Short time after publishing 2013 year-end balance sheets, I’ve noticed strong media concerns regarding the financial results of OLX.ro and Tocmai.ro, which are, no doubt, catastrophic by any rationale, see below:
‘Why is this happening?’ asked themselves fellow journalists.
Well, judged on a simple manner, the two Romanian companies seem like million euro black-holes in a broke economy and forever hopeful internet industry. However, things look bit different on a wider context.
– OLX is owned by Allegro and backed by Naspers, probably the second largest internet player (after Google), a South African company listed publicly at Johannesburg Stock Exchange (35,1 bn euro market cap, checked on Iphone this morning) with worldwide operations in digital and classic media.
– Tocmai is owned by Schibsted Media Group, a Norwegian listed company (4,35bn euro market cap) with media, internet and mobile operations in 29 countries.
SO, OLX and Tocmai are not just two regular limited liability Romanian companies, they are not alone. They belong to two important multinational corporations (actually transnational, but this another discussion) whom generate multi-billion revenues yearly as seen in the tables below.
Clear as daylight, the parent companies are backing as investments the two Romanian companies out of their profits which are not insignificant (million EUR):
I, personally, see no reasonable financial explanation of their spending, only the one already achieved, to be top traffic websites in Romania. Looking onto Schibsted’s financial statements for classified business on international markets I found a 23% profitability ratio. Optimistically assuming this ration for the Romanian ventures it means that to recover the up-to-date investment (aprox. 10 millions each), they’ll need to make 40 millions a year. And that would be a consistent jump from their actual revenues. A jump into nothingness, if you ask me, mainly because, with 3,6 million monthly unique visitors each, they’ve reached almost all active Romanian internet users. Bottom-line, there’s no way one can increase revenue 40x to 80x times on a stable market. There’s always the possibility of changing the business model but it’s hard to believe that they’ll do it only here.
So, yes, I guess they are million euro black-holes.
Why did they do it? There are probably many reasons, out of which I name three:
- they considered that replicating a verified and profitable international business model in Romania will work the same (not very plausible)
- they chose, rather than distributing all profits as dividends to shareholders, to invest some of the profits in new ventures in so called emergent economies (plausible)
- shareholders’ continuos pressure on management to increase price per share (PPS), market capitalisation, thus their portfolio value. This can be done either by good financial results in terms of revenues and profitability, or by reporting market-share results. This, I think, is the case of their Romanian investments. Couple of millions less on their profits are insignificant, but reporting they’ve reached #1 place in terms of traffic might be a sound headline on Letter to shareholders. (very plausible)
What next? OLX and Tocmai just (just = tocmai in Romanian) shook the classified segment in Romania, their competitors have all reasons to be traumatised, nonetheless they are all competing for a small market. Soon, they’ll give up this war as they’ve accomplished their aims and things will settle.
On the other hand, why not be more optimistic, and see it as a foreign investment in Romania directing tens of millions euro to the poor Romanian media and internet industry.