5 years. Obviously, we look at the market. But I do think we have a strong position. And we the team, and the drive and hunger. And in the same time, we don't want to make mistakes, 1 or 2 many mistakes we make every day, but not too many. Thank you very much.

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Operator [45]

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There are no further questions with the telephone lines.

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Presentation

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Alexander Schlomberg;Expertlead;Co-Founder, [1]

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All right. Good morning, everyone. I'm Alex. I'm one of the co-founders of expertlead. Before talking a bit more about expertlead, a short introduction of myself. So I have a background in management consulting before founding expertlead with my co-founder Arne and Rocket. I worked for McKinsey and did a lot of digital and strategic transformation. And the common observation doing all of these projects was a pretty obvious one, which is, really, all companies, regardless of how successful they were on which industries they were operating, didn't have the right access to the right tech people. So basically, all big corporates had great ideas on how to digitize, they have very sophisticated IT strategies, a very complex IT road maps and theory but they didn't have the right amount of tech talents to actually implement this. And then that's where expertlead comes into the game.

So what we do with our tech freelance community is we provide the skills and the knowledge of our tech freelance communities to companies and we help companies to realize their digital agendas.

And the special thing about us is it that we do not have any kind of technology freelance in our community. We really focus on the very best. So we developed a very complex and sophisticated quality screening process which allows us to identify on a very objective scale who are good coders, who are best coders and who are the very best coders. And we only focus on the very best one. And in the end, we only accept the top 5% of all tech freelancers in our community.

So think about our community like a place where there are excellent software developers, data scientists, the UI/UX designers, technical product managers, technical product owners, scrum masters. So basically, all kinds of people you need to realize complex IT projects.

And then our mission at expertlead is to enable the world's best tech freelancers to become even better. So as mentioned, we gather outstanding talent into our communities and we give them the opportunity to get even better. So the idea is, good guys together in one community learn from each other and get even better. So we established lots of knowledge exchange mechanisms within our community with off-line events, with online events. We have peer-to-peer managed exchange sessions to really make sure that knowledge gets transferred within the community. And at the same time, as also mentioned earlier, companies can get access to this highly qualified pool of IT individuals in which the freelancers can, again, further -- get further experience to get better in what they're currently doing.

The very important thing to note upfront among expert leaders that we are not another job platform. So it's not like people come to us to find a new job or a new project. We are much more, so -- but we are a -- the 2 lines that you see here. On the one hand, our main purpose is to serve this community of IT experts. And on the other hand, to serve our clients, to really find and assess the right techies that they need for their own individual IT projects. So what does it mean in more detail?

Starting with the community. So as you can see on this slide, we have, let's say, 5 dimensions that define our community.

So #1 is the peer-to-peer quality review. So we leverage the knowledge of our community to assess new applicants into the community. So basically, whatever someone wants to enter, let's say a software developer, he needs to do certain exercises, coding challenges, personality screenings and also peer-to-peer iterations with the live coding exercise with someone of the community, so that in the end, everyone who is part of the community is really outstanding in what he is doing. So other community members have the guarantee, whenever they exchange knowledge or they collaborate with someone within the community, they are actually operating with one of the very best.

The second dimension is related to content. So we know that these tech guys, they love to code. But they hate to do admin, they hate to do customer acquisition, they hate to do invoicing, they hate to do contract setting. So that's all taken care of from the expertlead side, and our community members don't need to hassle with that and can fully focus on coding.

Thirdly, all freelance in our community only get vetted customer projects. We're in this nice situation where there are always more companies who need good freelancers and good freelancers that are available, so we can really only select the very best, the most interesting, the most challenging projects to all our community members.

Fourthly, we have an ecosystem of relevant freelance services. So basically, everyone who's part of our community get access to, let's say, freelancer supporting services. For instance, discount on freelance insurance, preferred access to freelancer bank accounts, discounts on freelancer [indiscernible] and the like.

And then last but not least. We know freelancers are hardworking, and we make sure that they always get the payment on time. We don't make any compromises here. And we take care of the whole billing administrative part that the freelancers get paid on time always without compromise.

Looking on the client side. As mentioned, we also put lot of emphasis on really helping companies on an individual scope. So we not only find the right tech people for the companies, but we assess them as well. So companies who work with our freelancers can only look at the personal shifts because they know all the candidates coming from our community have a very high technical fit because they pass the thorough quality screening process upfront. So companies get, on the one hand, access to our community. On the second dimension, they actually know that everyone is quality tested and belongs to the very best in their respective fields. They get, thirdly, access to our commitment in a very fast way. So normally, we're able to match freelancers and companies in less than 48 hours. Of course, big corporates like to have dedicated counterpart and they find it within our company. And of course, in the end here, also, we take care of all the admin part, that the company has a very hassle-free process and setup. We do contracting. We do invoicing. And companies can just focus on working with the freelancers to deliver their complex IT project.

Why is the [full] market so interesting for us? You can see it on that slide. So there's a significant change in the whole workforce demographics happening, right? So especially the tech talents is moving into self-employment, into freelancing.

Taking a snapshot of figures. Workforce in 2017 shows that 1/4 of the field workforce was working on freelance basis. And it's actually estimated that in 8 years, so by 2027, the majority of workforce will comprised of freelancers. And then, of course, some companies and some markets are always a little bit faster than others. But if you look at Google, for instance, who are early adapters of new trends, they already announced the last year that they have more freelancers than full-timers on the payroll. So it's not like there's a small group of individuals who are doing freelancing. There's actually a massive change in the whole workforce demographic happening, and we want to be the ones that position ourselves early enough to be the go-to place for freelancers going forward.

So with this ever increasing amount of freelancers and then also the increasing complexity of IT, the quality screening becomes very important. And as I mentioned in the beginning, we have developed a process to really identify on an objective and scalable way who is good, not good and very good. And the top 5% make it into our community. And this quality screening process includes a couple of steps.

First step is on experience and personality screening where we check, do the people in our community can communicate well? Do they speak the languages that they have on their CV? Are they able to work efficiently in teams and this kind of activity?

Second of all, we do coding assignment. So basically, everyone who wants to be part of the community needs to do a 3-hour homework assignment where we can see on a objective way, is the code well written, is it smartly written, is it well documented, is it efficiently coded? We can test it automatically.

And then this people who passed that gate are coming to the technical peer-to-peer interview, where people from all communities do a live coding exercise with the new applicant. So in this session, we really evaluate 2 things. Number one is, did this person really do their homework assignment on his own, or did he get help or did he get some copy-and-paste code snippets, and by asking the right questions you find it out easily. And secondly, we assess how someone thinks strategically about code. So is someone experienced enough to not only have one coding solution, but is someone able to provide multiple coding solutions to a given project.

And then last but not least, and one who's part of our community knows that we have a continued quality assessment. So every freelancer who does a project with the client gets a rating after the project. And only the very best ones with the highest ratings are allowed to stay within the community.

So to all these steps, we can really guarantee that we only have the top 5% of the individual applicants on our network. And it's not a marketing slogan. Actually, currently, it's less. I think currently we're at 3% or 4% of people who pass our tests here.

Well, I've mentioned earlier, the community only focuses on tech, so we have all software development, and all program languages and all frameworks. We have data scientists, technical project managers, product owners, UI/UX designers. And then one additional thing I didn't mention is the Beta [comms] we're running at the -- on the vertical of penetration testing cyber security. So basically, we have very soon freelancers that hack into companies security mechanisms and find loopholes. And then, of course, in the end, talk to the companies and address to fix these loopholes.

And I think so far, as you can see on this chart, this whole community grows. The activities have been quite successful. Our community is growing constantly. We are a young company. We started in January 2018, but then the community numbers are growing quite fast, 73% quarter-on-quarter. The same on the delivered project volumes. So in total, even though we're just operating since 1 year, 9 months, we delivered more than EUR 5 million of project volume, also growing constantly, currently with 59% quarter-on-quarter. And I think, at least for me as the Managing Director of this company, yes, growth is, of course, important. But especially for a young company, it's a much more important thing currently is that the customers that we have are very satisfied with our services because these are the guys who bring additional customers in the future.

And then what we can see from the selected customers here on this chart is that our quality screening really works and the constant feedback we get is that our freelancers are extremely good in what they're doing, and hence, our customers are coming back very often, as you can see on the top right corner.

We're a young company and projects last between 3 and 6 months. So even though we're just operating 1 year and 9 months, customers already come back 3 times on average. Keeping in mind that many customers are first-time customers and the project is still running, we know that this numbers will go up because they never had the chance to get back there yet.

And what we think is really interesting and what we're also proud of is that we have a very broad range of customers. So it's completely industry and price agnostic, because in the end, everyone is good techies, right? So we have [stack corporates.] We have SME clients. We have small scale-ups. We also have start-ups. The only good thing for start-ups is -- I mean, I'm running a start-up myself. And very often, start-ups do not have the money to afford top 5%. But if it's a funded start-up, it's also a part of our target group. And in the end, as said, completely industry and price agnostic and one who needs good techies, they can come to us and work with us.

Yes. I think that's it. So I think so far, it has been a very interesting journey. Started in January with my friend and co-founder, Arne. We're 2 guys. Now we are around 50. By end of year, we'll be 60 people. We are fulfilling. It's a super exciting market. And then I think lots of future growth to come with our team. And then we are very much looking forward to achieve further milestones to go with Rocket and also to additional investors that joined our team recently.

Yes. I think that's it. Thank you very much. Any questions?

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Questions and Answers

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Unidentified Analyst, [1]

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Can you talk a bit about the competitive landscape because XING bought a company called Honeypot? Is that one or what you'd consider to be the competition?

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Alexander Schlomberg;Expertlead;Co-Founder, [2]

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No. Honeypot is focusing on full time employees, right? We are focusing on freelancer. So freelancers come in on a project basis. And the talent pool is completely different. And the chart we've seen where the whole workforce demographic is changing toward freelancing, it's only on the contingency work, right? Like freelancing project-based work. And Honeypot is only doing full-timers.

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Unidentified Analyst, [3]

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And on the [seel] investments, should we take that as an indication that you plan to go -- I mean your customer base locally, it's primarily in Germany. Can they be a platform for you to expand internationally?

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Alexander Schlomberg;Expertlead;Co-Founder, [4]

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Definitely. Definitely. I mean when we did our Series A with 2 new investors, we had 2 wish candidates and both wish candidates came into the team. So one, a strong German [indiscernible] with all the background in HR tech, and one international global strategist like [seek] who can help us in the future to realize the global potential that we have, right? Because the cool thing about our community is, it is already global, all right? As you said, the customers are mainly in the DACH region still. But most of our projects are on the remote basis anyways, right? So it doesn't really matter where you write the code, if it's just next to each other or if you're on other side of the planet. Hence, internationalization for us will become pretty easy because we just need to find new customers in new countries, but we can leverage the same community because the community is already on a global scale.

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Unidentified Analyst, [5]

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Maybe following up on this. It's quite interesting, you can be so international. What would you say to share in terms of like employees who are what you're referring on the platform coming from India and China? And how do you think this will actually develop? Because with my view, obviously beg your pardon, that the freelance market is very strong right now. But with the mighty flood of very high qualified people coming into the market in over the next 10 years and then the demand settles, but that's basically a helicopter view, maybe not the right view.

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Alexander Schlomberg;Expertlead;Co-Founder, [6]

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Yes. I mean our current, let's say, split of community members is still mainly Europe, but with the increasing share of Easter European (inaudible), right? Because yes, the number of [instances] will increase. But then the need for quality screening increase with the same rate, all right? There are lots of very talented developers in Asia and in India. But with the increasing amount, it gets more and more important to identify the few very good ones, all right, that the companies would like to work with. And that's what we do day in, day out, right? So the cool thing with us is people can get access to Indian developers, but they do not need to screen 40, 50 profiles themselves because we did it for them. The guys who are in our network are, on an objective base, top 5%, and companies can directly start working with them, while at the same time, of course, taking advantage of much lower daily rates, but the quality level is the same. So that's definitely our long-term strategy, to increase the Eastern European and, let's say, low-cost country pool freelancers much more, because the quality is the same, but daily rates are much cheaper.

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Unidentified Analyst, [7]

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Great presentation. I like the idea, now if you succeed. The questions would be, you focus on the top 5%, i.e. rock stars, right? To what extent does your business idea rests on the assumption that these guys will remain rock stars, i.e., coding will not get commoditized in the future, with all these platforms where you can get snippets of code, if these evolve? I think there was an acquisition in the U.S. where exactly that was done like commoditized code. Will that diminish the value of your platform? And secondly, assuming that it stays like this, how can you be sure that not rock stars, but like that the Neymar of coding will stay on your platform and not hire a team of people actually getting him projects? What's the advantage of outsourcing this to your platform?

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Alexander Schlomberg;Expertlead;Co-Founder, [8]

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Yes. So starting with the first question. Yes, code is getting commoditized. It's easier and easier to do, let's say, building blocks of codes and less and less human interaction required for a standard code method, right? So basic things. The things we work on are very complex things, right? They're all individual software solutions for big corporates. There are no such thing as I can copy-paste certain elements from the different projects and reuse everything in my new project, right? Everything is customized, tailor-made. And the more complex a certain IT project get, the less you can reuse these building blocks that you mentioned. All right? So we see, clearly, a disadvantage for companies that do not do quality screening, the companies that do search matching, like for instance -- there are lots of other providers, right, that do quality screening. And they will get a big problem from this commoditized code snippet, yes? So the 95% of the other code, people in that part of our community have much higher risk of being obsolete, right, because they can't do this very complex things that the top 5% can do, all right? And if anyone is building this building blocks, and it's the top 5% who is building them. So we don't see any risk of this having an impact on our community.

And the second question, the Neymar of code, as you said, so the select coders, why do they like working with us and do not do these activities themselves? First of all, there's more than just getting projects from us, all right? So that's the whole idea behind the community, right? That this whole topic about knowledge exchange and being part of the new community, right? Getting project is one channel. And to be honest, everyone in our community doesn't have problems getting projects. So if they want, they can continue with their old clients. They can always work on previous projects because the customers love them, right? It's not the main motivation to be part of our community. So yes, they have to -- additional channels to get more choice in the projects, which is cool, which is relevant for these guys, but the biggest advantage actually comes from being part of this new community. And learning from others were also excellent to become even better. And I think your example fits perfectly well. So I think Neymar alone and the soccer pitch doesn't have any value. He needs 10 additional players to be successful. And the -- in our community, people find additional players to train together and get even better and be part of this unique network in the end. Yes? Okay. Great. One more question.

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Unidentified Analyst, [9]

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In terms of the business model, you take a percentage of the -- what the [guy] makes?

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Alexander Schlomberg;Expertlead;Co-Founder, [10]

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Exactly. It's all commission-based.

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Unidentified Shareholder, [11]

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In what percentage?

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Alexander Schlomberg;Expertlead;Co-Founder, [12]

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It's high. I mean we are in a premium segment, numbers are confidential, I wouldn't like to share them, but it's very high. So it's 25% and up, depending on the project duration, the project length, the project complexity and the number of people involved.

Okay. I think if there are no further questions, we are done. And yes, thanks for listening.