There were some big changes packed into today’s SEEK Limited (ASX: SEK) half-year (1H21) results announcement. How will these changes impact the SEEK share price over the long-term?
SEEK predominantly generates revenue through an online marketplace for job seekers and employers. Its business operations have also expanded across to investing in early-stage businesses (SEEK Investments) and providing online higher education services.
Slight decline in revenue due to Asia and Latin America
SEEK recorded a 6% fall in revenue compared to the prior corresponding period, 1H20 (PCP). This was mainly due to a steep decline in revenue for the Asia and Latin America segments, dropping by 27% and 42%, respectively, relative to the PCP.
The biggest detractor in Asia was Hong Kong as the region felt the effects of both geopolitical issues and the pandemic. As for Latin America, COVID had a severe impact on the economies of Brazil and Mexico.
Another cause of the drop in revenue is the subdued performance of SEEK’s 61%-owned underlying investment, Zhaopin, an online marketplace based in China. Zhaopin’s revenue fell from $418 million in the PCP to $376 million in 1H21.
SEEK’s decrease in revenue translated to a slight fall of 1% in earnings before interest, tax, and depreciation (EBITDA) compared to the PCP.
Big changes
Following Zhaopin’s poor revenue performance, SEEK indicated it will reduce its investment stake from 61% to ~23.5%. The company is in advanced talks with a consortium to offload its stake.
SEEK also announced that former Commonwealth Bank of Australia (ASX: CBA) boss, Ian Narev will be replacing Andrew Bassat as the CEO. Andrew Bassat will move to the role of Executive Chairman for SEEK and the CEO of the SEEK Investments arm.
So this reshuffle means Ian Narev will be primarily responsible for the operations of SEEK’s key underlying business (SEEK Asia Pacific and Americas) whilst Andrew Bassat will steer the investments arm of the business.
Management outlook
Executive chairman of Seek, Graham Goldsmith believes the joint leadership will provide benefits, as he said, “There are numerous benefits from a greater degree of independence and focus for SEEK and Investments. A more independent SEEK will resemble a pure operating business. AP&A’s core operating performance will be the cornerstone of the company, whilst investors will retain significant economic exposure to Investments and Zhaopin.
SEEK will have greater capital flexibility for re-investment in AP&A and for dividends. An independently managed Investments, accessing external capital, can undertake aggressive long-term investment to build large businesses.”
The first thing that comes to my mind is that executive remuneration will likely double. Perhaps this is short-term pain for long-term gain?
My takeaway
Despite the headwinds caused by COVID, SEEK’s business remained somewhat resilient. The company also notes economic activity appears to be picking up again in Asia, which is the key driver of job marketplace revenue.
SEEK’s decision to scale back its investment in Zhaopin is a prudent one in my opinion given the current geopolitical and economic uncertainty across Asia.
As for the decision to use two executives to steer the ship, a lot of big US companies like Salesforce (NYSE: CRM) and SAP (NYSE: SAP) abandoned the co-CEO model in 2019. So, investors should monitor this aspect of the business closely.
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