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REA Group share price on watch after tough first quarter

The REA Group Limited (ASX: REA) share price will be one to watch on Friday following the release of its first quarter update.

How did REA Group perform in the first quarter?

It was a very challenging first quarter for the property listings company and this has been reflected in its financial performance.

For the three months ended September 30, REA Group recorded revenue after broker commissions of $202.3 million. This was a 9% decline on the prior corresponding period.

Despite a 2% reduction in operating expenses to $87.4 million, REA Group’s EBITDA (excluding share of losses of associates and joint ventures) tumbled 14% to $114.9 million. If you include the one-offs, EBITDA would have been down 16% on the prior corresponding period.

Also on the slide during the quarter was the company’s free cash flow. It fell 20% to $41.8 million.

What were the drivers of this result?

The main driver of this weaker revenue was a notable decline in listings volumes and new project commencements.

National listings fell 15% over the three months, including listing declines of 22% in Sydney and 21% in Melbourne.

Also impacting its revenue was the extended duration of Premiere All listings from 45 to 60 days. This led to an increase in revenue deferral for the period.

If you exclude the impact of the increased revenue deferral, group revenue would have declined 6% and EBITDA would have fallen 9%.

Management commentary.

REA Group’s CEO, Owen Wilson, appeared happy with the company’s resilience in such challenging conditions and optimistic on the future.

He said: “Our performance has shown remarkable resilience given we have been tested by unprecedented market conditions. Pleasingly, we are seeing the signs of a gradual market recovery. We know the buyers are back and it’s only a matter of time before the sellers follow. In September, enquiries for properties for sale on realestate.com.au increased 30% year-on-year, while average auction clearance rates have returned to the levels we were seeing before the market correction, over 80% in Melbourne and Sydney.”

“We also know that Australians remain passionate about property. In August, we received a record number of monthly visits to realestate.com.au at 87.5m and a record number of app launches at 36.2m. Our audience lead also increased compared to the corresponding quarter with over three times more visits than our nearest competitor,” added Mr Wilson.

Outlook.

REA Group notes that the market remains challenging with Australian residential listing volumes down 15% in October. This is largely due to declines of 15% in Sydney and 17% in Melbourne.

In light of this, management expects listings for the first half of FY 2020 to be lower than the same half last year.

Thankfully, a stronger performance is expected in the second half. 

“We anticipate that the more favourable listings comparatives in the second half of FY20 will deliver a stronger revenue outcome. The fundamental strength of our business positions us well to benefit from an eventual market recovery,” concluded Mr Wilson.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.