Sohn Conference | April 23rd 2018

Dylan Adelman
The Wharton School
dylana@wharton.upenn.edu
Introduction Dylan Adelman
dylana@wharton.upenn.edu
Because they wouldn’t let me pitch Zedge.

•  Vostok New Ventures (VNV) is an investment holding company

based in Sweden and listed on the Stockholm Stock Exchange.

•  VNV has a net asset value of $880M, consisting of a 13.2% stake

in the Russian classifieds website Avito (62.2% of NAV), as well
as other emerging markets companies (31.6% of NAV) and cash.

•  VNV is the best way to invest in Avito. Avito dominates the

Russian classifieds market, and is in early stages of monetizing.
Avito can easily grow earnings at 20%+ for the next decade.

•  Because of limited visibility into Avito’s financials and VNV’s

NAV discount, Avito is available at just 23.8x 2018E earnings.

•  The result: VNV has an expected 10-year IRR of 20%.

2
Craigslist Dylan Adelman
dylana@wharton.upenn.edu
Can you spot the difference?

Craigslist in April 2000

?
3
Craigslist Dylan Adelman
dylana@wharton.upenn.edu
Can you spot the difference?

Craigslist in April 2000 Craigslist in April 2018

4
 “Every few years, someone in Silicon Valley
looks at Craigslist and thinks he or she can do
better. All these efforts basically come to naught
[…] Craigslist pulls in more than $500 million in
profit a year without trying.” - Forbes, May 2017
Classifieds Dylan Adelman
dylana@wharton.upenn.edu
The opposite of Bruce Greenwald’s toaster.

What makes online classifieds such a great business model?

The network effect among buyers and sellers
1 gives a large advantage to the first mover and
4
ensures that the market is winner-take-all.
The combination of an unregulated natural
2 monopoly and myriad pricing levers results
5
in substantial pricing power over time.
Minimal capex requirements at scale because
acquiring new users and raising prices is not
contingent on reinvestment rates. The result
is a near-100% dividend payout once mature.
Professional sellers create subscription-like
recurring revenues via value-added services.

Asset-light business model because no assets Recession-resistant business model that meets
3 are required to deliver the services and there 6 the basic need for location-based buying and
is no inventory. Ultra-high return on assets. selling by both individuals and businesses.

Online classifieds are one of the best business models in the world. 6
Classifieds Dylan Adelman
dylana@wharton.upenn.edu
There must be a good election joke here…

7
Avito Dylan Adelman
dylana@wharton.upenn.edu
The best combo of Russia and Classifieds since Trump Tower.

•  Founded in 2007, Avito is the third-largest classifieds site in the world after Avito vs. #2 Competitor
Craigslist and 58.com (China). Avito has 70%+ market share in all verticals, in Russia (Page Views)
and is arguably the most dominant classifieds website in the world.
General: 70.1x
•  Avito is highly under-monetized. Per-user revenue is by far the lowest for
any major classifieds market, as Avito did not begin monetizing listings until
2012 (versus early 2000s for international peers). Most revenue comes from Services: 71.1x
listing fees and value-added services in a few verticals like jobs and autos.

•  In 2017, Avito earned revenue of $269M (32% increase) with an operating Real Estate: 21.6x
margin of 53%. Unique sellers increased by 9% to 47M (⅓ of all Russians).

•  Avito’s earnings are a factor of Per-User Revenue × Users × Margins.

Sustained increases in each of these will drive up Avito’s valuation. Autos: 2.2x

How will Avito grow Per-User Revenue × Users × Margins over time? 8
Per-User Revenue Dylan Adelman
dylana@wharton.upenn.edu
Even Craigslist is better monetized than this.

•  Because Avito was not founded until 2007, it is far earlier Classifieds Revenue/Capita by Country
in the monetization curve than international peers. Avito’s (PPP-Adjusted USD)
current monetization roughly matches peer levels in 2008.
15.9
•  Determining revenue/capita potential is difficult because
most peer sites control specific verticals. Very few are the 15.2
dominant classifieds site across every vertical like Avito. In
this sense, Avito is comparable to nationwide aggregates. 12.1

•  Peer comparisons adjust for income levels because most 8.7

comparables are in higher-income countries than Russia.
6.3

1.9

How can Avito reach the per-user revenue of more mature classifieds markets? 9
“The single most important decision in evaluating a
business is pricing power. If you’ve got the power to
raise prices without losing business to a competitor,
you’ve got a very good business.” – Warren Buffett
 Per-User Revenue Dylan Adelman
dylana@wharton.upenn.edu
Monetizing like Mugabe.
Avito has an enormous runway for monetization:

1
Roll out listing fees to more categories and regions.
Fewer than 5% of categories have listing fees.

2
Sell professional value-added services (VAS) to
businesses that list multiple products on Avito.

3
Increased third-party advertising, such as the
partnership with Yandex announced in March.

4 Further monetize verticals. Avito’s dominant real

estate subsidiary, Domofond, earns zero revenue. Categories/Regions with listing fees
Categories/Regions without listing fees
5 Increase prices. What alternative do sellers have?
[Data from October 2015]
Avito did not begin monetizing select verticals until 2012, and is 10 years behind its peers on the
monetization curve. Over the next decade, Avito will converge with peers’ 2017 per-user revenue. 11
Per-User Revenue Dylan Adelman
dylana@wharton.upenn.edu
Pricing power like Valeant, but without the congressional hearings.

•  France has the lowest PPP-adjusted revenue/capita classifieds services Avito Revenue/Capita
among larger developed countries (after Russia). Using France in 2017 (USD) 2017 à 2027E
as a benchmark for the revenue/capita that Avito can earn in a decade, 6.3
Avito will achieve at least 4.9% annual per-user revenue growth.

•  This does not include GDP growth, which affects the number of items
sold per user (quantity, not price). Based on OECD projections for the
next decade, Russian GDP growth will be a 2.6% annual tailwind.

•  Growth will remain strong in a decade. In 2017, France’s classifieds 1.9

site, Leboncoin, achieved 20% revenue growth with 58% margins, and
is guiding for 15-20% long-term growth. If peers that are more than
a decade further into monetization can still grow revenue at 20%
per year, then estimating 7.5% for Avito is highly conservative.

2018 is just the start. Per-user revenue growth will be at least a 7.5% annual tailwind. 12
User Growth Dylan Adelman
dylana@wharton.upenn.edu
How is 10% of the US population still not connected to the internet?
Buyers Sellers
•  One proxy is site visits over time. According to •  One proxy is listings over time. VNV reported
SimilarWeb, site visits increased by 9% in 2017. that Avito’s listings increased by 18% in 2017.

•  Increased internet penetration is also a driver of
new buyers. Only 70% of Russians are internet
users, versus 90% in the US/EU. New internet
users in Russia will be a 2-3% annual tailwind.
•  Russia’s online spending will grow at 18%
annually over the next five years (Russian
Association of Communication Agencies).
•  Avito’s total number of unique sellers (“listers”)
increased by 9% to 47M (that is 1 in 3 Russians).
•  As a proxy of professional sellers’ advertising
budgets, PwC estimates that Russian online ad
spending will grow at 21% through 2021.
•  As of March 2018, Yandex (the Russian version
of Google) is now directing advertisers to Avito.

While precision is difficult, user growth will be at least a 6.0% annual tailwind. 13
Margin Growth Dylan Adelman
dylana@wharton.upenn.edu
Is the business quality of online classifieds apparent yet?

•  Classifieds businesses naturally expand margins Peer EBITDA Margins (2016)

as they mature due to lower spending on R&D
and marketing, as well as market consolidation. 90.0%

76.4%
•  The highest-margin classifieds are those that are
either in control of a massive market (Craigslist 64.2%
in the US) or in control of a highly monetizable
vertical (Rightmove with UK real estate). 60.3%

56.5%
•  Avito controls a market size similar to Craigslist
with multiple verticals similar to Rightmove. 52.9%

“We believe that Avito will be able to reach best in 45.0%

class margins of at least 70%.” – VNV, 12/2017 42.2%

How can Avito achieve this margin expansion? 14

Margin Growth Dylan Adelman
dylana@wharton.upenn.edu
An undisclosed subsidiary?
“Domofond is still in a development phase and does not generate any significant revenues.” – VNV, 12/2017

VNV’s Ownership Structure Avito’s Subsidiaries

Acquiring Avito’s financials from the Swedish Companies Registration
Office (Bolagsverket) is difficult, and even these do not fully break out
Domofond. But, they reveal that Domofond is a separate legal entity.

Domofond is likely to be
weighing down Avito’s
margins, but VNV does
not break out its impact.

Domofond is a separate entity, so it must file an annual report with the Swedish government. 15
Margin Growth Dylan Adelman
dylana@wharton.upenn.edu
At least it’s not Chewco or Philidor.
Domofond
Domofond offers Avito a clear path for margin expansion:

•  Because Domofond is still in the investment stage, it creates

53% of Avito’s product development costs, but no revenues. [ – break – ]

•  Domofond produces 11% of Avito’s total expenses. Without

these temporary costs, Avito’s margins would be 5.9% higher.1
Avito

•  As Domofond matures and begins to monetize, its margins

will improve and will eventually match (if not exceed) Avito
overall. This is not too aspirational for a real estate vertical.

•  Once Domofond begins to follow Avito’s vertical playbook on

monetization, the new revenues and margin improvement will
drive Avito’s overall margins to 70% without any other changes. [Domofond financials in SEK thousands | Avito financials in RUB millions]
1112M SEK = 879B RUB à 879/14968 = 5.9% increase in margins
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Margin Growth Dylan Adelman
dylana@wharton.upenn.edu
More margin expansion than a sell-side report on Tesla.

A few key drivers of margin expansion for Avito: 2017 2027E

COGS 10% 7%
•  Decreased sales and marketing (S&M) spending as 6%
Avito’s usage further increases among professional 4%
sellers, and as competitors (i.e. Yandex) capitulate. S&M 19%
9%

•  Domofond’s transition out of the investment stage 11%

R&D
will lower product development (R&D) expenses.
G&A 13%
•  Lower G&A as a percentage of sales because back
office expenses like labor will increase at a slower 74%
pace once Avito becomes more mature.

Operating 47%
Avito will approach 74% operating margins by 2027. Income
Margin expansion will be a 4.6% annual tailwind.

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NAV Discount Dylan Adelman
dylana@wharton.upenn.edu
Somewhere between Murmansk Trawler Fleet and PSH.

Despite its growth prospects, Avito is remarkably cheap when purchased through VNV:

•  With a $740M market cap and $880M NAV, VNV trades at a 16% discount to reported NAV. This
is the largest discount to NAV in the last decade. VNV historically trades in line or above NAV, and the
discount is the result of a recent adjustment in the carrying value of Avito (+32% in December 2017).

•  After netting out other investments ($300M), VNV’s 13.2% stake in Avito is priced at $440M.
This implies an overall price for Avito of $3.33B. Avito’s 2018E earning are ~$140M.
VNV NAV/Share (Bar)
•  Through VNV, Avito is available at only 23.8x 2018E earnings (4.2% yield).

VNV Price/Share (Line)

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10-Year IRR Dylan Adelman
dylana@wharton.upenn.edu
It can’t be worse than shorting PayPal, right?

Revenue/User GDP Growth New Users Margin Growth Earnings Yield Avito

4.9% + 2.6% + 6.0% + 4.6% + 4.2% = 22.3%

This assumes zero

10-Year Average Weight IRR multiple expansion

Avito 88% × 22.3%

= 10-Year IRR = ~20%
Other Investments 12% × 0%
Given that “other investments” have double digit
returns and VNV is reasonably skilled at capital
allocation (proof: Avito), this is an extreme lowball.

Vostok New Ventures will earn a 20% average annual return over the next decade. 19
Rightmove Dylan Adelman
dylana@wharton.upenn.edu
A useful parallel for Avito in 2018.

•  Rightmove is a UK real estate classifieds site, founded in 2000. After almost

a decade of rapid growth, Rightmove appeared to slow down by late 2007.

•  Over the next decade, investors earned 28% per year (on average), including 12/2017
dividends. This was from a base price that was not reached again until 2010. £44.89

“The analogy with Rightmove in 2007 […] still holds very well.
Rightmove tripled revenues during the 10 years following 2007
whilst maintaining world class margins. We believe Avito is on
the same route, possibly even at a faster rate.” – VNV, 12/2017

•  Rightmove is still posting impressively strong numbers:

•  14% EPS growth in 2017 with a 30% payout
•  85% of EPS growth from monetization 12/2007 28% 10-year IRR
•  Trading at 25.5x 2018E earnings £4.40

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“No formula in finance tells you that the moat is
28 feet wide and 16 feet deep. That’s what drives
the academics crazy. They can compute standard
deviations and betas, but they can’t understand
moats.” – Warren Buffett
 Special Thanks
The Sohn Conference Foundation
Global Platinum Securities
Matt Jackson
Sohn Conference | April 23rd 2018

Dylan Adelman
The Wharton School
dylana@wharton.upenn.edu