Articore Group Limited (ATG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Redbubble Limited Trading Update. [Operator Instructions] I would now like to hand the conference over to Virginia Spring, VP of Investor Relations. Please go ahead.

Good morning, everyone, and welcome here in Australia. And good afternoon and evening for our Northern Hemisphere investors. My name is Virginia Spring, I'm responsible for Investor Relations at Redbubble. Welcome to this investor call for our first quarter trading update for financial year '23. With me today, I have Redbubble's CEO, Michael Ilczynski; and CFO, Emma Clark. The key information for today's update is contained in the ASX announcement released to the market this morning. Please note that the first quarter financial results for FY '23 and any strategic and operational metrics are from internal management reports and they have not been subject to internal audit review. Mike will speak shortly, and we will then open up the lines for questions at the conclusion of this presentation with Mike and Emma. 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, Virginia, and welcome to Virginia, who joined Redbubble last week. Hello, everyone. Thank you for joining us today for our trading update for the first quarter of FY '23. Given our recent FY '22 results update from last August, today's trading update for the first quarter will be focused on the trading result and therefore will be relatively short. However, before I start, I do want to call out that during the quarter there has been a tremendous amount of work by our teams across both businesses. We are seeing the uplift in people capabilities start to impact with real improvements to our on-site experience and operations being delivered to set the group up to deliver the best possible performance for artists and their customers over the peak holiday period. At our FY '22 results, I referenced the significant underlying transition that has taken place within Redbubble. This period of transition has continued into FY '23. We have been clear and we reiterate the commitment to our strategy of internal investment to develop the platforms and processes required to improve the artists and customer experience that will lead to sustained financial performance. Our disciplined approach to investing in internal capacity and capability will return the group to revenue growth and profitability and enable us to achieve our medium-term aspirations. As I said, we are starting to see the impact of this operationally. And over the near term, we expect to see this investment also positively impact our financial performance. In terms of performance, in summary, for the first quarter of FY '23, we saw encouraging growth in our biggest category, T-shirts, in our largest market of North America. This positive rating result from the T-shirt category was driven particularly by our TeePublic business given its focus in these areas. However, this was not quite sufficient to offset the decline in homewares, artworks and mask sales across the group that has continued in these areas since the peak of COVID sales. Our negative EBITDA results for the quarter largely reflects this strategy to invest to drive long-term revenue and margin growth through investing in our people and the FY '23 investment in the Redbubble brand. Given the seasonal operating cycle of our business and the impact of the investments we are making, we expect improved quarterly EBITDA and cash usage for the remaining 3 quarters relative to this quarter. So now looking into the first quarter results in more detail. Marketplace revenue for this quarter was down $5.1 million versus the prior corresponding quarter and down 8% on a constant currency basis. This largely reflects the positive impact of continued year-on-year growth in the T-shirt category of $12 million -- or 12%, sorry, or $7 million, which was not quite enough to offset the impact of cycling $4 million of mask sales in the Accessories category and continued negative year-on-year performance in homewares and artwork categories. Underlying revenue, which adjusts for delivery date revenue adjustments and mask sales, was down just 2% compared to pcp. Looking geographically, the marketplace revenue result was impacted by slightly lower sales in Australia, Europe and the U.K. than expected, particularly in September. Importantly, the group's largest market, North America, remained resilient in the first quarter of FY '23. You will recall our FY '22 results that we shared details about some of the proactive measures taken to support Redbubble's unit economics and margins both in the short and long term. These measures included an average base price rise of approximately 6% in May and trialing free shipping over a threshold purchase announced in the U.K. and in the U.S. Our experience in both of these trials has been encouraging across both members and nonmembers, with free shipping thresholds driving incremental marketplace revenue and gross profit versus the preceding period. The increase in sales in product revenue has more than offset the cost of reduced shipping revenue. Reducing reliance on shipping margin is and remains a long-term objective of the group. It's worth adding that, as a group, we will continue to experiment with initiatives such as free shipping, which we will adjust and refine as and when required. Gross profit for the quarter was $39.4 million, down $3 million or 7% on a floating basis from the prior corresponding quarter. Our gross margin was 39.1%, down 90 basis points, largely reflecting the margin impact of the free shipping trials. With Redbubble shipping margins in September reduced by more than 50% versus September last year, this is a deliberate strategically important step to reduce dependence on shipping margin. The actions we've been taking, such as the shipping trials, are focused on building sustainable, absolute scale in product revenue and gross profit dollars. And as we build towards our medium-term aspirations, we expect these actions to not only drive increases in gross profit dollars but in gross profit margin as well. The EBITDA loss of $14.6 million, down $18.5 million versus pcp, largely reflects the impact of the $3.8 million investment in the Redbubble brand, the ongoing investment in people through salaries and wages, up $4.7 million for the quarter versus pcp; and increase in other expenses of $4 million versus pcp, with the year-on-year change in other expenses principally due to unrealized FX losses on foreign currency bank balances. Salaries and wages in total were $19.3 million for the first quarter. This increase in salaries and wages reflects our strategy to invest in people to drive revenue and margin growth, with 76% of new FTEs since July '21 added to our growth-focused areas of Product and Technology, Marketing, Commercial and Supply Chain & Logistics. In relation to the EBITDA result for the quarter, given our existing FY '23 guidance for revenue growth over the financial year and supported by the group's favorable GPAPA margin, we expect that this will result in improved quarterly EBITDA for the remaining 3 quarters of FY '23 relative to the first quarter. While we remain committed to our strategy to invest to drive growth, as we discussed in August, we continue to monitor current trading conditions across all geographies and adjust how we invest in market appropriately. And off the back of the current economic environment, given what we observed in September, particularly across Australia, the U.K. and Europe, we made the decision to slow hiring in September. As a result, we expect FY '23 forecast salaries and wages to be towards the lower end of our previous guidance. So the lower end of increase of between approximately $14 million to $18 million for the year. In relation to the Redbubble brand program that we announced at our FY '22 results, investment in the Redbubble brand for the first quarter was $3.8 million. Total FY '23 guidance for the brand investment is unchanged at approximately $8 million to $12 million for the full year. We are pleased with the performance of the initial investments in increasing awareness in key U.S. cities we're testing. We have seen higher view-through rates of our ads and lower costs than benchmarks across all platforms. We will continue to closely monitor the performance of this program and, if appropriate, adjust the timing or quantum of the remaining investments. Our cash balance as of 30 September was just under $75 million. This position continues to provide us with operational and investment flexibility to continue with our current strategy. And just to add some color in relation to our cash position, consistent with our seasonal trading patterns, the cash usage of the business peaks during the September quarter. This means that we do not expect the same level of cash usage in each quarter for the remaining quarters of FY '23. Now moving to our FY '23 outlook, which we reiterate from August with a slight reduction to our FY '23 OpEx guidance. So revenue growth is expected in FY '23 with the benefit of one-off mask sales in FY '21 of approximately $55 million now largely fully cycled. Redbubble unit economics, as represented by the GPAPA margin, to remain compelling, supported by the approximately 6% average base price rise from May '22. Our forecast FY '23 OpEx reflects; a slowing of new roles in FY '23, down to 4% from 30% growth in FY '22; FY '23 forecasts salaries and wages to be towards the lower end of the increase of between approximately $14 million to $18 million for the year; and FY '23 forecast for Redbubble brand investment of approximately $8 million to $12 million at constant currency to build awareness that reinforces the path to our medium-term aspirations. Thank you very much for listening. I would like to remind shareholders that our Annual General Meeting is on next Wednesday, 23rd October, commencing at 11:30 a.m. Australian Eastern Daylight Savings Time, and we'll now open up the lines for questions for both myself and for Emma.

[Operator Instructions] The first question today comes from Sophie Carran from Goldman Sachs.

Just a couple for me, please. So first of all, -- just interested in the revenue growth for the quarter. Can you give a little -- sorry, the revenue for the quarter. Can you give a little bit more context just around the composition of that? I mean, how much reflects sort of repeat customer purchases versus new customers? And any incremental step-up in repeat customer behavior that you could call out?

Yes, sure. Thanks, Sophie, for the question. We didn't reference it directly, but repeat customer rates for the quarter was actually a record high for the group at just over 49% for the quarter. And it sort of reflects a couple of things. One, both businesses are really focused on driving repeat rates for the businesses, a big focus on retention and retained customers. And secondly, unsurprisingly, new customer acquisition is the area that is challenging at the moment, and we're not shying away from that, but we're really pleased with the performance of both businesses in driving that repeat rate.

Great. And then just on the brand investment, I would be interested if you could give a little bit more color on some of the metrics you're looking at, just to give you confidence in that brand investment. And then maybe just to clarify as well, the comment that, that $8 million to $12 million guidance is in constant currency, just where the FX is now versus when that guidance is set, is it fair to assume that, that could potentially come in a bit higher than that range if the FX stays where it is?

Yes. Thanks. So only -- look, that's something we'll monitor. Obviously, when we set the program, the Aussie dollar was a bit stronger. And given that the investment -- the reason we called it out is because the investment is totally focused on the U.S., all of that money in U.S. dollars. We did think it was important to call that out. However, obviously, that's something that we're managing and we'll monitor. Our goal, obviously, is to keep it within that guidance, but it is important to call out when we were doing that program that the Aussie dollar does impact us a bit directly. Most other areas, we have some natural hedges. But when it's a pure expense in U.S. dollars, there is that exposure. In terms of the metrics, #1 for us is measuring changes in awareness in our key demographics that we're targeting in the cities that we're targeting. And with the initial investments that we saw -- that we did a little bit of trialing in June. That was positive. We've seen similar patterns with obviously the step-up at the moment. We're still collecting all of the data and all of the surveys. So I'm sorry that we don't have explicit data to share at this point. But we are really pleased with what we're seeing from our initial survey results in increase in brand awareness. And because it's digital, we can measure very quickly the amount of completed views, the amount of click-throughs, the amount of interactions that the audience has with the different forms of ads that we're putting out. And these are the things that we can see quickly and other things that we've been really pleased with in terms of how many completed views did we expect, how many interactions did we expect to get from that. And just frankly, how much reach are we getting for the dollars we're spending, so far, the program is hitting all of those benchmarks.

The next question comes from Aryan Norozi from Barrenjoey.

A few questions, please. Just on the revenue guidance that you've sort of given for -- or expectations for growth in FY '23, is that on a floating basis? Or is that constant currency?

Good question. Thank you for that. I know, obviously, currency complicates our results because of all the different geographies in which we operate. When we're assessing performance it's always on a reported basis, reported is floating. So in terms of guidance, we always said on a floating basis. And obviously, it's up to us as the management team to manage all of our different FX currency exposures.

Perfect. And then by the same talking to the [ $14 million to $18 million ] of head count, additional headcount, is that -- is the majority of that head count in Australian dollars or U.S. dollars, so that the $14 million could be higher in Aussie dollar terms given it's a constant currency basis, please?

Yes, another good question. So it's actually split across the different geographies in which we have offices or locations where we have quite a few people. As we've discussed and we actually mentioned just previously, quite a lot of that increase has gone into growth areas of the business. And so engineering and product is largely based in Melbourne, supply chain and marketing largely based in U.S. so it's a cost base.

Okay. And then in terms of the quarterly EBITDA performance, when you say you expect improved performance, are you saying that the dollar EBITDA will be in -- for each of the next 3 quarters will be better than the first quarter that you just reported? Is that what you mean?

Yes, that's correct. What we're saying is we expect each quarter -- each of the subsequent quarters of the financial year to be an improved result relative to the results for this quarter.

And sorry, last one. The marketing cost and the percentage sales and performance, that's 16% now. Is that structurally higher now versus that sort of 10% to 11% you were doing pre-COVID? I mean -- any color on that, please?

I think it's just a great question, and I think it's 2 things. It's number one, absolutely, and we've been open about this, that cost of -- digital cost of acquisition has definitely increased really, really started to pop about October last year, and it's remained elevated since that point. So there definitely has been a step up there, particularly through the search channels, which is a lot of you know, is related to some of the ATT changes that have made -- have made attribution and effectiveness of nonsearch, particularly the social channels harder. That has caused a step up that we haven't -- we have seen it somewhat stabilize, but it definitely hasn't decreased. Secondly, though, it's also what's our approach as a business. And we've been really focused -- a lot of you would know, we're very focused on our first transaction profitable threshold for all of our different paid acquisition channels. And that's an important color for us. Within that, though, we are focused on acquiring customers that are profitable. But as long as they're profitable, given that we're starting to see our repeat rates and our retention rates improve, that gives us confidence to go a little bit harder on our paid marketing. As long as we're acquiring those customers and we're acquiring them profitably, then that's what we're doing -- that's what we're aiming to do. So that focus on absolute gross profit dollars as opposed to necessarily maximizing that GPAPA margin, that is a little bit of a shift as a business, it is important for us, and we feel that's the right shift. So I think you're seeing a combination of those 2 factors.

The next question comes from Wilson Wong from Jarden.

Michael and Emma, so I just wanted to get a bit more color just around what the composition of the brand investment was in the first half? And what will be invested in over the second half?

Yes. So in terms of the brand investment for this quarter, we're not going to break it down by its components in terms of dollars. But for a new program like this, there's a combination of a few things. One, obviously, there's the production, which is a bit more of a one-off. The bulk of the spend is obviously on media. And then there's also agency fees as we work with our external agency. So there is a definite a bit in this quarter that is a bit upfront. So there's a bit of upfront costs that are a bit more one-off in nature, particularly on production. That said, it was a deliberate decision this quarter to front-load some of the media spend, and that's for 2 reasons. One is to make sure that we're at the scale where we can really measure the effectiveness and maximize our learnings. But number two, we do know that customers in August, September, one, it's our back-to-school period, and we have a natural uplift during that period, particularly in the U.S. that we wanted to maximize. And secondly, we also note historically from our normal paid acquisition and unpaid marketing channels, the customers who either purchase or become aware of Redbubble during August and September are then more likely to come and purchase in the peak holiday period. So with those 2 factors that we felt it was important for us to go a little bit heavier than obviously the average during the first quarter of that investment.

Sure. My next question, just around, I guess, the relative performance across the regions. What drove the difference between -- the U.S.'s relatively better performance compared to Australia and Europe?

Yes. Look, we expected Australia to be a bit lower. And remembering that Australia is only 7% of our revenue within the group, 92%, 93% of our revenue is generated outside of Australia. But that said, within Australia, we expected Australia to be a really tough comp because this time last year, Australia was in a flat lockdown, particularly Melbourne, actually saw quite a spike -- quite a spike from that. That said, even within those expectations, it was a little softer as was the U.K. and Europe. Now we can speculate -- we can speculate on what that was. Obviously, Europe and the U.K. both have significant cost of living pressures. Australia -- the Australian economy tends to be more interest rate-sensitive given a lot higher percentage on variable relative -- relatively to the U.S. So we can speculate on those things. But what we're really trying to do is follow the data. And what we're really trying to do is make sure that we continue with our strategy of investing through our people and investing in our brands and drive both near term and the long-term growth of the business. But at the same time, as we said, we just saw enough in September just to make us want to be a little prudent heading into the very important holiday season. That's why we made the decision to slow down our hiring, which will pull back our OpEx a bit through the quarter ahead and also just give us a bit more optionality depending on how the quarter ahead plays out. I'm sure a lot of you know that, obviously, the holiday quarter is at peak. In revenue terms, we make roughly -- do roughly as much revenue in November and December as we do in the first 4 months of the year. So what we do during July and October, we do that basically again in just November and December. So we just got the right thing to do, given the little bit of weakness we saw in those markets was to be prudent with our OpEx and that gives us some optionality heading into next year depending on how the quarter ahead of us plays out.

The next question comes from Tim Piper from UBS.

First question just on balance sheet. Recognized that September quarter is the lower point in terms of your cash, and it builds up into December. The sort of $35 million uplift from September into December last year, sort of anticipate a similar kind of profile in the cash balance if the seasonality come through this year as well?

Thanks, Tim, for the question. So we expect a similar level of -- I mean, well, actually, let me come back a little bit. So in the last 3 years, we've had 3 completely different holiday patterns in terms of across that period of that quarter and how much the uplift has been versus, say, for example, the September results. So that's why we mentioned that there is a little bit of uncertainty going into this as to which one of those patterns, if any of them at all followed. That being said, broadly speaking, yes, we would expect a large seasonal uplift in Q2. Obviously, we're not giving quarterly guidance at the moment, so I can't give you the answer on the exact nature and number of the uplifting cash across that period, but we do expect it to uplift in terms of revenue and sales on the platforms quite a lot over the next quarter.

Yes. I think it's worth emphasizing that Q1 tends to be the seasonal low point. The end of Q2 tends to be the seasonal high point. You would all know that we generate a lot of sales and a lot of cash during November, December. We then pay out some of that cash into January, for those of you who follow the pattern. But those patterns are important with the business. The business is definitely not consistent every quarter. So just taking any number in Q1 and timing it by 4 is not the right way to approach this business, which I know a lot of you are aware of.