REA Group Ltd

ASX:REA

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by, and welcome to the REA Group Quarterly Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Owen Wilson, CFO. Please go ahead.

[Owen James Wilson, Chief Financial Officer]

Thank you. Good morning, everyone, and thank you for joining us to discuss REA Group's results for the first quarter ended September 30, 2018. As you're aware, the quarterly numbers we published are very much top line results, so we're restricted in the amount of data we can give. I'm going to hand over to our CEO, Tracey Fellows, who's going to give a business update, and I'll back to talk through the financial results. After which, we'll be happy to take questions.So it's over to Tracey.

[Tracey Fellows, CEO & Executive Director]

Thanks, Owen, and good morning, everyone. It's been a strong start to the year for REA, with revenue growth of 17%, delivering $221.9 million and EBITDA growth of 23%, delivering $130.9 million. This is driven to a large part by our Australian Residential business as well as the inclusion of Hometrack Australia business, which is a big data business we acquired last year. These results demonstrate, despite tougher market conditions, our customers and consumers are clearly seeing the value in the products and experiences we're creating. This quarter also had a stronger contribution from a number of the newer products in our portfolio.Let me take a deeper look at what the property market is doing. And certainly, there's been a lot of speculation around the health of the property market, and we have seen more volatility.This quarter, we've seen a 3% decline in listings nationally. However, we have seen significant variances in different markets across the country and even in some cases, within the same city. Not all geographies are being impacted to the same degree.For example, in Metropolitan Sydney, listings have declined 8% in the first quarter, whereas in Melbourne, they declined 1% for the quarter. And on the other hand, Tasmania has had a 3% increase in listings and ACT has had a little over 1% increase in listings. We are not expecting these conditions to improve in the short term, given there are state elections in both Victoria and New South Wales as well as a federal election.If I move to audience, in Australia, realestate.com.au remains the clear #1 place for property. Our audience lead remains strong, seeing 2.7x more visits across all platforms than the nearest competitor over the quarter. People continue to choose the realestate.com.au app as their preferred place to search for property. With our app being launched, on average, 27.2 million times a month during the quarter. And our app has now been downloaded 8.3 million times. We have the largest and most engaged audience of property seekers in Australia. Our growth strategy remains the same and is based on 3 pillars: Property Advertising, Lifestyle and Financial Services as well as our Global Footprint. If I look at Property Advertising first, in our Residential business, we saw the continued growth in our Premiere All contracts and strong take-up of Audience Maximiser all contract option, which was most recently introduced. We further enhanced on Match seller product, helping agents to get more qualified seller leads and helping vendors to find the right agent for them. We've sent over 5,000 leads since our launch to agents and have received very positive feedback.We've enhanced our Agent Elevate product, resulting in a 32% uplift in engagement for those agents. Now move to our commercial business. We launch a depth product offering, somewhat similar to some of our resi offerings, and have seen a significant takeup of the 2-year agreement. Our Developer business grew revenue despite the continued decline in the volume of new apartment construction product -- projects. We continue to acquire new customers and the extension of project profile duration has also contributed to the growth as well as an increase in the overall project spend as developers look for new ways to reach consumers.If I shift to our Lifestyle and Financial Services, our Lifestyle and Content offerings continues to deliver compelling content for consumers, with over 24.4 million visits since launch and 4 million visits plus this quarter alone, growing 29% year-on-year.Consumers continue to engage with our Financial Services experience despite some of the tougher lending conditions that we're seeing in the market. They're engaging with both our digital experience as well as our broker experience.Turning to our Global business. The Asia segment delivered strong revenue growth and continues to grow audience share across the region. We maintained our market-leading position in Malaysia, and we remain confident of the opportunity in Asia as a region with long-term growth potential, albeit still in it's early transition to digital advertising. As I pass to Owen, let me close by saying, we've had a very strong first quarter, and we're confident in our strategy for the year. Our market lead remains strong, and providing our customers with access to the largest and most engaged audience of property seekers in Australia continues to be at the core of this success.I'll now hand over to Owen to talk through the numbers, and then we'll take some questions.

[Owen James Wilson, Chief Financial Officer]

Thanks, Tracey. REA delivered a strong first quarter result, which demonstrates the clear value of our products and our market position. Our revenue growth of 17% reflects continued strength in the residential business and the inclusion of Hometrack, which is not included in the prior comparative period, it was also a full quarter contribution from the Smartline business compared to 2 months in the first quarter last year. The Residential result is particularly pleasing given the market conditions in the first quarter. As Tracey has said, total listings in Australia in the quarter were down 3%, with the listings down 8% in Sydney and 1% in Melbourne. These conditions are the reverse of the market conditions we experienced in the first quarter last year when we saw higher listings in Sydney and Melbourne, offset by lower listings in the other states.The revenue growth reflects the price changes, which came into effect in July, higher Premiere penetration and higher total depth penetration. We also saw stronger contribution from newer products, such as Audience Maximiser and Front Page. In October, we saw better overall listings despite continued declines in Sydney. Total listings in Australia in October were down 2% versus the 3% decline we saw in the first quarter. Sydney was down 12% while Melbourne was up 4%. It's pleasing that the lead up to the Victorian election does appear to have negatively impacted listings in Victoria.As we look towards the second half, it's worth noting the listing volume comps are softer than the comps we had in this half. There is, however, an election in March in New South Wales. The impact of the federal election is harder to predict. There is a scenario where we may see increased activity prior to the federal election, as investors seek to get in before any changed negative gearing. This scenario may also represent a good selling opportunity for vendors. The Commercial and Developer businesses both delivered double-digit revenue growth despite lower levels of new project commencements compared to the first quarter last year. The Developer business is benefiting from the new customer acquisitions in the prior financial year and the increased duration of project profiles. We also saw an increase in display advertising, as developers directed more of their marketing spend to REA. The growth in Commercial was due to higher depth penetration, offset by a small decline in total listings.As Tracey said, the Asian segment also had strong revenue growth in largely unchanged market conditions. Revenue growth in the Financial Services business was subdued, the tighter lending conditions in the residential mortgage market are well documented, with the contraction in total mortgage lending in Australia in the first quarter. It's also harder to recruit brokers who are new to broking while we have the uncertainty of the royal commission. These conditions will most likely continue until after the final report of the royal commission is released in February, and any recommendations from that have been considered by the government of today.Media revenue was also subdued, as some key segments reduced their marketing spend and the increase in Premiere listings reduced available inventory.The Hometrack business integration is making good progress, and the business remains on track to deliver the previous FY '19 revenue guidance of between $14 million and $16 million and EBITDA between $6 million and $7 million. The operating expense growth of 10% in the first quarter reflects different timing of some expenses. As we've previously stated, we manage expenses for a full year outcome, and as a result, the timing of some expenses will be different to the prior year. This will result in varied cost growths by quarter. Our guidance for the full year and for each half year is that we expect the rate of revenue growth to exceed the rate of cost rate. This will not be the case in every quarter, and quarterly EBITDA growth rates will vary accordingly.I'm going to stop there and open up the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Kane Hannan from Goldman Sachs.

[Kane Hannan, Research Analyst]

Just a few from me, please. Just firstly on the increased depth penetration that you've called out in the quarter, just if you could talk about how that compares across the various states afterwards given the weakness in South Wales? And if there's any comment you can make on how that's been performing in October? Then just around the federal election, you've commented around the potential for an increase in listings ahead of any change. But could you just comment a bit more around the potential impact of a change in negative gearing once that's being introduced and, I suppose, how you can prepare for that? And then finally, just in terms of the growth contribution, obviously [ the sudden infant ] is very good, if you can just give a bit more color around the contribution from Hometrack's Smartline in Asia in a gross number, if that's possible?

[Tracey Fellows, CEO & Executive Director]

All right. So in terms of the breakdown, as Owen said upfront, we don't do that in the quarterly reporting, so we won't give you any more color in terms of the different contributions. Depth penetration continue -- it is -- was strong and will continue until October because the penetration is really on the back of the increased contracts that we signed last year. I think you're asking specifically around Sydney, where there were fewer -- where we saw the more material decline in listings. And yes, our depth penetration continues to be strong in Sydney and indeed in Melbourne. Even in areas where we are -- there is a different level of pressure, perhaps on auctions, et cetera, we've continued to see very strong depth penetration. And of course, in the blue-ribbon areas, we have a higher yield as a result of that depth penetration.

[Owen James Wilson, Chief Financial Officer]

I'll take the negative gearing question, Kane. I think there is, if it becomes increasingly certain that we are looking at a change in government, possibly as early as May in here, but it can be as late as November. They've made it very clear that they will move negative gearing, only on secondhand properties, not on new developments and not new house-and-land packages. So we will, I think, see a reduction in investors buying secondhand properties if that is the case. It won't completely remove investors from the market. It just says you can't negatively gear, but if you're getting a yield that covers your cost, it will still be an attractive investment for investors. I think what we will see though -- and we saw this in Victoria when stamp duty was introduced in July last year on new development, we saw a big increase in activity in the sort of 3 to 4 months leading up to that as purchasers are trying to get in ahead of that stamp duty coming in on new developments. I think we'll see a similar thing with negative gearing that, if it becomes increasingly certain that it's going to go away and it's your final opportunity to get in, any investor who is thinking about buying will. And it will be a great time, I think, for vendors to sell. So we may see an uptick in activity. It's interesting to note too, though, that because the banks have tightened their lending with the investors, the proportion of mortgages in the market at the moment that are going to investors has already decreased quite significantly from this time last year. So that will, I think, lessen some of the impact of the removal of negative gearing. In terms of the contribution from Hometrack's Smartline Asia, I can't give you any more details. Hometrack is not really a seasonal business, so we've given revenue guidance. You can assume roughly a quarter of that is in the revenue this quarter and therefore -- which wasn't there last year, which has increased the rate of growth. And similarly, for Smartline, it's not really a seasonal business, but so we do get a -- there's a lag between transactions and settlements, but you can assume roughly that 1 month of extra revenue is relatively evenly spread across the year.

[Operator]

Your next question comes from Eric Choi from UBS.

[Eric Choi]

A cracking result as well, so well done. I just had 3 quick ones. Just on Developer, I guess you guys were previous guiding for the revenues to be slightly up in FY '19. I'm just wondering how we should think about that given it's currently growing double-digit. And then second one, just Domain has commented on a potential benefit from an extra week in second quarter FY '19. I'm just wondering if that will be the same for you guys. And then just last one, I think you've previously commented you were winning share from Domain in Melbourne. I'm just wondering if you think that's still the case and whether that's extended to any other states.

[Owen James Wilson, Chief Financial Officer]

Developer is doing better than we've previously guided for a couple of reasons. One is, the duration of the product continues to grow, and it's taking developers slightly longer to sell their stock. And so we're benefiting from that in increased duration project profiles. We also benefit from the display advertising. So the developers are getting quite choosy as to where they're spending their marketing budgets at the moment, and we are benefiting from that. So that was a nice lift in the quarter. The BIS Oxford forecast for the rest of the year is still a large decline year-on-year in the number of new project commencements. But as I've said, I think change is -- any changes to negative gearing may actually provide a boom in the long term for the developers because that's where you can invest a negative gear. In terms of the Domain extra week, that's not -- we don't qualify weeks, so that one has no new extra wiggle or whatever. It doesn't affect us.

[Tracey Fellows, CEO & Executive Director]

And in terms of share, I think, certainly, the quantum of our growth in revenue would seem to indicate that on marketing schedules, customers are choosing and/or vendors are choosing perhaps to invest more of their marketing schedule in the stronger of the player. And given our audience strength, I think that's worked to our advantage. So I think just kind of based on their results, that would be an indication. Our depth strength is across the states, but obviously, it's the blue-ribbon areas you see it the most.

[Operator]

Your next question comes from Entcho Raykovski from Crédit Suisse.

[Entcho Raykovski, Research Analyst]

Congrats on the results, pretty solid in tough conditions. A couple from me. Firstly, are you seeing any benefit on the resi side from longer time to sell? And just interested in whether you're capturing any of that sort of relisting, particularly as we've seen time to sell increase in various areas, particularly in Melbourne and Sydney. And then secondly, could you provide a little bit more detail on the initiatives, which are driving the increase in depth penetration for Commercial? I know you alluded to it, but just interested whether you're seeing take-up that will flow into the rest of the year.

[Tracey Fellows, CEO & Executive Director]

Sure. So maybe I'll start with the second one, and then I'll move on to time to sell. So in Commercial, we've always had depth offerings. So what we've done is created a different structure or bundling opportunity for our customers. So it's early to tell to see what the full year impact of that would be. We've had very strong customer take-up of that offer, but I think it's early for us to see the full year on the impact of how that will flow through to revenue. In terms of the advantage of longer time to sell, not particularly. So Premiere All customers have 45 days. And of course, for -- and so while there is a potential to relist, that does come with some level of vendor experience that's not ideal. Where we do see it is if somebody relist with a different agent, and then we would get a second listing for that. But I think, it's less of a material revenue driver really, and it's more how do we help manage -- help our customers manage the vendor satisfaction in that situation.

[Entcho Raykovski, Research Analyst]

Okay. Got it. And I mean, longer term, do you expect, if there is continued market weakness, for that to provide an area of upside?

[Tracey Fellows, CEO & Executive Director]

Look, I don't think a material one because I think there's a sensitivity to how you price for that. So I think -- I don't think it will be a material. I think it may help us in the upfront marketing schedule that people will tend to take some of the other additions, whether it's Audience Maximiser or some of the other products, to try and reach the broadest number of consumers when they're going into the marketing schedule.

[Operator]

Your next question comes from Fraser Mcleish from MST Marquee.

[Fraser Mcleish]

Well done on the result. And just some color, I guess, I'm trying to learn what the impact of a weaker property market is on you guys. And just what are you seeing -- are you seeing any signs of vendors actually kind of pulling back on spend because -- as prices are going down? Or is your view still the marketing is increasingly important and vendors need to be on the top product? That's the first question. And then just secondly, just on the Agent Match, any plans to start charging for that yet?

[Tracey Fellows, CEO & Executive Director]

So on Agent Match, no. No plans to charge for that right now. I think we're focused very much on creating a good experience for both the agent as well as consumers. And we think there's more we can do on that. And we're still in the early stages of that product evolution. Certainly, consumers are more price sensitive in a world where perhaps the price they're looking at selling their properties now is less than it was, say, 6 months ago. So I don't doubt there's some level of pressure on what they're spending on the marketing schedule. We aren't seeing that, and I think that's because it's imminently measurable. How many consumers are going to -- how many potential buyers are going to see it, they can see that regularly. They can see that on the kind of weekly reports they're getting. And given we have such a strong audience and, indeed, many of the vendors would be using our site themselves as they are looking for a new property, we haven't experienced that pressure ourselves from customers at all.

[Operator]

Your next question comes from Roger Samuel from CLSA.

[Roger Samuel, Research Analyst]

I've got 2 questions. The first one is just the recent talks on treaty about News Corp's alliance with Seven West Media. Can you tell us more about it? And the second question is just on the accounts. For first quarter 2019 results, is there any impact from the adoption of IFRS 15?

[Tracey Fellows, CEO & Executive Director]

So I'll take the first one, and I'll certainly let Owen take the second one. So the relationship with Seven West Media and News Corp are really in their realm. Certainly, we have a partnership with Seven West in advertising, and we've continued to work with them closely on how we market, engage with consumers, but nothing that's a deeper partnership to share.

[Owen James Wilson, Chief Financial Officer]

In terms of IFRS 15, the way we previously recognized revenue on our products was entirely consistent with IFRS 15. And so there has been no impact on our revenue recognition whatsoever.

[Operator]

Your next question comes from Eric Pan from JPMorgan.

[Eric Pan, Analyst]

Three from me, and just a follow-up on the depth. Where is that coming from? Is it mostly from Premiere All subscribers or non-subscribing agents? And then Domain recently decided to freeze their pricing in Victoria in 2019. How does that impact your pricing decisions for next year? And then lastly, any updates on the cost savings from Hometrack? Did it contribute to some of the EBITDA growth in the quarter?

[Tracey Fellows, CEO & Executive Director]

I'm going to let Owen take the last one, and I'll take the first two. So the majority of the depth impact have been from Premiere All customers, Eric. So customers who committed at the end of last year, and we continue to see that flow through in our results this year. I think Domain's decision to reduce price is really a function of them having lost some share in Melbourne, and indeed, they shared that on their end-of-year results call. And given what customers pay for ultimately is the largest audience, I think that's a reflection of some of the challenges they're having there. So we'll look at our pricing decisions with customers on continuing to add value to our customers.

[Owen James Wilson, Chief Financial Officer]

On Hometrack, as I said, look, integration is on track. And once we've integrated the Hometrack valuations onto the site, we will start to realize those synergies, which, as said previously, will be in the second half.

[Operator]

Your next question comes from Lucy Huang from Merrill Lynch.

[Lucy Huang, Analyst]

I just have 2 questions. So firstly, in terms of the Premiere All contract, are you going to talk about which states still have scope that, I guess, greater sign ons by non-subscribing agents? And then my second question is in relation to the Developer and Commercial contracts, you said that they were 2-year agreements. I'm just wondering if there's any price increases that are included in those terms?

[Owen James Wilson, Chief Financial Officer]

In terms of Premiere All penetration, it varies by geography. I mean, it is actually highest in Tasmania of all places, and then it varies by state. But there is scope in all geographies for additional customers to sign up to Premiere All.

[Tracey Fellows, CEO & Executive Director]

And then for the Commercial contracts with the 2 years, at their 1-year point, there is a price increase that's capped at a certain amount.

[Operator]

There are no further questions at this time. I will now hand it back to Tracey for closing remarks.

[Tracey Fellows, CEO & Executive Director]

So thank you, everyone. Thanks for joining the call, and for your time this morning. And look forward to talking to you again in a couple of months. Bye-bye.