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

Thank you for standing by, and welcome to the Frontier Digital Ventures HY '22 Results Briefing. [Operator Instructions] [Audio Gap] Mr. Shaun Di Gregorio, CEO and Founder. Please go ahead.

Good morning. Just before I go on, how do I know how many and who are on the call? So [indiscernible] how do I know how many and who are on the call?

We currently have 51 standing by.

Okay. Great. So they should be able to see my browser now. So, welcome everyone to our half year results presentation. Glad you can join us. I'm going to walk you through not a great number of slides, but what we think are the pertinent ones in terms of our results for the half year and some highlights that we'll talk to as well. With our quarterly, which came out at the end of July, it sort of was a preview of our [Audio Gap] update people on our progress, some of the milestones and to dig a little deeper into how we've achieved those milestones, and I guess to look ahead as well. Certainly, in the current environment, things have been rapidly changing, and our businesses have enjoyed the benefit of being quite agile, quite nimble. All of our portfolio companies are effectively locally run, so their ability to adjust and reflect the environments in which they operate is a feature of their businesses. So we're able to adjust each of these settings in our businesses really rapidly as things change around us. As was spoken about through the course of this half year, our businesses have a couple of characteristics, which we think are really important as we head into the rest of this year and next, and that goes to things like [Audio Gap] in the market. So to have market leadership incumbency is critically important. We have strong core businesses, which is essentially built around the classifieds model with an ability to help facilitate transactions as a value-creating product or service to our clients above and beyond that. And we've worked really hard to get our businesses to cash flow breakeven and into profitability, which we think gives them a really strong platform as we head into the next 18 months. So as we walk through some of our key results, we talk about our company with 3 regions, which is LatAm, Asia and MENA. LatAm, of course, is all of the businesses we have across South America. So that extends from Panama right down to Chile. Asia, of course, is our second biggest region now, and covers from as far West Pakistan across through the Philippines. And [Audio Gap] and you can see the relative revenue run rates based on the half year. So good progress in each of those key 3 geographic areas. And operationally, strategically, how we think about the business is very much anchored around these 3 key regions. So less than a year ago, we had swathe of companies right across our portfolio. We operationally always had a view that we wanted to get a geographic entity wrapped around each of those. It's very much how we think about the businesses day-to-day. It's very much a key to how we operate them day-to-day. And you'll hear us talk more and more about LatAm, Asia and MENA versus just FDV. So that's just repeating a bit of the narrative that we've introduced to FDV over the last sort of 6 months. When you look at our key highlights from [Audio Gap] our ability to get back to cash flow breakeven, which we did in Q2. If you look at the way we've operated our businesses historically, our ability to find new opportunities to acquire businesses to improve their operational performance and then get our -- some of the parts business back to cash flow breakeven is a feature of what we do and I'll talk to that in a moment. Our portfolio continues to be profitable at a portfolio level, and again, something we've been very conscious of achieving. And most, if not all of our businesses are basically breakeven on profitability now. Our half year revenue was really strong. Keep in mind when we listed -- I think our full year revenue when we listed was something less than AUD 4 million. So we're now AUD 42 million for the half year, double that and add some for the full year, and you can get a sense of how much we've grown since we listed a few years ago. Just to touch on Asia for a moment, we are [Audio Gap] significantly so. So add those equity-accounted businesses back in, we're not only cash flow breakeven, we're cash flow positive. Good cash balance. And as I mentioned, feature of our businesses and what we like about them is we've got a really strong core classifieds at each -- in each business. And what we've worked hard at over the years is really ensuring that those core businesses stay strong, and that's the definition of market leadership, which is really important to us. But also our ability to look for opportunities around helping more and more sellers and buyers do more around the transaction. But key for us is ensuring that the classified businesses stay really strong. And we think that, that sort of sets us apart right at the moment. Many of our competitors, perhaps they're doing classifieds only, which is fine, but they probably lack the -- they probably lack the strategy to get growth and revenues from [Audio Gap] businesses that are sort of struggling at the moment. So we think that the core classified strength is really important. This is an important chart for us, just talks about our journey a bit and how that's reflected in our cash flow. So we normally start out and have a bunch of businesses. We work really hard on improving. We get to cash flow breakeven. And, I guess, we use that moment to go look for new opportunities, which we've done. And you can see that pattern sort of repeating itself. We're now back to cash flow breakeven. And this is just on a consolidated basis. So it excludes if you were to add in Zameen and PakWheels, which are 2 of our bigger businesses. We just happen to equity account for those. Both of those businesses are significantly cash flow positive. And if you were to add those in, of course, sum of the parts for us would -- at a corporate level, at an FDV level, obviously, be cash flow positive. So this is something we recognize is really important, something that we're very conscious of [Audio Gap] And certainly, I think, if you look back at just the evolution of our business where we've invested in businesses at really early stages in a lot of instances, and they've generally required cash investment. And as you can see from the chart, we're able to improve their operability. We then looked at some new acquisitions we've made over the last sort of 18 months. And again, some of those have needed some cash to help operate them. But over the journey, we've managed to improve the operation of those businesses and now getting back to cash flow positive again. So this is a significant milestone for business. It's important in terms of our future as well, but one that we're pretty proud of and one we'll continue to focus on in the years to come. A big focus for us is getting to profitable growth and sustainable growth. And we know that this milestone is a key step in helping FDV [Audio Gap] they had probably just hold that progress ever just slightly. But when you're getting back into sort of consistent breakeven profitable and EBITDA level, this is just the operation of the portfolio. What's important for us is, we do passionately believe there is significant growth in these businesses to come, but we want to do that on a sustainable basis, and that's what we talk about internally is, is profitable, sustainable growth. And that means making sure you're operating at around cash flow breakeven. You're continuing to achieve profitability at each of the portfolio companies, but you're also still focused on the opportunity that are around us in emerging markets, particularly as these classifieds businesses do more and more around the transaction and broaden the market appeal to their buyers and their sellers. So it's just getting the balance right between ensuring that we absolutely get to cash flow breakeven, which we've done, ensuring that we're able to operate the portfolio profitably, which we're able to, but still remaining pretty focused on what we think are the significant growth opportunities that can -- that are available to us in emerging markets and the value that we can create by pursuing those growth opportunities. But we're really super aware of the fact, our reputation over the years has been built on our ability to do what we say we're going to do and be a trusted investor on behalf of our shareholders, and that goes to besides your sustainable, profitable growth. But we are still a growth business. But we're able to demonstrate that we can do that by managing cash really well and obviously getting our portfolio companies through to breakeven and profitability. And I think that's been a feature of how we think about this year and how we'll continue to think about future years is starting to see these businesses become profitable, but being able to pursue growth opportunities within each of the markets at the same time. So this is an important feature of how we operate. If you look through the portfolio, you can see that the EBITDA performance in the businesses, but for a few exceptions, has generally improved, businesses like Avito. When we bought Avito previous year, they had lost AUD 3 million. We've reduced that loss significantly while we've improved the revenue profile. We're working really hard to get Yapo on track. We invested a bit in Yapo in the first half of the year. They released a new website. We wanted to promote that in the market. We relaunched their brand and a whole range of things to get that business in much better shape to grow in the future. But as you can see, with most of the businesses, but for a few that we're investing in, we're really making good solid progress in getting through to profitability. And that's, again, something that we've been very focused on over the last few years. It goes without saying, know that we still see ourselves as a growth business, but we want to be a growth business that can do so sustainably. And that's probably another feature of this chart, which just goes back to our listing year. And if you go back to 2016, you can see the number that I was referring to on the right side of the chart there, which is the economic share of revenue. We're now up to almost 15x that number or thereabout, so really good growth profile on a revenue side and now starting to focus on marrying that good strong revenue growth profile with our ability to do it sustainably, to be cash flow positive and obviously to be profitable as well. So all of these charts pointing in the direction we want them to point. We're really pleased with that outcome, but we also recognize there's a significant opportunity for us ahead in the next couple of years. In terms of our statutory results, what we focus on is our group operating EBITDA. That's the best reflection of our financial performance that captures what we've -- what we account for in a control or a consolidated sense. And obviously, then includes our share of the equity accounted businesses and gives you our group operating EBITDA. And that map is now pretty close to our cash. It's no small coincidence that our cash flow is most closely mapped to this group operating EBITDA, and this includes all of our corporate costs, all of our costs across the company. So prima facie, we look at our portfolio performance, we then from a group perspective, look at this group operating EBITDA number, and gone from a loss of 3% to breakeven. We think that's a pretty good achievement half-on-half. And you can expect us to see -- to continue that trend in the second half of the year, which will obviously make out the full year for us on a profitable basis. The non-cash items below the line are the ones that sort of skew our P&L. Some depreciation when we acquired E24 as an asset, so we're still in the process of depreciating that asset and some accounting treatments of the intercompany loans and things like that. So there's a whole lot of non-cash items that sit below the line, but the most indicative and important number for us is the group operating EBITDA margin, which captures the performance of the businesses and obviously, all of our group costs. So that's now basically breakeven. And we think that's a pretty good achievement in the current environment. And as I just mentioned, we'll continue to look at that trend in the second half of our calendar year and committed to being profitable in 2022. And that number is a pretty strong indicator of our ability to achieve that this year. Just from a portfolio perspective, as I mentioned, some of the really important components of our business, certainly, in the past and even more so now and arguably even more important in the future is our market positions. And if you think about the performance of classifieds businesses, they're always really correlated strongly to the market position that the portal has or the brand has. That is ever more so in emerging markets where you don't tend to have [Audio Gap] really strong classifieds business as a profitable classifieds business correlates highly to your market position. And that then gives you the platform to do more in each of the markets. And by doing more, that's providing more products and services to sellers and better search experience for buyers. And that helps you then generate revenues in terms of facilitating transactions. And all of that business is helping to facilitate transactions, which is a really important part of our growth. Even more now we're seeing competitors who have relied on free money over the last couple of years start to struggle. We think that for that stress, we've got a real opportunity in the market, and we're starting to see some of the competitors that came into the market over the last couple of years funded by VCs that had to do something with their money and try to execute business models that were probably [Audio Gap] market leaders to improve their market position even further. And that goes to trust. It goes to their ability to introduce more products to their consumers and sellers. But it also just goes to the fact that it's going to get a lot harder for competitors over the next 18 months than it is for incumbents. Incumbents have got a real advantage in the markets at the moment as a lot of those competitors start to feel the stress of finding funding if they're not profitable. We're trying to execute a business model that might be marginal and that held up well over the past few years, because funding was always available. But what we know now is that funding is not available and the strength of being a market leader or being an incumbent and having a strong core business is going to be even more important over the next 18 or so months. Just to give you some headline numbers, and it's always interesting to look at these because you start to appreciate the size of the businesses that have been built and the opportunity that [Audio Gap] period of time. So I wanted stop on them. But when you're talking sessions in the hundreds of millions and leads in the tens of millions, we seeing extraordinary opportunity to continue to generate value in these businesses. And we think that we're much closer to the beginning than the end. But where we've got to already, which is good, strong growth profile, now doing it on a cash flow sort of sustainable basis, getting to profitability. We think that we've done a lot of hard work to get our businesses to now and starting to see them scale up and really make the most of their market leadership, their incumbency in markets where there's significant audiences that are searching and discovering houses and cars online and continuing to want to not only search and discover, but continuing to want to do more of the transaction online. If we look at the transaction momentum as well, so this just strips out property and cars in our portals. You can see that the [Audio Gap] some strong growth in houses and cars. And we know that if you get that right, it's a wonderful way to add value and revenues and profit to your core business. As I've said sort of a few times already, really important that the core businesses remain strong and profitable. That's what gives you the ability to go do more in the markets. And you do that if you're a market leader, you do that if your consumers trust you, you do that if your sellers have a dependency on you. The other feature we're starting to see at the moment as the markets get more interesting is that sellers become more dependent on these platforms. So if you think about people out there trying to sell houses and cars, if they see that there's fewer buyers in the market, because maybe the cost of money is going up, interest rates are bit higher, they've got to double down on their ability to sell their product. They've got to try harder, which means that they [Audio Gap] respective markets. So in years past, one of the roles that REA or iProperty or involved in iCar, whenever the market has got a bit harder, we found that sellers depended on us more, and we're starting to see that trend occur as well. So if you think about all of the factors you want to have in place as we move forward over the next 18 to 24 months, it's being a market leader, it's being a strong #1. It's been cash flow positive. It's been profitable, and it's operating in markets where you've got high trust from consumers, but you've got an increased dependence from your sellers as they've got to work a bit harder to sell their houses and cars. So our strategy is really, really clear. We have observed over time, a shift in consumer behavior, that's arguably accelerated through COVID but not to anyone's great surprise. We have this portfolio of [Audio Gap] in these markets for all of the reasons I've just mentioned. We know that there's a ton of value to be created by making sure we have the core classifieds business profitable and then adding transaction revenues over time, which will underpin cash flow positive and profitability and the value in these businesses. And we also know that, that opportunity remains really, really significant. I think I'd add to that, but the volatility we're seeing in markets, many of those macro factors play to the advantage of a market-leading incumbent who has trust for consumers and has dependency from sellers, and we've seen that play out, whether it was at REA back in 2007, '08, '09 or our iProperty in '13-'14. So all of these factors we've seen before, and we see the opportunity that exists in these environments. So we're pretty excited about the next sort of 18 months. But I think about how that plays out for [Audio Gap] sort of bottom left to top right on this slide, it's a very clear path that these businesses follow. And we tend to invest in a lot of them when they're in the bottom left-hand corner, and we work really hard to walk them through the stages of their evolution and the value that can be created as they start to evolve their businesses. And you can see some really good examples of businesses that are following that curve in our portfolio. And you could plot all of our portfolio along that curve at varying points. But we know that, as I said, we're probably closer to the beginning than the end. But we're starting to see some graduates of this program, if you like. We know the Zameen story. People are now much more aware of the InfoCasas' story, but seeing other businesses like Avito and Fincaraiz in different parts of the world start to progress along this curve as well. And we recognize also that there's the ability to [Audio Gap] we're effectively creating 3 mini FDVs where the revenues in any one of those 3 geographies is in the smallest one, which is MENA is already double the revenue we had as a total when we listed. So our smallest geography is twice the size of FDV was when we listed, so we think there is a lot of value in each of those key geographies. The key drivers of the value there ability to walk these businesses through that or up that strategy curve, and we know that when we get the opportunity for the liquidity, the opportunity for shareholder returns, the opportunity for creating value around these entities is really obvious to us. So we don't [indiscernible] and think about that last box on the right side of it. [Audio Gap]

[Audio Gap] I'm not going to tell you the number, but what I can tell you is that the things that will drive the business, that underpin that growth, we think are stronger now than they were when we started out this year. And probably -- we probably brought that strength forward a number of months in order to make sure that our business remains absolutely rock solid over the next 18 months. So we're just trying to balance those things, which I think a lot of companies are trying to do at the moment. We're trying to achieve both, which is continue to focus on revenue growth, but making sure that what underpins or underwrites the business with cash flow and profitability are there as well.

And just a second one, Shaun. You've obviously sort of seen some really good leverage come through, I mean sort of doing EBITDA margins there of sort of 18% to 19% the last 2 halves. Just wondering, is there anything that near term that will slow that business, seeing that EBITDA margin expand more materially here given it's at scale or is there any investment we need to be thinking about, just given how strong the recent margins were. But are we going to flat line where we are for a while or do you expect you to take the next steps towards becoming a more mature business without any obstacles of note?