REA Group Announces 47% Net Profit Growth but No Dividend
February 25, 2009 by Simon Baker
The REA Group today announced $11.4 million in first half profits, a year on year growth of 47%. Underlying this growth in profit was a year on year growth in revenues of 28% to $91.3 million. The key driver of this growth continues to be the Australian business, which delivered a 26% year on year increase in revenues and a 40% increase in EBITDA. However, while operating cash flow was $10.2 million, the Directors again failed to declare a dividend.
While on the surface these look like strong results, especially given the economic environment, a closer look reveals that revenue growth appears to be slowing. The business may be in for a tough second half of 2009.
Comparing the 1st half of FY 2008 to the 1st half of FY 2009, the REA Group delivered a 27% growth in revenues from $71.4 million to $91.3 million. However, what is interesting is comparing the growth in revenues from the 2nd half in FY 2008 to the 1st half in FY 2009. In the 2nd half of FY 2008, the REA Group delivered $84.2 million. Therefore, the growth over the 6-month period was only 8.4%. The corresponding period in the previous year delivered 19.9% growth in revenues over the 6-month period.
The Australian business continues to be the engine of the REA Group. During the half year it increased the number of agents using the site (up by 460 over the Dec 07 number) and the average yield per agent per month from $758 in Dec 07 to $926 in Dec 08, a respectable 22% growth. The result is that the Australian business delivered $73 million or 80% of revenues in the first half – a year on year growth of 33% and a 6-month growth of 11%.
Combined, the other countries in the REA Group delivered $18 million, a year on year increase of 9.5%. However, over the last 6 months, the revenues have actually shrunk by 2.5% reflecting the tough economic environment in many of the markets in which the REA Group operates.
Given the likelihood of a troubling economic environment continuing, it is highly unlikely that the business will deliver the projected 50% year on year growth reported in News Limited’s The Australian last year. It is more likely that the business will deliver a full year growth of between 20% and 25% – delivering full year revenues of around $190 million for the year.
However, the good news for shareholders is that the company appears to be focusing on reducing costs or at least reducing the growth of costs. The growth in costs over the last 6 months was 15.1%. This was better than the 28% growth in costs between 2nd half 2007 and 1st half 2008. Therefore, assuming cost reduction efforts continue, the business is likely to maintain costs relatively flat between the first and second half, and could deliver between $45 million and $50 million in EBITDA for the year.
The real question is dividends. To date, the News Limited controlled Board has not delivered any dividends to the shareholders. With the business apparently not investing in new acquisitions and even exiting some business (New Zealand and Clarke Computers), the business is likely to significantly improve its cash position over the second half of the year. It currently has $20 million in the bank and no real debt. Assuming a fair second half of the year, the business could see its bank balance increase to between $30 million and $35 million. Given there are 125 million shares on issue, a modest dividend of 10c per share would not significantly affect its cash position.
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I’m sure this will be music to the ears of Australian agents. NOT. While REA makes big profits they struggle to pay the bills.
I for one have never understood these comments.
Well the reality is those costs are in the main passed on to the Vendors?
So why would the agents be upset??
They pay more for print and get less roi dont they ?
Rea are reaping the benefits of a five year strategy to be number one.
Aus has bred some great .coms,seek,wottif,real category killers.
The reason agents will be upset is because nobody likes being held with a gun to their head (figuratively). Because of REA’s market position agents are required to use them to be competitive and watch helplessly as REA increase prices and profits. What agents really want is alternatives. Price is not the big issue. The only way an alternative will be successful is if it gets a lot of agent support, and historically getting them all to work together to deliver that has been hard.
It is a similar situation to a lot of other markets. For example, over the last year there has been a big backlash against Google. Even though their products are totally free, people feel that they are too dominant in the market and want competition.
precisely
REA/Google analogy works for me
If you dont use google its your loss ,same as REA.
REA has no comepetition nationaly in Aust.
Thats because Fairfax didnt react and execute quickly or effectively enough
Regionaly some areas are strong..canberra would be one but who cares its small population.
The next 6 months will be testing for the REA Group there is no doubt.
There is evidence, which Simon brought out above, to suggest that revenue growth is already slowing.
Given that 80% of revenues come from Australia, then the following points need to be considered.
1. Ability to grow revenues from advances in marketshare.
REA Claim to have 95% of agents advertising with them. This leaves little scope for growth in market share. It actually places them in a position of defending market share losses to attrition, competition (RPData, Domain, etc…), price elasticity of the market place.
This will then force REA to source new markets. Traditionally, they have just segmented existing markets within the real estate category (Commercial). However their latest sub-market, Holiday, is already facing criticism from the industry for its planned subscription pricing for a service which has been covered by an existing subscription.
2.Cost cuttings/savings impacting on performance/systems operations.
If in 2008 it was possible for email leads to not be delivered to agents for over 6 weeks (see business2.com.au), then how do cost efficiencies/savings impact on already stretched (or perhaps the term is non-reliable) systems?
From a display advertising revenue perspective, should a similar situation present itself, then there would be a significant loss in revenue growth from a segment which is already diminishing in spend.
3. Price Barriers.
Australia has recently increased its pricing for Subscriptions, and also depth products (such as agent display advertising/email products etc… )
These increases will naturally prompt agents to re-asses their marketing budgets and where they spend money. While this will make agents look at ROI comparisons of REA and its competitors, it will also raise the question of the effectiveness of the various Depth Products which agents purchase.
It has been written on Business2.com.au, that although REA has experienced an increase in traffic, there has not been a proportional increase in the number of leads. Therefore the logical question to ask is what ROI are the various Premium Subscriptions, Branding and email marketing products from REA providing?
4. Online consumer behaviour.
With it becoming clearer, that consumers are becoming Search Savy, and that they search for the product/property which best suits their needs (as opposed to the traditional method of finding an agent), then there are considerable questions over the value of Premium listings, Banner advertisements and other depth products.
I cannot imagine that someone would purchase a home purely because it was presented as a premium listing, or appeared at the top of search results. Moreso, a prospective property buyer would select a property based on its key attributes (Price, Size, Location, Yield, etc…).
It would be good for REA to provide agents with clear statistics on the relationship between Premium listings and the likelihood of a property being sold, as opposed to a normal listing. If there is no clear correlation, then it would be logical to assume that Depth Product revenue for REA may experience negative growth over the next 6 months as agents reallocate their marketing spend to other areas.
5. All eggs in one basket.
In normal and depressed market conditions, it is imperative that agents ensure they are reaching the broadest market possible with their budgets.
Whilst there is a clear gap between REA and its nearest competitor domain, it is still interesting to note that 1 million consumers visit domain and not REA. Should domain present a different strategy (which would need to include price, and ‘reach the 1 million people who do not use REA), then there is an opportunity for domain to gain Revenue market share from REA, placing even greater pressure on revenue growth.
The following equation is probably what most agents are running at the moment.
(REA Subscription+Depth Product costs) / Total UB’s =/= (Domain, Homehound, Myhome costs)/ Total UB’s
It may make more sense for agents to take the money spent on REA depth products, and invest it in other sites to reach a greater audience for the same spend.
6. Agent/Customer investment in self publishing.
The economic conditions may encourage agents to reallocate their marketing spend and invest in their own websites/systems as these would bring about more tangible benefits to business and truly foster consumer relationships with the individual real estate brand.
However, with announcements that REA is scaling back Hub Online and the sale of Clarke Computers, it would seem that this potential revenue stream is diminished.
Summary:
REA certainly has the opportunity to continue revenue growth, but most likely not at the 50% as purported by the MD.
They face challenges in maintaining revenue growth, and perhaps also relevance of some key revenue products.
The key question for REA and any portal operator is: In a Search Savvy market, are online depth products as effective/efficient as Print Advertising?
Craig,
Do us all a fave and stop whinging mate. You almost make it a profession on any industry related site you can find.
Maxy, it’s not a profession, just a hobby. What frustrates me as a property buyer and technologist is how bad the state of the portals is in Australia. They are all absolute rubbish for the buyer, REA, Domain, MyHome, the whole lot. For a agent they may be fine, but for a buyer they are rubbish. It is possible for this to change of course, but the reasons it won’t in the short term are all politcal. The agents hold the answer in their hands, and all I am trying to do is get them motivated.
craig.
i guess the question is what makes a great portal?
We see many concepts,but not many that have longevity?
Snoop, for a buyer like I am, what makes a great portal is one that presents the info I am after and doesn’t try and do a sales job on me. A few things I want in a portal.
1. No premium ads, I want the search to be in the legit order with no premium ads obfuscating the results.
2. I want to know what other houses sold in the streets surrounding the house,for how much and when.
3. I want to know local info. Local attractions/facilities suchs as shops, schools etc should be displayed.
4. I want to know demographic information, is this a safe suburb.
I think you get the idea.
What I want is a site to help me buy a house. Current sites are designed to help agents sell a house, they are basically just online versions of the old newspaper ad. Things that could hinder the sale are definitely never shown. Agents just need to be a bit more transparent in their sales tactics (don’t try and hide the real price range) and everyone will in the long term be better off. The smoke and mirrors needs to be removed from real estate in Aus.
Valid suggestions
look at trulia etc all moving that way
But commerical imperatives come first.
Also will consumers vote with their mouseclicks,I wonder.
Snoop, I think consumers would vote with their mouseclicks if a site like Trulia came out in Australia. Unfortunately the reason it can work is because of the MLS system they have where agent’s can’t protect their listings from buyers.
Like snoop hints at, no other ads and or feature properies = lower revenue = less tech advances.
fair points though craig
Max, I think a profitable business can still be built without the annoying things. REA is very old school, basically just a newspaper model online. I wonder who owns it?
[...] news comes after the REA Group posted increased revenues for the first half of the Australian financial year. Despite a challenging economic climate, the [...]
It appears that the Australian Banks have stopped taking out prime advertising positions on realestate.com.au, and are going for the lessor costing display positions.
The middle quadrants on the front page used to be crammed with Banks, and RPdata advertisements which would have provided realestate.com.au with considerable 3rd Party Revenues.
At the moment, every single quadrant is used to promote various sections of the realestate.com.au website.
Perhaps the second half of FY08/09 is living up to expectations and will be somewhat behind first half results, and the predictions of the MD of 50% revenue growth.
Max – “no other ads and or feature properies = lower revenue = less tech advances” – I agree to a point. However, what possible tech advances can be undertaken when there is a reduction in revenues from 3rd Party customers?
REA results due out in the next few days for the full FY’09 .
Will be interesting to see if the predictions made at the half year point will be close to the mark given the disappointing revenue performance over the last last six month period and the discarding of two of their International business. Whilst the sold businesses won’t show up on the FY’09 numbers they were both reportedly going backwards.
As reported in Simon’s original report the Aust business is the major engine of REA and it has been spluttering for the first time in about six years.
Revenue downgrades have been presented to the board at least three times according to REA insiders so I’m fairly surprised by the share price or do people think that the selling of the overseas ‘fat’ is driving this?
I agree with Simon that we will see full year growth of no more than 22% but overall revenues in my opinion will struggle to go much above $175m down from the predicted $190m with the Aust Business coming in at about $155m to $160m.
Time will tell.