Annual Report 2014

Chairman's report

Dear Shareholders

Trade Me achieved a good deal in F14, but many achievements were not the sort that show up in the bottom line in the current year. In F14, Trade Me grew revenue by a respectable 10 per cent and net profit after tax by 2 per cent. A rate of growth in net profit of 2 per cent was not much to write home about.

However focus on a one-year growth rate tells only part of the story. In assessing the value of any company, it is important to look at both the current performance and the expected future performance.

One of the most important tasks of the management and board of a company is to balance current year profit, with investment for future profit growth. Restraining investment can boost current year profit growth, but this comes at the cost of future growth.

Depending on what sort of business you are in, investment in future growth can amount to buying new equipment, launching new products or drilling more holes in the ground. For Trade Me, it comes in the form of hiring more people, increasing investment in brands and customer acquisition, and in buying new complementary businesses.

In F14, Trade Me hired an additional 41 people, most of whom are software developers, testers and sales people. Trade Me also increased marketing spend by 168 per cent. It is the increase in these and other related costs that has caused net profit growth to be just 2 per cent, despite 10 per cent growth in revenue.

The most important question for shareholders to ask of the Board and management of the company about these new investments is: "What return on these investments do you expect to get?"

We are investing and working hard to ensure that Trade Me is able to continue to grow strongly.

This question cannot be answered with any precision, and we do not know exactly what the return will be on these investments, but we are very confident that making the investment is the right thing to do.

All businesses need to invest just to stand still. Competition and the inevitable degradation of physical assets ensure that this is the case. Trade Me does not require physical assets such as machinery, but the investment the company makes in software is depreciated as if it were a physical asset because it is subject to competition, decline in productivity and obsolescence just as a physical asset is.

A guide to how much a company needs to invest merely to remain as competitive as it has been in the past can be seen by the depreciation recorded in its accounts.

Trade Me's primary depreciating productive asset is software and as shareholders will see from our accounts the depreciation in 2014 has risen from $8.7m to $12.3m. This rise in depreciation is permanent: in fact we expect our depreciation expense to rise further in the years to come. This is a result of our need to invest more to sustain our current competitiveness.

The markets we compete in, in particular our online marketplace for new and used goods, are becoming more competitive and in some categories much more competitive than in the past. This increased competitiveness is largely in new goods and is a result of more New Zealand-based brands and retailers developing their e-commerce businesses and New Zealand consumers increasingly looking to buy from brands and retailers in all parts of the world.

The strongest opportunity for growth in Trade Me continues to lie with the Classifieds business – employment, real estate and motor vehicles.

These trends have been with us for a while now but they have accelerated strongly in the last year or so. Trade Me recognised some time ago that it needed to invest quickly and effectively to make the website and mobile sites better than the best local offerings, and competitive with international offerings in range, findability and ease of shopping. Jon’s report will tell you more about what we are doing to ensure this is the case.

Importantly the need to invest more just to stand still does not mean we need to invest more to remain capable of producing the same earnings as this year. Standing still in this context does not mean 'being capable of producing the same earnings'; rather it means 'being capable of growing earnings at the same rate as previously'. We are investing and working hard to ensure that Trade Me is able to continue to grow strongly.

Acting against Trade Me's ability to grow earnings at the same rate as previously is the company's size. In the context of the New Zealand market, Trade Me is now a large company. Not only do we have to invest to maintain the current growth capacity of the business, we have to invest to increase that growth capacity as the gravitational pull of our size inevitably slows our annual percentage growth rate.

The board and management are confident that our investment in the marketplace business will result in this business returning to solid growth. We are not confident we can predict exactly when this will be, and in 2015 we will need to invest at about the same rate as we have done in 2014 to support our confidence in the future growth of this business.

The strongest opportunity for growth in Trade Me continues to lie with the Classifieds business – employment, real estate and motor vehicles in particular. These three businesses grew well in F14 and will continue to grow strongly for many years to come.

To support the growth in Trade Me Motors, we bought a related businesses in F14. MotorWeb provides data services to the automotive industry and consumers in Australia and New Zealand.

We also acquired LifeDirect, which provides online insurance comparison services, and this month we announced the acquisition of online payments gateway Paystation too.

All of these businesses have been developed by entrepreneurs who have decided that working with Trade Me is the next logical step for them in building their businesses. In each case, the key people have joined us and continue to run their businesses while gaining the benefit of Trade Me’s very large audience, low costs of IT infrastructure and extensive development capability.

Jon Macdonald, your Chief Executive, continues to do a fine job for customers, staff and investors. On your behalf, and the Board's, I thank him for everything he has done for Trade Me in F14.

Please read his report to find out more about what the company is doing to continue to grow and develop the business.

The final dividend of 8.4 cents per share will be payable to shareholders on our register as at 12 September 2014 and the dividend is expected to be paid on 23 September 2014. This follows on from the interim dividend of 7.6 cents per share paid to shareholders on 25 March 2014.

Thank you for your investment in Trade Me. We understand that you have placed your trust in us and expect to see the value of your investment in Trade Me increase over time. That is what we are focused on doing for you.

Our Annual shareholder meeting this year is in Wellington on 29 October. I look forward to seeing as many of you as are able to make it.

Yours sincerely,

David Kirk
Chairman
Trade Me Group Limited