realestate.com.au Ltd GREAT RESULTS

Transcription

1 realestate.com.au Ltd GREAT RESULTS REA GROUP ANNUAL REPORT

2 CHAIRMAN S LETTER Every year since 2001, the chairman of the REA Group has had the pleasure of announcing that the current year s results are the best ever achieved in the company s history. The year was no different. And, on behalf of the Board of Directors, management and staff I am happy to announce to our shareholders record revenues, EBITDA and profitability. Revenue was up 45% to $156 million. EBITDA increased by 56% to $37 million. Net Profit After Tax and Minority Interest was up 48% to $22 million. Cash from operations (excluding tax payments) increased by 35% to 33 million. Not only has the company performed well, but it has outperformed comparable investments in Total Shareholder Return since 2005, including Google, EBay, Seek, Yahoo, Amazon and the ASX 200. Good corporate governance is directly related to the protection and creation of shareholder value. In the past year we have strengthened governance in four key areas: We have updated the Corporate Governance Statement in this report to comply with new best practices from the Australian Stock Exchange. We have established new governance policies on Market Disclosure, Risk Management, Share Trading and Shareholder Communication. Our new Risk Management Charter gives more autonomy to our risk management team, so they can make better decisions, faster. We have also completed the director review procedure, ensuring that members of the Board are accountable and assessed for their performance. In August the Board decided to replace Simon Baker as CEO of the company. We are grateful to Simon for his many contributions, and feel it is time for new leadership to take the business to the next level. On 8 September, Greg Ellis joined the company as the new CEO. He has extensive knowledge of the online industry. The Board intends to constantly improve the success with which we oversee the business on behalf of its owners. But it is to the company s 667 employees that all shareholders especially owe thanks for the excellent returns of the past year. Richard J Freudenstein Chairman $8.1m FY05 $8.2m FY06 $2.4m FY04 CONTENTS Results Highlights 2 Revenue and Operations 4 Australian Business Summary 6 Overseas Business Summary 8 Growth 10 The Shift to Online 11 Audited Financial Statements 15 realestate.com.au Limited and its subsidiary companies are known as the REA Group and traded on the Australian Securities Exchange under the symbol REA. REA Group Annual Report

3 $22.3m FY08 $15.1m FY07 STRONG PROFITS 48% Net profit after tax and minority adjustments 1

4 RESULTS HIGHLIGHTS The REA Group this year delivered significant growth on all key indicators: Overall revenues grew by 45% to $156 million. EBITDA increased by 56% to $37 million. EBITDA margins improved from 22% in to 24% in. In Australia, the source of 78% of total revenues, the EBITDA margin increased from 46% to 51%. Net Profit after tax and minority interest increased to $22 million, up by 48% compared to last year. Unique browsers across the entire network grew by 15% to a new high of 8.2 million in June. 22,478 agents (and 2,892 agents on trial subscriptions) now advertise on our sites their 1.6m property listings (up from 17,011 agents and 1.1m listings). We now operate 22 consumer-facing websites, compared to 16 at the end of, and 7 publications. $ ,478 $ $37 17, $60 $24 10, $13 5,207 6,414 $ $6 $ $3 $m m $mm FY 04 FY FY FY FY EBITDA UNIQUE BROWSERS PAYING AGENTS UNIQUE REVENUE BROWSERS 15% 32% 45% UNIQUE BROWSERS PAYING AGENTS REVENUE The REA Group continues to build strong year on year growth across all key metrics. 2 REA Group Annual Report

5 22, $37 17, $24 10,713 $13 5,207 6, $6 1.0 $3 $m m FY FY FY EBITDA PAYING AGENTS UNIQUE BROWSERS 56% EBITDA INCREASED THE BUSINESS MODEL The REA Group has its strong home base in Australia as the operator of the country s most popular residential and commercial real estate websites. The REA Group is Australia s sixth largest online publisher by revenue, according to BRW magazine in April,. When compared to online real estate classifieds peers, the Group ranks second worldwide in revenues. According to publicly reported figures, first is Move Inc. in the USA, with A$312 million in revenue in calendar year. The REA Group s growth is supported by industry fundamentals, especially the structural shift from print classifieds and old media advertising to online. In four out of the five past years, online classifieds spending in Australia has increased at a rate no lower than 54% per annum (Interactive Advertising Bureau Australia / PriceWaterhouseCoopers), while the Group s revenue has grown at rates of 45.1% to 100.1% per annum in the same period. Besides benefiting from sector growth, the company can tap opportunities to increase market share with new products, as it has done in Australia with the acquisition of homeguru.com.au in and also with the launch of realcommercial.com.au in 2003, realholidays.com.au in and ozhomevalue.com.au in. The success of its proven business model in Australia has permitted the REA Group to dedicate a portion (20%) of its cash flow to expand outside of Australia since Now, two and a half years into its international growth and 13 years after getting started in a garage in Doncaster East, Victoria, the company has operations in 10 countries, on three continents. Overseas operations already account for a quarter of revenue and are rapidly growing. Investments in countries such as Italy have the potential to deliver good returns in future years as those markets catch up to where Australia is today in internet usage and spending. Our international expansion also cuts the risk of being dependent on a single market. 3

6 REVENUE AND OPERATIONS FIVE YEAR OVERVIEW FINANCIAL COMPARATIVE DATA IN FY 2004 FY2005 FY2006 FY FY Growth Revenues from Services 18,997 33,416 60, , % Operating Expenses (16,274) (26,951) (47,048) (83,793) (119,058) 42% EBITDA 2,723 6,465 13,343 23,500 36,575 56% EBITDA Margin 14% 19% 22% 22% 24% Depreciation and Amortisation (369) (1,051) (2,297) (4,974) (7,336) 47% EBIT 2,354 5,414 11,046 18,526 29,239 58% Net Interest (Expense) / Income (462) (69) (139) 101% Earnings Before Tax 2,477 5,620 10,584 18,457 29,100 58% Income Tax (Expense) 2,472 (3,943) (7,469) (13,337) 79% Minority Interest (net of taxes) 1,581 4,076 6,581 61% Profit attributed to members of parent 2,477 8,092 8,222 15,064 22,344 48% Closing no of Employees (FTE) % Subscribing Paying Agents (closing no) 5,207 6,414 10,713 17,011 22,478 32% 77% of the REA Group s total revenue is derived from residential and commercial real estate agents. These customers sign contracts for a year or longer, buy premium advertising upgrades and purchase software products designed to help them manage their businesses. The large online audience that the company aggregates, 8.2 million in June, is also attractive to advertisers from outside the real estate industry: consumer brands, banks and financial institutions, not-for-profit organizations, electronics manufacturers, etc. This type of advertising generated $20 million and 13% of total revenue in, an increase of 38% from. The Group derives 5% of its revenues from print. However, it does not see print as a goal in itself or a medium to be protected from the internet s growth. All of our print publications were acquired in acquisitions to increase the profile of its websites. 4 REA Group Annual Report

7 ONLINE PROPERTY PORTALS AUSTRALIA 1 NEW ZEALAND 2 EUROPE 4 CLOSED JAN CLOSED MAR ASIA 3 GLOBAL CLOSED JAN 5

8 AUSTRALIAN BUSINESS SUMMARY AUSTRALIA $120.7m 78% OF REA REVENUE Residential site, Commercial site, Holiday Rental site, Agent office solutions The group operates six consumer-oriented websites in Australia, including some that represent new products with new revenue streams. realestate.com.au has been Australia s most popular real estate website since October of 2000 (NNR). It was used by 4.1 million unique browsers in June, more than the 15 next largest competitors combined, according to Nielsen//NetRatings. Over 95% of Australian residential real estate agents advertise more than 430,000 properties for rent and sale on the site. property.com.au is the only Australian residential real estate website to ask what you think. It s a beta, or test site to try out new search and display technology. It is the only Australian real estate site to be named an Official Honoree of the Webby Awards. realcommercial.com.au is Australia s largest commercial real estate site. It is used by 97% of commercial real estate agents, as well as business brokers. Together, these groups advertise more than 86,000 commercial properties and businesses for sale or for lease more than any other (estimate). HomeGuru.com.au and ozhomevalue.com.au generate leads for agents by providing homebuyers with free market reports on their homes. They are majority owned by the REA Group. realholidays.com.au is a new product developed from holiday rental listings that had been on realestate.com.au. Agents now subscribe to it separately. New categories like holidays and commercial real estate increase the overall profit margin because they are built on existing infrastructure and have minimal startup costs. The group also offers real estate agent back office services via its HubOnline and Clarke Computers. These businesses help real estate agencies improve every aspect of their business, including websites, marketing, bookkeeping, trust funds management, recruiting, business development, office management and sales. 6 REA Group Annual Report

9 $ 900 APRA (AVERAGE REVENUE PER AGENT) FOR AUSTRALIA 800 $ $ JUL 05 NOV 05 MAR 06 JUL 06 NOV 06 MAR 07 JUL 07 NOV 07 MAR 08 JUL JUL 05 NOV 05 MAR 06 JUL 06 NOV 06 MAR 07 JUL 07 NOV 07 MAR 08 JUL 08 UNIQUE BROWSERS IN AUSTRALIA 5m 4m realestate.com.au 5m 3m 4m 2m 3m 1m domain.com.au (#2 player) 2m JAN 01 JAN 02 JAN 03 JAN 04 JAN 05 JAN 06 JAN 07 JAN 08 1m PAYING JAN 01 AGENTS JAN 02 IN JAN AUSTRALIA 03 JAN 04 JAN 05 JAN 06 JAN 07 JAN 08 10,000 9,190 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 JAN 01 JAN 02 JAN 03 JAN 04 JAN 05 JAN 06 JAN 07 JAN

10 OVERSEAS BUSINESS SUMMARY For the business as a whole, the overseas expansion diversifies the risks of single-market dependence and creates new revenue streams. Overseas revenue accounted for 22% of total revenues in, up from 20% for. ITALY In Italy, casa.it has extended its lead as the biggest real estate portal. It leads its competitors in terms of paying agent subscribers and revenues. In FY agent customers rose from 3,511 to 5,514, an increase more than in any other country in any year in the company s history. Sales to real estate developers and non-real estate advertisers were also successful. Approximately half of all Italian real estate agents advertised their properties on casa.it by June, up from 19% when the REA Group acquired the business in February. UK The UK property market was in decline during much of the financial year, making agents more careful with their marketing spending. This trend has benefited propertyfinder.com, with the high value and low cost of its products. The acquisition of the hotproperty.co.uk real estate portal in March and the UKpropertyshop agent directory portal in July improved this offering and revenue opportunities. Today, growth in UK users, subscribing agent customers and revenue has moved propertyfinder.com to a clear second place after Rightmove. In FY, agency customers rose from 3,919 to 5,633. In March, The Connells Group the UK s second largest real estate agency operator began advertising on the site. Connells has about 500 offices across the UK, operating under 15 different brands and listing approximately 30,000 properties. In May, Glasglow Solicitor Property Center brought 272 agent offices to propertyfinder.com. In addition, 500 international agents advertise on the UK sites. KEY OPERATIONAL HIGHLIGHTS Country Revenue in EBITDA in Margin FY Australia 120,719 61,946 51% United Kingdom 22,071 (10,057) (46%) Italy 5,401 (2,819) (52%) Luxembourg 3,532 1,054 30% Other countries 3,910 (3,602) (92%) Loss of associate (homeguru.com.au) (185) Unallocated overhead (9,762) Total 155,633 36,575 24% FY Australia 85,745 39,314 46% United Kingdom 17,891 (8,180) (46%) Italy 1, % Luxembourg 1, % Other countries 1,093 (107) (10%) Loss of associate (homeguru.com.au) (226) Unallocated overhead (7,674) Total 107,293 23,500 22% 8 REA Group Annual Report

11 LUXEMBOURG In Luxembourg, there continues to be strong take-up by real estate agents and the athome.lu site maintains its leadership position, with EBITDA margins increasing from 22% to 30%. OTHER COUNTRIES The athome team is also expanding region by region into neighbouring countries and is already the market leader in terms of number of subscribing agents and property listings in those areas. In, it launched new businesses in Alsace, France and the south of Belgium. athome already operated in Lorraine, France and Mosel, Germany. In Belgium alone, athome signed up 150 new customers, from a base of zero. In both Dubai and Hong Kong, the Group s local businesses launched new websites in and have increased revenue, users and subscribing agents throughout the year. The New Zealand residential website, allrealestate.co.nz grew on all indicators. The Group also launched a new commercial property website in New Zealand, realcommercial.co.nz 9

12 GROWTH When expanding, the company looks for opportunities (organic growth or acquisition) that fall into three basic categories: To consolidate a marketplace where we operate To enter an important market for the first time in an attractive position To enter an emerging market in a long-term investment The company made new acquisitions of $23.4 million during the financial year, of which $8.2 million were injected by minority shareholders. The financial year was an important one, with the acquisition of real estate media businesses in four countries: Hong Kong (entry in an emerging market) Dubai (entry in an emerging market) United Kingdom (a consolidation move) Australia (a consolidation move) June June Residential Online Advertising realestate.com.au realestate.com.au property.com.au property.com.au homesite.com.au homesite.com.au (until March ) homeguru.com.au homeguru.com.au ozhomevalue.com.au allrealestate.co.nz allrealestate.co.nz propertyfinder.com propertyfinder.com hotproperty.co.uk ukpropertyshop.co.uk (since July ) casa.it casa.it athome.lu athome.lu athome.be athome.be athomelorraine.fr athomelorraine.fr athomealsace.fr athome.de athome.de homesolution.lu squarefoot.co.hk propertyfinder.ae allglobalproperties.com Residential Holiday Rental Advertising Residential Print Advertising London Property News Commercial Property Advertising realcommercial.com.au / propertylook.com.au realcommercial.co.nz / propertylook.co.nz atoffice.lu Agent Back Office Solutions Hub Online Web Design Services Clarke Computers Altowin (Belgium) realholidays.com.au London Property News HotProperty / Renting Squarefoot / Inside Discovery Bay Publications athome magazine and athome new homes (Lux) realcommercial.com.au (including propertylook.com.au) realcommercial.co.nz (including propertylook.co.nz) atoffice.lu Hub Online Web Design Services Clarke Computers Altowin (Belgium and Luxembourg) 10 REA Group Annual Report

13 THE SHIFT TO ONLINE Australian classified online spending ,000,000 Growth ,000,000 43% ,000,000 53% ,000,000 56% ,000,000 45% 357,000,000 19% Source: PWC / IAB From its beginning, the REA Group has benefited from the shift of users and advertising dollars from print to the web. While hardly a single dollar was spent for online advertising a decade ago, 12% of all advertising dollars in Australia are now spent online (Interactive Advertising Bureau Australia / PriceWaterhouseCoopers, Goldman Sachs JBWere). More importantly, this shift is not over. Far from it. It is driven by pull factors that include online s greater ease of use, convenience and depth of freely available information. It is also driven by the lower cost of advertising online. For consumers, use of the web to search for property is free, compared to the approximately $2 price of a typical weekend metro newspaper. The average real estate agent pays about $17 to advertise a property online via a subscription, compared to the several hundred dollars for a one-time ad in a typical suburban newspaper. Advertisers expect to dedicate a steadily increasing share of their marketing budget online in the foreseeable future. DIGITAL SHARE OF ADVERTISING (AU, F) 25% 20% 15% On-line real estate classifieds 16% Newspaper real Estate classifieds 84% 10% 5% Source: CEASA, Credit Suisse estimates On-line real estate classifieds 11% Newspaper real Estate classifieds 89% 400% 300% Companies have been rebased to 100 REA AU EQUITY 11

14 THE SHIFT TO ONLINE (CONTINUED) PRICE COMPARISON Why it matters: Advertising real estate on sites operated by the REA Group is relatively inexpensive. This is one reason for its success with real estate agent customers, together with its reach, power and flexibility. Investors can use this data to estimate the potential for increased agent spending on realestate.com.au and the cost pressures that may help encourage agents to shift more of the advertising efforts to the web. ADVERTISING ON OUR WEBSITES IN AUSTRALIA Average total monthly spend per agent $885 Average number of listings per agent 53 Average spend per listing $16.70 ADVERTISING IN PRINT Applied cost for a 1/4 page newspaper advertisement ranges from $400 to $2,000* *Average advertising rates per insertion when buying 4 insertions at rack rate, August. $17 AD ON OUR WEB AVERAGE SPEND PER LISTING DISPLAYED FOR A MONTH $400 UP TO $2,000 NEWSPAPER AD AVERAGE 1/4 PAGE AD COST* APPEARING 4 TIMES 12 REA Group Annual Report

15 INTERVIEW ANDREW COLE CORPORATE RELATIONS MANAGER, REACH The REA Group is a proud Major Sponsor of Reach. We use our network of people in every Australian state to help Reach expand from its Victoria base and inspire kids all over the country. Q. What is Reach all about? A. Reach runs workshops, weekends away and large-scale events that give 57,000 teenagers a year reasons to believe in themselves. Q. How did you get started? A. The Reach Foundation (Reach) was established in 1994 by Jim Stynes (AFL Brownlow Medalist, youth motivator, and Victorian of the Year 2003) and Paul Currie (drama coach and film director). Q. Can you share a success story about how Reach has changed someone s life? A. Independent research has shown that our programs help teenagers to improve overall levels of self-esteem, optimism, and feelings of control over their lives. In particular, I think of a very angry young man who was unexpectedly given a birthday cake on a Reach weekend camp. He was summoned up on the stage to blow out the candles and say a few words about his 18th birthday, but at first he was too overwhelmed with emotion to speak. Then, the tears started flowing down his cheeks as he said that Reach is where he had learnt about love. When he was given a birthday present, he excitedly raised his arms in the air and looked out at the 70 or so people in the room and said, I deserve it. It was probably the first time in his life that he felt that way. Q. How can people reading this help out? A. The best way to help Reach is by sending young people to our programs, making donations and getting our name and message out there! Visit

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17 FINANCIAL STATEMENTS For the year ended 30 June MORE GREAT RESULTS 15

18 CONTENTS Directors Report 17 Income Statement 31 Balance Sheet 32 Cash Flow Statement 33 Statement of changes in equity 34 Notes to the Financial Statements 35 Independent Audit Report 79 Directors Declaration 80 ASX Additional Information 81 Corporate Governance Statement REA Group Annual Report

19 DIRECTORS REPORT Your directors submit their report for the year ended 30 June DIRECTORS The names and details of the company s directors in office during the financial year and until the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. Names, qualification, experience, and special responsibilities Mr Richard J Freudenstein Age 43 (Non-executive Chairman) BEc, LLB (Hons) Mr Freudenstein is the Chief Executive Officer of News Digital Media (the digital division of News Limited), which includes digital properties, News.com.au, truelocal.com.au, CareerOne.com.au, CARSguide.com.au and moshtix.com.au and related activities involving News Limited newspaper and magazine websites, including vogue.com.au and taste.com.au. Mr Freudenstein is on the board of News Limited and The Bell Shakespeare Company. Mr Freudenstein returned to Australia in August 2006 after seven years at British Sky Broadcasting, the last six as Chief Operating Officer. Mr Freudenstein has worked for News Corporation and related companies since Mr Roger Amos Age 60 (Non-executive Director) FCA, MAICD Mr Amos is an independent Director of Espreon Limited and Austar United Communication Limited and Chairman of Proteome Systems Limited. He also has a non-executive role as Chairman Asia Pacific for Management Consulting Group Plc. Mr Amos had a long and distinguished career with international accounting firm KPMG, retiring in June 2006 after 25 years as a partner in the Assurance and Risk Advisory Services Division. In addition to his portfolio of clients, focused on the Information, Communications and Entertainment Industry (ICE), Mr Amos held various roles in the KPMG Global ICE industry groups, including Global Chairman of the Communications Industry Group. Mr Amos also serves as a Director of the Opera Foundation of Australia which supports the development of emerging opera talent through awards and scholarships. Mr Simon T Baker Age 41 (Managing Director / CEO) (until 4 August ) BSc, MBA Mr Baker was the Managing Director and Chief Executive Officer of realestate.com.au Limited until 4 August. Prior to becoming CEO, Mr Baker was Chief Business Development Officer at News Interactive, was Chief Technology Officer in a US start up and spent five years with McKinsey and Company providing strategic and organisational advice to Senior Management at major Australian and International companies. Mr Baker holds a Bachelor of Computer Science degree from Monash University as well as an MBA from the Melbourne Business School. Ms Kathleen Conlon Age 44 (Non-executive Director) BA (ECON) (DIST), MBA, MAICD Ms Conlon is a professional non-executive Director. She is a non-executive Director of CSR Limited (since 2004), where she serves on the Safety Health and Environment and Remuneration committees. She is also a non-executive director of DLA Phillips Fox and a member of Chief Executive Women. She is also a NSW Council Member of the Australian Institute of Company Directors. Ms Conlon brings over 20 years of professional consulting experience to her boards. She is a recognised thought leader in strategy and business improvement, and has advised leading companies across a range of industries and countries. In her seven years as a partner and director of the Boston Consulting Group (BCG), Ms Conlon led BCG s Asia Pacific Operational Effectiveness Practice Area and, previously, the Sydney Office. In 2003, Ms Conlon was awarded a Centenary Medal for service to business. Mr Alasdair MacLeod Age 47 (Non-executive Director) Mr MacLeod is the Managing Director of News Limited s NSW publishing company, Nationwide News, and sits on the Board of News Limited. Nationwide News publishes The Daily Telegraph, Sunday Telegraph, The Australian, Weekend Australian, mx and Sportsman. Mr MacLeod joined News Limited in 2002 as Managing Director of the company s community newspapers division which publishes over 120 titles throughout Australia. He relocated to Australia after thirteen years with News International in the UK where he held a number of senior positions including Managing Director of online division News Network and General Manager of Times Newspapers, the publisher of The Times and The Sunday Times. Prior to joining the News Group, Mr MacLeod worked with Citibank Limited in Sydney and in Hong Kong. Mr John D McGrath Age 45 (Non-executive Director) Mr McGrath founded McGrath Estate Agents in He has taken the company to Australia s largest property services group, selling over $3.5 billion in residential property in Sydney last year. The company became the first real estate company to be ranked on BRW s Australia s Fastest-Growing Private Companies List and is a 3-time recipient of BRW s Fast 100. McGrath Estate Agents also owns Oxygen Home Loans, its mortgage broking business, as well as Total Real Estate Training that provides training programs and seminars for the real estate industry. Mr McGrath is a Director of McGrath Group of Companies and the Rawson Group. In 2003, he was awarded a Centenary Medal for service to business. His latest book, The Ultimate Guide to Real Estate, published in June 2005, ranked as the No. 1 Business Book within a few weeks. 17

20 DIRECTORS REPORT CONTINUED Mr Stephen P Rue Age 42 (Non-executive Director) CA, BBS, DPA Mr Rue is the Chief Financial Officer of News Limited, the Australian arm of News Corporation. He was appointed to his current role in May 2003, and previously was the company s Group Finance Manager. Mr Rue first joined News Limited in 1996 and moved into the role of Treasurer and Special Projects Manager prior to being appointed Group Finance Manager. Mr Rue s experience includes 8 years at Arthur Andersen where he held the position of Senior Manager in their Audit and Business Advisory division. Mr Rue is Chairman of Community Newspaper Group Limited and a Director of News Limited and Australian Associated Press Pty Limited. Mr Rue is a Chartered Accountant and holds a Bachelor of Business Studies and a Diploma in Professional Accounting. Mr Sam R White Age 37 (Non-executive Director) B.Com, LL.B. Mr White was appointed to the Board of Ray White Real Estate in 1998 and later as Deputy Chairman of the Group. He joined Ray White Real Estate in 1991, initially in its research department, moving through a number of areas in the company including residential sales and home loan consultancy. Mr White currently oversees all areas of the Ray White Group, including its agency operations as well as its finance and insurance businesses. Mr White has a Bachelor of Commerce and a Bachelor of Law from the University of Queensland. COMPANY SECRETARY Mr Nicholas J V Geddes FCA, FCIS Mr Geddes is the principal of Australian Company Secretaries, a company secretarial practice, which he formed in Mr Geddes is a Vice President of the National Council of Chartered Secretaries Australia and a former Chairman of the NSW Council of that Institute. His previous experience, as a Chartered Accountant and Company Secretary, includes investment banking and development and venture capital in Europe, Africa, the Middle East and Asia. Officers who were previously partners of the audit firm There were no officers in the company during the financial year who were previously partners of the current audit firm, Ernst & Young, at a time when Ernst & Young undertook an audit of the company. 18 REA Group Annual Report

21 DIRECTORS MEETINGS The number of directors meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are: Director Directors Meetings Number of meetings held while a director Number of meetings attended Audit Risk and Compliance Meetings Number of meetings held while a director Number of meetings attended Remuneration and Nomination Committee Meetings Number of meetings held while a director Number of meetings attended Richard J Freudenstein Roger Amos Simon T Baker 7 7 Kathleen Conlon John D McGrath Alasdair MacLeod 7 6 Stephen P Rue Sam R White Committees The current members of each committee are: Audit Risk and Compliance Committee Mr Amos (Chairman), Ms Conlon, Mr Rue Remuneration and Nomination Committee Mr Amos (Chairman), Mr Freudenstein, Mr McGrath, Mr White Tax Consolidation Following advice from tax advisers, the Board has decided to enter into tax consolidation in Australia from 1 July 2006 onwards. Interests in Shares As at the date of this report, the interests of the directors in the shares and options of the company and related bodies corporate were: Interest in Shares Ordinary Shares fully paid Richard J Freudenstein Roger Amos 2,363 Kathleen Conlon John D McGrath 2,139,086 Alasdair MacLeod Stephen P Rue Sam R White 16,249,045 Simon T Baker (until 4 August ) 3,108,206 DIVIDENDS No dividend has been paid or recommended in the current or prior year. SHARE PRICE The closing market share price at the end of the previous financial year was $5.94 per ordinary share and at market close on 30 June was $4.38. CORPORATE INFORMATION Corporate structure realestate.com.au Limited is a company limited by shares that is incorporated and domiciled in Australia. realestate.com.au Limited has prepared a consolidated financial report incorporating the entities that it controlled during the financial year. The ultimate parent entity is News Limited. It has the following wholly-owned subsidiaries: Netwide Solutions Pty Limited, Australia; property.com.au Pty Limited, Australia; Property Look Pty Limited, Australia; Hub Online Global Pty Limited, Australia; NL / HIA JV Pty Limited, Australia ( homesite.com.au ); REA Group Europe Limited (United Kingdom) consolidating all European operations; REA Group Hong Kong Limited (HK); and the following partially owned subsidiary: REA Group FZ LLC (United Arabian Emirates) Nature of operations and principal activities The principal activity during the year of the entities within the consolidated entity was the provision of online advertising services. This activity consists of the following services: Online advertising of residential properties for sale and rent in multiple countries Online advertising of commercial properties for sale and lease in multiple countries Provision of online display advertising space for advertisers in various industries Provision of website development services to the real estate industry Software licensing of estate agent back office solutions Print publications to advertise properties for sale and rent in multiple countries Other services, such as training services via the REA Knowledge Network or data services There have been no significant changes in the nature of these activities during the year. Employees The consolidated entity employed 667 employees as at 30 June (: 479 employees). 19

22 DIRECTORS REPORT CONTINUED OPERATING AND FINANCIAL REVIEW realestate.com.au Limited and its subsidiaries (referred to herein as the REA Group ) successfully continued its international expansion in online real estate advertising. As at June, the REA Group operated 21 websites in ten countries, with most of the sites either first or second in each of its market. The group has also announced or completed three strategic acquisitions: Hong Kong, United Arab Emirates, and a step-up in the investment in homeguru.com.au. Areas of operations June June Residential Online Advertising realestate.com.au property.com.au homesite.com.au homeguru.com.au allrealestate.co.nz propertyfinder.com casa.it athome.lu athome.be athomelorraine.fr athome54.de realestate.com.au property.com.au homesite.com.au (until March ) homeguru.com.au ozhomevalue.com.au allrealestate.co.nz propertyfinder.com hotproperty.co.uk ukpropertyshop.co.uk (since July ) casa.it athome.lu athome.be athomelorraine.fr athomealsace.fr athome54.de / athome.de homesolution.lu squarefoot.co.hk propertyfinder.ae allglobalproperties.com Residential Holiday Rental Advertising realholidays.com.au Residential Print Advertising London Property News London Property News HotProperty / Renting Squarefoot / Inside Discovery Bay Publications athome magazine and athome new homes Commercial Property Advertising realcommercial.com.au / propertylook.com.au realcommercial.co.nz / propertylook.co.nz atoffice.lu realcommercial.com.au / propertylook.com.au * realcommercial.co.nz / propertylook.co.nz * atoffice.lu Agent Back Office Solutions Hub Online Web Design Services Clarke Computers Altowin (Belgium) Hub Online Web Design Services Clarke Computers Altowin (Belgium and Luxembourg) * propertylook.com.au and propertylook.co.nz operated as separate websites until January. All traffic is redirected to realcommercial.com.au or realcommercial.co.nz. 20 REA Group Annual Report

23 While the acquisitions are an investment in future growth, the REA Group has yet again successfully delivered organic growth across its operations. The financial performance of the REA Group is summarised below: Financial Comparative Data in FY 2004 FY 2005 FY 2006 FY FY Growth FY07 to FY08 Revenues from Services* 18,997 33,416 60, , ,633 45% Operating Expenses (16,274) (26,951) (47,048) (83,793) (119,058) 42% EBITDA 2,723 6,465 13,343 23,500 36,575 56% EBITDA Margin 14% 19% 22% 22% 24% Depreciation and Amortisation (369) (1,051) (2,297) (4,974) (7,336) 47% EBIT 2,354 5,414 11,046 18,526 29,239 58% Net Interest (Expense) / Income (462) (69) (139) 101% Earnings Before Tax 2,477 5,620 10,584 18,457 29,100 58% Income Tax (Expense) 2,472 (3,943) (7,469) (13,337) 79% Minority Interest (net of taxes) 1,581 4,076 6,581 61% Profit attrib. to members of parent 2,477 8,092 8,222 15,064 22,344 48% Employees (FTE) % Subscribing Paying Agents 5,207 6,414 10,713 17,011 22,478 32% * = Excludes Interest Income Performance Indicators Management and the Board monitor the group s overall performance, from the implementation of its mission statement and strategic plan through to the performance of the company against operating plans and financial budgets and forecasts. The Board, together with management, have identified key performance indicators (KPI s) that are used regularly to monitor performance. Dynamics of the Business realestate.com.au Limited primarily operates in the online real estate classified advertising market for residential and commercial property. Over the last fiscal years, realestate.com.au Limited extended its market leading position from Australia to other countries such as the UK, Italy, the Luxembourg region, United Arab Emirates, Hong Kong, and New Zealand through acquisitions and organic growth. The three key drivers of advertising revenue for the company are: The number of real estate offices within any particular market, which determines the number of subscriptions purchased. The number of listings within any particular market, which primarily determines the take up of additional advertising products. The number of visitors to the site, which determines the effectiveness of the classified advertising and determines the take up of display advertising revenue by developer and third party advertisers. According to analysts, the underlying housing market depends on certain macro-economic factors such as population growth, international migration, regional population growth, GDP growth, and annual house sales growth. Key Financial Highlights The key financial highlights for FY08 included: Revenues of $155.6 million, up by 45 per cent over the last financial year. Operating expenses of $119.1 million, up by 42 per cent over the last financial year. The key driver of operating expenses continues to be employees and commission payments to staff and media agencies. It contributes $62.1 million or 52 per cent of the overall operating expenses. Staff numbers increased from 479 as at June to 667 as at June. The majority of new staff members were employed in sales and marketing positions and were focused on signing up new agents or serving existing customers, thus driving greater take up of additional advertising products and services. EBITDA of $36.6 million, up by 56 per cent over the last financial year. The group has increased its EBITDA margin from 22 per cent to 24 per cent. Property Listings across all sites increased to 1,624,392 listings as at June, up by 534,067 listings compared to June. Subscribing Paying Agents increased from 17,011 as at 30 June to 22,478 as at 30 June. 21

24 DIRECTORS REPORT CONTINUED Key operational highlights on a country basis: Country Revenue in EBITDA in Margin FY Australia 120,719 61,946 51% United Kingdom 22,071 (10,057) (46%) Italy 5,401 (2,819) (52%) Luxembourg 3,532 1,054 30% Other countries 3,910 (3,602) (92%) Loss of associate (homeguru.com.au) (185) Unallocated overhead (9,762) Total 155,633 36,575 24% FY Australia 85,745 39,314 46% United Kingdom 17,891 (8,180) (46%) Italy 1, % Luxembourg 1, % Other countries 1,093 (107) (10%) Loss of associate (homeguru.com.au) (226) Unallocated overhead (7,674) Total 107,293 23,500 22% Australia The Australian operations continue to be the key driver of value within the REA Group. The Australian business operates four websites realestate.com.au, property.com.au, realcommercial.com.au and realholidays.com.au as well as providing agents with market leading software through HubOnline and Web Design Services. In FY08, the Australian has further expanded its market leadership position: The number of subscribing agents across all portals increased to 9,190 up from 8,410 as at 30 June approximately 95 per cent of the Australian agents is using the group s residential or commercial site. Average revenue per month from Australian agents increased to $885 by 30 June, up from $667 in June. Additional advertising sold to agents now represents 38 per cent (compared with 31 per cent as at 30 June ) of the overall revenue with residential agents. It is generated from sales of Banner Advertising, Feature Properties, Guaranteed Top Spot, ebrochures, and Feature Agent advertising products. The other 62 per cent (69 per cent) of the overall revenue from residential agents represents subscription revenue. A significant growth in revenues from the property developer and third party segment compared to previous periods. Overseas Growth Businesses In September 2005, the company commenced a global expansion plan that saw it acquire sites in the United Kingdom, Italy, the Greater Luxembourg Region, Hong Kong and the United Arab Emirates. In addition the company has launched new sites into New Zealand, Belgium and the Alsace Region of France. United Kingdom In November 2005, the REA Group acquired Propertyfinder.com, the then number four site in the United Kingdom. Since its acquisition, Propertyfinder has moved to being the number two site in the United Kingdom and this position has been enhanced through two further acquisitions hotproperty.co.uk (April ) and UKPropertyshop. co.uk (July ). At acquisition, Hotproperty had 0.4 million Unique Browsers and 692 unique agents while UKPropertyShop had 0.6 million Unique Browsers. The key performance measures: Increase in revenues of 23 per cent over the previous year. Almost all of this was organic growth as Hotproperty was acquired late in the year. An increase in total UK paying agent numbers from 3,919 (30 June ) to 5,633 (30 June ). propertyfinder.com and hotproperty.co.uk is now used by approximately one third of the UK estate agents. Strong significant growth in revenues from the property developer and third party segment compared to previous periods. The turn-around of Propertyfinder Publications into a break-even publishing business supporting the online brand. 22 REA Group Annual Report

25 Italy In February, the REA Group acquired approximately 59 per cent of casa.it. Casa.it is the leading residential real estate site in the Italian market. During FY08, the REA Group increase its stake in casa.it to approximately 69 per cent through the acquisition of 10 per cent from Antonio Fregnan, the founder of the business. The remaining 31% is owned by SkyItalia. During FY08, the Group ramped up the performance of the casa.it business through investment in sales and marketing. The result was a loss for the year, however there has been strong top line growth. In particular, paying agent numbers increased significantly, from 3,511 as at 30 June to 5,514 as at 30 June. Including the 2,412 agents on trial subscriptions, casa.it is the clear leader in the Italian market with 7,926 agents using the site. Luxembourg In February, the REA Group also acquired the athome Group. The athome Group comprised the number one player in Luxembourg, athome.lu plus sites in Belgium, France and Germany. The Luxembourg business has significantly improved its margins from 22 per cent to 30 per cent in FY08 while further strengthening its dominant market position. All other countries In September 2005, the REA Group launched allrealestate.co.nz in New Zealand. Over the last 12 months, agents subscribing to the site increased from 496 to 527 thus being used by 36 per cent of agents. As part of the athome acquisition in February, the REA Group acquired sites in Germany, France, and Belgium. The last 12 months has seen the number of agents using these sites increase from 181 as at 30 June 07 to 519 as at 30 June 08. In September the Hong Kong businesses Squarefoot Limited and Primedia Limited were acquired and a couple of months later the first portal launched. In March, the REA Group acquired 51% of propertyfinder.ae in United Arab Emirates. The business is making solid progress in the UAE market and has increased agent numbers by 90 per cent since acquisition. Unallocated Overhead The group allocates the costs incurred in its Corporate Centre and its Product Service Group (IT department) across all the countries and reflects those costs in the EBITDA figures shown in the segment report. Unallocated costs include costs of corporate affairs, the group finance function, the corporate development function, the Board and Secretarial function, ASX Listing fees, parts of the costs for the office of the CEO and R&D related IT development costs for a group IT platform. Traffic on Websites Many of the 21 websites of the REA Group continue to be leaders in online real estate advertising in their regions / countries. According to independent rating auditors Nielsen//NetRatings and Omniture (UK), the monthly readership (measured in Unique Visitors) of all websites increased by 15 percent from 7.1 million in June to 8.2 million in June. The Australian residential website realestate.com.au had 4.1 million Unique Visitors and the gap to the second placed website domain. com.au increased to a record 2.3 million visitors. Also according to Nielsen//NetRatings and Omniture, the overall number of pages of information (page impressions) viewed by readers of the group s websites increased by 46 percent from 473 million in June to 592 million in June. Cash Flow Excluding corporate tax payments, operating cash flow has increased from $24.2m in FY07 to $32.7m in FY08. Corporate income tax paid is up from $3.2 million to $16.9 million due to FY07 and FY08 tax installments being paid in the first half-year of FY08. Investment for Future Performance The company will continue to invest in building and expanding its businesses in both online advertising and in other related sectors of the real estate industry. Rounding of Amounts The company has applied the relief available to it in ASIC Class Order 98/100, and, accordingly, amounts in the financial statements and the directors report have been rounded to the nearest thousand dollars. 23

26 DIRECTORS REPORT CONTINUED REVIEW OF FINANCIAL CONDITION Capital structure At the end of the period, 127,255,057 (: 127,255,057) ordinary shares were outstanding. The group is equity financed as at 30 June with an undrawn credit line of $21 million for short term financing needs, which will expire in September. Treasury policy Excess funds are currently invested in an overnight professional funds account. Cash from Operations During the financial year, the group delivered $15.9 million (: $21.1 million) in operating cash flows. The main driver were income tax payments for the amount of $16.9 million (: $3.2 million). At the same time, the group invested $29.1 million (: $32.9 million) out of which $23 million were spent on acquisitions. Liquidity and Funding The company has sufficient funds to finance its operations. Risk Management The company takes a proactive approach to risk management. The Board is responsible for ensuring that risk and opportunities are identified on a timely basis and that the company s objectives and activities are aligned with the risks and opportunities identified by the Board. The mechanisms for risk management include approval of a strategic plan by the Board, the approval of operating budgets and their regular review against actual financial data. Significant Changes in the State of Affairs Throughout the reporting period there have been no significant changes in the state of affairs other than acquisitions (see note 24). Significant Changes after the Balance Sheet Date None Environmental Regulation and Performance The company is complying with all environmental regulations and is not subject to any particular environmental requirements. SHARE OPTIONS Unissued shares Between 30 June and 30 June, there were no unissued ordinary shares under options. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS For FY08, the company paid premiums totalling $19,419 in respect of contracts insuring all the directors of realestate.com.au Limited against costs incurred in defending proceedings for conduct involving: 1. a wilful breach of duty; or 2. a contravention of Sections 182 or 183 of the Corporations Act (2001), as permitted by section 199B of that Act. realestate.com.au Limited has entered into a standard form deed of indemnity, insurance and access with the independent directors against liabilities they may incur in the performance of their duties as directors of realestate.com.au Limited, except liabilities to realestate.com.au Limited or a related body corporate, liability for a pecuniary penalty or compensation order under the Corporations Act, and liabilities arising from conduct involving a lack of good faith. realestate.com.au Limited is obliged to maintain an insurance policy in favour of independent directors for liabilities they incur as directors of realestate.com.au Limited and to grant them a right of access to certain company records. In addition, each Director is indemnified, as authorised by the Constitution, on a full indemnity basis and to the full extent permitted by law, for all losses or liabilities incurred by the Director as a director of a member of the group. The indemnity operates only to the extent that the loss or liability is not covered by insurance. Up to 11 November 2005 (when News Limited increased its share in realestate.com.au Limited to a controlling shareholding) the company held a Directors and Officer s Liability Insurance Policy on behalf of current directors and officers of realestate.com.au Limited and its controlled entities. On 11 November 2005, this policy was converted into a seven year run-off cover. realestate.com.au Limited is now covered by a D&O insurance for the News Corporation Group of companies. This cover excludes claims brought by major shareholders (News Limited). 24 REA Group Annual Report

27 REMUNERATION REPORT (AUDITED) This report outlines the remuneration arrangements in place for directors and executives of realestate.com.au Limited the company and the group is in accordance with the requirements of the Corporations Act 2001 and its regulations. Remuneration philosophy The performance of the company depends upon the quality of its directors and executives. To prosper, the company must attract, motivate and retain highly skilled directors and executives. To this end, the company embodies the following principles in its remuneration framework: Provide competitive rewards to attract high calibre executives Significant portion of executive remuneration at risk, dependent upon meeting pre-determined performance benchmarks Establish appropriate, demanding performance hurdles in relation to variable executive remuneration Remuneration and Nomination Committee The Remuneration and Nomination Committee of the Board of Directors of the company is responsible for determining and reviewing compensation arrangements for the directors, the Chief Executive Officer (CEO) and the senior management team. The committee assesses the appropriateness of the nature and amount of remuneration of directors and senior managers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. Remuneration structure In accordance with best practice corporate governance, the structure of non-executive director and senior manager remuneration is separate and distinct. Non-executive director remuneration Objective The Board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held in November 2006 when shareholders approved an aggregate remuneration of $350,000 per year. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The remuneration of non-executive directors for the period ending 30 June is detailed in Table 1 of this report. Senior manager and executive director remuneration Objective The company aims to reward executives with a level / mix of remuneration commensurate with their position and responsibilities within the company and so as to: Reward executives for performance against targets set by reference to appropriate benchmarks; Align the interests of executives with those of shareholders; Link reward with the strategic goals and performance of the company; and Ensure total remuneration is competitive by market standards. Structure Remuneration consists of the following key elements: Fixed Remuneration Variable Remuneration Table 2 gives details the variable component of the five most highly remunerated senior managers. Fixed Remuneration Objective The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market. Fixed remuneration is reviewed annually. All contracts for new senior management have to be approved by the Remuneration and Nomination Committee. In addition, deviations from the budgeted salary increases also require approval. Structure Senior managers are given the opportunity to receive part of their fixed (primary) remuneration in fringe benefits such as motor vehicles and education expense payment plans. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the company. The fixed remuneration component of the five most highly remunerated senior managers is detailed in Table