Frontier Digital Ventures Limited (FDV) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Frontier Digital Ventures FY '19 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Shaun Di Gregorio, CEO and Founder. Please go ahead.

Thank you for that. Good morning, everyone. Welcome to our 2019 full year results presentation. You all will have access to our investor presentation, which was lodged with the ASX this morning. I'm going to reference that presentation as we go through it this morning. You'll see on Page 2 that it's in 3 sections. First section, we'll talk to the results themselves. We'll go into a bit of detail on the headline numbers and some of the individual companies. The second section does give a strategy update. You will note in the second section, if you've been following us for some time, that there is what might seem like some early information, i.e., information that was in our deck maybe from a year or 2 ago. That was deliberate. What we have been receiving in recent times is an increased volume of interest from our new investors, investors from outside of Australia, particularly North America. So we've, I guess, accommodated some of those new investors in this deck to give them a bit of background on the business that might seem repetitive to some, but certainly, for our new investors, we want to make sure they feel that. And then in section 3, there is a fairly expansive appendix, which also just reminds people of our accounting treatment of the various entities into which we've invested. And I think there's 1 page there on most of the businesses as well. So we'll go into the first section, section 1, which is our 2019 results. If you flip through to Slide 4, you'll see a slide, total rapid revenue growth so that, again, just demonstrates the half-on-half growth since we listed in the first half of 2016. Two ways in which we report our results to the market. One is at 100% level -- portfolio level, which is 100% of everything. And then beside that, you'll see the portfolio share. So this is the percentage of the portfolio that we own, and we carved that out so investors can get a clear understanding of the percentage of that revenue that can be attributed to FDV. Both charts, we're really happy with the performance of 2019. I think it's been the best year in FDV's short life where our revenue actually accelerated, our revenue growth accelerated versus 2018. Not many companies can lay claim to that. And what we've continued to deliver is really solid results half-on-half. Underlying that has been the structure of our business, which is, as you know, to invest in local entrepreneurs running marketplace businesses in emerging markets. We've got a portfolio that is really increasing quality now. And as a result, we're able to come back to market and consistently deliver on our results and, more importantly, I think, continue to deliver on what we said we were going to do right back to 2016 when we listed. So our full year revenues are there, everyone can see. As I said, our growth did actually accelerate year-on-year, which was -- which is a pretty impressive result, and you'll see the continued rapid growth on our percentage of that. If you flip over, next slide, you'll see that the -- a feature of our portfolio is that all of the individual businesses are now starting to perform better and better, and that means more of them are getting closer to profitability. We always talk about our business in a portfolio sense. We will increasingly talk to investors about our portfolio on an individual business sense. Each of the businesses are starting to get larger and larger and become more material. So while we will always come back to that portfolio view, what drives that is obviously the performance of the underlying businesses. And it's very pleasing to see that we've all had -- that they've all had really solid years and all had improved, for the most part, EBITDA position. So it means that at a portfolio level, FDV continues to deliver on what it said it would do. And you can see that the EBITDA performance, again, has significantly improved over each year, and we're really pleased with where that's got us to in 2019. Some of the operating metrics you can see on Slide #6. These are obviously a lot of lead indicators for us. They're what drive the businesses and just really consistent growth over many halves now. And again, I guess, that comes back to the nature of our portfolio where we're across a number of markets, we're across a couple of verticals. And it really does ensure that the indicators, the metrics across our portfolio have continued to grow really strongly in 2019 as well. I'll move on to Slide 7. It's a really important slide for people to understand, includes on the left side, obviously, the operating companies, but it also includes the percentage of those companies that we own, the vertical that they exist in and their '18 or '19 revenue and the relative growth. And beside that, we'll break out for you the FDV share of that. So you can see that some of the parts, we grew faster in '19 than we did in '18. A big part of that was -- had a couple of businesses really have breakout years, performed really well. A feature of the markets we invest in is that they're not always smooth. What we do focus on though is the trajectory from quarter to quarter, half to half, different things happen in different markets. But our portfolio is structured in such a way that it all evens out and we've been able to deliver a really strong result as well. Won't go into the individual businesses there, but I'm sure anyone on the call who's viewing the deck can look through that list and see that it's been pretty solid contributions across the board and now getting more and more of our businesses. And we would reference this in previous investor presentations, up over that $1 million revenue mark. I think you've got a couple there that are in the 900s in FY '19, with only a couple that were really still around that $0.5 million mark in total revenue. Important to remember that when we listed in 2016, I think half of our portfolio probably had only a couple of hundred thousand dollars in revenue in total. So it's been really pleasing to watch even the small businesses in our portfolio start to get some size and scale and get some growth over the course of the calendar year. Going into -- so that's really the financials and we will go to questions at the conclusion of my presentation, so we can come back to some financials based on the Q&A. We have updated our strategy section, as I said, continue to communicate a really consistent strategy. And I think if you go back to our previous investor decks, you'll see that much of this narrative remains really, really consistent. We have included some strategy slides just to give new investors and those that are interested in our business, which I said earlier, has become a longer list, a bit more background. Essentially, our footprint on Slide 10 is now very much focused around Asia and Lat Am markets. We've done less and less in Africa. We've exited a couple of businesses during the course of 2019 that were in our portfolio that were in Africa. So our focus very much around 2 geographies, developing Asia. So that's Asia, mainly Southeast Asia and South Asia, and then, of course, some of those Lat Am markets. And the Lat Am businesses did really well in '19. And as you know, whilst we continue to invest in automotive, we are very, very focused around the property verticals. So our business over recent years has matured a bit in that really focused on a couple of regions and really focused on a couple of verticals, and you can see that reflected in the slide titled Geographical Breakdown on #10. We break that out a bit more just to help people understand the emphasis on property, and you'll see that 7 of our portfolio is property, 4 automotive, and we have 1 general classifieds business. And again, a big focus for us, whether it's property, automotive or other, is market leadership, and we've continued to really drive our investments to focus on their market leadership and what they can leverage with that market leadership once they become a trusted brand in their individual market. Further that on Slide 12, again, is an extrapolation and an update on the model. So when we started investing in online classifieds businesses, it was very much the traditional model that everyone understood, which is consumers coming to a website, finding a house, finding a car, clicking on an ad and then really disappearing into the ether. What is happening now in all of our markets, and we're really excited about it, is that as these classifieds businesses become market leaders, they increasingly extend their leadership in a given market and really start to become trusted intermediaries. They really start to become marketplaces. This is a really interesting dynamic we're seeing. The online classifieds model evolved rapidly around the world in developed markets. It's interesting that the online classifieds model has developed and evolved really, perhaps even more rapidly in emerging markets. So many of our brands, obviously market leaders, are now starting to leverage that leadership, not just to sell ads to property agents or property developers or car dealers or car manufacturers, they're really leveraging that position to play a much more active role in the transaction. And we talk about this in the context of it being a 2.0 world. I know it's a very well-used label, but it is very much a rapid evolution of what's happening in classifieds. And one could argue that what's happening now, well, starting to happen is a genuine disruption of the model. I think historically, the evolution of online classifieds was improving on a process that was otherwise a bit clunky. It's helping property agents sell more properties at a better price. It was helping consumers find properties. But this has now evolved to the point where the portals are starting to become marketplaces, where people go not just to click and then leave but actually remain within that ecosystem, within that marketplace that's been created and go much closer to the transaction and, in many cases now, starting to complete the transaction with the portal being up close to that process. And in many occasions now, portal is starting to take some of the commission that's generated at the point of transaction. So what that's done, I guess, is opened up markets. So when we look at markets, we're not just thinking about advertising revenues that are possibilities, we're now thinking about advertising revenues. But on top of that, we're thinking about transaction-based revenues and many other revenue streams that come out of a process such as buying a property. It's a really exciting part of our business and one that we're very, very focused on. And it's very, very interesting to see how these businesses are leveraging their position into transactions. If you go over to Slide 13, it basically means as markets open up more opportunities for their classifieds businesses, that many of our businesses are really starting to improve their trading position. Obviously, growing revenue is very important. You can see from the data that we're seeing a general improvement on profitability, which means less cash burn, which means that we're getting more and more businesses becoming self-sustaining, which is really important but from a financial perspective and from a management perspective as well. Where that does leave FDV is with a really strong balance sheet and really well positioned as we head into 2020. We've been pretty busy over the last 6 months or so. If I think back earlier in 2019, we're very focused on just consolidating the operational capabilities of our investment companies and that was really a big focus for us. Over the last number of months, part of our strategy, again, is to start to acquire larger stakes in the businesses in our portfolio. We know the entrepreneurs very well now. We know the businesses really well. And if I go back to December, we increased our position in InfoCasas, which is a great business in some of the Lat Am markets. We increased our stake in AutoDeal in Philippines. It's the leading auto site there in the Philippines and exceeded 3 million visits for the last -- for the first time in January. So another auto site has done that. We're really impressed with how they're tracking. Beginning of this year, obviously, we came off a really positive 2019 where we saw a number of our partners trade profitably. For the full year, we saw another couple of our partner companies trade profitably in Q4. So the underlying performance, a lot of the businesses has really started to improve. And as we rolled into the start of 2020, we also have increased our stake in iMyanmarHouse. It's a property portal in Myanmar, which is a market we really like. And we've increased our stake in Sri Lanka as well. And at the same time, we managed for the first time to make an exit of one of our investments, which was Propzy, a portal in Vietnam. That was done for a number of reasons. We're very, very pleased with that outcome and delivered a substantial return to shareholders, and I guess in some respects, was proof-of-concept of our model where we were able to achieve an exit. But at the same time, we continue to invest in businesses that we can see scalable, growing and ultimately profitable businesses. Just on Slide 15, again, and this is addressing a wider and wider investor audience. So we try to talk our potential investors about the potential for return to shareholders. We are very focused on the fact that we will deliver return to the shareholders and there are many opportunities for us to do that, one of which is obviously monetization opportunities, which is documented on 15. I'm conscious of time. There are a couple of more slides there, which go back to the, I guess, the history of FDV and a bit of information about the register. And if you look in the back of the appendix there, section C or the third section, as I said earlier on the call, there's a little more information on the accounting treatment of our portfolio because it's not clear, when you look at our statutory reports, how it relates to the performance of our portfolio. And there is a slide which helps people understand the accounting treatment of the various investments we've made. And further into the deck, you'll see the 1-page update on most of the businesses there just to demonstrate their track record and just some highlights of 2019 and how they've progressed. So on that note, shortly, I'll pass back to the moderator who is going to facilitate some Q&A. But I think it's been the best year in FDV's short history. We're really, really pleased with how it finished and really, really pleased with the progress of our portfolio. And as I said, I think it maps very, very consistently to the strategy that we laid out. And we're very excited about what 2020 holds and beyond as we continue to grow this business. So on that note, I'm going to hand over to the moderator, who is going to facilitate any questions that might be there for people who have dialed in for the call.

[Operator Instructions] Your first question comes from Ivor Ries from Morgans Financial.

Shaun, if I can just kick off with a question on Zameen. Obviously, last year was a great year. You had some quite sensational growth in the Zameen business. I just wondered what the potential is this year to grow. I mean, obviously, the main driver of growth is the number of projects which are participating. I just wondered what this year looks like in terms of the growth rate you can achieve.

Thanks, Ivor. You're right. Zameen, once again, the team there did a great job. They exceeded their budget expectations. They exceeded our expectations, which was tremendous. Keeping in mind that the market in Pakistan last year was pretty tough, had significant exchange or currency depreciation. But even in the face of that, the management team there delivered an outstanding result. Again, we look forward into 2020. Things in Pakistan are -- there's probably green shoots in terms of things getting a bit better as the year goes out, and we think the business will have another really strong year. Difficult for us to say how much it's going to grow by, but the guys have always overdelivered, so we're always going with fairly conservative expectations. The management team there have done a great job and have overdelivered in every single year we've invested. So if they can get anything like they did this year, we'll be very happy. A big factor is the volume of transactions that they can facilitate and that -- they're only still a relatively small part of that market. The agency market in Pakistan is probably starting to flatten off for them a bit. They've got most agents getting more spend out of them, like a lot of the more mature portals becomes a bit more of a challenge. But the volume of new transactions is still pretty good. And that's a part of the model that they're really focused on. So yes, we remain pretty optimistic about the year ahead. And we know we've got a great team running that business.

And in terms of the -- it's obviously, they made a small EBITDA profit. Would you expect them to be running better than breakeven in 2020?

Well, they were ahead of the curve this year. We didn't think that they would get there on a full year basis, but they did, so again, it was above our expectations. And I think our message to the management team is just keep growing as fast as you can. And where that leaves EBITDA, we'll probably know about halfway through the year. But it's a pretty mature management team and they know what they're doing, but we still think there's a lot of top line growth. And we would never strangle the business for it to deliver big margins if we thought that there was still a lot of top line growth to be had. So I guess it's finding that balance.

Yes. And if it's okay with you, I'll ask you a supplementary on InfoCasas. Obviously, they had an absolutely tremendous second half. And I'm just wondering whether there's an element of seasonality in their business now. I mean, what I'm trying to work out is whether the second half, which was just an absolute blinder in terms of revenue, whether that's the new base or whether it's going to be like a seasonal growth we should anticipate.

Yes. There -- if you look historically back, and I don't have the exact numbers in front of me, but I can anecdotally tell you that their second halves are generally better than their first from memory. And again, I've not got all of that data in front of me. What they've got really good at, there's probably 3 things driving that business, and it all started to come together in the second half. It's got a really strong management team. Ricardo and his team have been at it now for 2 years. They know their markets really well and they actually execute really well. As you appreciate, Ivor, in emerging markets, strategy is one thing but execution is almost everything else. And they've done a really good job of it. They've increasingly -- number two is they've increasingly got better at leveraging their classifieds space. So they've built really strong classifieds businesses, and they're now leveraging those, as the playbook suggests, into facilitating transactions. So they're actually getting much better at that. And the way in which they go about it is quite efficient. So it's a very tech-driven way in which they help consumers connect with property developers, with sellers. And it's a low-cost way of doing it as well. So it's very efficient. Number three, they've sort of put their toe into the market in Peru, which we're pretty excited about. Peru is the size of their other 3 markets combined from a GDP perspective so it's a really big opportunity for them. But they've done it in a really thoughtful way. They haven't gone in or gone to play. They haven't gone in and bet the farm on the market. They're doing it smart, they're doing it low cost, and they're doing it in very segment-specific around urban areas. So those are the sorts of things that started to drive the business in the second half. All of those remain in place but the first half seasonality does come into it. And there are a few local factors which will probably make their second half stronger than their first, which won't be dissimilar to last year in that dynamic.

[Operator Instructions] Your next question comes from [ Ryan Evans ], a private investor.

Just wondering what you've seen so far and what you anticipate you might see in terms of coronavirus impact, particularly in some of these emerging markets that may not have as good infrastructure to deal with an outbreak.

Yes, it's very topical. And yes, I think the interesting thing is that all of our businesses are very domestic, so they're not transborder businesses. They don't rely on trade per se. They don't rely on movement of people or goods. They are very local businesses, which, to some extent, insulates them from international dynamics such as coronavirus. Not to say that they are immune from it, of course, they're not. We haven't seen a tangible or any evidence of that impacting the businesses so far. But I think it remains one of those things that no one is quite sure where it's going to finish. And when one gets different information every day about how it's being managed, it's a bit difficult to put a finger on how it's going to affect our businesses. But I think if I were to look at what are the mitigating factors, we are very -- each business is very domestic and it's very local, doesn't rely on anything that is transborder. And to that extent, it's probably on the right side of the ledger for the type of business you want that might not be affected. On the other hand, you did right -- I mean, emerging markets, corona does seem to be around Asia a lot, but we just haven't seen the impact to the businesses in a tangible manner. But it's wait and see, I guess. But so far, no material impact. It would be interesting in 3 to 6 months to see where it lands.

[Operator Instructions] Your next question is a follow-up from Ivor Ries from Morgans.

Shaun, everyone else seems to be shy here so I'll just barge in. With AutoDeal, obviously, they had strong second half, and I was a little bit surprised at how good the revenue growth translated through to the EBITDA margin. Can you give us a flavor of how far penetrated you think they are at the moment of the revenue potential for what they're doing? And also, if you can give us a flavor on whether you think the kind of EBITDA margin that we're generating in the second half is now the new normal for them.

Yes, it's a business that has got better with time as obvious as that might sound, but it's been a momentum business. So they started their own auto portal, the #1 in Philippines, but those of you who know their history will know that they started with a big emphasis on new cars. New cars, it's a far more lucrative part of the auto market in emerging markets than the second-hand cars. So their legacy is slightly interesting or slightly unusual to be where they are now, which is a market leader. A big part of that momentum has been their product. They're very product-focused. It really is an excellent product. If you're a car dealer in Philippines, you use their product, their back-end is very strong. And it's given them a sense of momentum. When we started to see that momentum gather pace in the second half, I think they had a pretty good result from an EBITDA perspective. But again, it's not a business that we're likely to strangle to get big margins out of. Because if you look at the market there, they are still relatively small vis-à-vis the auto market. While they are very large in the online market, in the online auto space, number one, good penetration with dealers, it's probably only in the second half of the year where the market started to appreciate the fact that what AutoDeal generated was a ton of car transactions. They've been measured perhaps before that as a business, that was a leads business that generated visits to a website and maybe inquiries to dealers. Where it started to come together was when they marketed themselves far more strongly to their customer base, to dealers and correlated the fact that what they were generating for dealers was transactions of cars, not just leads, not just people coming in and inquiring, but they were responsible for most of the transactions. So we started to see that come through on the revenue number, which certainly helped the EBITDA number. I'm excited about what they can do in 2020. Not a business that we're going to strangle for big margins. We really think that they're in a great position that's kind of a long time to get there and we're quite excited about what lies ahead. But again, similar with Zameen, we're not going to strangle them on margin, while we think that there is still a heck of a lot of opportunity in what is a pretty big market in Philippines, of which they had penetrated a relatively small part of.

And in terms of the way they're growing, are they wiping out a competitor in that market?