Naspers Ltd. (NAPRF) CEO Bob van Dijk on Q2 2018 Results - Earnings Call Transcript

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About: Naspers Ltd. (NAPRF)
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Earning Call Audio

Naspers Ltd. (OTCPK:NAPRF) Q2 2018 Earnings Conference Call December 3, 2018 9:00 AM ET

Executives

Eoin Ryan - Head of Investor Relations

Bob van Dijk - Group Chief Executive Officer

Basil Sgourdos - Group Chief Financial Officer

Martin Scheepbouwer - Chief Executive Officer, Classifieds

Laurent Le Moal - Chief Executive Officer, Payments

Analysts

Miriam Adisa - Morgan Stanley

Cesar Tiron - Bank of America Merrill Lynch

JP Davids - JPMorgan

Richard Kramer - Arete Research

Catherine O’Neill - Citigroup

Ziyad Joosub - HSBC

Operator

Good day, ladies and gentlemen, and welcome to the Naspers First-Half Financial Year 2019 Results Conference. All participants are currently in listen-only mode and there will be an opportunity to ask questions later during the conference. [Operator Instructions] Please also note that this call is being recorded.

I would now like to turn the conference over to Eoin Ryan. Please go ahead.

Eoin Ryan

Good afternoon. Thanks, Chris, and everyone for joining us for the call today. You can find our interim report and all accompanying documents on our Investor Relations website. On the call with me today is our CEO, Bob van Dijk; and our Chief Financial Officer, Basil Sgourdos. To kick things off, I’ll hand it over to Bob.

Bob van Dijk

Yes. Thanks a lot, Eoin, and welcome, everybody, to our interim 2019 results call. So for today’s call, I’ll kick us off with a strategic overview and context on how we have performed against that strategy over the last six months. So then I’ll over – hand over to Basil, and he will update you on the financial results for the period. After that, we will leave plenty of time for any questions that you may have.

So if I can start us off on Page 5. Before we jump into the results, let’s take a quick step back and frame Naspers’ overall strategy. I think it will give good context for our results, as well as the strategic investments that we’ve made during the last period.

So if you go on the left-hand side of Slide 5, that’s the framework that drives our strategic decisions and also severs as a filter for our capital allocation. So the heart of our strategy is to build and invest in entrepreneurial platform companies in fast-growing markets, particularly when they address large societal needs.

And while the Internet has seen explosive growth from taking traditional offline businesses and moving them online, we believe that the next wave of growth will come from tech-enabled offline businesses, and we see this opportunity actually largest in growth markets. And at this point in time, we see the biggest area for this opportunity in the classifieds, in the food delivery and in the payments space, and you’ll see we are doing quite well there.

So now, actually, we’ll focus on the progress on each of these areas, as well as our thinking with respect to the future opportunity in each of them. So now, if I can take you to Slide 6, we cover some of the highlights of the period, and we continue to execute well and we are delivering on our key objectives.

So first, we reported solid financials and we’ve seen strong revenue growth and continue to improve profitability. In ecommerce, we’ve seen revenue grow with 29% year-on-year, and we also increased ecommerce profitability meaningfully, resulting in good growth and overall trading profit, as well as a 39% increase in our core headline earnings.

So Basil will go into more detail. But I’m really happy to say that the classifieds area of the business is now profitable, including letgo and that’s great progress there.

So second, we saw really strong execution in all of our three ecommerce segments. So in classifieds, user engagement continues to grow strongly and particularly excellent results were recorded from Avito, from Brazil and from our European markets, particularly in Poland and in Ukraine.

So in our payments business, TPV increased to about $14 billion, and India now accounts for more than half of that. In food delivery, GMV increased by 46% on an annualized basis.

Third, we’ve strengthened our portfolio considerably in the last six months to targeted investments in our core segments, in classifieds, in food delivery and payments, and I’ll talk more about that later.

And finally, in September, we announced our intention to list MultiChoice in the Johannesburg Stock Exchange and to simultaneously unbundle this business to our Naspers shareholders. And that’s another step to address the discount that we are facing and we will expect – that we expect it will unlock significant value for our shareholders. It also moves Naspers towards 100% online global consumer Internet company.

And at the same time, it will create an empowered top 40 JSE-listed African entertainment group. So this process is developing well, and we plan to complete the listing and unbundling in the first-half of 2019.

So now we will dive into each of the segments. And if I can take you to Slide 7, you will see that in classifieds, we are the clear global leader and we took significant steps during the periods to further enhance value and to also provide future runway for growth.

So classifieds now has more than 340 million monthly active users and has the largest global footprint. And we have leadership in 35 countries, and the activity across the platform actually continues to grow strongly. The average monthly paying user base is up 33% year-on-year.

OLX grew revenue an impressive 37% organically in the first-half, and that’s more than doubled the industry average. We also continue to see strong traction in the high-growth markets that we focus on. We expect them to contribute meaningfully to the ongoing growth of the segment.

In the U.S., letgo continues to perform very well, and we are excited about the potential there. And that’s also why you saw us take full ownership of the U.S. business during the period. And as I mentioned, classifieds is now profitable, including letgo.

If I can you take to Slide 8, in classifieds, it’s not just business usual, but we’re actually deepening our market presence. So we are leveraging the strong horizontal market leadership positions that we’ve had to get deeper penetration in ways that will enhance professional relationships and also grow monetization. So we are extending the business model by investing into highly monetizable verticals, as well as convenient transaction formats that have very high ARPUs.

In our initial experience and experiments in this extension has provided really promising results and we’ve accelerated our investment here. And Webuycars and Frontier Car Group are two excellent examples of that.

So if I can you take to Slide 9, we can dive into food delivery. So in food delivery, we have a strong position. So if you combine Delivery Hero, iFood and Swiggy, that gives us leadership in 40 markets with really strong customer loyalty and network economics. If you take the segment in aggregate, GMV grew with 46% year-on-year actually with strong contribution from all businesses and global orders also growing strongly, particularly in Latin America and in India.

And food delivery is a perfect example of our strategy in action with online platform capabilities that address a large offline societal need in high-growth market. And I want to pause here for a second and underline for you how we think about the food delivery space in this regard.

So I would say, it’s still early days. But if you look at the growth in revenue and the underlying operating metrics that gives us real confidence in the potential here. And there is an opportunity to have a profound societal impact and transform the food industry by disrupting and improving the entire value chain.

So you’ll have seen that we’ve increased our investment in Swiggy and iFood recently, because these brands are clear leaders in their space. They’re leading in the eyes of the customers that use them, but they’re also leading in the eyes of the local restaurant owners that use the platform.

And what we’re doing is, we’re investing to further strengthen those relationships very much driven by tech-driven product innovation. And this sort of customer-centric and product-driven approach as opposed to a race to the bottom list promotions and price is what will differentiate and drive growth, expanding the market beyond pure food delivery of today.

If I take you to slide 10, we talk about our payments business. And in payments, we are excited about the opportunity to leverage our core global leadership positions in the payment service provider space to expand the market further and address large societal needs and particularly around credit and convenience to customers, who previously have not had access to this. And we’re making great progress here and the metrics support it.

So if you look at average daily transactions, they’re growing strongly. They’re up 39% year-on-year. Total payment volume is up 29% year-on-year on a constant currency basis. What is also exciting is that, we are operating in the highest-growth markets in the world and PayU has strong leadership positions in many of the 18 markets it operates in.

Similarly to food delivery, India is really a key market for us in payments. It has a huge market opportunity in excess of $800 billion, with underpenetrated consumer and SMB credit. In payments as a whole, India now represents more than 50% of grop volumes, with average daily transaction growing 50% year-on-year for the period. In credits, Lazy Pay is also gaining very significant traction and has reached already over 450,000 consumers.

If I take you to Slide 11, it shows how we have effectively used M&A to further accelerate the growth in our core segments. What you see in the past six months, we’ve deployed capital and put more weight behind our operations to solidify our leadership positions, and we continue to do this if I we see the right opportunities at the right price.

We have about $9 billion in net cash and that gives us the flexibility on the balance sheet to pursue our growth ambitions and to build out further our key segments, classifieds, food delivery and payments, and we think we can make these businesses into large multibillion-dollar operations. And I think the slide underlines just that.

So in classifieds, we increased our ownership in letgo and in Dubizzle, and we deepened our position in key auto verticals by investing in Webuycars and in Frontier Car Group. And that increases our exposure to these convenient transaction formats that I mentioned earlier.

In food delivery, we believe these investments will increase the pace of execution and it will solidify further our leading positions. And in payments, we’ve expanded our strong performing Indian credit portfolio with further minority investments in PaySense and in ZestMoney.

So I hope you’re excited about our strategy, and I will now hand over to Basil to discuss our financial results.

Basil Sgourdos

Thank you, Bob. So good morning, good afternoon and good evening all, and thank you for joining us today. As Bob mentioned, I’m going to take you through the financial highlights.

So a couple of reminders before we kick off. As before, the presentation includes growth percentages that isolate the impact of Forex translations and M&A. This provides an understanding of the organic growth in local currency terms, which better reflects our underlying operating performance. As I work through the deck, I’m going to focus on this organic growth.

The Forex impact is largely a translation impact in the Internet businesses. However, in the video entertainment segment, the Forex impacts are more significant, given the large U.S. dollar cost base versus local currency revenues. And then finally, all amounts are on an economic interest basis, meaning they include our proportional share of associates and JV results.

So first, let’s get going with Slide 13, which lays out the financial highlights. In ecommerce, we are really pleased with our progress. With strong underlying growth frames, the investments we’ve made have been well placed and are now showing real recurrence.

For me, this underlines the core of the Naspers strategy. We find great assets, addressing real societal needs in high-growth markets. We invest to scale them and then we benefit from that scale. We saw strong growth in revenue and the underlying user metrics.

Trading losses reduced by substantial 46% and margins improved meaningfully. Our classifieds business is now profitable, including letgo for the first time. Payments, etail and travel also had a noteworthy reduction in losses.

As we balance improving core profitability with investment in new opportunities, we will continue to drive towards ecommerce reaching overall profitability in the coming years.

The video entertainment segment had a steady six months, growing subscribers by 4000,000 13.9 million households. Despite ongoing economic and currency volatility, effort to return Sub-Saharan Africa operations to profitability are gaining traction. Then the group returned to a free cash flow positive position that’s unlocked improvement of some $367 million year-on-year. Pensions again contributed to a healthy earnings growth. And in summary, our core objective remains strong returns over the long-term and unlocking value for our shareholders.

Turning to Slide 14. You’ll see a brief synopsis of our performance for the six months. Top line grew 29%, with Naspers generating a sizable $11 billion in revenues, trading profit grew 34%, which fueled a strong growth in core headline earnings that – which were up 39% year-on-year to $1.7 billion.

On the next slide, we unpack revenue and trading profit in more detail. Ecommerce revenue increased 29% to $2 billion. The combination of good revenue growth and further efficiencies that come with scale meant profit growth was significantly higher than revenue growth. Trading losses narrowed by 46% to $209 million.

The Ecommerce segment continues to deliver the highest profitability improvement of all our segments. It grew at nearly twice the rate of Tencent. In our social and Internet platforms, revenues grew to $7 billion, driven by Tencent. Although the year-on-year growth rate is reduced at 38% growth rate is a great achievement given Tencent’s size.

Mail.ru accelerated its growth and grew our share of revenues by 30% year-on-year. Tencent was yet again a meaningful contributor to trading profit, with the social and Internet platform segment increasing its contribution by 24% year-on-year. Overall, margins declined as the business mix evolved and as the significant investment in cloud and other services continued.

The Video Entertainment segment delivered solid results, generating revenue growth of 7% and maintaining a fairly stable trading margin, and this despite stepping up investment to catch additional growth around the FIFA Soccer World.

On Slide 16, we double-clicked on the improved profitability of the Ecommerce segment. The ecommerce trading loss margin halved from minus 21% to minus 11% this year. All margins across the portfolio improved. Except for food delivery, we have further investment in scaling operations expanded trading losses.

Classifieds continued to show strong profit growth, with a margin improvement from minus 16% to plus 12% in a year. Payments improved from minus 23% last year to minus 14% this year, even as it invested to build out its new credit business. The uplift was driven by our core PSP business, which is moving to profitability in the aggregate with several markets already profitable. Our food portfolio continues to exceed our growth expectations.

So as Bob mentioned earlier, we’re still at the early stages of a significant tech-enabled shift in eating behavior. We are leading this shift and we are encouraging our businesses to invest in capturing the sizable portion of this opportunity going forward. Travel’s trading margin also improved substantially from minus 32% to minus 14%, driven by macro solid revenue growth and improved unit economics in the hotel business.

Slide 17 analyzes development spend in more detail. We continue to make large strides in reducing overall development spend. So folks, for those of you that are trading us for the first time, in our new tire business, development spend reflects current trading losses incurred by businesses yet to reach scale.

The total spend continued to trend downwards by 21% year-on-year. For reference, the consolidated number came down by 27% year-on-year. Spend on new investments decreased by $41 million, or 33%, and that’s mainly related to lower spend in letgo and MakeMyTrip. We also saw a 13%, or $41 million decline in funding our more established businesses, most notably a 29% reduction in classifieds spend, as developing markets continue to scale.

Slide 18 details the financial performance of our profitable ecommerce entities. So we think this view is useful, because we have many businesses at different stages of investment. But importantly, we are seeing a consistent march towards profitability across the portfolio.

As I said, this is the Naspers strategy in a nutshell, as our goal is to invest in scale and then move these businesses to profitability, and I think this is something we have been quite successful at doing, as you can see on this slide. Our profitable businesses demonstrated strong growth. Revenues grew 29% year-on-year to $902 million and trading profit grew even faster at 48% year-on-year to $223 million.

As in full-year 2018, our total ecommerce profits exceeded that of the Video Entertainment segment. Importantly, overall, the sources of profitability are increasing, driven by classified and payments as these businesses scale.

Slide 19 outlines the financial progress of our classifieds segment. Revenues grew 37% to $405 million, and now already represents 64% of full-year 2018’s revenue. Avito performed well and grew revenues by 31% to $162 million, despite weak macro conditions and some competition.

OLX Brazil grew revenues 54% and expanded its profit margins. letgo performed strongly with a solid stock in testing monetization and continued growth in the user base. letgo’s growth is particularly encouraging as it was driven by product enhancements, which sparked new activity across the platform and reengage past users.

Year-on-year, losses are declining meaningfully, so this is very good progress. Overall, classifieds’ trading profit amounted to $47 million, compared to a loss of $45 million for prior period. That’s a swing of $92 million. The classifieds segment is on track to be profitable for the full-year.

As you look to the second-half, be sure to factor in the letgo marketing investment, as well as the traditional seasonal patterns. This is the period in the year where we ramp up investment to drive growth in the New Year.

Slide 20 outlines the strong growth of the online food delivery segment and our renewed investment to scale and expand this space. As Bob explained earlier, food delivery is just at the beginning of its journey, and the opportunity for continued explosive growth is immense, as the markets expand through additional offerings, choice and services to consumers and restaurant peers.

As I mentioned, we are encouraging our businesses to invest further in the opportunity to solidify the strong positions we already have. During the period, the segment continued to grow strongly, with solid contributions from all businesses. Revenues tripled to $181 million, while losses expanded to $41 million, reflecting the investment I just mentioned.

In India, Swiggy continues to record outstanding growth, with orders growing more than four times and revenue also growing very strongly. In July 2018, we invested an additional $79 million million in Swiggy, bringing our effective interest to 25%. Delivery Hero executed well and grew their revenues 48%. iFood continues to execute exceptionally well, doubling its revenue.

We recently committed an additional $400 million to the iFood business over the coming years and believe it will enable iFood to increase the pace of product development and innovation to compromise its current offering and accelerate growth. This is a cycle we’ve been through before and it’s a cycle we know very well.

Slide 21 summarizes the payments segment financials. PayU showed strong progress in its PSP business, growing revenue while containing costs. The PSP business, which lies at the core of the payment strategy and enables expansion into adjacent businesses is approaching profitability.

Revenues grew 33% year-on-year to $171 million, driven by a 35% increase in transactions and a 29% increase in total payments value. Specifically, India, which is a market of strategic focus for Naspers, now makes up more than 50% of PayU’s total payment value, which is a sizable $14 billion.

As the number one ecommerce payment gateway in India, we are well positioned to lead in the rapidly advancing payment market, unlocking incremental opportunities in areas such as credit, global payments and cross-border transfers. We also substantially narrowed losses, bringing them down by 58% and improving trading losses considerably.

On Slide 22, we outlined the performance of our social and Internet platform segment. Tencent’s strong performance continues and we remain convinced of Tencent’s long-term prospects and returns.

Moving on to Slide 23, we illustrate the increased contribution to central cash flows by our Internet business. Improved ecommerce profitability, particularly in classifieds, resulted in a greater contribution to overall central cash flows. Once we exclude video entertainment, free cash inflows from profitable units and dividends totaled $544 million, which is a 43% increase year-on-year. That’s a significant improvement and a trajectory that puts us in a position to take the step to unlock value for our shareholders by unbundling MultiChoice.

Slide 24 illustrates our free cash flow position. We are free cash flow positive at the end of the six months, $271 million of inflows, compared to an outflow of $96 million in the prior year. That’s a marked improvement and was driven by the improving profitability, converting it into cash and with dividend income from Tencent increasing, together with positive working capital effects from Video Entertainment segment.

Turning to Slide 25, we set out the significant M&A transactions included in the first-half. Acquisitions in the payment totaled $750 million. We remain disciplined and focused in our investment approach, which is vital to balancing strategic priorities with delivering satisfactory returns to you, our shareholders.

As painful as it has been, our market direction, like the one we’ve seen, typically benefits well-capitalized companies like Naspers and may create opportunities to put capital to good use and delivered great future returns.

Slide 26, we provide an update on our internal rate of return. We continue to deliver healthy returns as we optimize our portfolio. Return on investment remains important when we allocate capital. Rates are significantly ahead of our cost of capital, NASDAQ and many of our peers. This track record, including the 29% Flipkart IRR and our disciplined approach to allocating capital, provides us with a confidence that we can generate excellent returns for shareholders by investing in growth opportunities.

And on Slide 27, we revisit the discount. So we understand and acknowledge that the discount is a source of frustration for all stakeholders, and we are working tirelessly to identify the best options to address it. The core problem remains Naspers’ sights on the JSE, which has caused force-selling pressure from the South African funds, as they line closer to the newly introduced capping index and their prudential leverage in terms of single stock exposure.

The slide sits on our priorities and several initiatives so far. In the first-half of full-year 2019 with increased profitability, we were disciplined in the capital allocation and we locked in great returns with the Flipkart sale. The announced intention to list MultiChoice Group on the JSE is yet another step in this unlock. We have far more work to do here. We’re looking at additional measures, including primary listings and we will communicate to the market when we are ready to do so.

In the next few slides, we will unpack the performance of MultiChoice Group and the rationale for our decision to list the group on the JSE.

Slide 29 shows the performance of the video entertainment business for the period. Results for the VE business was solid. Revenues grew 7% year-on-year and trading profit by 6% in local currency. This was achieved on the back of really strong subscriber growth, with our products and services now reaching almost 14 million households across the African continent, an increase of 14%, or 1.7 million subscribers year-on-year.

A key focus on cost control resulted in programming cost being flat year-on-year. So that’s a remarkable achievement by the team. The business delivered significant improvements in free cash flow generation, mainly due to the unwind of prior year content payments and set-top box inventory through the FIFA World Cup.

The South Africa operations delivered a stable performance against a challenging macroeconomic backdrop. Subscriber growth remained buoyant in the mid to mass-market segment, and the business reported an acceleration in net adds to 285,000.

Sub-Saharan Africa reported strong growth momentum, with both revenue and trading profit growing 16% in local currency. Translating to U.S. dollars, the business turned the corner and reported stabilizing losses despite some significant ongoing currency devaluations, especially devalued kwanza, which is down 55% year-on-year.

The value strategy delivered a further $15 million in cost savings. Profitability should continue to improve from here. During the reporting period, the business leveraged the growth opportunity provided by the FIFA World Cup and invested significantly in decoder subsidies to grow the subscriber base. This investment shaved some 9% off the trading margin. But given that has resulted in a much larger installed base is expected to deliver healthy returns in the years to come.

So turning to Slide 13 – sorry, on Slide 15. On 17 September, we announced our intention to list and unbundle the video entertainment segment as MultiChoice Group on the JSE sometime during the first-half of the New Year. We expect this will unlock value for Naspers’ shareholders, move us toward a 100% online global consumer Internet company and create an empowered top 14 JSE listed African entertainment group.

As the leading video entertainment platform on the African continent with unparalleled content offering, we believe MultiChoice Group is very well positioned as a standalone business. It’s highly cash generative. It has no debt at listing. It continues to deliver strong subscriber growth and enjoys an early leadership position in the fast-growing connected video space. And it has great local expertise and know-how to bring people across the continent the best entrainment anytime, anywhere. We will update you on the progress of the unbinding in the New Year.

So before I conclude, I will quickly summarize for me what are the key takeaways. We’ve made excellent progress during the period. Revenue continued to grow strongly. Trading profits grew even faster and our business underlying metrics are encouraging across the board.

We have returned to a positive free cash flow generation, which is particularly meaningful given the upcoming unbundling of MultiChoice. The investments we have made are proving to be well placed with continued attractive returns on invested capital to date.

We will continue to invest in future growth and we will do so in the same disciplined capital allocation approach that has driven our success to date. We continue to work hard on finding the right solution or set of solutions to address the discount, and ours and your goals are fully align-based.

So with that, I’ll hand it back to Bob.

Bob van Dijk

Thanks, Basil. Before I close off, let’s go to Slide 32, where we look forward and think about the future. It’s clear that the execution during the period has been strong. Revenue tends to grow strongly. As Basil said, trading profits are on the right trajectory. I would say, our confidence in the future of our investments has increased.

So as I look to the remaining of the year and beyond, here’s what we’re mainly going to be focused on. So we’ll continue to drive our ecommerce business to profitability, while we’ll also invest in new opportunities to sustain that growth for the long-term. I don’t want to smartly use the flexibility on our balance sheet to pursue our growth ambitions in classifieds, in food delivery and in payments.

We’ll also continue our focus on innovation and efficiency across portfolio by embedding AI and machine learning more and more deeply in our products and in our service offering. And finally, we will take further steps to address to discount.

So with that, I would like to thank you for your time so far, and we’ll open up for questions, and the operator will take you through how that works.

Question-and-Answer Session

Operator

Thank you very, sir. [Operator Instructions] Our first question is from Miriam Adisa of Morgan Stanley. Please go ahead.

Miriam Adisa

Good afternoon, everyone. Thank you for taking my questions. Firstly, the customized business, given that you’re now seeing good profitability in classifieds. What level of profitability do you think you need to reach before you would consider a separate listing?

And then secondly, linked to that, we know that Schibsted plans to list their own classifieds business next year. Could that be a potential catalyst for delisting of your own business? And are you open to some sort of transaction with them given your overlap? And then secondly, just on capital allocation and your comments around the market correction. Do you feel now that there are more opportunities on the public markets relative to the private markets? And has that changed your appetite or willingness to do larger-sized transactions? Thank you.

Bob van Dijk

Yes. Let me try to answer both of your questions, and Martin, feel free to chime in on the classifieds point. So I think that we’re very encouraged by the trajectory that Martin and the team have delivered. And I, based on operating performance, think that the best is yet to come.

The – I think the reality is that, we have been able to invest in the business very proactively and we see a substantial further growth trajectory ahead. So I think the company is well-positioned to be within the Naspers move for the time being, even though its profile is indeed looking very attractive as well.

I would say, Schibsted’s listing is is Schibsted’s strategic priority and doesn’t influence our decision-making. We play our own cards. As to your question on the future consolidation, I think, our view stays as it is before. We are building a fantastic business. We’re also a pragmatic group of people. If at some stage, there is an attractive transaction to be done, we’ll obviously consider it. And Martin, maybe you want to add before I move on?

Martin Scheepbouwer

No, that’s it, Bob.

Bob van Dijk

Okay, thank you. Second question was around whether sort of a correction in multiples would push us towards more public market investment. And there, I would say, you would have seen in the past we’ve made both investments in private and public companies, and we do that based on the expected return that we think we can deliver for our shareholders, and in many cases been in private companies, in some cases, we’ve invested in public companies with exceptional results.

So that our methodology doesn’t change. We’re looking for a strategic angle where we can add real value to our investments. And at the time – at the same time, we want to deliver an excellent return for our shareholders, it doesn’t change our approach.

Miriam Adisa

That’s really helpful. Thank you.

Operator

Thank you. Next question is from Cesar Tiron of Bank of America Merrill Lynch. Please go ahead.

Cesar Tiron

Yes. Hi, everyone. Thanks for the call and thanks for taking my questions. I have three different questions. The first one on classifieds margins. Do you think that margins on classifieds that monetize have reached a ceiling at about 47%? I think there was about a 2% decline from 2018, or is that mainly due to the fact that you’re adding new properties in the monetization category, which obviously have a lower margin?

Second question is on letgo. I mean, obviously, the losses have halved compared to last year. Can we expect this trend to continue? And should we expect to see non-organic ways to further reduce losses, such as in-market consolidation?

And then the third question is on the M&A. You spent about $750 million in H1 in acquisitions. Is that the run rate, which you’re comfortable with, or should we expect an acceleration of that spend, given that you have about $9 billion in cash? Thank you.

Bob van Dijk

Yes. Cesar, many thanks for your question. And maybe I’ll start by answering your third one, and then I’ll hand over to Martin to answer the two classifieds questions. Yes, so we spent about $750 million, and I think it’s actually really hard to predict what our go-forward rate is.

What I can say is that, we see some fantastic opportunities in our core segments, where we could potentially invest the company’s money. We’ve been actually encouraged by – as we mentioned earlier, in food delivery, I think the opportunity is much larger than we previously thought. So there might be, if we run into the right opportunities, a great destination for further investment.

However, M&A is extremely hard to predict and we can’t give you any future guidance. I would say the opportunity set is very significant and we’re quite bullish without being able to give any guidance. Martin, could you answer the first two?

Martin Scheepbouwer

Certainly. Yes, so when it comes to classifieds profitability, as Bob said, we are only in the midst of this. As you’ve been able to see on Page 19, we now on a blended basis have a 12% profit margin. That’s really a mix of businesses that trade in – with very high margin and still loss-making ones. And when it comes to the high-margin ones, I think main upside comes from revenue expansion – revenue growth rather than margin expansion at the many of the, yes, loss-making entities, including letgo, will, let’s say, grows less in the future, and we’ll invest mainly behind big opportunities when we see one.

So this does not prevent us from pushing advantage when we spot an opportunity. But, for instance, letgo U.S., yes, the losses will continue to shrink going forward as it starts to monetize and mainly sourced from, as Bob called it, let’s say, product-driven growth.

Cesar Tiron

Thank you very much for your answers.

Operator

Thank you. The next question is from JP Davids of JPMorgan. Please go ahead.

JP Davids

Hi, good afternoon. A couple of questions from my side. Just firstly to follow-up on an earlier question and maybe to make it slightly broader. Over the last couple of years, you’ve executed on a number of in-market consolidation trades to improve profitability. Looking ahead, how do you think about consolidation of regional assets to scale up the size of your key verticals, and whether that may be value enhancing?

And then switching gear and probably more for Basil, I see there was some tax leakage around the Flipkart transaction. Can you confirm that this is an isolated tax issue, and that generally, your ecommerce structure is tax-efficient? Thank you.

Bob van Dijk

Thanks, JP. I will give you an answer on the first question and then ask Basil to deal with the Flipkart tax situation. So in terms of consolidation, I think if you look back in the last few years, I would summarize it that we have been, I think, the set of assets that we’ve operationally improved tremendously, and I think actually also across the board in classifieds, in payments and in food delivery.

But there have been opportunities where you could see additional value creation by consolidation. And the source of the value creation and consolidation has been been quite different. In some cases, it was a direct competitive situation that was much more productive by letting companies pursue growth together in other cases, which is getting to scale.

For example, in our India payments business by combining forces with Citrus, we’ve got to better scale. And I think in the end, you deliver better solutions at a better margin profile. So I think for different reasons, we have been pursuing consolidation. And those underlying considerations, I think, are the same going forward. So if we are building great business organically, if there’s a compelling reason either from a scale or a competitive point of view and we can create a better customer proposition, we will certainly consider it.

Basil Sgourdos

JP, if I can deal with the tax question. So a couple of points. First of all, the 29% IRR that I quoted was after this tax amount. So it’s a significant return, including a very, very small tax amount. Secondly, we are aimed and focused on recovering that tax amount. So we’re in the process of doing that, and we hope to be able to do at some point.

And then thirdly, our structure is really solid across the board. We spend lots of time. We’ve got a top-notch tax team team on board, and we make sure we have substance and that we actually are properly constructed in the markets we operate in. So I’m not worried about that at all.

JP Davids

Very clear. Thanks very much.

Operator

Thank you. The next question is from Richard Kramer of Arete Research. Please go ahead.

Richard Kramer

Thanks very much. Just one broad question on the food segment. Do you see real evidence there that these are more than a collection of national businesses? And do you see that building out of footprint, as it was discussed in the previous question, at a regional or even global level has some very clear synergies or operating benefits?

And second, on that business, a lot of the more evolved players in this space are reinvesting now to build out delivery footprint. Can you talk through your approach to that since, it’s going to be very different in different markets?

And then a quick one for Basil. Two-thirds or so of the free cash flow came from a working capital improvement. Obviously, in the media business, can you talk about how repeatable that is or whether in the portfolio of activities working capital might be more or less tied up in the future? Thanks.

Bob van Dijk

Yes. Thanks for your question. I guess, your food question is split into two. One around synergies from combining above a national level, the other one is around delivery. And maybe I’ll have a crack at the first one, and I’ll give Larry an opportunity to speak more about delivery. But then Larry is not on the call, so I have the pleasure of covering both before Basil answers your third question.

So I think, what we have seen and even within sort of our set of assets, there is actually huge knowledge synergies in having – being an investor in several of these companies. What we have learned in iFood has given us the opportunity to make a very value-added investment than Delivery Hero. And again, what we’ve learned at Swiggy, for example, has informed us on what’s – what is the future of first party going to look like.

So I would say, in terms of knowledge synergies, you’re absolutely right, there’s huge value in operating in more than one country. In terms of practical synergies, I would say over time, I think, that will be more the case than it is today, because I think today, it’s still very much a country by country, even city by city, in some cases, business, where you can run a great business on a national level.

I think over time, what we see is that you’ll see more, particularly machine learning being added the technological complexity, I think, if you go five years from now, we’ll be higher, which also, I think, then drives a good reason to look for technology synergies. I don’t think we’re quite there yet. But I think over time, we will get there.

In terms of delivery, I think, it’s a nuance picture. You see indeed in several markets, player investing in more of the first-party infrastructure. And I think it’s because it obviously delivers some more convenience to customers, and I think particularly in high-density environments, that is, A, you can build a good business on first-party delivery; and second of all, I think it’s what customers demand.

I think the third-party business still works well in less dense environments and can be very attractive. So I think you’ll see, yes, more first-party going forward, but I think still the third-party model will be there to stay in many parts of the market.

Basil Sgourdos

Thanks, Richard. If I can build with the free cash flow, working capital part of the question, I think a couple of things that I’d like to call out here. First of all, you’re right to call out working capital. It’s a sizable faster contributor to free cash flow, but it wasn’t the only thing.

Our profitable businesses and the cash generation from that improving profitability is a strong driver, and we believe we can sustain that going forward certainly from our ecommerce businesses. The working capital in the ecommerce businesses is relatively light. It’s not very heavy, and it doesn’t swing around a lot and that’s well managed.

In video entertainment, the working capital can be bulky year-on-year. It really depends on whether we have big contract renewals. And then generally there, what we tend to do is make an upfront payment for a portion of the contract, which then gets, of course, amortized over a couple of years. And then also, if you’ve got a big event or big drivers and depending on the timing of the current inventory, that can also have a bulky thing. So last year was for big outflow that shows you a big inflow. I would not say that that’s sustainable on a long-term basis. It is going to be pretty lumpy year-on-year.

Richard Kramer

Okay, thanks.

Operator

Thank you very much. The next question is from Catherine O’Neill of Citi. Please go ahead.

Catherine O’Neill

Hi. I’ve got three questions. On food delivery, you’re clearly very excited about the area. Are you happy with your current holding in Delivery Hero? Is that something you think you need to change in terms of your position there? And could you perhaps just provide a bit more detail about iFood and what the plan is for investment, given it already has a high market share in Brazil and where that’s being focused?

Is it being used to expand into other markets on education as well with inventors? I’ve seen some comments not long ago that suggests that’s an area you’re also excited about. Could you maybe just give us some idea about how you see the outlook for a tech new investment there in the medium-term?

And then finally, on etail, you don’t really talk about etail much. Is it a core business? Is that an area where you might look to exit at some point? And also could you just talk about the threat from Amazon or any other global operators in some of you existing markets?

Bob van Dijk

Yes, thank you very much. I think I’ll take all of those. So I would say, when it comes to food, we are looking across the globe at opportunities. And I would say with Delivery Hero, we’re very happy with our holding there. We’re happy with the performance of the company and I think it will continue to do extremely well.

In terms of iFood, I think I can elaborate a little bit more, yes. So we committed substantial amount of capital. There’s much to do with the further size of the opportunity. So I think iFood has been a great success in terms of building actually a market that didn’t exist before in Brazil. And we see that there’s huge further potential in several directions.

One is, we see opportunities for dark kitchens in Brazil that now are still quite nascent. We’ve also seen that actually there is the desire to have food at even lower price point, which we think we can also achieve, for example, through private label. So I think better is what – when we invested in iFood, we got excited about the progress. I think the overall market opportunity is probably 4, 5x of what we thought it was. That’s what we’re very much investing against.

In education, we’ve invested in a number of businesses that we’re strong believers in. And we added one recently with SoloLearn, which is, I think, another one that is on the cutting-edge between online learning and software development, where we really see the world probably needs another 10 million to 15 million software engineers. And we think that the kind ad tech products that we’ve invested in can actually deliver to us.

So I would say – and if you look at the majority of how education still happens, the disruption, I think, is only a fraction of the way there. So we look for the right opportunities to do more there. And I think, again, it’s one of those offline parts of the world that people spend a huge amount of time and money on where technology, I think, will play a much bigger role if you look 10 years down the line, so great opportunity.

And finally, on etail. I think what we’ve seen over time for different reasons is that, we’ve divested of a number of assets in some cases, because there was a buyer for it that was very interesting – very interested and we could lock in an excellent return for our shareholders and we’re pragmatic about that.

In other cases, because we would end up being a small minority that is not strategic, and we thought it was better to lock in a return than to be a passenger on somebody else’s investment fundamentally. And we’re really happy with the operational performance of the assets that we still have. And I think they are in strong markets, have a strong market position and are still quite early days.

So in Eastern Europe, eMAG has an extremely strong market position, but is growing rapidly, I think can still strengthen its position. Take a lot in South Africa is doing well, is market leader, but I would say is a fraction of what it can be. So excited about the assets we still have and their potential. I think we have time for just one more question.

Operator

Of course, sir. That last question would be from Ziyad Joosub of HSBC. Please go ahead.

Ziyad Joosub

Hi, everybody. Thanks for the question. I’ve just got a question on PayU, please. I know it’s early days and it’s probably very difficult to give completely clear guidance in this going forward. But I’d just like to get your initial thoughts on how big do you see the Indian consumer credit opportunity for Naspers. Do you think online platform could become a scaled player in the space?

And having Kreditech, as well as PaySense technology in-house, as well as the consumer payment and transaction data you have, do you see those as clear differentiators in this consumer credit space, or do you expect it to be a highly competitive area of the medium to longer-term? Thank you.

Bob van Dijk

Thanks for your question. I think we have Laurent on the line. And maybe, Laurent, I don’t want to steal your thunder. You want to have a crack at those questions?

Laurent Le Moal

Yes. Hello, absolutely. Right. So for the consumer opportunity around credit in India, we approach it in three ways. The first one is, we build our own product, leveraging the data that we have from the payments business and the distribution that we have from our merchants in India.

And the second thing is, we do distribute other people’s credit, right? So you mentioned Kreditech, and Kreditech is one partner among others in the market. And the third one is, we have also made investments and in other companies, especially in India companies like PaySense and ZestMoney that do have a slightly different products for the consumers.

And the reason for this approach is, first, we believe that in the market of – like India, which is still at the early stage of automotive lending. And we believe that, first, there would be different products. By now, pay later type of products for small-ticket items like our product Lazy Pay, which is a very successful merchant like Swiggy. We believe also that there is a market for installment products, so higher tickets at the point of sale. And the third one is there is also an opportunity to grow directly to the consumer. So that’s why we have a multi-point approach.

To your question on competitions, I think this is a very different market from payments. Payments is a game of scale. It’s a game of efficiencies to get to profitability. I think when it gets to credit, this is first and foremost the game of access to data, because with the data, the right data about consumers, then you can successfully build a credit scoring system. We do have the data.

We’ve learned about credit scoring through our investments. Now it’s a matter for us of scaling the business. But it’s fundamentally different in terms of assets and in terms also of business economics for the business. It’s still very early on, right? We still have less than 10% of our revenues coming from credit, but it’s growing very, very fast. So we will be investing more of our time and building the team specifically for that business going forward. That’s it for me.

A - Bob van Dijk

Many thanks, Laurent. And yes, I think that was the last question we have time for. I want to do two things. So first and foremost, if there are further questions, please do reach out to Eoin. Eoin is here if ever to run our Investor Relations arm, ready to interact with you at anytime. Second of all, I want to thank you for your time and attention and it was a great set of questions, and look forward to talk to you soon again. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, that then concludes this conference call, and you may now disconnect your lines.