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Ladies and gentlemen, thank you for standing by, and welcome to the REA Group Q1 quarterly report. [Operator Instructions] I'd now like to hand the conference over to your first speaker, CFO, Janelle Hopkins. Thank you. Please go ahead.
Good morning, everyone, and thanks for joining us. This morning, we will discuss REA Group's results for the first quarter ended 30 September 2019. 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. Our CEO, Owen Wilson, will provide a business update, then I'll talk to the financial results. Following this, we'll be happy to take any questions you may have. With that, I'll hand over to Owen.
Thanks, Janelle. Good morning, everyone. In line with expectations, it's been a challenging start to the year for REA Group, with large declines in new residential listings and new project commencements in the first quarter. Revenue was $202.3 million, a decline of 9%, and EBITDA from core operations, excluding share of losses from associates and joint ventures, was $114.9 million, a decline of 14%. National residential listings declined 15% over the 3-month period, including listing declines of 22% in Sydney and 21% in Melbourne. New developer project commencements were down 26%. The results were also impacted by increased deferred revenue due to the duration of Premiere All extending from 45 days to 60 days. If we exclude the impact of the increased revenue deferral, the group's revenue decline was 6% and EBITDA decline was 9%. Pleasingly, we are seeing the signs of gradual market recovery, and we've continued to see growth in our Premiere All products on the back of the latest offering, which commenced on the 1st of July. Our performance has shown remarkable resilience, given the unprecedented market conditions. Our results demonstrate that our customers and consumers continue to see clear value in the products and experiences we are creating. As we highlighted at the full year results, our data continues to tell us that the buyers are back. Inquiries for property for sale were up 30% year-on-year in September and up 33% in October, demonstrating a very healthy increase in people searching for properties for sale. Average auction clearance rates for September returned to levels we were seeing before the market correction, over 80% in Melbourne and Sydney. In August, we had our highest-ever number of visits to realestate.com.au at 87.5 million, a 13% increase year-on-year. And in October, we hit another new record of 92.3 million visits, a 16% increase year-on-year. We're also seeing increases in house prices in Melbourne and Sydney. The higher buy activity, coupled with interest rates at historic lows and improved lending conditions, all point to an eventual market recovery. Turning to our audience numbers. In Australia, realestate.com.au is the clear #1 place for property. Our audience leadership continues with over 3x the visits of our nearest competitor. People continue to choose our app as their preferred place to search for property. In August, we had a record number of app launches at 36.2 million, a 25% year-on-year increase. Our app has now been downloaded over 9.3 million times. Our teams remain focused on providing consumers with easy access to the richest data, content and market insights to help them make better-informed property decisions. With the largest and most engaged audience of any property site in Australia, it is clear that consumers are deeply connected with the experiences we provide. Our underlying growth strategy remains the same: To have the best property marketplaces in all of our locations. And we'll achieve this through 3 core objectives: firstly, providing individual, proactive and lifelong consumer interactions, not just when they're transacting but in between transactions; secondly, providing the richest content, data and insights to empower our customers and consumers throughout their property journey; and thirdly, delivering the best customer value through innovative products that derive great leads and great ROI. Put simply, the most leads and the best leads. During the quarter, we delivered a number of consumer enhancements. In August, we launched our first-to-market experience allowing users to access property news, data and insights within the realestate.com.au app. With over 200 stories, videos and image galleries added each week, our app users now have the latest property information right at their fingertips. The integration of a new open-for-inspection booking tool within the realestate.com.au app has seen fantastic consumer usage. Since launching this new feature, an additional 60,000 weekly bookings are occurring, helping agents and property managers more effectively to net prospects to properties. In line with our buyer experience, we've migrated our rent platform to an improved technology stack. This will significantly increase the speed and efficiency of delivering new features and provides a new look and feel for consumers. We announced an exciting content-sharing partnership with news.com.au. This allows the sharing of breaking business and finance news, together with property news, data and insights. The partnership has seen traffic to the realestate.com.au news section hit record highs in Q1 with 4.1 million visits in September, representing year-on-year audience growth of 56%. We look forward to continuing to leverage the combined power of REA Group and News Corp assets to deliver increased value for both our consumers and our customers. From a customer perspective, we continue to deliver great value through the advertising solutions and the number and quality of leads we provide. There are a number of highlights for the quarter. Agent Match continues to provide access to prospects via the 8.7 million people who visit realestate.com.au every month. To date, 1 in 4 Match sellers are going on to list their property. Agent Reach, our end-to-end digital marketing solution, continues to see excellent customer uptake. And as part of our commitment to making it easier for customers to do business with us, over 9,000 customers have now signed up to Ignite, our new self-service customer platform. Turning to Financial services. During the quarter, mortgage submissions, a key leading indicator, increased in response to the low interest rate environment and improved lending conditions. We've continued to evolve our strategy and enhance the consumer experience by providing people with increased choice when it comes to deciding on their home loan preferences. Mortgage brokers now have equal prominence on our realestate.com.au home loan portal. Earlier this month, Smartline was recognized as Australia's top franchise group, following a comprehensive survey of franchisees across the country. The award recognized Smartline as the benchmarking franchising across all industries, not just within mortgage broking. Turning to Asia. Audience leadership increased in Malaysia, Indonesia and Hong Kong. We continue to keep a close watch on the situation in Hong Kong, ensuring our teams are appropriately supported to manage through the ongoing disruption. Last month, we are delighted to announce we have entered into a binding agreement to form a JV partnership with Singapore-based 99.co. Joining forces with 99.co creates a market-leading presence in terms of customers and listings. Combined with our expertise and experience in other countries where we are the clear market leader, this represents a fantastic opportunity to rapidly increase our share in the expanding growth markets of Singapore and Indonesia. I'll now hand over to Janelle, and she'll talk us through our financial results in more detail.
Thanks, Owen. As previously noted, REA's result was delivered in particularly challenging market conditions, with continued declines in new residential listing volumes and new project commencements. As Owen mentioned, national residential listings declined 15% over the 3-month period, including declines of 22% in Sydney and 21% in Melbourne. The Developer business was also impacted by a 26% reduction in new project commencements. The impact of these market conditions resulted in a 9% decrease in revenue to $202.3 million and a 14% decrease in EBITDA from core operations, excluding the share of associate losses, to $114.9 million. The decrease in EBITDA and timing of tax payments resulted in a 20% reduction in free cash flow. The Australian residential revenue result reflects the unfavorable market conditions noted earlier and the extended duration of Premiere All listings from 45 to 60 days, which increased revenue deferral for the period. Excluding the impact of the increased revenue deferral, group revenue declined 6%. This is purely a timing difference, which will balance out over the course of the financial year. This decline was partially offset by price changes that took effect from 1 July 2019, improved product mix, including stronger levels of Premiere depth penetration and continued growth contribution from AR products such as Audience Maximiser, Property Showcase and Agent Reach. The market remains challenging, with Australian residential listing volumes down 15% in October 2019 compared to October 2018 with declines of 15% in Sydney and 17% in Melbourne. Moving to the Commercial and Developer business. Revenue decreased due to the continued reduction in new project commencements, down 26% for the quarter. This decline was partially offset by the benefit from extended Project Profile durations and an increase in commercial depth penetration. New project commencement declines are expected to continue for the remainder of the year, driven by funding constraints, a reduction in consumer confidence due to inventory quality and a reduction in foreign investment. Media, data and other revenue reduced due to lower advertising revenue in key segments and lower available inventory as Premiere listings increased. Financial Services revenue was lower due to the decline in mortgage settlements. However, pleasingly, mortgage submissions in our broking business, a key leading indicator, increased during the quarter. This points to an improved future performance for our Financial Services business. Asia revenue was in line with the prior year and was impacted by the ongoing disruptions in Hong Kong. As Owen mentioned, we are excited by the new joint venture with 99.co, which is anticipated to be completed in early 2020 and is subject to due diligence. Throughout the quarter, strong cost management and efficiencies gained through an organizational realignment resulted in a 2% reduction in total operating expenditure from core operations. The organizational realignment resulted in noncore restructure costs of $3.5 million for the quarter. Looking forward, residential listings for the first half of FY '20 are likely to be lower than the same half last year due to the comparatively favorable listings environment in half 1 FY '19, particularly in Melbourne and Sydney. As we move into the second half of the financial year, the listing comparables are much more favorable, particularly in Q4. As a result, we expect revenue growth to be heavily skewed towards the second half of FY '20. Consistent with previous guidance, whilst committed to innovation and investing in growth initiatives, efficiency gains and strong cost management are expected to result in a reduction in full year reported core operating costs year-on-year. I will pause there. Operator, we will now open for questions.
[Operator Instructions] Our first question comes from the line of Eric Choi from UBS.
I just had 3 questions, if I could, please. First one, just wanted to clarify cost guidance. Just wanted to clarify, excluding AASB 16 impacts, whether underlying cost guidance has changed. And then the second question, just around depth. Normally, in your commentary, you'd call out depth penetration as a specific driver for the Australian revenues. And I just noticed it wasn't there this time so just wondering if there's been, I guess, a change in that driver, whether it sort of flattened or turned negative even. And then just the last question on these deferrals. I just wanted to check that I understand the right way that this work. So I guess, if revenues were equal every quarter, you'd see a drag in the initial quarter and then you should -- I guess, you shouldn't see a drag in the preceding -- sorry, the following quarters. But if we've got a rising revenue pool, does that mean we should expect another revenue deferral dragging from second quarter as well?
Okay. Let me take those for you, Eric. On cost guidance, our expectation for full year cost guidance is we will be marginally down year-on-year excluding the impact of AASB 16 and comfortably down with the impact of AASB 16. To your point around depth penetration, we did note that we have seen improved performance with depth penetration for the quarter. And to your point around deferral, so you're right. So quarter-on-quarter, we should see it being equal. What we have seen, because of the fact that this is -- we have had a change, there is an increase in deferral for this quarter as we are deferring the revenue over a longer time period. If -- as revenue continues to increase, you would then see the deferral increase as well.
And so what you've got in Q1, Eric, is a double whammy. Because it’sthe first quarter of going from 45 to 60 days, you don't get the deferral out of Q4 into Q1 but you do get the deferral out of Q1 into Q2.
And can I take a step, a follow-up on those deferrals. I guess you've given us enough data points to back solve the size of the Premiere All revenue pool. And it looks like third quarter could be as much as $100 million per quarter. Or if I just completely messed that up?
No, we haven't given that level of information. So I don't know, Eric.
Our next question comes from Kane Hannan from Goldman Sachs.
Firstly, just talk about the timing of that organizational realignment during the quarter and whether that's now been completed, just in terms of how much will flow into FY '21. Then just on the depth penetration commentary and performance there before, you've -- just interested, like, how much's the rate of growth in Premiere. Can you -- whether that was similar to the magnitude in FY '19? If you have that column chart you guys would normally provide at the half year, has the rate of growth continue in line with what we saw previously? And then finally, just on Asia. Can you talk a bit more about your strategy for Asia, whether we should be seeking more partnerships, if possible, in that market?
Thanks, Kane. The organizational realignment wasn't fully completed until September. And so the benefit of that, you're not seeing much of that in Q1 at all. It is complete, and everyone is in their new roles, et cetera. But the actual kind of cost benefit of that reorg only flows through from Q2 onwards. In terms of the rate of growth in Premiere, it's actually very healthy. In fact, just trying to think, year-on-year, there's probably a slightly healthier uptake in new customers this year than in the previous year. And part of that was the extension of 45 to 60 days. That was a very attractive change, which brought another wave of customers across the fence to Premiere. So it is healthy growth. So the rate of Premiere penetration is higher from July onwards. In terms of Asia, it's hard to say in terms of partnerships, but the partnership that we've entered into with 99.co just made real sense for us. Particularly, we've spoken before, Singapore is our weakest market and always was. We knew that going into the iProperty business. We were sort of #2 on some measures and #3 on others. And combining with a business like 99.co, where between us now we've got more customers and more listings than the #1 player in that market, really sets us up for strong revenue growth. We're also particularly pleased about the partner there. They're a very high-quality partner. And so it just made sense. Whether we do other partnerships, it would have to have compelling reasons for us to do that.
Our next question comes from Eric Pan from JPMorgan.
Just 2 for me. Given the significant revenue pressure, should we expect negative jaws for the half and the full year? And then secondly, can you give us some color of where you're cutting costs? There were media reports of some head count reductions. Can you give us an idea where -- which departments do those cuts come from?
So I'll take the second one. The reality is the reorg was primarily designed around lining up our strategy -- sorry, lining up our organization with our strategy. And it involves the creation of a new customer product area. We were doing customer product development in various parts of the organization and bringing those together delivered a lot of synergies. It means we are now fast to the market. So getting a double whammy impact, Eric, of this reorg. It's increased our speed of delivery. We can see that already but also part of increasing that speed is because we've got less people involved in the process. And so it's an actually lower cost area. In terms of where that came in, look, it's not at developers and engineers, that's for sure. It's really more in supervisory layers that the head count reduction occurred. And in terms of the jaws question, I'll hand it over to Janelle.
Thanks. Thanks, Owen. So Eric, our expectation for the full year, assuming that the listings do improve in the second half and based on the relatively weak comparatives, that we do expect to see positive jaws for the full year. What will happen for the half will depend on what we expect to see or what will flow through in listings in November and December.
Our next question comes from Entcho Raykovski from Crédit Suisse.
Three from me. The first one, just following up on costs. And I'm just conscious of the weak listings environment has obviously continued for a little while now. And just interested if the recovery doesn't take place over the course of the second half, can you further reconsider the composition of the cost base? And how are you thinking about that longer term? I mean do you see this as a bit of an opportunity to add into that cost base? You're obviously doing that right now, but just interested how much you think there is more of an opportunity beyond what you've guided to so far. Then secondly, if we begin considering what's happening with the underlying environment, are you effectively looking at monetizing other areas such as rentals, for example? And if so, what's the size of the opportunity? And just finally, a pretty straightforward one. The quantum of that tax impact on cash flow in Q1, if you could give us that, that would be useful.
So I'll take the first -- let me do the first one around costs. Look, the good thing about our business is that it's highly flexible to grow, decline and contract, if we have to, based on where our expectations on revenue growth. So we never want to short turn the business, and we always need to continue to invest in growth. But we have a capacity, if we need to, to cut back on discretionary items and make sure we are prioritizing hard on the things that will support the business going forward.
So even if listings were flat in the second half, Entcho, we will deliver revenue growth in that environment so provided it is not declining. And looking at the comparables for the second half, I mean, they are very, very low. And so a flat environment would be a good one, and we'll get revenue growth out of that. In terms of other areas for monetization, I mean, rentals is already a very healthy revenue stream for us. We're the #1 in rental by a long way in this market, but there are things we don't do. For example, we're the only portal in the country that doesn't do private landlords. And so that does present an opportunity for us going forward. So we are looking at other areas where we don't currently monetize where we could. And in terms of the tax impact, I'll have to hand that one over to Janelle.
It wasn't a material impact. I can come back to you with the exact number, if you’re interested.
Okay. Cool. And just -- I mean, for our benefit, do we expect that to reverse in future quarters?
It was a high -- effectively a higher installment rate. So I wouldn't expect it to reverse.
Our next question comes from Lucy Huang from Bank of America.
I just have 3. So firstly, I guess, feedback from the industry and agents. What are you hearing in terms of when the industry thinks that listings will start to come back? Because I think everyone was expecting spring to see a positive bounce, but we haven't seen it yet. So maybe what's your sense on the earliest that one can see some positive numbers there? And then just secondly, on the recent price rise. So what's been the reception from the agents and consumers? Have you seen any, I guess, impacts or churn as a result of the price rise given that we are in a low listing environment? And then just thirdly, on Agent Match. Are you able to give us some color as to what's the proportion of agents that are accepting leads being delivered by REA?
Sure. I'll take those questions. So in terms of listings, it's very hard to predict. I think that we had our -- coincidentally our top sort of 30 customers in here on Wednesday for a strategy session. And talking to them, they feel like the market is absolutely getting better. They talk about at the moment, with the low levels of stock, that some sellers are sort of sitting on their hands. One agent said he had seen prospects who are kind of ready to sell if they can find something to buy. So you're kind of getting this self-fulfilling policy. Our view is, given where we're at, at the moment, that we don't see that year-on-year comparison turning positive this calendar year. But the feedback from our customers, the vibe of our customers is that coming into the new calendar year, it's going to be much better. And in terms of the impact of the price rise, it's kind of old news. We took that to market. In March, we started the communication. And so our customers had a long time to digest that. It's usually around that time around April, May, if someone is going to churn off a product because of a price rise, it would happen then, and it didn't happen. So there's been no discernible impact of the price rise from our customer base. And in terms of Agent Match, it's still very early days in terms of our experience there. What we are seeing is that, unsurprisingly, when we think about it, that most of the leads, something like about 85% of the leads, are actually going through to Premiere All customers, and that shouldn't be surprising because Premiere All customers are typically the larger or more successful customers in the various areas. And it is still free. So it's still free for Premier right through to July next year. And so they're accepting them. And again, the feedback on Wednesday from our customers is they are very good leads compared to some of the other sources where they buy leads. So these are very high quality. We are still running -- just started charging the non-Premiere All customers. There's been a bit of noise around that. That's a new experience to them, having to pay for a lead with us. And it's fair to say there has been noise from those customers. But we are -- we've always said, we'll test and learn with this. And we've described previously having maybe different ways we charge for those leads. So we'll watch this for the next 2 or 3 months. And then if we need to pivot the way we charge for that product, then it's pretty easy to do that.
Our next question comes from Fraser Mcleish from MST.
I'm just trying to understand a little bit better what's going on with yields, if you don't mind. So I know these are high-level group numbers. And just roughly, I mean, you've had 15% listings decline, you called out. Your underlying revenues down 6%, so that's kind of 9%, call it, yield, of which price probably about 8%. So you've – kind of looks like you've only got 1% from depth penetration, mix, et cetera. Can you just tell us what's going on there? Is there a big geographic impact going on there, for example, Melbourne being particularly weak, Sydney being particularly weak?
Yes, I mean, you know that, Fraser, in that the yield is up on a kind of like-for-like geographic basis. But when you look at the yield by geography, it does differ quite considerably between the Sydney, Melbourne markets versus South Australia, WA, et cetera. And even within Sydney, the yields are very different from inner suburbs out to the outer suburbs. So you're seeing a mix in it, but the price went up. So like-for-like by geography, yield is absolutely up. But when you see Melbourne and Sydney down more than the rest of the country, that will have a negative impact on yield and vice versa when it goes the other way.
[Operator Instructions] Our next comes from Paul Mason from Evans & Partners.
I've just got one because all my questions have been asked. But I'm just wondering if you could give us some color on your Audience Maximiser, Showcase and Reach products that you've called out as improving. Is their contribution of late actually becoming meaningful here? Like in aggregate, could we look at them as actually contributing up for like percentage level differences to your results? Or are they still sort of rounding errors versus like the Premiere All contributions to revenue growth?
They are relatively small compared to listing revenue. In aggregate though, they are growing faster, and they can add to the percentage of revenue growth, but you need to aggregate them to do that.
[Operator Instructions] Our next question comes from Andre Levy (sic) [ Andrew Levy ] from Macquarie.
Andrew here. Just a question from me. Domains moving to tiered pricing, it looks like based on the value of property in the suburbs, I'm just wondering if you guys have looked at that model previously. And if so, why you haven't gone there and you’re sort of stuck with flat pricing to segment it on housing and apartments in each geography? And then secondly, I was just wondering, early thoughts on what you think the impact might be on the market in REA’s business?
Thanks, Andre -- sorry, Andrew. Yes, look, we've obviously had fairly full visibility on the domain-tiered pricing. And again, I've got to talk to some customers about that on Wednesday. There's 2 things that you need to know within that. So within that pricing change, they are putting a fairly substantial price increase in there. And the customers are absolutely awake to that. So I'll let you look at what the feedback on that might be in this market. The second thing that the customers have said is that it's quite complicated. And so where it's really going to get complicated is around the cast of the different yield points. And I think it's 3 zones. It's quite a complicated matrix. And so the principle of trying to align the cost with the value of the house, absolutely, we think makes sense, and that's why we've got geographic pricing in our pricing methodology that's loosely aligned with property values. But the feedback from customers at the moment is that's quite a complicated pricing structure.
There are no further questions at this time. So I'll pass back to Owen Wilson for closing comments.
Thank you, and thank you, everyone, again, for your time today. And we're really pleased with the resilience of our performance, given those market conditions that we talked to earlier. We absolutely know that the buyers are back, and it's inevitable that the sellers will follow. And when the market does turn, we're confident that the fundamental strength of our business does position us well to capitalize this. We look forward to updating you again when we release the half year results in February. Thank you. Goodbye.
Thank you so much. Ladies and gentlemen, this does conclude the conference call. Thank you for participating. You may now disconnect.