REA Group Ltd

ASX:REA

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by, and welcome to the REA Group Ltd Q1 Financial Results Conference Call. [Operator Instructions]I would now like to hand the conference over to Mr. Graham Curtin, General Manager of Group Reporting. Please go ahead.

[Graham Curtin, Executive Manager of Financial Reporting]

Good morning, everyone. Thanks for joining us to discuss REA Group's first quarter results ended 30 September 2021. Before we commence, I'd like to acknowledge the traditional owners of the land on which we are hosting our meeting in Melbourne, the Wurundjeri people of the Kulin Nation, and pay our respects to the elders past and present. As you know, our quarterly numbers are our top line results so we're restricted by the amount of detail we can provide. This morning, our CEO, Owen Wilson, will provide a brief business update. Then Janelle Hopkins, REA's CFO, will talk to the financial results for the quarter. Following this, as always, we'll be happy to take any questions you may have. For now, I'll hand over to Owen.

[Owen James Wilson, CEO & Executive Director]

Thanks, Graham, and good morning, everyone. REA Group has delivered an exceptional result and made an excellent start to the new financial year. The result is particularly impressive given the long lockdowns in Sydney and Melbourne. Revenue for the 3 months ended 30 September was $264 million, an increase of 35%. And EBITDA from core operations, including associates, was $158 million, an increase of 25%. Excluding acquisitions, revenue growth was 22% and EBITDA growth was 24%. The strength of the Australian residential property market was clearly on show during the quarter despite the lockdowns across the East Coast. After modest year-on-year declines in July, national listings increased 11% for the quarter with Sydney down 7% and Melbourne up 79%. Melbourne's growth rate reflected the impacts of the lockdown in the prior period. As we enter the new financial year, our core strategic objectives remain consistent: providing our customers with access to the largest and most engaged audience of property seekers; delivering unparalleled customer value; providing the richest content, data and insights to empower our customers and consumers; and creating the next-generation of property-related marketplaces. Once again, Australians demonstrated their love of property with a growing number of people visiting realestate.com.au for all their property needs. We received 129 million average monthly visits, up 13% year-on-year. This is 3.3x more visits than the nearest competitor. Our app also performed strongly with average monthly launches of over $58 million, a 17% year-on-year increase. We have an extremely loyal cohort of property seekers. On average, 12.6 million people visit our site each month with a record in July of 7.3 million people choosing to use realestate.com.au exclusively. Added to this, our audience has extremely high intent, underpinning the incredible growth in buyer inquiries delivered to our customers, up 61% year-on-year. Our commitment to delivering highly personalized experiences resulted in a number of consumer highlights during the quarter. Our goal is to convert Australia's largest audience of property seekers and owners into realestate.com.au members. We do this by delivering the right experience at the right time, which, in turn, drives trusting relationships with our consumers. realestate.com.au's membership base experienced strong growth, increasing by over 30% year-on-year. Pleasingly, we also saw a 23% year-on-year increase in the engagement levels of our members, accessing features such as our property owner dashboard. Using the powerful combination of consumer behavior data, property supply data, content and calculators, our property owner dashboard is assisting owners in making decisions related to selling, renting, renovating or refinancing their property. Throughout the quarter, we averaged over 200,000 owners engaging with the property owner dashboard each month, driving a growing number of leads to our customers and our Financial Services business. The number of homeowners tracking properties also continued to grow during the quarter with total owner tracks reaching a new record in September, increasing 51% year-on-year. Looking at our rent segment. realestate.com.au remains Australia's #1 place for rent. Our focus on building the next-generation rental marketplace is centered around seamlessly connecting property managers, tenants and property owners. We delivered a number of innovations during the quarter. Our new centralized rental application offering delivers a faster, more efficient process. In July, we released utility connection service for renters within the Ignite platform. And we launched our new rental inspection feature, allowing agencies to generate QR codes. This allows consumers to easily verify their attendance at a property inspection and improves the overall ease and efficiency for property managers to process applications. Turning to our customers. One of the biggest drivers of our strong result was the record penetration of our top-tier advertising products in both Residential and Commercial, along with continued growth in our add-on products such as Audience Maximiser, the brochure and property showcase. This is testament to the fantastic effort by our customer team in Q4 FY '21 and the exceptional value these products deliver to our customers. Our new Connect offering, which helps agents to attract, nurture and convert seller leads, continues to resonate strongly with customers. We saw a 200% increase in agent signing up to Connect on the prior quarter, demonstrating the pace at which the industry is adopting digital solutions. Our Financial Services business had a pleasing quarter with revenue increasing due to strong settlements growth. We also continued to grow the number of brokers across the Smartline and Mortgage Choice networks. Since completing the Mortgage Choice acquisition, we've made excellent progress integrating the businesses, reaching a number of key integration milestones. In October, we announced that our combined broking business will operate under the Mortgage Choice brand. This will result in the SmartLine brand phasing out following a transition period. The combined business will also transition to a single broking platform in 2022. Turning to our investment in India. During the quarter, we rebranded Elara Technologies to REA India. India continues to rebound from the severe impacts of COVID experienced earlier this year. On the back of these conditions, REA India performed strongly. Record listing volumes on our flagship site, Housing.com, were achieved in September growing 33% year-on-year. Housing.com also delivered excellent audience growth for the quarter with visits up 65% year-on-year. Janelle will talk to the results of our international investments in more detail. Turning briefly to market conditions. With COVID restrictions now lifted in Sydney and Melbourne and clear road maps out of lockdown announced, things are returning to more COVID-normal state. On the policy front, we've seen APRA introduce total loan serviceability test, but this change will only impact the borrowing capacity of a small number of buyers. If further changes are made to address house price inflation, this could slow listing volumes. But conditions are ripe for sellers to list with confidence high and buyers remaining out in force. In October, we saw our highest ever visits to realestate.com.au, reaching an incredible 145.5 million. We also had record buyer inquiries, increasing 49% year-on-year. National listings also grew strongly in October, increasing 16%. These excellent market conditions are underpinned by low interest rates and healthy bank liquidity. As Australia opens up, the return of foreign students and the resumption of immigration, coupled with the supportive lending environment, should see this positive momentum continuing to 2022. I'd now like to hand over to Janelle to talk through the financial results.

[Janelle Hopkins, CFO & CEO of Financial Services]

Thanks, Owen, and good morning, everyone. REA has delivered a strong result, which pleasingly saw revenue growth in all Australian segments. We have provided group results in the ASX release for the first quarter and also growth rates excluding the REA India and Mortgage Choice acquisitions. Revenue increased 35% to $264 million. Operating expenses from core operations increased 49% to $107 million. And the group delivered EBITDA, including the results from our associates, of $158 million, up 25%. Excluding acquisitions, group revenue increased 22% and EBITDA including associates increased 24%. After a soft start, we saw July national listings down 3%. The Australian residential property market again demonstrated its resilience during the quarter. Despite lockdowns in Sydney, Melbourne and Canberra, national listings ended Q1 up 11%. Sydney listings were down 7%, which is impressive given the whole quarter was spent in lockdown. And Melbourne listings were up 79%, assisted by the weak prior year comparable due to last year's lockdown. Australian Residential revenue increased for the quarter, benefiting from increased depth and Premiere penetration following a very strong recontracting effort from our sales force in the June quarter, listings growth, the contracted price rise from the 1st of July and continued growth in add-on products. Turning to Commercial and Developer. We were pleased to see growth in revenues despite the impact of Sydney and Melbourne lockdowns with Commercial revenues benefiting from a 1st of July price rise and increased depth penetration. Developer experienced a sharp decline in project commencements, down 37% year-on-year for Q1. However, despite this, Developer revenue increased in the quarter assisted by strong project commencements during FY '21 and extended project duration. Media, Data & Other revenues were up during the quarter with positive momentum in PropTrack and Media revenues, partly offset by lower Other revenues as COVID continues to impact Flatmates.com.au. Both our existing Financial Services and the Mortgage Choice businesses had a strong quarter with operational revenue growth driven by record settlements and continuing momentum in broker recruitment. The integration of Mortgage Choice is going well. And whilst we have recognized some immediate synergy benefits, these are being reinvested to support integration. We are aiming for full integration to be completed by Q3 FY '23. After a challenging second half of FY '21 impacted by COVID, the Indian market has recovered well in the first quarter. REA India experienced strong revenue growth driven by Housing.com's core business and additional growth driven in adjacency products such as Housing Edge. Core operating costs, excluding acquisitions, increased by 13% during the quarter. This partially reflects reduced operating costs in the prior period as we reacted to COVID and revenue uncertainty. However, it also reflects higher head count to support our growth initiatives and the impact of a double pay rise due to the annual July 2020 remuneration review being deferred to December 2020 and upward pressure on salaries in a tight labor market. The group's combined share of associates contributed $1 million to EBITDA, down from $3 million in the prior period. The year-on-year decline reflects a lower contribution from Move and losses from new investments. Move continued to deliver strong revenue growth, up 30% year-on-year with the traditional lead generation product benefiting from continued strong demand and improved sell-through and yield and the referral model benefiting from higher average home values and transaction volumes. However, this growth was more than offset by planned reinvestment spending to drive long-term growth, including in areas such as marketing and employee-related costs. The reduction in contributions from associates also reflects the inclusion of equity accounted losses from PropertyGuru from the 3rd of August as well as losses from Simpology, Realtair and CampaignAgent. We would anticipate the contributions from Move in FY '22 to be largely offset by continued equity accounted losses from these new associates as they invest for future growth. PropertyGuru plans to list on the New York Stock Exchange in Q2 or Q3 of FY '22. And as a result, PropertyGuru is expected to incur a number of one-off costs, which will be reflected in the group's FY '22 reported equity accounted results. Moving to current trading conditions. October national residential listings were up 16% year-on-year with an increase in Melbourne of 20% and 29% in Sydney as these cities began to emerge from the lockdowns. Looking across the remainder of the year, we expect year-on-year growth rates to slow as we cycle very strong prior period listing comparatives, particularly in the second half. As Owen mentioned earlier, regulatory measures to slow house price inflation could impact listing volumes as well as a temporary impact from a federal election expected in Q3 or Q4. The group is targeting positive operating jaws, excluding the impact of acquisitions. Based on current market outlook and excluding the impact of REA India and Mortgage Choice, the group anticipates high single-digit core operating cost growth. This reflects increased investment to deliver our strategic initiatives, combined with a tight labor market, driving higher salary inflation. I'll pause there. Operator, we will now open for questions.

[Operator]

[Operator Instructions] Your first question comes from Eric Choi with Barrenjoey.

[Eric Choi, Analyst]

Cracking result going in, Janelle, so well done. All my questions are based on digging into the strength of that underlying 22% revenue growth number. The first one, if I look at Resi depth, Domain probably did 20% growth in the first quarter. Can I just confirm your Resi depth growth is well north of that like, back solve, it's probably in that 25%, maybe even 30% zone? And then second question, if I unpick that Resi depth, price and volumes probably sums up to around 19%. So just wondering what drove the bulk of the delta. I know there were some deferral impacts in 4Q so maybe it was that? Or was it depth from new products? And then just lastly, on the non-Resi segment, it looked like they were really strong. And obviously, FY '20 and FY '21 was sort of low points for Media, Commercial and Developer. And I'm wondering if you can comment on how close we are back to those sort of first quarter FY '19 levels, which were sort of much stronger.

[Owen James Wilson, CEO & Executive Director]

Thanks, Eric. I'll take 1 and 3 and Janelle can talk to the mix of growth across the price, volume and other factors. Bear in mind, there are other products other than listing, the core depth products in there. So that's -- but, Janelle can talk to that. Look, in terms of Resi depth, it's fair to say our growth is well north of that number that was reported by our competitor. We're pretty pleased with that. We had -- as I said in the speaker comments, our team did an incredible job of recontracting and we saw a huge uptick in our depth penetration, particularly our Premiere product. In terms of the non-Resi segment, again, a fantastic job by the team, particularly in Commercial with recontracting. That market is still pretty tough in terms of listing volumes. It hasn't recovered and -- so we're pleased with that. You would have seen Janelle talk about Developer project commencements being well down in the quarter. That is starting to recover as we come out of the lockdowns and the number for October is much better than that. But we saw in Developer the benefit of all the projects that commenced in FY '21, and that they just keep going on and on and project duration keeps increasing. So the other segments are performing well in, I would say, not great markets. And so I wouldn't say we're at the high watermark there.

[Janelle Hopkins, CFO & CEO of Financial Services]

And Eric, to your question around Resi, absolutely, it's been a cracking result. If you think about, obviously, we had 11% listings growth. We obviously shared price growth of 8% and then penetration and mix all very positive as well as growth in our add-on products. And actually, the offset to that for us for this quarter was deferral. Deferral was actually a negative for us this quarter as we had -- whilst we had a strong benefit coming in from Q4 last year. The strength in September coming in the -- particularly in the last few weeks is actually deferred out more than deferring in. So overall, it's been a very strong result.

[Eric Choi, Analyst]

That's great. Can you comment at all if that new product delta has become more material than that sort of depths and mix delta now?

[Janelle Hopkins, CFO & CEO of Financial Services]

Are you talking about things like Connect for us? So Connect, we've barely started monetizing that. You'll see, whilst still early days, revenue start to come in from Connect more in the second half and into '23. But at the moment, we gave a free period and anybody that signed up in the last quarter is getting 3 months free as well. So we're trying to support sign-on.

[Operator]

Your next question comes from Lucy Huang with Bank of America.

[Lucy Huang, Analyst]

I've just got 3 questions. So firstly, just also in relation to depth. Just wondering how that's also trended coming into October, whether we've continued to see strong depth uptake through this month? And then just secondly, in terms of cost growth, you mentioned kind of higher salaries driving a bit higher cost growth versus previously. Just wondering how confident you are in maintaining that positive jaws. And with that cost growth, is most of it coming from salary increases or is there actually a lot more spend planned in sales and marketing? I mean, and just thirdly in terms of Elara. So I think last time you showed us that Housing.com's web visits are now -- they've come in at the #2 position in the market. Just wondering how that's trended over the last quarter.

[Janelle Hopkins, CFO & CEO of Financial Services]

Thanks, Lucy. I'll take 1 and 2. So yes, we have continued to see that positive momentum in October for overall penetration. And as you saw, listings is continuing to be strong, which is excellent, and also strength in Melbourne and Sydney. In costs, I think as we've shown over the past few years, we are capable of flexing our cost base up and down depending on the expectations of the market and revenue growth expectations. So we do currently anticipate to retain our positive jaws. Yes, we are seeing growth in salaries. Clearly, we had the impact of the 2 price -- well, pay rises in December and in July again this year. Clearly, the tech market is extremely hot and we want to continue to grow, and we will take talent from other organizations. So -- but we can manage our cost growth. And whilst the growth is predominantly in salaries, we are flexing up marketing over the quarters.

[Owen James Wilson, CEO & Executive Director]

I'll take the Elara question, Lucy. Look, we made great inroads in the race for leadership in audience in the second half of FY '21. It does bounce around a bit month-to-month. We've seen our competitors increase their spend rate on marketing significantly in Q1, but I'm really pleased to say we ended the quarter pretty much in that same position that we achieved in the second half of FY '21. So the team are doing a great job in that race to become the #1 in audience.

[Operator]

Your next question comes from Entcho Raykovski with Crédit Suisse.

[Entcho Raykovski, Research Analyst]

I've got 2. So the first one is around listings, and I guess I'm interested in perhaps how the listings environment over the last 3 months compared to your expectations back in August. I mean I got the sense that you were a bit uncertain as to how restrictions might impact listings and it seems to have tracked pretty well. So also interested in that kind of, as an add-on, is there a chance you actually surprised us to the upside for the rest of the year, notwithstanding those tougher comps in the second half? And then secondly, obviously, you're talking to some pretty good depth penetration numbers. Have you seen that improved depth penetration across all states and across all regions? And to what extent do you think that is attributed to perhaps a favorable property market, the low interest rates, Owen, that you've spoken about? And do you think you can hold on to all of those gains longer term and obviously continue to grow as you've been doing in the past?

[Owen James Wilson, CEO & Executive Director]

Thanks, Entcho. Look, in terms of listings, it's probably fair to say that Q1 was higher than what we thought at the time we spoke to you. You might recall Melbourne had no property inspections in place, and thankfully, the state government realized that you could do it safely. And so they allowed inspections to recommence before we came out of lockdown and I think that had a huge impact on the volumes for Melbourne, and we weren't sure they were going to do that at the time we did the full year results. So that definitely exceeded our expectations. In terms of the rest of the year, it's just so hard to predict. As you know, we cycle over a huge Q4. We had 59% growth in listings in Q4 FY '21. Having said that, though, the market is still very strong: 145 million visits in October and massive growth in buyer inquiry. So the demand is there. So if you're a seller, it's probably never been a better time to sell. I just don't see that changing anytime soon even if we got a rate increase, and I don't think we will in the immediate future. The big swing factor is the election. And it's -- we've done a lot of analysis on the impact of listings of the past 3 elections. You see a drop in the election campaign. And then you typically see a subdued period after the election depending on whether there's a certain result, and the last couple haven't been slam dunk wins and therefore -- consumers just hate uncertainty. But it's temporary and it comes back. And so the big swing -- why I call it the big swing factor. If the election was to happen, say, right at the end of May, you could see May and June down because of that and recover in July and August, but that's next year, right? And so it could have an impact across the years. But if you smooth it out, there is no impact. So it's really hard to predict. But look, the market is very healthy. But when you're cycling tougher comps, if you ask me now, I'd say, Q3 we would expect positive listings. But Q4, particularly if there's an election, could be negative. On depth, look, we saw improvement in all states. The exception was ACT, but it's a minor market. So we saw depth across all states. It's got nothing to do with the market, in my view. This absolutely speaks to the value that we put into the new contract we've seen is incredibly attractive, and that's why people -- our customers chose to step up and sign. I don't think it's market-related at all. In fact, I've said for years, in a hot market you probably need to advertise less; and a slower market, you need to advertise more. So I don't think it's due to market conditions.

[Operator]

Your next question comes from Fraser Mcleish with MST Marquee.

[Fraser Mcleish]

Great. Janelle, can you just confirm how Asia -- sort of the rest of Asia, not Elara, is treated both in the way you've kind of done the revenue adjustments for the year or the impact of the changes there plus in that cost guidance for the year?

[Janelle Hopkins, CFO & CEO of Financial Services]

Yes. So on Asia, we've obviously reflected the cost growth, excluding acquisitions. So excluded that from the adjustment that we've made. So the cost guidance obviously -- with the savings we've obviously got from Asia, we have reinforced -- reinvested a portion of those back into the business.

[Fraser Mcleish]

So you've got PropertyGuru -- so there's been 2 transactions in Asia, hasn't there? The was the earlier one with some of your smaller, was it Singapore, and then there was the PropertyGuru one. So sorry, I'm just trying to understand, are Asia costs still in that guidance or...

[Janelle Hopkins, CFO & CEO of Financial Services]

So effectively, Asia costs, so remaining -- so effectively, the removal of Malaysia and Thailand, we obviously had -- they had an impact on removal of some of the revenue and some of costs in relation to those businesses that have come out. The PropertyGuru transaction, that's an equity accounted through our associates, so those are reflected in there. When you look at the cost growth, what we have done is, obviously, there's reported cost growth and our cost growth excluding M&A acquisitions. So that excludes effectively Mortgage Choice and Elara.

[Owen James Wilson, CEO & Executive Director]

Yes. So the guidance absolutely reflects the removal of the Asian business from those numbers going forward. If that answers your question?

[Fraser Mcleish]

Yes. Great. I'll maybe follow up on that after, but that's helpful.

[Operator]

[Operator Instructions] Your next question comes from Paul Mason with E&P.

[Paul Mason, Executive Director of Technology]

I just wanted to get a quick comment on -- there's been some expectation that you might be releasing an updated leads model. Obviously, we had a bit of a comment around Connect earlier in the call. But are we still expecting any sort of other product releases around that during this year at all? And anything you can say on that?

[Owen James Wilson, CEO & Executive Director]

On seller leads, look, the timing on that hasn't changed from what we talked about at the full year results. We're very pleased, one, with the number of consumers engaging with our find-an-agent section. I think there's about 100 -- sorry, 1.8 million visits to the find-agent section per month. We're driving increased seller leads to our customers and they are seeing huge value in that. In terms of monetization, the timing hasn't changed. It won't be this financial year, but we are getting set up to launch beyond that.

[Operator]

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

[Owen James Wilson, CEO & Executive Director]

Look, thanks, everyone, for joining the call today. We've started the year incredibly strongly, and we are very pleased with the Q1 results. And I really look forward to updating you on how Q2 goes at the half year results. So thanks for your time today.