Annual Report 2016

CEO's Report

Dear Shareholders,

Thank you for investing in Trade Me.

The year ended 30 June 2016 has been one of good progress for Trade Me. It is satisfying to deliver a positive result to our shareholders that is once again in line with our expectations, and consistent with the guidance we’ve provided.

Over the last three years we’ve undertaken a period of accelerated investment to reinvigorate our offer – both to improve audience and inventory. We have substantially strengthened the business by doubling staff numbers, increasing our marketing spend, improving our product offers in both our General Items marketplace and our Classifieds businesses and enhancing our sales capability. Through this period, we’ve increasingly improved our mobile offer as its importance to our audience has risen.

We’re reaching the completion of this period of substantial investment, which is best demonstrated by the return to revenue growth in our marketplace, and the return to profit growth for Trade Me overall.

The numbers

In F16, Trade Me’s revenue continued to grow strongly to a new record of $218.0m, up 9.2 per cent on F15’s $199.7m. In the second half of F16, revenue grew by 9.4 per cent year-on-year.

Across F16, we’ve also seen the rate of our expense growth continue to decline. Expenses grew by 17.8 per cent year-on-year, down from 25.5 per cent growth in F15, as our period of significant investment comes to an end.

Our EBITDA for F16 was $140.5m, up 4.5 per cent year-on-year. And excluding the losses from our stake in peer-to-peer lending start-up Harmoney, our EBITDA was up 5.1 per cent year-on-year.

Trade Me’s net profit after tax was down 6.5 per cent year-on-year to $74.9m, but excluding a one-off impairment charge, net operating profit was $83.0m, up 3.5 per cent on a year ago. The investment we’ve made over the past few years begins to come to fruition. As our chairman, David Kirk, notes in his report our result was driven by a solid performance in the second half of F16.

Earnings per share for F16 was 18.87 cents. A fully imputed final dividend of 9.0 cents per share will be paid on 20 September 2016. This follows on from the interim dividend of 7.8 cents per share paid on 22 March 2016.

Operating performance

In our General Items marketplace, we were delighted to see revenue growth return after two years. Revenue in this segment was up 3.5 per cent year-on-year, and up 7.0 per cent year-on-year in the second half of F16. Gross merchandise sales have now been heading in the right direction for five consecutive quarters, and underpinned the revenue growth in this segment.

In our General Items marketplace, we were delighted to see revenue growth return after two years.

We attribute the lion’s share of the return to revenue growth to the core product improvements we have made across many aspects of our marketplace. Another contributor was the simplified pricing we introduced on 1 February, with the key changes including the introduction of free photos on all listings, a new flat fee success fee, and a ‘no success fee’ tier for items that sell for $1 or less.

We were also pleased to release a new ‘Book a courier’ service on Trade Me in April 2016, and see mitigating hassle for buyers and sellers around shipping as a big opportunity. Getting this right will improve activity and transaction volumes.

The Classifieds businesses have continued to deliver strong results for investors, with revenue up 13.2 per cent on F15 to $112.8m. There was a good contribution from all three businesses, after a strong focus on generating premium revenue and making our products better.

The Classifieds businesses have continued to deliver strong results, with revenue up 13.2 per cent on F15 after a strong focus on generating premium revenue and making our products better.

Trade Me Property reported a 15.9 per cent year-on-year lift in revenue and continued growth in listings from agents and very strong demand for premium products (up over 50 per cent on a year ago). Trade Me Property remains New Zealand’s most visited real estate website, and its apps have now been downloaded more than 500,000 times. We were very pleased to roll-out free sale price and rating valuation data to consumers. We’ve also been heartened by the response to OneHub, our portal that provides individual agents with an exclusive platform to build their profile, and deliver insights into buyer behaviour and listing performance.

Trade Me Motors enjoyed another solid lift in revenue, up 11.2 per cent year-on-year and continues to be the New Zealand market leader in the automotive category. We’ve seen dealer revenue grow strongly (up 26 per cent year-on-year) off the back of a strengthened sales effort, and MotorWeb revenue increase 15 per cent year-on-year. In July 2016 we launched a reviews and news section, which is a key building block in ensuring we’re relevant to car buyers for more of their research
and purchase journey.

Trade Me Jobs also delivered an increase in revenue, up 14.6 per cent year-on-year, underpinned by listings growth and ongoing demand for premium products (up 35 per cent). We released a ‘recommendation network’ in March 2016, using our data to get the right jobs in front of the right job hunters, and we have updated our job hunter and job advertiser guides. The pre-release version of our new Jobs-specific Android app is available now in the Google Play Store.

In the Other category comprising our advertising, travel, dating, insurance comparison and payments businesses, revenue was up 8.1 per cent year-on-year. Revenue from display advertising
increased by 12.8 per cent year-on-year, despite the continued decline in desktop impressions.

In F16 operating expenses increased 17.8 per cent year-on-year (F15 was 25.5 per cent year-on-year). The increase was largely driven by headcount growth and additional marketing spend.
Excluding cost of sales expenses, the rate of growth lessens to 16.4 per cent year-on-year as some of our lower margin businesses are growing strongly.

This year we have a one-off goodwill impairment charge of $8.1m in connection with FindSomeone, our small online dating business. Over the last couple of years FindSomeone has come under pressure from international competitors which has seen financial performance decline. Relative to our other businesses FindSomeone lacks scalability and upside potential and therefore we have diverted resources into large opportunities that sit within our core businesses. It remains a profitable business and provides a useful service to its customers and we will continue to keep it running.

Full Year Revenue Composition ($m)

Revenue donut chart

Investments and new businesses

We launched Trade Me Insurance in August 2015. Underwritten by, and tailor-made with, local insurer TOWER, it delivers a streamlined, simple, good value online experience for New Zealanders buying home, contents, and car insurance. The business is still in its infancy, and the long term opportunity remains attractive.

We acquired a minority stake in peer-to-peer lending platform Harmoney in January 2015. Harmoney was the first licensed peer-to-peer lender in New Zealand and is continuing to scale
up its business - including reaching the very creditable milestone of $300 million being lent in September 2016. Like many early stage technology start-ups, it continues to incur losses (although the losses incurred in the second half of our F16 financial year were less than the prior corresponding period) but we see a lot of potential for P2P lending to work well in New Zealand. Our Head of Marketplace, Stuart McLean, has joined the board of Harmoney, replacing Jonathan Klouwens.

Mobile focus

We are continually reminded about the importance of mobile. The number of mobile sessions on Trade Me overtook desktop sessions back in F14 and and now comprises more than 60 per cent of total sessions. Not surprisingly, a growing proportion of GMS is concluded via a mobile device.

Many browsers also use more than one device to access Trade Me during their day, and in so doing are more inclined to transact onsite, so ensuring we deliver a consistent and seamless experience across all devices is important.

We’re continuing development on our new interface for Trade Me. This incorporates a responsive design and will provide a more contemporary and consistent experience for our users, regardless of device. We also expect this new interface will vastly reduce the time needed to build new features. 

We were excited to release our new “universal” iOS app to all users in July 2016, providing an updated Trade Me experience for both iPhone and iPad users.

Brand and marketing

Trade Me has a strong, trusted, well-known and much-loved brand. We were recently named the most influential domestic New Zealand brand by Ipsos, following on from the same accolade last year.

Trade Me has a strong, trusted, well-known and much-loved brand. We were recently named the most influential domestic New Zealand brand by Ipsos, following on from the same accolade last year.

That said, our brand has grown in an organic way for many years and we’ve recently done a lot of work to better understand how we’re perceived. We want to develop our brand, make it more consistent, and make sure we’re protecting and nurturing it as best we can.

Part of that work manifested in a new, refreshed logo in July 2016, kicking off a wider visual refresh. A week later we launched a new Trade Me campaign riffing on the idea that “Life lives here” and that behind every trade there’s a person, and behind every person, there’s a story.

Elsewhere, we enjoyed telling New Zealand about our billionth listing back in December, and a typical Trade Me story emerged around our most viewed listing for the 2016 calendar year: a $100 note sold by an auto mechanic from Geraldine.

We have continued to bolster our expertise and resources around email marketing. We will continue to invest in our capability in this area in F17.

We were pleased to lead the way with our annual transparency reports released in July 2015 and July 2016 respectively. These reports are about being open and honest with how we deal with requests from Government agencies for Trade Me members’ data. To our knowledge we’re the only New Zealand company that does this.

People

The number of staff at Trade Me has grown considerably from 302 (280 FTEs) in December 2012 to 509 (487 FTEs) as at 31 July 2016. This is up from 464 staff (437 FTEs) a year ago.

One new face joined our Executive team with Caroline Rawlinson joining us as Chief Financial Officer in August 2016. Caroline’s most recent role was as CFO of Formica Asia (a subsidiary of Fletcher Building), and she was previously Fletcher Building’s general manager of strategy and corporate development. She has also worked at Sealord and PwC. Our previous CFO, Jonathan Klouwens, left Trade Me for a new role in investment banking in May 2016. I’d like to thank Jonathan for his incredible contribution to Trade Me.

Elsewhere, Jeremy Wade replaced Pete Osborne as the head of Trade Me Jobs in July 2016. Pete has done an excellent job at the helm of this business since August 2013, and we were sad to see him return to Australia for family reasons.

There was a change to the Trade Me board this year. In June 2016, Sydney-based executive Katrina Johnson joined as an independent director. She has extensive experience in technology businesses, including 12 years working in the United States and Australia for eBay and its subsidiaries. She is currently legal director of Uber Australia/New Zealand.

Also in June 2016, Gail Hambly stepped down as a director. She has served on the board since Trade Me’s IPO in 2011, but began her association with Trade Me when Fairfax Media acquired the business way back in 2006.

Outlook

We have good forward momentum. We will continue to derive benefit from the investment we have made over the past three years, and we are better placed than ever to capitalise on opportunities.

Trade Me has delivered operating profit growth in the second half of F16, and our investment over the last three years is starting to show returns.

Looking ahead to F17, we expect total revenue to grow at a similar rate (in percentage terms) to that of F16. We expect expense growth for the F17 full year of circa 10 per cent year-on-year as our recent period of investment draws to completion. This will deliver year-on-year EBITDA and operating NPAT growth rates in excess of F16.

We anticipate the profit uplift will be delivered by our General Items marketplace and Classified businesses, driven by the increasing ease-of-use of our products and conversion of premium revenue opportunities. We expect our General Items segment to deliver F17 revenue growth similar to the second half of F16.

Trade Me has good forward momentum. We will continue to derive benefit from the investment we have made over the past three years, and we are better placed than ever to capitalise on the opportunities in front of us.

We’ll keep working hard to make life better for Kiwis through the online experiences we deliver. We know there is much more to be done to continue the positive trend, and we’re excited about what lies ahead.

jon macdonald signature

Jon Macdonald
CEO
Trade Me Group Limited