Prosus N.V. (PRX.AS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the processing the OLX Autos Deep Dive call. [Operator Instructions] Please also note this call is being recorded. I would now like to turn the conference over to Eoin Ryan. Please go ahead.

Great. Thanks, Chris, and good afternoon, everybody, and thanks for joining us on quite a difficult day for the first in a series of detailed dive calls that we'll be doing over the coming months into our businesses. We'll be taking a look at OLX Autos. And on the call with me today, I have the CEO of our OLX, Romain Voog; and the CEO of OLX Autos, Gautam Thakar, and they are going to take you through the business. So with that, we'll go through a quick presentation, and then we'll open it up for Q&A. And with that, I'll turn it over to Romain. Romain?

Thanks, Ryan, and good morning, everyone. I'm Romain Voog, I'm the CEO of OLX Group. Thank you all for joining the call today. I wanted to start by saying that we are very aware of the events of the past 24 hours in Ukraine. And I wanted to say that our thoughts are with everyone in the area at what is, we believe, a very concerning time. As you may know, OLX Group operates in Ukraine, and the safety of our team is obviously of paramount importance to us. We are taking all appropriate actions to support our team and our customers during those troubled times. So I wanted to acknowledge that. Now the aim of today's session is really to update you on our progress and ambition of what we are very excited about, which is out to Auto OLX, Auto business, our global auto transaction platform. But let me first start by sharing a little bit about OLX Group. If we turn to Slide #1, our vision at OLX Group is to build leading marketplace ecosystems, enabled by tech, powered by trust and loved by customers. What you can see already today at OLX is the translation of that vision in our strategy. If you look at our business, we clearly have 2 reinforcing businesses; one, which is Classifieds with brands, such as Olx or Avito; and the other one, which is Auto Transactions with brands, such as Olx Autos, Letgo [indiscernible] Turkey or We Buy Any Car in the U.S. Both businesses are among the leading player in each of the [ local ]. Together, we have over 300 million monthly active users, more than 1 million app installs and operate in more than 30 countries and are supported by 14,000 employees. When I'm saying both businesses is a clear testament to our vision is that both businesses are actually part of our ecosystem and marketplaces. We leverage common technology that are across several markets or businesses. We leverage our existing supply and demand in countries where we have both business models. For instance, in Turkey, 50% of the cars we buy on our Auto Transactions platform come from our listed classified websites. But we also leverage our global -- our local operating teams, as well as all the global function and expertise that we have across OLX. If we turn to Slide 2, I want to share a little bit more about Classifieds before we dive into Auto. In Classifieds, we keep on building, what I call, a successful high-growth Classifieds business ecosystem, both with what people will know as horizontal sites, which are multi-category sites across real estate, cars, goods, job and services, where we basically benefit from the power of traffic. And with dedicated sites, more vertical sites as known in the industry, especially the one in real estate and cars. And you see [indiscernible] have different assets, whether horizontal or vertical across the different markets. Most of those assets are actually leading in the market. And when you look at our growth rate and profitability, what's very interesting is we actually have generated, as we've shared with you during our H1 results, USD 0.7 billion of revenue in our Classifieds at a staggering 48% growth year-on-year, which is significantly above the industry benchmarks. What you've seen in terms of profitability is we actually had, what I'd call, industry-level profitability in our most mature market. And you should see our portfolio has some mark-to-market and some markets where we keep on investing in Classifieds. And if you move down the notion of Classifieds, you'll see us evolve from what was probably a traditional Classifieds business to what I will call a transactional Classifieds business, with a strong category specialization. What does that mean? Is that mean that we invest in technology and marketing to build stronger category-specific customer experience, and we will move toward or graph more of the value chain -- of a profit pool when it comes to monetization of transactions. By doing so, we think we'll be able to further monetize our audience and actually improve or increase the number of customers that come to our platform and increase the relevance of our customer experience, making us even more strong in each of the [ local. ] A great illustration of that move is what you can see in product investments, such as [indiscernible], which is a major push we're doing this year. On this one, I'm very pleased to share that we have already reached what I'm saying record time 3 million monthly transactions in our -- in just our 2 main markets, Russia and [ Poland ]. And we are close to zero 12 months ago. So 3 million monthly transaction [ lately ]. So that's for Classifieds. If I'm turning to the next slide, which is more about Auto and before a more detailed presentation by Gautam on -- our Auto Transaction CEO, I will just want to provide a high-level view. So Auto, is primarily at the stage of first-party marketplace where we buy the cars that we later sell to dealers or consumers. This obviously require not only technology, but also off-line infrastructure to inspect, refurbish and sell the cars. When you look at the Auto Transactions business around the world, and Auto OLX, in particular, you will see that it is actually at Auto OLX already a quite sizable business in our total revenue. It was representing roughly half of our business in H1 when you look at revenue. But the growth rate that we are posting here is quite important, right? 200% year-on-year, a little bit higher when you neutralize for FX. What is even more exciting with Auto is that there is a significant potential for high long-term growth. When you look at it, it's a USD 2 trillion market. It's a market that is very, very poorly served, I would say, by the current incumbents. And the ability of our technology-enabled model to disrupt this market by significantly improving the customer experience, especially in the area of trust and guarantees, but also choice and quality and financing is actually very impressive. And you will see from the first result that we have already taken a strong path toward [indiscernible]. Now moving to the financial slides, the next one, Slide #4. These are -- this is just a reminder of the last results we disclosed during the Prosus H1 results. And as you can see, overall, the group has grown 100% in H1 to USD 1.3 billion revenue, both driven by Classifieds and more significantly Autos transaction. And what we are seeing since then is a continued strong momentum in the second half of this year as our investments in product, marketing and auto inventory are paying off. On the trading profit side, we have demonstrated how we can get leverage out of our growth, especially in Classifieds. Overall, our trading profit had increased 270% to USD 108 million in H1 FY '22. And while this was achieved with some level of investment into our core Classifieds and our Autos business, you will see us further investing at a higher level to fuel our growth in Classifieds and to scale automotive business in the second part of the year. I want to conclude here my part and say that we have strong conviction on the potential of both our Classifieds business being transforming to a transactional Classifieds, and in our Autos transaction business to create a significant value for OLX Group and Prosus. With that, I'd like to turn it over to Gautam, the CEO of Auto Transaction. Thank you.

Thanks, Romain. Indeed, an amazing set of businesses in OLX and excellent results in FY '22. Hi, everyone. My name is Gautam Thakar, and I'm the CEO of OLX Autos. I look forward to sharing more detail of our OLX transaction journey and how we are solving a massive consumer pain point to build a large, high-growth business for many years to come. This is the first time we are sharing details around OLX Autos, so I might defer to some of my colleagues in Investor Relations to come back to you on specific questions so that we remain consistent with our disclosure policy across the group. That said, I hope to give you a clear sense of our strategy and progress to date, and why we believe we are poised to be 1 of the largest players in this category globally. So let's begin on Slide 7. Romain already mentioned this, but I'll skip through this quickly then, used cars is one of the largest categories in the world, over 125 million used cars are sold every year in a $2 trillion market. A large part of this trade happens in high-growth emerging markets where OLX Group already have significant assets. More importantly, this is a category that is right for disruption, deeply fragmented with multiple dealer and subdealer networks who do not provide transparency with respect to quality and pricing. In many markets, the process is time consuming, with analog documentation needed to complete the transaction. And from a consumer perspective, it's one of the few categories where both the buyer and the seller feel cheated at the end of the transaction because they don't know if they got a good price or a as-described car. Having bought and sold such 7 vehicles myself across 3 countries, I know personally how uncertain and untrustworthy this process feels like. And it's true in every global market and any culture in the world. This is also a category that is at a very early stage of disruption. In fact, only between 1 and 2 -- I should say, digital disruption, only between 1% and 2% of the category transactions are done online, and there's tremendous runway here. If you move to Slide 8, I want to start with the genesis of OLX Autos. Our journey started a couple of years ago when we invested in and eventually acquired the Frontier Car Group, I'll use the abbreviation FCG. FCG had over 4 years built an extensive network of offline car purchases, inspection centers, valuation capabilities, a dealer bidding platform and a car management app. There was strong synergy in bringing together FCG's off-line automobile and retail experience with OLX's online capabilities, dealer network and millions of high-intent users and traffic. This acquisition gave us a start and gave us the capabilities, scale, talent and a new domain in which we started our Auto Transaction journey. As Romain called out earlier, this is a very different business in as much as we control the user experience because we control the product, in this case, the car, and it's one of our first big bets in transaction categories. On Slide 9, you'll see that we have a significant transaction already. I'm delighted to share that we almost doubled our transactions and tripled our revenue growth in H1 of FY '22. While we have yet to report our H2 numbers, I can tell you that the pace of growth has accelerated, and we will report significantly higher results as part of our formal earnings later in the year. This outcome has been made possible by a strong team, our investment in tech and our FCG integration. We certainly also benefited from some macro factors around new car supply issues in some markets, but this growth is especially pleasing in a period when many of our offline centers were under lockdown for parts of the year due to COVID. As a business, you'll see we have crossed $2 billion of revenue since our inception 2 years ago. And our second billion dollars took us a little over -- only a little over 8 months to deliver. We hope to better that pace in FY '23, as we start to invest even more in our growth. While the growth is pleasing, what is even more satisfying to me personally is the success in some of the specific initiatives witnessed across our markets, and Slide 10 will show this well. We know what it takes to build this business over the last 12 to 24 months, and our execution to date has provided proof points and increased our conviction in the model and confidence in the long-term growth potential for OLX Autos. For example, we made a shift to B2C last year, which means selling directly to consumers instead of to dealers, which is what FCG used to do a lot of. And now, in some of our markets, for example, Indonesia, we're already seeing that 40% of the cars that we sell are sold directly to consumers, and we have clear market leadership in this area in that market. This is important because once you start selling directly to consumers is when you really disrupt and really make the consumer experience come alive. For us, with that Indonesia experience, we have started launching through the year B2C in many more markets. In fact, with Turkey, which is the fourth largest used car market in the world, we did a B2C first launch, which means that our focus is B2C and not so much dealers. Another successful example of a test, which we piloted was our financing business in Chile, which we started 2 years ago, and now 30% of our B2C cars sold are actually sold via financing offerings -- our own financing offerings as OLX Autos, and this continues to grow with very low and lower-than-market delinquency rates. In India, we began to test brand advertising and have had significant impact in a very short period of time, doubled our transactions in less than 6 months in the latter part of last calendar year. This has crystallized our learning and approach and our decision to invest significantly in global brand over the next few years. Finally, we operate a niche, but successful and rapidly growing business in the U.S. where our playbook has been defined over many years with the We Buy Any Car brand. Our continued success in the U.S. in launching new domestic cities and markets reinforces our confidence to launch many more cities every quarter in the coming years. We have not spoken about auto specifically to the investor community in the past, and some of you may be surprised in short time the global scale that we have, which you can see here on Slide 11. Since our inception 2 years ago, we are already in 11 markets, ranging from the Americas to Europe and Asia. As I mentioned, we operate under the We Buy Any Car brand in the U.S. and that's a strong growing business, but it focuses exclusively on selling to businesses. The rest of our global footprint will run on a single global platform and leverage a common playbook. We have a large team, over 5,000 employees now already worldwide, mostly in inspection and retail operations and significant investment in growing our team in technology. We have a wide coverage of offline locations that allow us to offer convenient touch points for our users. We are probably, today, the most global used car transaction marketplace in the world, and that is what OLX Autos is today. If you go to Slide 12, you'll see that in the short time, by footprint and scale, we are already one of the top digital used car platforms. While we are very focused on solving customer problems and generally don't compare ourselves with other players, given our newness, we thought it would be a fair comparison to give you some helpful perspective on our scale and geographic footprint relative to other prominent players, public and private, in our markets. To caveat, this is by no means a comprehensive list, and the numbers are based on publicly available data for the last 3 quarters and extrapolated for the full year, including for valuation data where we have fixed recent data that public markets have reported. For OLX Autos, though, the numbers that we have extrapolated are for the first half of the year times 2 and the actuals, and we report them will be far higher because we have had significant acceleration in H2. Despite some of these players having been around for 6 to 8 years, we are already one of the top players, and we are well positioned for the future. Turning to Slide 3 (sic) [ Slide 13 ] this future and our vision for the future is inspired by the opportunity to revolutionize vehicle ownership globally, fueled by tech, powered by trust and loved by customers. A used car is the second most important purchase in our customers' life, especially in the markets we operate in. Making this experience trusted and the process transparent and hassle-free really matters. Financing options are limited in many of our markets, and we believe we can make vehicles accessible to more people and improve their lives. The vision also serves as our guiding light to reinforce areas where we will disproportionately invest, namely technology first, building a trusted brand with customer experience at the heart of everything we do and making cars more accessible with embedded financing for our users and doing this globally. This vision shapes our strategy, which is laid out on Slide 4. I'll talk about each pillar in a minute, but at the highest level, we know we have a significant asset in the OLX brand, with high intent visitor traffic in many markets around the world. We'll leverage this as a starting point for our growth. We will accelerate our investment in direct-to-consumer offerings, B2C, increase our penetration and financing steadily across the world. And finally, we have a large and growing technology team that will continue to enhance our global platform, which we are very proud of, to scale fast, innovate and replicate success in every market as we build product features in one market and take it across the world. On Slide 15, you'll see that we plan to leverage our portfolio strength of supply and demand in Classifieds markets. I want to talk about a couple of things on this page. First, from a portfolio perspective, we have a successful, but C2B-focused business in the U.S., which we treat slightly differently, and we continue to invest in that. But our midterm focus will be predominantly in markets where either we have a well-known OLX Group brand with Classifieds, which means we can leverage the high intent consumer buyer and seller traffic, or where -- in large markets where FCG had a presence. Specifically, this means that our key investment markets will be Indonesia, India, Turkey, Mexico and Poland. These are approximately $200 billion in used car market size today and continue to be growing rapidly, which means there's tremendous runway for us to build a leading transaction business for many years to come. Our Classifieds properties allow us to leverage the significant volume of supply of cars from hundreds of thousands of listers. Additionally, we will also be opening our platform in a managed marketplace model to our highest quality dealers who sell on the OLX Classifieds platforms. This not only improves our cost of acquisition, but affords a wide selection of vehicles to OLX Autos users, which is a critical advantage in supply-constrained markets and something that most of our competitors cannot do. We will also list high-quality, retail worthy cars that OLX Autos buys directly from sellers to the millions of buyers who come to our Classifieds platform and allow both businesses to feed up each other. Romain already mentioned that in markets like Turkey, we are seeing more than 50%, even though it's early days of our ability to buy cars from our Classifieds platforms. In Indonesia, almost 50% of the cars that we sell are sold to people who visit our Classifieds platforms. So there is a natural synergy here, which we'll exploit as we go forward. And equally importantly, in the midterm, the vast amount of data that we have on our Classifieds listing with respect to pricing can enable our data science and AIML models that we have already started implementing to become better than others at pricing, which we think will be a key differentiator in the future. The second element of our strategy is to accelerate our B2C capabilities. We're making good progress on this as shown on Slide 16. In FY '22, we learned how to build out offline infrastructure in different formats, retail formats like warehouses, supermarkets, own and franchise stores that were piloted in separate countries, and we are learning what works best and then we scale it across every market, leveraging our global presence. We also tested building out refurbishment and logistics in partnership with local companies, so that as we learn more, we can bring them in-house as appropriate. Alongside this, we invested in product and technology to build an integrated one-stop-shop for trading, buying and financing a car and also started investing in brand marketing in some markets to educate our customers to buy a car digitally with full trust and transparency and from the comfort of their home. We've had significant success at scale in India on home inspection in cars, where almost 85% plus of cars now are inspected at home either through self-inspection or us sending an inspector to people's homes and changing how they sell their car. In Indonesia, home test drives have been successful. And in multiple markets, our warranty and money back propositions are things that we have learned on and are ready to scale as we grow B2C. All of this has led to the share of B2C transactions, which means us selling directly to consumers rather than to dealers grow from approximately 10% in the previous year to 30% this year. We believe we will have accelerated growth here in this share over the next few years as we continue to invest more in all of these capabilities. Our focus on accelerating B2C naturally aligns with our strategy of embedding financing into our product, which is shown here on Slide 17. Our customers are underserved with regard to used car financing in most of the markets that we operate in. Traditionally, it's between 20% and 30% of customers have access to used car financing. Typically, that's because traditional players, who offer financing at scale, don't have a good way to value the underlying asset, nor do they have an efficient way to liquidate the reprocessed vehicle in case of default. This is a natural advantage for our business, and importantly, a real important need to make cars accessible to consumers everywhere. And we believe this is something we can invest and grow in. We launched, as I mentioned earlier, a financing pilot in Chile 2 years ago, and 30% of the B2C cars in Chile now have our own financing. We have learned many things. Speed of credit decisioning is important. We've built processes now that are faster than traditional lenders. Our credit models that we are continuously improving with internal and external data are actually showing lower-than-industry default rates. Our unique friendly buyback program, which means if somebody can't pay back the full loan, we offer them lower-priced cars or an exchange or allow them to sell off their cars on our platform and recover our amount is really helping us manage the risk and differentiate versus other players. The success in Chile has given us the confidence to launch our business in Mexico and Colombia, which we did recently. And we will scale this over time to many more markets, but we will do that little bit, I would say, treading cautiously to make sure that we are compliant with regulatory requirements, and that we manage the credit risk in daily steps before we expand and accelerate in every market. In FY '23, we will invest extensively in product, process and platform strategy here. Again, we believe that financing, combined with B2C on our product platform, will build long-term advantages for us as we go forward, which brings me to Slide 18 and something the team is really proud of is the investment we made in technology over the last 12 months to build a unified global platform. Our new platform, which we call Roadster, is blazingly fast, micro services-oriented architecture, micro front end that allow us the ability to customize by market and launch new features in one market and scale rapidly to others, whether it's things like home inspection, self inspection, home test drives and even new countries with ease. The platform is now built for flexibility, allows significant automation, in fact, we reduced our testing time for new launches by 65%, allows us to create multiple rapid instances of testing environments, which enables experimentation. And this now has the ability to leverage data for AIML models globally across pricing, credit risk and many more high-data-intense activities, which we think will be critical for the future. The platform is efficient. It's cloud native. It's now all on AWS, and it operates at a much lower cost of operations. We will migrate our transaction business in Turkey, which was on a different platform, the Letgo brand next week actually, onto this global platform. And going forward, our transaction capabilities in every market, whether it's B2C, selling through dealers, financing will be run off this highly agile, flexible and single platform, which allows us to scale. As you can see on Slide 19, we've started leveraging the platform in many critical product areas already. The platform allows us to integrate internal and external data and leverage data science models of credit risk assessment to expand the pool of consumers who are eligible for financing by looking at thousands of data points in real time. We are now using AIML models to enable visual recognition and identify dent and damage in car inspection and automate vehicle condition reports. This also allows our pricing engine to make accurate assessments for retail cars by incorporating car grading with market data. Finally, this puts the power in the hands of our consumers by making it exceedingly simple for them to do self-inspection on their cars from the comfort of their home with our product and get a price quote that they can choose to use and sell their car to us. Another example of testing and scaling is our successful pilots with home test drives in Indonesia. The ability to look at a car with immersive 360-degree videos, book and reserve a test drive, combined with our money back program and warranties, has significantly improved the customer experience and disrupted the current car buying process. We are actually seeing way higher than normal retail car conversion through our home test drive integrated program with the product that we are now building. Now with the new platform, we can productize this test in Indonesia that has been successful and roll it out across appropriate markets that ask for this at incredible speed, which earlier was not possible. Again, our global platform will give us a scale and enable us to do things much faster across multiple markets. While the technology platform drives scale benefits and helps our economics, our growth has driven productivity in all areas of our business. On Slide 20, you will see us call out a steady state or future state of our unit economics. But already, we are saying through retail efficiency, performance marketing efficiency, inventory management, margin improvement from scaling B2C and financing, we are starting to improve our unit economics, and we feel very confident that, in the long term, these are sustainable unit economics that we have shown. In fact, I'll point your attention to the box in the center, which calls out that already today, we are a unit contribution margin positive business in FY '22. This gives us tremendous confidence for the long-term economics. We will remain in elevated investment mode over the next 18 to 24 months to continue our rapid growth, but we will do so while maintaining a positive unit contribution margin. We have clear line of sight to drivers of our midterm profitability, which are B2C financing penetration because of the higher margins we can charge there, investment in technology, which will drive automation, reduce costs and just the scale benefit on marketing and retail operations. This chart calls out our expected margin profile in steady state. But as you can see, we're already at a 4% unit contribution positive margin as a business. We expect from an EBITDA perspective and steady state to be a 5% EBITDA business, and our overall economics, we think will compare favorably with some of the leading and highly scaled players in this industry. We've also shown a comparison of what Carvana thinks their steady state numbers might be. For those of you who are more familiar with our Classifieds business, the 5% EBITDA might look low, but it may be helpful to note that the Auto Transaction model we expressed EBITDA as a percentage of GMV, so a more like-to-like comparison to Classifieds would really need to express it as a percentage of net revenue. In that light, our Autos business will have an approximately 40% EBITDA margin expressed as a percent of net revenue. Finally, to summarize on Slide 21. This has been an exciting year for OLX Autos. We are playing in one of the largest consumer categories with an unsolved pain point of trust and transparency. It's a category that is ripe for disruption by making an inefficient market efficient and accelerating a whole new digital experience. FY '22 has been incredibly strong. We have grown more than 2x amidst a year of uncertainty and change. More importantly, we have delivered multiple proof points such as growing B2C capabilities, scaling financing with risk mitigation, building a global platform and building a global business and team. In FY '23, we will leverage all these learnings and scale rapidly with our new unified global tech platform. And our unique ability to create a virtuous cycle with our classified properties, harnessing the high-quality traffic that exists there and the supply will allow us to build the most trusted marketplace with the widest selection of cars in global markets where we operate, which are highly supply constrained today. Most importantly, we feel really good that even at an early stage, we are unit contribution margin positive, and now are confident that we have a clear path to profitability. It is a competitive environment, but we are already one of the largest global players in this space. Our global team has unique off-line and online capabilities and is excited to make our vision of revolutionizing vehicle ownership fueled by tech, powered by trust and loved by customers come alive in FY '23 and beyond. Thank you for the opportunity to share our progress and strategy. I hope I was able to convey the incredible progress the team has made for our business and our customers and our technology platform through our many successful pilots, but also my deep personal conviction in our future. Thanks again for your time, and I'll hand over to Eoin to facilitate any questions that this presentation may have sparked.

Great. Thanks, Romain, and thanks, Gautam. Chris, do you mind giving some instructions on how to launch a question, please? Chris?

[Operator Instructions]

Great, so while we are building the queue, we've collected a bunch of questions that have come in when we announced this call I remember weeks ago. So why don't I just pose them now. Romain, this would be to you with PaynShip, and now OLX Autos, it appears that the Classifieds business is becoming more capital intensive. This is the question we received from many investors as well. This makes the model more or less attractive? And what does it mean for long-term notes investment and cash flow?

Thank you for the question. Let me maybe separate my answer in 2 parts. So the first one I want to clarify is our core classifieds model is real steady, is very attractive, both from a growth potential and a profitability standpoint, and we continue to prosper. Even if we're evolving from a classifieds marketplace to transactional marketplace, it is not a transactional marketplace that will be what we call asset heavy. It will be rather what we call asset light. And so -- while it required investment, especially in technology, we expect a limited capital intensity shift at this stage. Now let me be clear. I think this evolution of from traditional classified to transactional classified, moving more towards capturing part of the transaction is absolutely critical for the long-term success of Classifieds in general. Now if we move to the second part of our business, which I qualify as Autos transaction, this is indeed a more capital-intensive business model as Gautam has shared. Clearly, today, the offline process for buying car is fraud meaning efficiency, safety of concern, particularly in emerging markets. In order to solve that, you need to bring the transaction mechanic in-house, right? And you do that well by leveraging technology. By doing so, you're able to provide a more reliable service, through car inspection, better pricing, better choice and overall more convenience for the customer. While we do so, we're also able to do this in a more efficient way than any [indiscernible] as our technology back end makes this scalable and more efficient across our markets. Obviously, to inspect cars, to price, to sell, we indeed need to invest in infrastructure, such as inspection center and to take on inventory, which is by design more capital intensive. However, I stress that our business has already a positive contribution margin, which is a very strong signal of path to profit. Given the fact that each time you're going to scale, it's going to contribute more to your fixed cost. And while the investment required upfront is substantial, we believe there is significant operational gearing over time. Financially, by owning the 2 transactions, it allows us to access a larger part of the value chain, which means at scale, the EBITDA opportunity is potentially larger than traditional Classifieds model. And when you -- as Gautam shared, you also see comparable type of EBITDA to net revenue ratios as what you've seen Classifieds in the long term. Bottom line is, yes, the model in Auto Transaction is more capital intensive, especially initially, but we are very capable of generating substantial cash flow over time in a very large market where we are very well positioned.

Okay. Great. Thanks, Romain. There's another one for you, another one that we've been getting quite a lot on is, we're building this Auto Transaction business alongside the Classifieds business. And it's not something that many of our peers are doing. So can you address why it makes sense to do this, and what are some of synergies?

Sure. So let's be clear, each business Classifieds and Auto Transaction are relevant on their own. And you could totally see in the market currently players building both business independently. What we see, though, and I think it's been very well articulated by Gautam through a couple of examples, is that bringing them -- bringing both of them together create an additional flying wheel that contribute to fueling the growth and the profitability of each of it. That is very in line with our mission Autos OLX, which is build both leading marketplace ecosystem enabled by tech, powered by trust and loved by customers. And we think that combining those 2 business we will actually have a competitive advantage versus any other player on the market. And I think it's been very well expressed during the presentation by Gautam around the notion of data -- data power, like leveraging what we know about customers, what do they want to buy in terms of cars, what are they selling, what are the price points in the market to fuel our auto business. It's clearly through a single technology platform that we have across Auto and that can actually -- on which we will onboard -- we will onboard other part of our businesses, which otherwise might have developed this functionality on their own. It is very clearly expressed through the synergies we've seen in supply demand from consumer or dealers, selling us their cars and on the demand side from consumer or dealers buying our cars. So, for us, investing in Auto Transactions is a very logical expansion for OLX, and we see a clear differentiator versus our classified peers here. We believe it's a key strategic priority for us given the opportunity we have to really disrupt that market, and we expect it to be a major source of value creation for our company and to significantly not only benefit from Classifieds, but also make Classifieds a stronger business for us.

Okay. Great. I've got a bunch of other questions. So let's go to the line, Chris, if there are any in queue yet?

Our first question is from Will Packer of BNP Paribas Exane.

I've got 3, if that is okay. Firstly, I suppose, to frame it, it feels like you're doing kind of 3 separate things. One is you are Classifieds, that we know well, secondly, your online car dealer, but thirdly, you're looking to be a more capital-intensive marketplace. Could you just help us think about what you're going to -- you plan to do in that role? Are you going to be doing reconditioning? Are you going to be doing inspection? Are you going to be doing delivery? Obviously, you are in a lots of different markets so it will vary a lot. So in that marketplace model, where is your ambition? Secondly, in your key Classifieds markets where you make sizable profits, what has the reaction of local dealers been to you competing with them? Or in those markets are you not there yet -- not yet there? And then final question, clearly, the geopolitical background is very tough in some of your markets right now. In previous crisis, how materially impacted of operations have been, I suppose, for retail most obviously?

Thank you. I think the first question is mainly focused around Autos. So I'll ask Gautam to cover it. And I'll take the second and third question, if that's okay. So Gautam, do you want to go with that first?

Yes, sure. So I think, first of all, I think as we spoke about from our ambition, I don't actually see this as an online e-dealer and a marketplace. I think we are building a marketplace for customers who can sell their car to us or who can buy their car from us. One of the things that we're doing in the marketplace, which actually talks to something that Romain will probably address as well with respect to dealers is we want to have this marketplace be a marketplace that has our own cars, which we have bought, as well as cars from our high-quality dealer network. So we think that we will absolutely be allowing our dealers to leverage the benefit of people who want to buy in a transactional model and continue to partner with them in that fashion. So I think we see a complementarity here, which is something we can uniquely do. Also, when we buy cars from consumers, not all cars are necessarily going to be retail worthy, but they may be sold to dealers. So I think we allow dealers the opportunity on both sides of the house to benefit from our investment in marketing and technology and everything else that we do. On the what we do in the ongoing basis, absolutely, we will buy the car. We will -- in many cases, in many markets, we are starting to put up, either through partnership or ourselves, refurbish the car, make sure that the car is right and ready for an end consumer to buy, allow the consumer to take financing from us and deliver the car either to the consumer's home, if that's what they choose, or to let the consumer come to us and take it from us. In this journey, we will also do things, as I mentioned, like home test drives, which we have piloted in some markets, offer warranties, over time, potentially offer additional services for the consumer in the lifetime of that car. But it is an end-to-end car transaction ownership program that we will embark on. It will be a marketplace where high-quality dealer -- as long as they meet the criteria that we apply for ourselves on how old the car is, what the condition is, whether it's certified or not, as long as those criteria are met, this will be, over time, a marketplace that we and our dealers can leverage.

I think just to clarify. So in the example where the dealer wants to keep ownership of the car, they could outsource the delivery to you potentially?

Yes. Potentially in the future. Right now, we are only doing it for ourselves. But in theory, we will -- if we accept the car that's -- we will look at it from a consumer lens and we will offer up a possibility for high-quality cars to be taken through our network and supplied as well.

And so I think Gautam has actually answered question number two, and you can see how this move into Auto Transactions is not -- is rather an extension of what we can provide dealers as a service -- for dealers as a service. So we do not see at this stage any conflict rather an ability for us to consolidate a very, very, very fragmented market under a single brand with a high level of quality and processes and a high level of trust and make some of the dealers benefit from these opportunities. Maybe I'll address question 3, and I believe question 2 has been addressed here. So what -- every crisis is very different, right? And we are at the very early stage of this crisis here. And so it's very hard to comment on it. The only thing I'll say is that in previous situations, especially [indiscernible] that we had to face a [indiscernible] what we've seen, so maybe surprisingly is that there was actually a tailwind of growth for online platform as the off-line infrastructure was under stress and/or had to shut down in some part of it. So we actually have seen marketplace where this happened in the past get some form of tailwind from the situation. Now, once again, every crisis is very peculiar. This one is developing as we speak, and we will adjust to the situation. But I can tell you, obviously, we have plan in place for providing business continuity on our end in Ukraine.

The next question is from Catherine O'Neill of Citi.

I wanted to ask about the online penetration level, which I think you said is sort of 1% to 2% in most of your markets. Where do you think that can get to for the medium and longer term? And which of your markets do you see the potential for this to increase at the fastest rate? The other question I wanted to ask is just around competition. Are there any other key operators in markets that are doing the sort of Auto Transactions type model online? Do you see yourselves as the first mover? And then the final question is on the contribution margin. So to get from the 4%, you're at currently to your 9% target, I just wanted to understand a bit more about what the main drivers of that would be, where you see the main sources of upside on that margin if you can break down some of those component parts?

Thank you. I'll direct all of those questions to Gautam.

Thanks, Romain. So I think, first, each of the markets, and I think there was a slide there where we said, "Hey, our focus markets will be in no particular order, but Indonesia, Turkey, India, Mexico and Poland, outside of the U.S., which we have a different brand that we treat slightly differently. Together, they are $200 billion of market, and they're under 2%, give or take. Some of those markets are larger in terms of digital penetration. So India has already accelerated to 7%, 8% already. Some of them are very small. I think Turkey, which is a $90 billion market, is probably under 1% today. So these numbers are averages and you look at it in aggregate terms. We think that most of these markets from external projections are expected to not only grow in used car size, but expect it to become, in a reasonably short period of time, in the 8% to 10% type range. Those are the projections that exist. But irrespective, I think that's a massive size of an opportunity in an already growing market. So we see our role, frankly, as being a first mover where we can, leveraging and educating consumers and actually changing the game by building a trusted experience, transparent pricing, making sure that the consumer is not left with any concern in the buying journey. So I think we can actually play a big role in accelerating this in really large markets. Yes, there are, in some countries already, solid competitors who are well funded as well. There are some companies, some of you may be familiar with. In LatAm, there's a company called Kavak. In India, there's a company called Cars24. I think Indonesia and Turkey and Poland, we probably have a really nice head start. But this is becoming a competitive market. And I think some of the things we spoke about, which we think others don't have, whether it is our unique ability to get supply and demand because of Classifieds, our pricing data, our investment in our single global platform, which allows us to test and learn in one market and rapidly take it everywhere else, meeting all of those things will stand us in good stead. And ultimately, I think it will come -- it is ultimately a little bit of a retail business. So strong brand and strong execution becomes important. But I think all of the component parts of what we are doing to build advantage, we think, we are very confident about where that will get us to. To your question on the margin, I think there are 2 or 3 things that we spoke of today. Traditionally, margins are slightly higher when you go direct to consumer as opposed to selling to dealers. So as the penetration of our direct-to-consumer business improves, that grows the margin, as financing gets attached to a car, that improves the margin. Just by the nature of scale, retail operations efficiencies, improve the margin. A lot of the things that we are doing with product and technology around automating things, whether it is things that allow us to have better inventory management, but importantly, things like we're very proud of self-inspection tools, which allow you to just walk around the car with your camera and your phone and you sort of get a reasonably good valuation because the data sciences team has built visual recognition algorithms to make that happen. It takes out a lot of the retail geographic footprint costs. So these are some of the things that we think will drive the margin. But again, there are very few businesses of this scale today where at such an early stage, we are already unit economic from a contribution margin positive. So we feel good, and we think we'll continue to enhance that.

Just I would like to add to the second question around competitive situation. As Gautam pointed out, in some markets, we clearly have a leadership position. We've stated before, Turkey is probably a good example. In some others, we are second or third player. I will really encourage us to think about it as maybe we have 1% or 2% of the market and the second 1 at 1% or 2% of the market, the reality is there is 96% of the market, which is still ripe for disruption. And I would see that was [indiscernible] when you look at the customer expense of the incumbent offline type of dealers as sourced suboptimal versus what could be brought by company and by technology that you would actually believe that the real pie is the 96% [indiscernible] and the pace at which online will penetrate the market.

Okay. That makes sense. I just have actually 1 more question on funding of inventory, which I think you mentioned is currently funded by yourself. As this business scales further, is there scope for that for you to bring in outside funding sort of other loans or ABS facilities, something that's -- it's something you're already using or whether that's that you could do in the future?

Maybe I'll take that question. At this stage, we indeed do not rely on a external funding except -- in fact our funding comes from Prosus who is also leveraging that if you want to think about it. We don't exclude any other more efficient way of getting funding, including consignment. When you talk about external dealers selling on the platform, you can actually have inventory in containment and you don't pay for it or any other means. At this stage, we are just focusing on scaling with the current equity funded inventory type.

The next question is from Lisa Yang of Goldman Sachs.

A couple of questions if I may. I'm just wondering if you could maybe talk about the opportunity to do cross-border sales. I mean you talked about the synergies by leveraging your comments. Talk about -- wondering whether there could be an opportunity to take advantage of the some pricing [indiscernible] arbitrage between the various markets where you operate? The second question is, I mean, regarding competition. Obviously, we're starting to see a little bit of consolidation happening. Obviously, with the merger of [indiscernible] and [ CarMax ] and given obviously the current market conditions and maybe some of the competitors might -- may become more rationale and try to limit the cash flow. I'm just wondering if you see any interesting consolidation in the space in your market? As you mentioned, there are multiple your #2 and #3. So just wondering which markets could be interesting. And the third question is really you're growing extremely fast. I'm just wondering like how do you ensure that you can keep maximizing that growth, while, at the same time, optimizing whether it's customer experience or video experience? Because obviously, many other players have commented on the challenges they could face when they are growing. So wondering, what are the sort of potential bottlenecks to growing faster from here?

So i'll let Romain, if you want to add on?

I'll let you take 1 and 3, I'll take the 2 on the consolidation.

Okay. So look, I think in many of the markets that we operate in, currently, we are focused in the domestic market itself. There are not necessarily as easy cross-border opportunities as perhaps in Europe where they exist and a large proportion of our operations are in Latin America where regulations and what it takes or in Asia or in Turkey, where it's slightly different, and it's not part of our immediate plan. That said, one thing I'll call out is just like in some of these markets in Europe where there are cross-border opportunities, there are significant opportunities. We are playing in really large population markets and Tier 1 cities and Tier 2 cities are very different. And there is actually often arbitrage between small towns and large towns, whether in India, whether in Turkey, and those are the things that as we start building out our logistics systems, et cetera, we will exploit first before we look at anything that might come from a cross-border perspective just because of the nature of the markets being slightly less homogenous than perhaps in Europe. But absolutely, that's something that we will do. And then the second thing on growing fast and scaling, I think the reason we are so excited about the ability to have this unified global platform, which we have now launched and are scaling is that it allows us a lot of flexibility. And the ability to have a portfolio of 11 countries right now allows us to test different things in different markets. Oftentimes, at least in my experience, people trip up and they have to build technology in a [indiscernible] way and then they can't scale, or they have to do the same thing again and again to prove it out in different places. I think we feel really good that we can have a platform where, if something works in 1 market, the same instance of that product can quickly be replicated everywhere else. And more importantly, as you heard me say earlier, a test drive, we are testing in Indonesia, home inspection, we are testing in India, retail warehouse formats, supermarkets we are testing in Turkey. As each of these -- this is a very early stage business. We are disrupting, as Romain said, the 98% or 96% of the off-line population and getting it digital. I think all of the pilots and bets that we are making across our 11 markets once they work, we can just rapidly scale. So we don't have to put the burden of execution and test on 1 team, and we can distribute it. And I think that gives us a lot of scale, leverage and confidence.

So thank you, Gautam, to address question #2 on consolidation. I think we are at a very early stage of those markets. As Gautam said, it's -- online is [ 1, 2, 3. ] India is probably quite advanced as well as U.S. With a 7% penetration of online. So it's pretty early stage to talk about consolidation. Will consolidation happen in the future? Maybe. If you look at India, there is like 4 players today. So there might be an opportunity for smart consolidation there. So we will always be open at looking at opportunities to create additional value for shareholders when it's relevant, obviously as well as we'll be very open to look at M&A opportunity to increase our ecosystem where it's relevant and efficient for our shareholders. Now that being said, I want to point out to something, which is important. We are -- we've discussed a lot about Classifieds and Classifieds is a model where the leader of the market can extract additional value by having a bigger platform than the next player. In car transaction, this is probably a little bit different. The efficiency and the monetization and the profitability of an Auto Transactions platform comes when you reach a certain scale. Even [indiscernible] player which is bigger than you, the reality is the sheer scale of your operation will get you to the right level of economics and business model because you will amortize your network and your infrastructure and have inventory rotation that is required. So we see Auto Transactions as a less critical one -- [indiscernible] #1 type of play. I totally see big markets where 1, 2, 3 player might actually all succeed. Once again, 96% of the market in most market is still not online.

All right. That's really helpful. Can I just follow up maybe. So I think you mentioned there will be more investments to come in the next sort of 18, 24 months. Should we expect basically the peak of investment to be within that sort of 18, 24 months and then investment should like cut down and you will sort of [indiscernible] margin positive after? Like how should we think about that the level of investment...

I understand this question is for OLX Autos, right? So I'll defer to Gautam.

Yes. So look, we are excited about what we've achieved and that gives us both the ability, as well as the motivation to continue to invest. So certainly, the 18 to 24 months, we will be at an elevated level of investment. But I think it's important to note that all through this period, we are -- our focus is to remain by market unit contribution margin positive. Now what does that thereafter? We don't think that the investment -- it's actually a good problem if we're going to have to continue to invest thereafter at high levels, which means we are making bigger and bigger dents in the digital transformation of this category. But also, today, we are focused on these markets that we are in. As we learn more, as we scale, if we choose to go into newer markets, the cycle of investment that is required to scale up a market will start all over again. So I think this is a multiyear -- it's a hyper-growth phase, not for 1 or 2 or 3 years, we believe it could be for a decade. And then as we execute more, as we hopefully add on more things to the platform and do geographies over the future, I think our investment levels will continue on. But for now, in the markets that we are focused in, we think the next 18 to 24 months will be elevated investment, but the hyper growth period will last for a long time.

And very last question for me, I promise, for Romain. On the transactional side, so ex-Autos, what sort of competition are you seeing from market prices? It seems like [indiscernible] getting a bit more traction in sort of markets. I'm just wondering if you can add any color on that?

Sorry, are you talking about Auto Transactions or Classifieds...

Classifieds B2C, yes.

Yes. So you have very different answer by market. And if you look at our main markets, Russia doesn't have really any Facebook presence. Then when you go about the rest of the markets, our largest markets has actually developed such a strong presence and are, I would say, advanced in a way from a product standpoint, but we, at this stage, are not seeing -- are not necessarily concerned by the type of competition we could see from large maybe less productized marketplace, such as the Facebook Marketplace at this stage. Now we take all competition very seriously, but it is not a concern of us on cars classified.

Okay. So -- and again. So I think we're past the hour. So I want to be respectful of time, let's just take then maybe 2 more, Chris, and then we'll push on and you can feel free to reach out to IR, and we can continue the conversation.

Of course. Thank you. The next question then is from Cesar Tiron of Bank of America.

I have a couple. The first one, do you see any countries where OLX has a strong presence, but where you do not see the potential for OLX Autos? And then can you please explain why? Second question, which I have, do you see any synergy in this business between the countries? And then third question, how much capital do you need for the car financing business? And will that be done through an external partner?

Maybe you want to take the first question on -- the first and second question, maybe Gautam, I'll take the 1 on capital car financing.

Yes. So from a country perspective, as we said, we have presence in the 11 countries, the large markets within that, Indonesia, India, Turkey, Mexico and Poland is something that we are focused on. U.S., we operate a different brand. We love that business. We will invest in it, but it's done slightly separately. As we look at new markets, we evaluate a variety of things, size of the market, regulatory environment, competitive presence, if you will, and also our own assets. And so we are looking at that constantly. And at this point of time, we believe that the markets that we are in, over the next 12 months or so, are something that we want to really double down on and invest but we'll keep every 6 months or so, looking at seeing how things change. We don't believe that there is any market where the auto transaction model will not work. It's just a question of prioritization, focus and size and scale. So I think that's how we think about it. I may not have fully understood. I think you asked synergy between countries, i.e., of having Classifieds and Transactions or just having a cohort of countries that are more synergistic?

Our last question is from...

There was a question from the [indiscernible] of the second question from Cesar.

My apologies. Please go ahead.

Yes, yes. So -- yes, so there were 2 other questions. So I just wanted to make sure I understand if there are any synergies between the countries? And then also on the capital, which we need specifically for the financing business, which you discussed?

So I think synergy-wise, as we spoke, there's a ton of synergy that we have seen between the classified and the transaction business within a country where we can divert traffic as well as have the data and pricing and all of that become a competitive advantage. I think I mentioned earlier, sorry, but it wasn't clear that, at this point, things like cross-border trade are not something that we look at. But the synergy of learning on a product feature or learning on a test in 1 country and then rapidly scaling it across countries is the way we think of leveraging our global portfolio and our global presence. But I'll let Romain talk to the third one.

And maybe just complementing what Gautam was saying. Obviously, one of the big synergy is single platform, right? This is -- in classified, there is a history of having a platform, which are developed by countries, which we have partly in OLX and we have partly platformized our technology. In OLX Autos what's very, very interesting, and I think an absolute competitive advantage is a single platform across 11 countries. So this is a big synergy. Because when you think about the level of tech stack you need to build to be able to operate both business online, offline, moving online to offline, managing inventory, it is a more complex type of technology and stack but what you see in Classifieds too. So it's very -- so the synergy is actually quite significant when it comes to our OLX Autos business and how it's been architected. So just complementing the second question. Third question about capital for car financing. So what's very interesting in car financing is a couple of fold. What we discovered is that we believe we have also here a little bit of a competitive advantage because we know exactly what we sell. As Gautam was saying when you're trying to get a loan for your car, you're getting a loan, but the person who's providing you the money doesn't really know the quality of what you buy. And we know very well what we -- what people buy with us because we have inspected the car with more than 300 points. So we know exactly what the value of the asset is. More importantly, what we've seen in our businesses is deal with delinquency we're able to provide a process where we actually get back the car and one person can be able to actually resell it, right? And so we have -- we are able to recover more of the default than probably other traditional players. So that's one very important thing on car financing that make us think that we actually could drive that business with a lower level of default than any other incumbent players. When it comes to capital of car financing, as you would know, in any type of those businesses when you start to actually have a track record. And this track record is built across multiple years. Some people said 2, some people said 3 years. So you will probably see us in the first 3 years in a given country, rather financing with our own equity. And as we build our credit history, go and leverage more external debt. We actually have done some of it already, some leveraging of external debt in Latin America, but you should expect us to fund a large part of our next year at least cap financing through our own equity.

And our last question is from Miriam Josiah of Morgan Stanley.

Three for me, if I may. Firstly, if you could just comment on the current environment [indiscernible] shortage, how that's impacting on your ability to source vehicles. I think you might have said it was a tailwind earlier on, but if you could just clarify that. And then when thinking about your investment over the next 1 to 2 years, could you sort of rank your investment priorities? Is it sort of inspection centers, marketing spend, technology, logistics, where do you kind of see the greatest area for investment? And then finally, how are you thinking about the future of car buying in your markets? What are you doing today or planning to do around car leasing or subscriptions and those kind of things?

Gautam, I will let you answer that question.

Yes. So thanks for that question. I think from a supply constraint, I think depending on different industry experts, everybody believes that for the next 6 to 12 months, the situation might improve, but it's not going to materially change. So we do think that new cars will remain in short supply because of the chip and everything else, and that has helped our business in some ways shift people to buying used cars has increased ASPs, et cetera. Now we are seeing some gradual declines there, but it's more -- we have really focused about units of cars that we sell. So I think that if more people buy used cars, that's good for the business, if the ASPs are higher, that's good for the business, but that's something that will keep happening at least for the next 6 to 12 months. So we expect to see that momentum not recede. And through that period of time, as we grow our business, scale our footprint, drive our tech and brand investment, we think the momentum of -- that we have achieved now will sort of propel us beyond the new car supply [indiscernible] that we have. I think from an investment perspective, I think you called out all the areas. I would say that in the next 12 months, we are going to significantly continue to overinvest in our platform and technology, though we feel really good about it. I think there's a lot of product features on top of the incredible platform that we want to build, which may have benefits over the next multiple years, but I think that investment is something we want to make now. So technology will be a big part of our continuing investment in the next 12 months. As I said, we are piloting a variety of different off-line infrastructure methods. And I think as we see success in one market, retail footprint or geographic footprint from being closer to customers, refurbishment, logistics, I think these are the areas that we will invest more in. And then I think trust is very important. Of course, we will build trust into every process that we have. But we want to educate customers about the new way of buying and selling their cars and brand investment would be a third area in the next 12 months that we will invest in. And from a long-term perspective, it is on our mind. And if you noticed, when we spoke about our vision, we said revolutionized vehicle ownership. We didn't necessarily talk about a better way to buy and sell a car. So we are starting to think about what the future might hold, whether it is around different ownership models. One of the advantages -- and it's very early stage. This is not going to happen in the next 12 months. But 1 of the things we think about is that we have large amounts of inventory in every market. Are there ways to have short-term leasing/renting type options that we may evaluate over the next 2 years? So it's still some time away, but we are looking at trends around ownership and what we could do and how we could do differently. But it's more in discovery phase and it's probably 18 months away before we have anything concrete on that topic.

Great. I think we have to leave it there, Gautam. I'd like to thank everyone for joining today. I hope you found it interesting. Please follow up with us and IR if you have any follow-up questions. Glad to help out. And I would like to thanks Romain and Gautam also for spending the time with us today. So thanks all, and have a great rest of your day. All the best.

Thank you, everyone.

Thank you.

Thank you very much, sir. Ladies and gentlemen, that then concludes this event, and you may now disconnect.