Articore Group Limited (ATG) Earnings Call Transcript & Summary

Good morning, everyone, here in Australia, and good afternoon and evening for our U.S. investors. This is Louise Lambeth, Head of Investor Relations for Redbubble Group. Welcome to this investor call following the release of the business update provided earlier today. With me on the line, I have Redbubble CEO, Michael Ilczynski; and CFO, Emma Clark. The key information for today's update is contained in the ASX announcement provided earlier today. Please note that the preliminary financial results and strategic and operational metrics are from internal management reports and have not been subject to audit review. Mike and Emma will speak shortly, and we will then open up the line for questions. This session is also being recorded. Before we start, I would like to call your attention to the safe harbor statement regarding forward-looking information in our ASX release. That safe harbor statement also applies to this investor call. I will now pass on to Mike.

Thank you Louise, good morning or good afternoon to everyone. Thank you all for taking the time to attend this session. Redbubble Group released the trading updates to the market earlier today in accordance with the Company's ASX continuous disclosure obligations. We would like to take this opportunity to provide some additional context and answer any questions you may have. I'll be providing a summary of what we experienced over the peak holiday period and in the second quarter, walk through how we responded to the trading environment, the impact on the business and why we are updating our FY22 outlook. I will then pass to Emma who will discuss the preliminary financial and revised outlook in more detail. Finally, I will outline the strategic and investment decisions that we are making in the business before opening the lines up for Q&A. First half underlying marketplace revenue, which excludes masks and is on a paid basis, was $283 million, down 5% year on year on both a floating and constant currency basis. The underlying revenue performance in the second quarter was just below our expectations, which overall we were pleased with, given we experienced strong competition for customers during the second quarter and this was particularly felt through the peak holiday period. The increased competition impacted both organic unpaid demand, mainly the acquisition of new customers through unpaid channels, as well as our paid marketing acquisition costs. The increased caps continued what we saw in Q1 as the impact of iOS 14 and the IDFA changes resulted in increased, broad based, less targeted spend across the marketing landscape. This spend came from both online and more traditional offline retailers and was predominantly large names with strong established brands. Many of these companies invested heavily in both brand and acquisition spend both on and offline during the period. We responded to these changes in the landscape by increasing our promotional activities in total paid acquisition spend. These actions across both businesses, Redbubble and TeePublic, positively impacted our revenue result but at a lower contribution margin. This, in combination with our decision to absorb increased shipping costs over the holiday period, impacted gross profit and GPAPA, which is gross profit after paid acquisition, margin and this flowed through to the bottom line, resulting in lower EBITDA in the quarter and the half. Despite our performance at the GPAPA level not being where we'd hoped, I was really pleased with how the teams reacted to a pretty challenging period. From a revenue perspective, the half for the group is still up 60% on two years ago, the last pre-COVID half the business had. There are a number of real positives in the half that I will speak to later that reinforce the potential for the business and the work we need to do to capitalize on this potential. Given this opportunity and our significant cash balance, in the second half we will be continuing to invest in our technology platforms in particular to enable future growth. Due to the combination of the first half result, our revised revenue outlook, and our decision to continue investing in second half, we are updating our FY22 outlook across both marketplace revenue and the EBITDA. I'll now pass on to Redbubble Group CFO, Emma Clark. Emma.

Thanks, Mike, and hello to everyone. Please be aware that unless otherwise stated, the financial results discussed are on a delivered basis, however, are preliminary and have not yet been subject to audit review. I will quote growth rates on both a floating and constant currency basis as I normally do; however, this may sound a little repetitive as FX ultimately has had minimal impact on the half year numbers and so therefore the rates are almost the same. In the first half of financial year 2022, Redbubble will report gross transaction value of $381 million. Year-on-year, this was down 14% and also 14% on a constant currency basis. However, compared to two years ago, GTV has grown 64%. First half reported marketplace revenue is expected to be $288 million, down 18% year-on-year and also 18% on a constant currency basis. Excluding masks and on a paid basis, which is how we disclose underlying numbers, marketplace revenue will be $283 million, down 5% versus prior year. As we have flagged in previous outlook statements, we had expected that first half revenue growth would likely be negative due to the cycling of strong prior-year numbers, which were driven by COVID-related lockdowns and mask sales. We did see strength in the largest geographic and product category, being North American apparel sales, which represents over 40% of total sales on the platform, and this geographic and product category grew 10% in the second quarter and 7% in the first half. However, this was offset by weaker year-on-year performance in categories such as European homewares, which were down 25% in the first half. Compared to two years ago, marketplace revenue has grown 60%. The second quarter's revenue profile did differ from previous years, with some holiday spend being pulled forward into October as customers responded to media reports of potential supply chain constraints and shipping delays. The Thanksgiving period was weaker than expected, with a portion of this weakness offset by longer last-order-by dates, which effectively extended the peak sales season. However, the reported revenue numbers came at a higher than anticipated cost on both the gross margin and paid acquisition lines. In the first half, Redbubble is expecting gross profit of $108 million, down 25% year on year and 25% on a constant currency basis. Gross margin came in at 37.5% for the half and 36.1% for the second quarter. Whilst product mix, manifesting as a combination of lower mask, higher apparel and lower homewares and artwork sales, acted as a slight headwind to margin, the main drivers were increased shipping costs that were not passed on to customers and the extension of promotional activities over the quarter. Whilst we are not anticipating running increased promotional activity through the second half, we do anticipate that shipping costs will continue to be a headwind to margin and together with uncertainty over the overall inflationary environment in the near term, we anticipate overall margin to be closer to 38% than 40%. On a two-year basis, gross profit has still grown substantially and was up 63% for the half. Further down the income statement, we have continued to see higher paid acquisition costs and this will be 15.5% for the half after remaining elevated at 16.1% in the second quarter. Entering into the holidays, we had expected the challenging digital marketing environment to continue as the entire industry continued to adapt to the IDFA privacy changes. Even so, this is higher than what we were expecting and as Mike mentioned earlier, was driven by stronger competition from both online and offline brands. That being said, even at these levels of paid acquisition spend, the business still maintains positive unit economics and each dollar of revenue is on average a positive contribution towards GPAPA. Unfortunately, at the group's current revenue scale and with an expected EBITDA margin in the mid-single digits, a 2% reduction on margin and a 3% increase in paid acquisition costs will result in EBITDA generation falling by the same amount. On a preliminary basis, the first half EBITDA is expected to be $8 million, compared to $48.8 million in the first half of last financial year and $4.3 million in the first half two years ago. EBITDA margin for the first half will therefore be 2.8%. Finally, we recorded a total of $143 million in cash at the end of December, providing the business with a strong balance sheet. This represents an all-time high and whilst some of this will be paid out to artists and to sellers over the current quarter, the business will still be holding a significant amount of cash providing continuing strategic flexibility, including the funding of near-term growth investments. Looking ahead, Redbubble expects financial year 2022 marketplace revenue to be slightly below financial year 2021 underlying marketplace revenue of $497 million. This will still represent solid growth on the $350 million achieved in financial year 2020. We remain committed to our mid-term aspirations and the investments that will be required to deliver upon our growth objectives. As such, in the second half, we will be continuing to invest into the business, which will increase our operating expense run rate. We will be funding these investments out of our existing cash reserves. The combination of the decreased first-half EBITDA, continuing headwinds on shipping costs and customer acquisition costs and the increased operating expense investments, the EBITDA margin as a percentage of marketplace revenue is now expected to be negative low single digits for the current financial year, with the margin expected to expand over the medium term in line with top line growth. I will now pass back to Mike.

Thanks, Emma. It's important to emphasize that we remain committed to our mission to create the world's largest marketplace for independent artists. The Redbubble Group is uniquely positioned to capitalize on its medium to longer-term growth potential and emerge as a significant company in what are very large and growing addressable markets. When we spoke in October last year, we had flagged that while there are definitely many uncertainties ahead, as our various markets move towards a post-COVID normal, the early data points we saw gave us confidence for our business over the medium to longer term. My confidence of the tremendous upside potential remains unchanged and I'm confident in the strategy that the business has embarked on. Viewed across the longer term, as I said, first half marketplace revenue has grown 60% since first half FY '20 or 68% on a constant currency basis. The business is now substantially larger and we are working towards furthering our scale to build resilience and improve profitability. While the first half had some challenges, as Emma mentioned, the fact that we saw year-on-year growth in North American apparel, our largest product geo segment, gives us confidence that we are going to stabilize and trend back to ongoing growth. We were encouraged to see an increase in our repeat base, with 45% of first-half marketplace revenue coming from repeat customers, up from 40% in the first half last year. We've talked before about the importance of increasing loyalty and repeat rates and of driving customers to become members. And we saw in the second quarter a good uplift in both membership sign-up rates and the percent of marketplace revenue generated from members versus a year ago. We also saw mobile apps, again, an area we've flagged that we would focus on growing, increase to 14.3% of Redbubble's marketplace revenue in the second quarter versus 12.6% in the second quarter last year. And from an operations perspective, our supply chain logistics and customer service teams saw significant improvements in last-order-by dates, on-time delivery percentages and customer satisfaction relative to last year. We will expand on these highlights at our full half-year update in February. These highlights reinforce the strategy that we have is right; we need to continue with it, with a focus on customer engagement, retention and loyalty. Looking to the medium to longer term, we remain confident of the business' unit economics. Every dollar of revenue, whether from organic or paid channels, is contribution margin positive, emphasizing that by investing to grow, to drive scale, we will drive improving levels of profitability from this scale and the operating leverage inherent in the business model. The company is well capitalized with a strong cash balance of $143 million at the half, an all-time high, and we will be continuing to fund near-term investments from these cash reserves to expand capabilities and capacity across the group. These resources will focus on improving our technology platforms, the artist and customer experience and our brand in order to enable this future growth. So there's a clear and well-defined strategy with multiple growth levers, and given our strong cash balance, our decision to continue investment reflects the upside potential that can be unlocked by pursuing this opportunity. Across the group, teams will continue targeting initiatives that will expand and scale the business towards our medium-term aspirations, which remain unchanged, to grow GTV to more than $1.5 billion, to grow artist revenue to over $250 million and to produce marketplace revenue of $1.25 billion per annum. With that, EBITDA margins will expand over the medium term with this top line growth. With that, we'll now open up the line for questions.

[Operator Instructions] Your first question comes from Aryan Norozi from Barrenjoey.

Just the first one from me, just around your medium to long-term aspirations. You've obviously reiterated the top line piece, but just around your margins, EBITDA. You've previously quantified it at 13% to 18%, this time it's qualitative. Can I just confirm that there's no change around that 13% to 18% way you're thinking in that things, or is it a new change in thinking in your business please?

We confirm no change to those EBITDA margins at that level of top line scale.

Perfect. And just in terms of the marketing costs, so it's about 16.5% in the second quarter. If I was to break it down in terms of one-off or recurring versus non-recurring, how do I think about that and where should I think that's settling sort of over the next 12 to 18 months as the market digests these IDFA changes, please?

Yes, look I think it's probably fair, Aryan, it's not necessarily one-off. I mean, obviously, as we came out in October and we talked about the experimentation we had been doing as part of our response to those IDFA changes, they were one-off in nature. What we really saw in the second quarter was just a massive increase in competition, which drove CACs up. Now in looking at and obviously coming out today, we've also looked at what happened in January month-to-date as well, can say that those CACs have come back down after the peak holiday season. But it just highlights to us that it is a continuing volatile environment, it's very hard to predict and so prudently, we would say that there will continue to be volatility in that over the remainder of the half and so therefore there will be periods potentially of stronger competition and periods of weaker competition. So we've effectively thought that there will probably be -- previously we'd said it was 12.5%, around 12%, it's clearly going to most likely be higher than that for the half and hence some of the reason behind the change to our guidance.

Perfect. And the gross margins, the 38% you flagged, are you talking in that second half?

Yes, pretty much actually for the second half and the year. As you can see, the first half was 37.5% anyway. So what we're effectively flagging is that what we've seen in the last half, we're likely to see something similar in the second half, but that probably depends on shipping margins.

Okay. And within that gross margin, were there any pressure points around rising import costs, like costs and prices which are more flagged in the industry? Has there been any sort of change embedded in the results from that?

Yes, it's a really good question and I know it's obviously an area of focus for everybody because there's so much media on it at the moment. As we discussed in the October update, we had a couple of fulfillers come to us, only 3 or 4 out of, obviously, quite a large number and request some price increases, but nothing further than that. That remains the case. We would expect that there will be continuing pressure on prices as we go through the second half, both from, as you say, an import perspective, but also a labor perspective. We will monitor those as they come in and decide at that time how much of that can be passed through to customers versus how much of that is absorbed by the business.

So is the guidance that you've sort of made for the full year, is that factoring in import cost pressure? Is that just factoring in a continuation of freight costs being elevated and promotional intensities being high, but easing off, off Christmas?

Yes, largely the latter 2, but what I would say is, based on where we sit with our supply chain at the moment, it also does incorporate our views on overall inflationary pressures within the margin line. So the 38% is total margin, not just like the shipping component of it, if that makes sense.

So it incorporates the rising import costs as well as the...

Yes, what we would expect to see in terms of rising import costs at the moment and what we would expect to do with rising import costs.

Yes. Perfect. If I can squeeze one more in, please, just around the hiring. Can you give us an update around how many heads you've hired so far, how many more you need to do for the rest of the year, and just a headcount circa please?

Sorry, I was on mute. My apologies there. We'll talk about the more specific numbers at the full half-year results. What we had when we spoke in October, I think like a lot of organizations, hiring hasn't come along as fast as we hoped, particularly in the first quarter and while it had a positive impact on OpEx, it impacted our ability to make changes. As we move into the second half, we're revamping a little bit our employee mix. So we'll add some contractors, our hiring is coming along better, so that's why in some ways we're probably more confident in our employee position, but also in the OpEx ramp in the second half.

The next question comes from Anna Guan from Goldman Sachs.

Just a couple of follow-ups from the earlier comments and previous questions. Just firstly, Emma, in your opening commentary, you mentioned something around extended peak selling season, particularly off the back of Thanksgiving. I think I only caught part of it. Can you just help me understand that a little bit more please?

Of course, not a problem, Anna. So what I said was that the actual Thanksgiving peak season, which is normally that for the 4 or 5 days across the Thanksgiving weekend, was weaker than we had expected and some of that weakness was offset by the fact that this year we had extended last-order-by dates. So if you'll recall, going back 12 months to holiday season the year prior, there was a lot of challenges with the ability to ship products at that time. Some of the shipping carriers had put in caps, we had to run really early last-order-by dates, which compressed that particular holiday season. We knew coming into this particular holiday season that those conditions didn't exist. Whilst there's still uncertainty around COVID and there's some COVID impact, the shipping carriers had not put on caps and we had made some improvements in our systems that meant that we could also run longer last-order-by dates. So instead of closing off say the first week of December, we were able to close off a lot in the second week of December. And so what that did was that gave the customer shopping on the platform those extra days to be able to continue doing their Christmas shopping and know that they would get their thing before Christmas.

Yes, okay, understood. So net-net really is more of a mutual impact from a top line point of view.

Slightly down, I would actually say, Anna, to be honest. The weakness across those sort of 4 or 5 days was only partially offset by the extension to last-order-by dates, not fully. I mean, obviously, we're talking primarily about changes due to gross profit margin and paid acquisition costs, but want to be very clear that revenue is slightly below what we would have ideally like to have seen for the quarter as well.

Yes, got you. And then my second question is just around shipping. Obviously, you guys called out that as one of the two factors driving the slightly lower margins. Are you guys able to quantify that?

Not as specifically, sorry Anna. We don't disclose shipping margins separate to product margin, that's considered to be commercially sensitive, which is why I reiterated that the overall margin is going to be closer to 38% than 40%, so that you guys can encapsulate that impact without me having to disclose detail that we shouldn't disclose.

Yes, no that makes sense. Just lastly...

Sorry Anna, it's probably worth just adding, because it goes to important decision, it's with the shipping margin, when we saw those increased shipping costs, it was a deliberate decision by us not to pass those through to customers. We had flagged, we talked about it both in our August results and in our October results that our medium-term objective is to decrease shipping margin. We know that lower shipping costs to customers helps with conversion and particularly helps with repeat rate. That was a decision that we made as we were flowing through.

Yes, that makes sense. Just lastly, and I think you kind of answered part of the question, but I just want to get sort of a summary comment from you guys, I'm just trying to understand what changed in the implied second half '22 guidance versus I suppose the previous guidance. Because, obviously, you mentioned earlier, you are pretty much assuming the lower cap to partly continue throughout the rest of the year and also just expecting to continue into the second half. Is there anything else that's changed in that in the prior second half, or is this the previous update you guys gave out?

Yes, so I love that you've captured correctly other than CACs we're assuming continue at a somewhat inflated rate, albeit not as aggressive as what we saw through the second quarter for the rest of the next half. The one missing piece is that revenue is slightly down. So the prior guidance said that revenue would be slightly above the prior year's underlying revenue. And we've obviously changed that guidance to be slightly below prior year's underlying revenue. So there is a small decrease to revenue.

Yes, and just the operating leverage that comes with it?

Absolutely.

Okay. Excellent. Thanks very much guys.

The next question comes is from Tim Piper from UBS.

I'll just ask a couple of questions and then jump back in the queue. Just firstly, around the fulfiller network. We're obviously hearing some commentary from U.S. companies around labor shortages disrupting distribution centers, et cetera. Is it fair to assume that the print-on-demand industry largely dodged that bullet in that seasonal demand sort of peak through November/December? Or are you starting to hear some of the fulfillers come up against capacity constraints now due to labor?

Yes. Thanks, Tim. Your summary is correct that most of the fulfillers in the network were able to navigate through the holiday period quite well, which is why we talked about being able to extend those last 4 or 5 days. The model works better. And obviously, now is a relatively lower period traditionally, as we come off the seasonal high. So those who are having some labor challenges, there's obviously less demand at least coming from the likes of us. So yes, your summary is right that in general the network has avoided some of those pressures.

So you're not seeing anything that could be a headwind right now?

Look, not at the moment. I mean, it's pretty uncertain. We've got to be clear, it's pretty uncertain. But no, right now the network is in reasonable shape.

Okay, great. Ang just a second one on I guess the quarterly run rate of revenue through the second quarter. You called out the pull forward of demand. And then maybe a slightly lower than anticipated sort of Christmas and November/December. Are you confident that, that has been a bit of a one-off in terms of pull forward? Like the exit run rate of this quarter going into the second half, I mean is that captured in your lower guidance in some of the revenue line? Have you seen enough trading now to be confident that it was just a pull forward and not so much a drop-off in demand?

Yes, Tim. And as we said before, in coming out today, we obviously have not just looked at the half and that quarter, we've also looked at the first 2 weeks of January. So in terms of all of our guidance update, they actually incorporate what we're seeing so far for half a month in January as well. So in terms of the changed profile within the quarter, which I obviously called out previously, that is quite different to prior years. And as I said, we believe it's driven by, obviously, all of the media attention and the supply chain concerns. So I would categorize that more as a one-off, but what it does highlight to us as a business is just the predictability of prior patterns at any point in time is not necessarily there at the moment. I know we came out in October and said we were seeing a return to more normalized patterns. The holiday quarter actually had quite a different profile because of all these macro events. And so therefore, it just underscored to us that, that is just that continuing unpredictability in sort of the shape of sales over a year at the moment.

Okay. Got it. And just one last one on your product mix. You called out a couple of categories there like strong apparel growth in the U.S. and the decline in those homewares in Europe. I mean, are you typically seeing this as economies reopen? Is that what's driving it? And the product mix changes that you're seeing, how much impact has that had on your gross margins set down quarter-on-quarter?

Yes, thanks. Emma can probably comment on the gross margin. It's had a little bit of an impact. Masks were really high margin, clothing is a little bit lower. So it's had a little bit of an impact, but not much. But I think your broader point that what we saw, if we go back a year ago, we had some really COVID winners. So we saw that homewares, wall art, they really took off. They grew way over 100% year-on-year. And then obviously now -- and apparel was okay, but not as strong as those were a year ago. But get to now and, as we said, we see our more traditional areas, which is, apparel has been one of the core areas for Redbubble and TeePublic through its history, actually growing quite strongly. But those areas that really took off during COVID, like homewares and wall art and masks, have come right back down. They're still quite a bit up on here they were two years' ago, but definitely they've come back down, which is, to be honest, back to the pattern that we expected would occur through this time. The positives of having that diversified product portfolio has helped us overall and continues to be something that we'll add to. When we come out in February, we'll have the full breakdowns like we normally do for each product set. So that will come out in February as normal.

Yes, I think what we're simply flagging here is, in terms of changing our guidance, we already had expected that product mix to swing in our prior guidance. So it's not necessarily a divergent factor in terms of updating guidance today. And so therefore the impact of it in terms of what we're actually saying that's different is minimal.

The next question is from Owen Humphries from Canaccord.

A couple of quick ones for me. Just around the artist margin. I just noticed in that second quarter picking up to almost 31%, which is record high. Can you just talk me through the dynamics behind that?

We'd have to look at how you've calculated that, Owen, because the numbers I've got in front of me don't show such a big swing in artist margin. You've got to keep in mind the bridge between gross transactional value and marketplace revenue also incorporates taxes. So there's been movement in tax as well. So obviously, when we go through the full half in February, we'll provide all of that breakdown so that you can calculate all of those percentages. But I would say that, that's not what happened. There's not been a big increase in artist margin in the quarter.

Okay. I'll go back and have a look. And then, just around the GPAPA margins. Obviously, your historical range has been around that 25% to 27%. That's kind of the target. Obviously, a low point at the moment, and you explained that. But just understanding what your views are over the medium term around that target range?

Yes, thanks Owen. Look, we definitely expect those GPAPA margins to come back up for two things. One, we scale. We know that scale helps out traditionally. Two, with the work that we can do to improve gross margins working with the fulfilment network as we scale to reduce import cost, working to reduce, to improve our shipping costs. We talk a lot about shipping margins, but the other way to attack that area is to actually reduce our shipping costs through better routing, through different arrangements with the logistics providers, et cetera. So we have a really -- you've talked about investing in our technology platform. One of the areas that we will and are investing in is our supply chain and logistics network. So we can more proactively drive that gross margin. And gross margin is such a huge driver of the business. Every percentage point that we can proactively improve there goes straight through to the bottom line. So that's a big focus for us. And then thirdly, on our marketing spend, as you know, all that marketing spend at the moment is paid acquisition. We've talked about moving forward. We do want to start to invest in our brand. That will add to that in the short-term. But at the same time, we really believe that in the medium term that's going to actually reduce our reliance on paid acquisition. We think it's really important that over the medium term we build our brand, so that we can increase our organic customers, increase the percent of customers coming through organic channels because they know our brand, because they love the proposition of Redbubble and TeePublic. And that will reduce our reliance on our paid channels. So when we look at our models and our plans, we still remain really confident and committed in those medium-term EBITDA margins, which require our GPAPA margin to be, frankly, a lot better than where it was this half.

Yes, I would just add a couple of points to this. So one is that the year where we had the sudden growth because of COVID actually demonstrated that. So we've demonstrated that step-up the top line, hold everything stable for a period of time and this thing throws off EBITDA very quickly. We have been very clear that we're going into an investment phase at the moment, and we're in one. So therefore, the challenge is that at our current scale is, it only takes small movements, as I highlighted, on gross margin and paid acquisition and they flow straight through to a relatively low EBITDA margin. But none of that actually, if we were to hypothetically have another $200 million on the top line, and being at more like $700 million, those unit economics come back really, really quickly. So we're very confident in our ability to deliver that over that medium term.

And just on the OpEx base of $32 million for the quarter. I know the second quarter is normally a bit higher than the other quarters, but it sounds like you're still hiring. Is that the new base now between $32 million to $35 million per quarter?

Obviously, not giving precise forecast at that level of detail, Owen, but I would think, historically, as you yourself pointed out that second quarter does tend to be slightly higher than all of the other quarters, I would expect even an investment environment for that to be the case. There's still to be a little bit of seasonality in that. So I expect it to step back slightly off that.

Good one. And then just a last quick question for me. $143 million of cash on hand. So very well capitalized. You've put the business now into kind of just slightly negative EBITDA for this year. What's the rest of the Board and your views, I guess, around EBITDA profitability over the next couple of years?

Sorry. I was on mute again. I hit on wrong button. Apologies, Owen. I think, in terms of our EBITDA margin and our cash balance, the Board, myself, the management team of both businesses, we're really aligned on the potential for the business. That cash balance gives us tremendous strategic flexibility, primarily to invest in ourselves, primarily to invest in our platforms, in our capability and in our brands, to go after that scale that Emma talked about. It's really clear. It's really, really clear, the operating leverage in this business. We saw it on the upswing last year. And unfortunately, you see it, you see if we miss slightly on revenue with a couple of other hits, you see the reverse. So we know the operating leverage in the business. Our job is to drive that scale. So our number one focus is to invest in the business. We've got a really good cash reserve that enables us to invest in the business to go after that scale. And then obviously, beyond that, the cash balance does give us more strategic flexibility beyond just investing in ourselves. Whether that's potential M&A or other activities. But our number one focus is to invest to drive scale over the medium term.

The next question comes from Paul Mason from E&P.

A bunch of mine have been asked. So I've just got one which is, in terms of the cash balance and the growth versus the EBITDA, it sort of sounds like basically the main source of that is probably a build-up in payables to your artists or to other suppliers. Was there anything else that's sort of helped that along besides the $8 million of EBITDA and then sort of maybe delayed payouts to suppliers? Or is that basically an explanation for the build-up?

Yes. So hey, Paul. We always see a seasonal build-up in cash at December 31. In terms of any 12 month period, it's usually our highest point of cash, because as you can imagine, we have obviously received the increased flow of customer sales on the platform for November and December, but haven't yet paid out all of the suppliers; that generally happens in January. So it comes down, so we always have a cash outflow obviously in Q3 as a result of that. I think the point that we made when we were talking earlier on the call was that we know obviously about these seasonal trends. They're actually quite predictable. You can look back at our prior year cash balances to see how it normally moves. But we're obviously going to have still a substantial amount of cash post all of those payouts. It probably settles back down somewhere between the range of $100 million and $110 million. So that's obviously still quite a decent cash balance and gives us that continued strategic flexibility to invest as we need to.

The next question is from Joseph Michael from Morgan Stanley.

Thanks for your time this morning. Just a couple from me. So firstly, just on the medium-term target, just to clarify, previously you had the comment in there that you can grow marketplace revenue at a CAGR of 20% to 30%. Is that still part of the guidance?

Oh, hi Joe. Look, absolutely, that's our goal over the medium term for this business to be growing at 20% to 30%. We genuinely believe that that's possible between the markets that we're playing in and the growth that we think that our sector is going to achieve and the growth that we believe we can drive ourselves. I think it's really important that, that's not going to be linear. You know that that's not the way that these things work. And what we're really clear on is where we need to invest over these next couple of years in order to go after and get to that growth. As we said, we can see the green shoots of our strategy in terms of the need to focus on investing in our brands, the need to focus on driving members, the need to focus on our apps, the need to focus on repeat rates, loyalty, customer retention, et cetera. So yes, so we absolutely believe that, that sort of growth over a medium term is possible. That's the growth that we saw in the business pre-COVID, obviously of a smaller scale, and that's the growth that we believe we can achieve once we get back to restabilizing our product lines, put in investment we need to, and start seeing the investment we're making actually show up for artists and customers.

Okay, great. And then the next question I had was just around CACs, and I know we've sort of talked about this quite a bit. But just trying to understand, is this a sort of structural issue with performance marketing? Is the cost of acquiring customers just going to continue going up? And is that sort of lack of visibility going to remain? Or do you sort of see this as more of a one-off issue, and at some point everything recalibrates and kind of rebases?

Yes. Look, to be honest, it's a really critical question. And I think for us to say that we know exactly when this plays out would be wrong. So we think that this uncertainty that's in the digital marketing landscape, this sort of chaos, it does feel chaotic at the moment, will continue for a little bit. But it has to normalize out over time. And there are a lot of players similar to us who are working hard to get back to being able to target audiences much more effectively. And what we saw in that second quarter was because of some of the IDFA changes, the inability to target as accurately, particularly from some of the big brands, is that a lot of the response was just to put more spend into much more broad-based audiences. And so that just drove up the CACs for everybody across the market. And I'm sure, as it did for us, that has to, to be honest, by definition, impact everybody's profitability. So whether that's a strategy that other players, the larger customers who effectively drive the market, whether that's something that they'll repeat in the future I think is a reasonable question, because it must have impacted everybody's profitability. So we would expect that, that ability to target audiences more effectively than we can, than all players can at the moment, and the impact that's having on behavior, will normalize out over time. But we don't expect it to return to normal in the next three months, that's for sure. And I think that that's why we've tried to be really explicit with our outlook for this half moving forward. That we expect some of this behavior to continue. Hence one of the reasons why we're saying that our marketing costs are likely to remain elevated versus what we experienced last year.

Okay. Got it. And then just one last question around sort of customer retention. I think at the last update you said something like 7 out of 13 loyalty experiments you are running were showing positive retention signals. Just wondering if you could give us an update on those loyalty experiments. Are you still seeing higher retention from some of those initiatives?

Look, thanks for the question. Again, that's probably an area we'll talk in more detail in February. As we spoke in August and October, that was really our first crack under this kind of testing experiment concept that we ran through the middle of last year. Those experiments did sort of show a real clear positive uplift we have continued within the businesses where that occurred. The other ones, some of them that showed a positive uplift but were at a small scale, as part of our planning for calendar year '22, that we're in at the moment, that we hope those will repeat but at a much larger scale, which some of those we'll embed as ongoing business. I think overall what we want to emphasize is that concept of driving loyalty, driving retention, driving repeat rate is one of the areas of importance for the business. Again, we're seeing some very small green shoots. We've got a lot of work to do here. We've spoken a lot around the fact that there's no silver bullet. There's no one thing we can do. There's lots of different things we need to do to drive that; part of it is investing in our brand, part of it is investing in the experience, part of it is lowering the shipping costs over time to customers, and part of it is increasing our quality and the end customer experience. So we've got a lot of work to do in a lot of areas. But I think what continues to be the positive for us is we can see all of the improvement opportunities. Our job is to get out there and go after them.

The next question comes from Chamithri Ratnapala from RBC.

I just had a quick question in terms of the lower CACs that you talked about, specifically looking at the first 2 weeks of January. Are you able to provide any commentary on the competitive environment, particularly looking more at the third quarter?

Yes. Thanks for the question, Chami. So yes, what we've really seen is the competitive intensity has come off in the first two weeks of January. So as Mike said earlier in the call, a lot of the response to these privacy changes has been lots of big brands just throwing lots of money in over holidays, extending promotions. Spending a higher amount to acquire those customers with a high intensive spend. But we would seasonally expect the CACs to come down sort of November/December to January anyway. But obviously, they were higher than we expected during that period. They've come back down at the moment to within what we would consider to be a normal range for January. I think the thing I just want to continually highlight is we don’t know how long it persists at that exact level for. And because it is chaotic, it can move around quite a bit even within a month. But so far, the first two weeks would say actually much more sort of in terms of what we had said previously for guidance as opposed to the elevated levels. But we've not assumed that, that remains for the prior 6 months.

All right, thanks for that Emma. With that 12% to 15% guidance, I mean are we sort of still talking to that? How would you sort of look at that guidance? Would the next probably 4 to 5 months be a more indicator to sort of come back to that?

Yes. 2 things to answer that question. So one is, it comes back into the prior answer about those midterm aspirations. So at that level of scale, we obviously had that range within marketing, and we've been, I think, pretty clear that we're not moving away from any of those midterm aspiration targets in terms of margin and percentages. So we definitely still believe longer term that that's the range. I think what we're also trying to be very clear about is, in the short term, it's going to be higher than that.

Thank you. There are no further questions at this time. I'll now hand back to Michael for closing remarks.

Thanks very much. I just want to say thanks again for everyone joining us for this update today on short notice. I will remind you that we will be speaking again at our scheduled half year results release in early February, providing a complete and audited set of financial statements as well as a much expanded strategic and operational discussion at that time. So thanks again for your attendance, and we will now close the call.