Adevinta ASA

OSE:ADE

Earnings Call Transcript 2019-Q1

[Rolv Ryssdal, executive]

All right. Good morning. Good morning to all of you, those who are here in Oslo and those who are following us on the webcast. I'm happy to welcome you to the first quarterly presentation of Adevinta. And the presentation will be given by me and of course, our new CFO, Uvashni Raman, who will take care of the financials.

It's been a good start for our new company and I think today, we'll have a relatively short presentation because there aren't any very big news. I think we're delivering as expected and I think we have a steady path for the new company. So as you know, we did the listing recently, just 1 month back and it was a very interesting preparation for us, traveling around, meeting many investors. And I was happy to see that there's lot of interest for the company, and we had good communications with many investors. We're looking forward to continue that. And as you know, it was oversubscribed and I can see that now, after the listing, we're very well positioned to continue our growth in Adevinta and we see that being a pure-play company is giving us the focus we're looking for, and we're looking forward to a very exciting journey in the years to come. The highlights from the first quarter is that the results are good. We are delivering well, especially in our core segments. So the big markets are delivering as they are -- as many of you have expected. And I would like to stress that it's especially within our core business verticals that we're doing very well. So real estate, biggest of course and then cars and jobs are as a result of product development and our continuous strides to create perfect matches on the world's most trusted marketplaces. This gives results in the long run.

So in France, we're seeing a strong quarter for our core businesses and this is driven by product development, new apps, I'm getting back to that. Spain, also a good growth for all the verticals and we're seeing also Brazil is delivering very strong in their main segments, which is of course, the real estate and the cars. Global end markets, of course also working to improve their product, and we're seeing there from some encouraging signs in several of the sites, so let me get back to that.

And we have said to you that the revenue growth with the -- I think we said in the investor presentations that it might be at the lowest side of our guided range. We ended up at 15% due to strong performance from the verticals. And here, we can see that because the verticals are growing actually at 19%. I'm very happy with that, those are the most important numbers we're looking at. Then the market for display advertisement has been softer as we otherwise viewed earlier, and that market is also much more volatile. So since the market actually went down this quarter, you would -- you can see that the revenue growth would have been even stronger had that been a more normal market condition.

Then there's a very good margin development going up to close to 30%. And here, you're starting to see the operational leverage coming through and also then strengthening cash flow.

This is for those who haven't followed us that long, let me just repeat that. So you see a strong growth in revenues and operating margins, and we have said that we believe that we maintain our 15% to 20% medium to long-term growth rate. I'd like to have ambitious targets. Of course, 20% is a stretch, but very confident that 15% to 20%, that's our medium to long-term target.

And core business, the verticals, again, real estate, cars, jobs. We're working hard to strengthen our position there. We'll continue to do that, and then there will be a focus on the operating leverage, which will lead to higher profitability and cash flow. And you can see that here on the right-hand side, how the revenues have developed and also the margin for Adevinta as a whole the last couple of years.

Here, you can see that the growth in the company now has actually led then by the verticals. So the verticals is up 18%, I think 20% if you do it in local currency. And then since the display ad market is actually down for us 5%, then you'll -- there you can see it resulting from that, you can see that the advertisements, which used to be 23% is now 19% of totality. So again, verticals, strengthening their position which is good. I think that I'll get back to the advertisement market and what we're doing here, but this is the overall picture.

All right. Let me talk about France. France is delivering a strong quarter, and you can see that in the real estate, the bundles offers, which is Leboncoin and Avendrealouer is really doing very, very well, and you can see that -- we see that also on the traffic numbers, especially for Avendrealouer, it's going very well. Then we are experimenting with the products and helping the professional car dealers to have better products, and that -- those allowed us to increase prices somewhat as long as we create value for them.

Then we are accelerating the product development. I'm happy to see that the apps both in the Android and the iOS apps are developing rapidly now, many new features out and that has actually led to a higher traffic, up 7%, which is good for such a big site. And I can see that development is now continuing also in the second quarter.

We are developing new features all the time. So if you're in the web part of France and you want to -- as a consumer, you want to interact with someone who is in the other part of France, then we offer now peer-to-peer payment solutions and we are also starting to offer shipping solutions. Personalization is coming on stronger and stronger.

Then display advertising, negatively affected by the weak ad market. And I would say there that there's, this goes for France, and also for the other part of the portfolio. What's happening is that the softer market in totality has been soft the last year. And following GDPR, we can actually see that there's also been some internal technical issues because it's rather complicated with the ad flow because you have the advertiser, you have the media agencies and then you have the ad tech providers. They should all talk to each other and there's been some technical issues between our tech supplier, which is AveXis and Google. But the services have talked to each other, taken some time to iron those things out. We're working on it, but that has been the technical issues which has hampered also the development for us. And then thirdly, we'll have some internal issues with the product development and sales force that we're now strengthening up. So that's why I'm confident that we'll get back on a more positive path, but of course, we'll have to see how the total market develops.

Then Leboncoin continues to do well in most respects, so it's ranked fourth among all the large companies in France in Great Place to Work. That's of course, a very good sign for the health in that -- in the organization.

In Spain, we continue to do well. We have a great team in place there, solid revenue growth coming from all over the verticals actually. There again, we're bundling to our sites, which is Coches and Milanuncios. And together, that creates a very effective and powerful marketing tool for the car advertisers, so that is going well. Again, here, we're working hard on product development and we're seeing as a result of that, the people spend more time on our sites, more time on the real estate site. We launched some new products also on cars, let me get back to that pretty soon. And then you're seeing then that we have improved the margin and that gives them -- you get as a result, the operating leverage.

Important internal event for us is that in the first quarter, we did buy out minority shareholder and we own now 100% of Spain, and we have moved all our employees in Barcelona into the new office. So far they've been in different parts of Barcelona, some outside, and for jobs in the central hub in the third place, that is really a big news for us internally. That will facilitate a lot of internal collaboration.

Brazil, strong quarter. And I think that you'll see that Brazil is a market that is still at an early stage. I think only a limited number of the car dealers and real estate brokers are aligned already, very good growth potential. So you can see that the main verticals, cars and real estate, are continuing to do well. So happy -- we're happy with the development we're seeing in Brazil.

Then let me briefly comment on the other parts here, on the Global Markets. So in Italy, we're seeing now some results of our focus on the car verticals. So we're seeing that a bigger part of the revenue comes from there. We have been able to develop more products for the car dealers and there's also been a better lead generation for them.

Willhaben, joint venture in Austria, continuing to improve their position, especially down in the verticals.

Ireland, Daft is the real estate site and the Daft, if you compare it to many other countries, the takeout is relatively low compared to the GDP in Ireland. I think that with the product development improvement we're doing and hopefully a good development in the Irish economy, we'll do better there.

Hungary, working constantly on their product development. Have done ad and searching easier, seeing some positive results on the traffic and engagement there.

Then of course Shpock, which we talked about earlier, where we've launched the kind of new strategy after we did buy out the shareholders that -- the founders last fall. We've set in place new management. They are now focusing a lot on the consumers less on the professional customers. And we're seeing there that what we're doing is to help consumers along all the way, arranging for payment and shippings, et cetera. And engagement there is going in the positive direction. We are of course, also using -- spending less money on Shpock as we have built a bigger user base. We're not capitalizing on that.

So if you look at the Global Markets, there's a positive development in totality. We're at breakeven or close to breakeven in most markets, and you can see also there that the EBITDA then from the investment phase is -- clearly have a positive trend, with a negative only of EUR 3.5 million in this quarter, and that's of course, mainly due to Mexico and Shpock, where we've changed the strategy and now are focusing more on getting quicker to a breakeven situation.

Right. I mentioned the products. Well, we are working constantly on our products. So in Leboncoin, for instance, I mentioned that we're starting with C2C payment and shipping. Now also, ratings of the users can rate each other, which increases the trust.

In Spain, here's an example. So some consumers have been a bit confused when it comes to how much they should pay for the price. Is it cash or whether they use different financing options. Now we launched a new tool so we can compare them. Makes it -- it's all about making it easier for the consumers.

Here, other interesting example. This is actually big news because here, you can see that this is from Avito and this is from Leboncoin. In Leboncoin, now if you use the app, has taken away the iconic map and replaced it with a personalized feed. So meaning that if you're using the Leboncoin app, like of course most people in France, then you'll now get personalized feeds based on your search history. So we're doing all this in order to facilitate the transactions and making it easier for our users. So that will be our total focus going forward as well. Right. Then I think I'll -- that was the overview of the operations, then I think I'll -- let's go into the financials, and then I'd like to hand it over to Uvashni, who started as our CFO only roughly 1 month back but getting into the numbers very well. So please, Uvashni, go ahead.

[Uvashni Raman, executive]

Thanks, Rolv Erik. I guess for me, without trying to repeat everything Rolv Erik has said, I'm just going to take your high level through the numbers again and then just give you some core elements of some of the callouts, especially around some of our corporate costs, et cetera.

Right. These financials have been solid for the quarter. Year-on-year on a proportionate basis, we've increased revenues by 15%. Yes, 15% in terms of our expectation, but our verticals have done brilliantly at 19% growth year-on-year from a quarter basis. Softer advertising revenue, of course, and we did know that and realized that and expect that softness due to Q2. But as Rolv Erik has said, we expect some of our initiatives to kick in the second half of the financial year.

On EBITDA performance, I mean again, contribution from across the board. A standout here from an EBITDA perspective, of course, is our asset in Brazil. On a revenue basis, up 54%; on an organic basis, 39% on a proportion basis, showing some great movement and growth there. Spain as well is starting to contribute quite nicely. And of course, operating cash flow, we're really starting to see the cash hit the bottom line as the initiatives start to come into play.

Just to show you the buildup in terms of revenue, EBITDA as we report versus the proportionate basis. And as you can see, contribution across the board. Of course, the softness you see in France is compensated for by the growth within Spain and within Brazil. And of -- and the standout number there on the Global Markets, starting to see those losses reverse, giving us a good indication of where we're ending up today. I think some of the strategic change and transformation we're seeing in some of the assets are really starting to show some growth and potential.

Just on the headquarter cost, I think in line with what we had expected. Some costs are starting to rise as we start to build up capacity in our corporate teams at the head office. So you'll see that rise too in quarter 2 and in quarter 3 as we build up that capacity, but we don't expect it to be beyond the guidance we have provided both in the prospectus and on the road shows as well. So yes, great movement in that front and other than with the advertising, we feel softness. I think we have -- we're on mark to receive our -- I mean, to achieve our full year numbers.

Now I'm just going to go into some of the more detailed explanations, some of the core movements within the financial statements just to give you an outline. In terms of the income statement, you would see that IFRS has had an impact, and I'll go into some detail on that impact in the next couple of slides. But you're starting to see some impact on IFRS 16 and then of course, the accelerated depreciation as we moved into a new office. The share of profits on our joint ventures, as I said, will have and -- excuse me, Brazil starting to really make an impact relative to quarter-on-quarter performance and from our full year numbers last year.

Our net financing activities just in the quarter, we had quite a big impact in terms of foreign exchange gains, but this is a nonrecurring and it's a one-off.

On operating profit and losses, I just think here what we wanted to remind you again on is how we account for Brazil. So on a proportionate basis, Brazil is included but because we equity account, we then eliminate that and we show it below the line in an equity basis. So just to give you a reminder again, that's why you'll see from a proportion basis, we show EUR 174 million in revenue but on an equity account basis, we saw EUR 160 million and just show the difference between our JVs and how we accounted for that.

The IFRS impacts, as I said, had a positive impact in terms of EBITDA of EUR 3.5 million, and then you will see the negative impact in terms of the depreciation and amortization cost. On the balance sheet, as you would know, we would have to -- we increased assets and then you see an offset in your liabilities, and then the net impact of that, you'll see in your equity, the movement of EUR 0.7 million.

The underlying tax rate, I mean, our tax rate relative to the underlying tax rates of the assets differ quite a bit and some of the main reasons for that is the way we look for and account for our losses within the Global Markets segment in our portfolio investment phases, and then how we also look at some of the gains and losses we see within taxable versus nontaxable. But what you see is as your investment phase losses start to reduce, your tax rates start to converge to your underlying tax rates. So that you'll see more and more, and it's pretty stable from year-on-year.

So just in summary, yes, the quarter 1 saw our performance in line with guidance. Softness in advertising continues but we strongly believe that the guidance we've provided, we're still in line for that. EBITDA margins are on a 40% basis. I think on the long to medium -- mid to long term on a proportion basis, we still believe that is achievable. Our leverage remains stable because we haven't done anything other than in the quarter where we would effectively will draw down to pay off our Schibsted that should be -- our Schibsted debt, that will remain the same, and then the dividend policy remains intact as well. Rolv Erik, if you want to conclude. I think overall, pretty stable outcome and a positive set of results.

[Rolv Ryssdal, executive]

Right. And just remain up there, if you like and -- looking at the outlook, well I think we're very happy with the start we've had. It's been fun and interesting to work with all the preparations. And I can say I'm also happy to have put that behind us so I can focus fully on the operations. And I believe that Adevinta is in a very good position and that we will then continue to grow and also can play a leading part in consolidation in the market. That's why we repeat also our medium to long-term guiding. And I have talked about that we're going to reduce the investment phase losses and then continue to focus on the operations and do more and better products for our users. I think that's the most important takeaway from today. Not any very big news, but we're on a steady path and we're confident about what we're seeing in the development of the company.

Right. So I think actually, we'll leave it at that and then, of course, take questions, if any. There's also an investor call scheduled for later this afternoon. But if there are any questions here or on the webcast, please go ahead.

[Rolv Ryssdal, executive]

Henrietta, you get a microphone now from the question up here.

[Unknown Analyst]

Henrietta [ Johnson ], [ Arctic ]. Your verticals were quite strong this quarter, but this way, ads was a little disappointing. Is it possible to give some more color or quantify what impact the technical issues with AveXis you talked about had in the quarter? And is this solved in -- do you expect this to be solved in Q2?

[Rolv Ryssdal, executive]

So I think there are 3, 4 factors. One is there's been a relatively soft market. And then we've had some technical issues, not only us but I think actually in the aftermath of GDPR. You've seen that -- you've actually seen that Google and Facebook have strengthened their position because they're not reliant on all those ads where we're talking together. Whereas we are working with AveXis to resolve these things and I think we have -- we're showing good progress on it. And then we've had some problems or some issues with our internal sales force that we're addressing. And in addition to that, so what we're now doing is experimenting with new formats, new ad formats. So for instance, in Leboncoin, they're experimenting I think this very week with new native video products, more targeted ads. And we expect these things to have a positive effect in the second half. It depends, of course, on the total market development. There's a question here. Yes.

[Oliver Pisani, analyst]

Oliver Pisani, Nordea Markets. I think you specified in the prospectus that January and February saw about a 14% revenue growth and now you've come in slightly stronger than that. So could you explain in what area of the business you saw accelerating growth during March?

[Rolv Ryssdal, executive]

Well, it is specifically down in the verticals and it's been the big countries that are delivering well. So I think we've seen very positive development in real estate bundling in France, the car bundle in Spain. So those are kind of important highlights, and it's really now our core business which has had the positive development.

[Oliver Pisani, analyst]

Okay, very good. And when you said internal issues with the sales force in France, could you elaborate on what kind of issues you've had in the sales force?

[Rolv Ryssdal, executive]

Well, I think I've -- let me say, we've had some issues with product development, which we're accelerating, and of course, we focused a lot on being GDPR compliant. Now, we're focusing on new ad formats. And then I would say in all over the both in France and also actually in Spain, we're seeing opportunity to strengthen our sales force because there's so many opportunities. So we hired some new people and added that, so that's kind of what I was referring to. Yes. There's a mic here.

[Unknown Analyst]

[ Markus Berg ], here, [ SEB ]. On the vertical growth, can you try to break it up in some sort of different components, like how much is driven by ARPU or new features? Is there a big volume component or any more flavor on that?

[Rolv Ryssdal, executive]

Well, it's -- we don't actually want to provide too much breakdown there, out of competitive reasons because there's strong competition in our market, so we don't want to do it. What I can say is that we've seen, obviously in Brazil, this increase also in the number of customers. We're actually seeing that in some of the Spanish parts of our business as well and some in France, but I don't want to be too specific on it. The important thing is to be able to deliver new products that you then can also charge a higher price for. Any more questions here? Otherwise, I think there's something in the webcast.

[Unknown Executive]

Yes, sure. There are a few questions from the viewers. Can you say anything about marketing activities in France in the Q1? How did that affect the margin development? Any color on that?

[Rolv Ryssdal, executive]

I don't think we're -- I don't think we're prepared to go into that level of detail. What we said is that we expect the marketing expenses to be kept -- fluctuate a little bit from quarter to quarter, but there's no specific things affecting the market in -- there's no specific compared to the first quarter effect in the margin in France.

[Unknown Executive]

There's one question just for clarification, referring to your final slide on outlook. It says -- it could be read as you expect verticals to grow with 15% to 20% in the medium to long term, but the clarification is whether that goes for the whole group.

[Rolv Ryssdal, executive]

That was for the whole group, yes.

[Unknown Analyst]

And then what -- can you say anything about the local currency growth in Brazil? It was 34% or so in euros, slightly being higher in Brazilian revenue -- currency?

[Uvashni Raman, executive]

Yes. It's because the currency from year-on-year has actually depreciated. So in local currency, we'd see a much higher growth, whereas when you convert it to euros, the revenue absolute number is lower. So you'll see a lower growth rate there.

[Unknown Executive]

One question on Global Markets. You are now reducing investments here. Is there a chance that this will hamper the growth outlook as the growth already in the segment is lower than other segments?

[Rolv Ryssdal, executive]

I think investment phase, that's mainly now Mexico and Shpock, and I think that the reduction there will not affect the growth in the rest of the portfolio.

[Unknown Executive]

I think the final question for now at least, are you willing to share any detail on how negative display ads were in France in Q1?

[Rolv Ryssdal, executive]

Well, let's say that it's -- we've set 5% negative for the whole portfolio and we don't -- it's not too far from that in the different countries, but I don't want to be more specific than that. That's relatively representative.

Okay, any other questions? No? Okay. Well, in that case, thank you so much for coming, and let me remind you also that there is an investor phone conference this afternoon at 2:00. So welcome to that.