We have recently hosted a teach-in on Youla, online classified business, which is the largest contributor to the Mail.ru Group’s “New Initiatives” reporting segment. During the event, we discussed recent milestones and provided more details around Youla’s financials, strategy and outlook. You may find the event presentation here and full event replay below.
As we have received a number of questions during the teach-in webcast, which we were unable to address during the event and received some follow-up questions, we decided to address these in this blog as FAQs, which you can find below.
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Q: How do you compare moat and strength of horizontal classifieds vs specialized vertical players and within verticals relative strength of job vs car vs real estate verticals?
A: The relative strength of the horizontal model is in the: a) targeting of broader user base, b) higher user retention, and c) higher user engagement. This helps build brand awareness and loyalty with a relatively lower marketing budget in comparison with the classifieds targeting one vertical.
Traffic initially acquired in high-frequency verticals can be further retargeted and leveraged through the verticals with higher tickets. In addition, due to revenue distribution from several verticals, a horizontal classifieds tend to be less cyclical.
Youla is currently focused on Generals, Jobs (blue collar), and Services, which offer high-frequency users and significant synergy potential with the social networks owned by Mail.ru Group. We consider Cars and Real estate verticals as future opportunities for further monetization given their higher average tickets although much lower frequency.
Q: Do you believe classifieds is a winner-take-all market or is there space for multiple players? How easy is it to monetize the platform?
Given the directly addressable market volume of RUB 139bn with an additional opportunity to grab from adjacent offline markets of estimated size of RUB 380bn+, there is space for several players. When comes to first mover advantage, worth mentioning global examples of latecomers, such as Letgo, OfferUp, Wallapop, launched a few years ago and unseating local majors.
With MAU exceeding 20m+ by FY17 year-end, Youla has already gained the critical audience milestone, which allowed us to start monetization. 1st billion of revenues target was achieved in the 1st year of monetization or just 3 years since launch, which is faster than any competitor in Russia. The main contributors to such results were self-service customers, since no B2B instruments were available at that time. In 2Q 2019, Youla launched its B2B platform with basic functionality, which should give significant uplift in revenue over the coming years. For 2019 we are targeting around RUB2bn in revenues, which means almost doubling vs 2018 levels.
Q: How important is Youla integration with social network? Is this competitive advantage vs independent classifieds platforms like Avito?
A: We do believe this integration into the broader MRG ecosystem is one of Youla’s key competitive advantages over other local online classified platforms. Integration gives two-sided advantages – access to the largest social platforms in Russia from the traffic acquisition perspective, and opportunity to sell unique products to users from the monetization perspective.
Recent integration of job board Worki into VK is the clear example of the first steps towards exploiting these advantages. This gives an opportunity for building the largest CV database based on users’ social network profiles (subject to user permission). First days after the integration already showed promising results – organic growth in key metrics. In other words, our job classified is well-placed to propose a unique product to customers allowing them to promote vacancies on several platforms simultaneously and to reach almost the entire internet user base in Russia from “one window” made up of two classified platforms (Youla and Worki) and combined with the largest local social networks where VK alone reaches almost 80% of Russian online audience on monthly basis.
In addition, we see further opportunities to expand sale of combined products to our high-frequency verticals, such as Generals and Services. Data Insight research supports this vision by reporting that social network and online classifieds are the two most popular channels for both lead acquisition for service providers and social commerce.
Q: What are your expectations regarding the timing of break-even for Youla?
A: At present, we do not disclose guidance regarding Youla’s breakeven.
Looking at peer companies’ track records, it has taken on average 6-7 years to reach break-even. One of the recent examples is OLX business in Brazil, which began monetizing in 2015/2016 and reached profitability in 2018 or 4 years after the first money earned. They did it in a quite competitive environment with MercadoLibre and several strong vertical classifieds already operating in the market.
Another example is one of the latecomers Wallapop. Launched as a mobile-first platform in 2013 it has recently reported 2018 as the first profitable year. Youla has celebrated its 4-year anniversary recently and so far has been the local champion in reaching the Rub1bn revenue milestone. Yet, it is in investment mode still, with around RUB2bn in EBITDA loss targeted for 2019. Proportionate level of losses is expected to decline in 2020 and beyond.
Q: You mentioned 8x gap in ARPU with the market leader. What factors contribute the most to this gap? How will you narrow the gap?
A: Finishing its second year of monetization, Youla is currently at the early stages of monetization and has yet to catch up with the market leader in the set of marketing tools offered to its customers. For example, we estimate that Youla has 50x less B2B clients than the market leader, mainly due to lack of B2B instruments until recently – in 2Q 2019, we launched our B2B platform, albeit with limited functionality so far.
We expect ARPU to grow due to both price increases on existing products and adoption of new products. Target initiatives include the following:
1) Further optimization of price grids across regions and listing categories
2) Introduction of bundled products as well as products tailored to the needs of each vertical
3) Enhancement of our B2B platform with value-added tools such as detailed data-driven analytics, performance management solutions, and automated billing
4) Offer of products in cooperation with other Mail.ru Group platforms
5) Building proper distribution channels: self-service for small and medium enterprises as well as sale-house for large corporate clients.
Q: On slide 19, you included transaction-based revenue in long-term revenue sources for Generals vertical. What is your vision of this revenue stream potential for online classifieds?
A: A prerequisite for the development of this revenue stream is closing a transaction with online payment via the platform. Users in Russia, especially those transacting on online classified platforms, historically prefer cash to online payments. Thus, transaction-based revenue is currently not a significant revenue contributor for Youla, but can have major potential in the long term.
By bringing escrow payments to the classified market in Russia, Youla pursues two goals: promoting safety in the market and building the platform for expansion of transaction-based revenue streams. By September 2019, Youla already showed a 10x increase in transaction-based revenue YoY.
Latest research by AIM Group revealed a global trend for classifieds to move from simply connecting buyers and sellers to getting "deeper into transaction". Horizontal online classifieds, such as Leboncoin, OfferUp, Carousell, Shpock, Quikr and several others have been offering online payments. The trend has also spread to verticalized platforms. For example, the UK leading Auto classified AutoTrader highlights online transactions among the future horizons for growth. While US Real estate classified Zillow goes even deeper into a transaction by offering iBuying.
Q: What competitive advantages help Youla increase the market share?
A: Youla is well-placed to compete in each of the three main business areas: strong product expertise, access to large traffic and its ability to offer unique products.
When comes to product, we believe our team has strong product expertise and better time-to-market vs competition. Youla continues to lead in the introduction of new products to the market, which is what allowed us to bridge the gap with the key competitor in terms of the audience size on. This is partially provided through our ability to exploit technologies which already exist within Mail.ru Group ecosystem.
Synergy with the Group provides not only access to one of the largest audiences, but also the ability to create the most personalized product. The audience can be monetized by offering unique products in cooperation with other Group’s platforms, not available to the competitors. Integration of the job board Worki into the social network VK is the first step towards implementation of this strategy and hence we look into the future and our market share potential with a lot of optimism.
Q: Why do you believe gamification & social network features are so important to the online classifieds business? Do they affect the money earned by the platform?
A: Gamification & social network features directly affect two core metrics: user retention and engagement, i.e. time spent with the platform and the number of interactions. Eventually, this leads to lower marketing costs needed to retain the audience, as well as to more interactions of buyers with sellers stimulating the latter to spend larger share of their budgets on the platform.
By rewarding users with bonuses via gamification, we also encourage them taking certain actions that benefit Youla. For example, users are rewarded for regular visits and filling out profiles. Users can exchange bonuses for partner promo codes in the recently launched “Promo codes store”, while Youla receives a new revenue stream based on CPA-model.
Q: You indicated a target revenue for Generals of RUB 5bn+. When are you going to achieve it?
A: This is a long term potential on the horizon of several years based on the market volume estimates and is an indication rather than our guidance.
Q: Could you give any guidance on Youla’s operational gearing? What proportion of Youla’s expenses is fixed?
A: Online classifieds have high operating leverage leading to EBITDA margins of often above 50% upon maturity. The business does not have any direct commissions reducing revenue. The same is true for Youla. The only exceptions are the commissions shared with the real estate agents executing deals for our agency 33 Slona, and acquiring charges, which together account for less than 5% of the total costs.
For details on Youla’s cost structure please refer to slide 29 in the teach-in presentation. Marketing expenses comprise the largest share. We do not expect them to grow at the same rate as revenue, since we expect ARPU to drive the revenue growth rather than the audience, which is already relatively large.
We should continue to invest in customer experience of both B2C and B2B, and thus need to expand further our product development and sales teams. We are proud of automated moderation tools with embedded neural networks, aimed to keep listing moderation costs at reasonable levels while the listing base is growing. This is another good example of cooperation within Mail.ru Group, since the tools are based on OK technologies.
Other costs comprising less than 10% mainly include maps used to display geolocation of listings, sms notifications, and software licenses. We are now optimizing cost of maps by moving from third-party service providers to the solutions available within the Group.
Q: How do you estimate Youla’s CAPEX ratio compared to the peers’ indicators presented on slide 30? Given the doubling of the active audience in recent years, have you faced the similar growth in CAPEX?
A: Despite the significant growth in active audience, CAPEX did not grow at the same rate. Over the past 3 years CAPEX have remained quite stable in absolute terms and has been decreasing as a share of rapidly expanding revenue. To maintain CAPEX at reasonable levels, we are constantly optimising back-end architecture.
Q: Will you continue developing job vertical on Youla platform, given the acquisition of another job board Worki? Will they compete to each other?
A: Yes, we continue developing a job vertical within Youla. The boards do not compete and rather supplement each other. Worki is the primary entry point for recruiters since it has tools tailored to recruiter needs. Youla is an additional board to promote vacancies and supply traffic. Recruiters may place vacancies on both Youla and Worki platforms and get broader reach.
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