Articore Group Limited (ATG) Earnings Call Transcript & Summary

[Audio Gap] I am in our Melbourne office and joining us live from our New York office is Articore Group CEO and Managing Director, Vivek Kumar; and Group CFO, Derek Yung. Vivek and Derek will provide an overview of our FY '26 results shortly, and we will then open it up for questions. [Operator Instructions] The key information in today's call is contained in the ASX announcement and investor presentation released to the market this morning. I would like to call your attention to the safe harbor statement in our ASX release regarding forward-looking information. That safe harbor statement also applies to this webcast. This session is being recorded and a transcript will be released to the ASX. I will now hand you over to Vivek.

Thank you, Virginia, and thank you all for joining us today. FY '26 was a transformative year for Articore. We delivered EBIT of $10.3 million slightly above the top end of our guidance range and a $20.1 million year-on-year. Margin expansion has been meaningful and sustainable. Gross profit and gross profit after paid acquisition or GPAPA, both grew for the year, driven by supply chain efficiencies pricing, great marketing effectiveness and the new artist account fee structure that enhanced market-based dynamics. Gross profit margin reached a record 49.6%, up 400 basis points and GPAPA margin improved to 28.6%, up 210 basis points. We also strengthened the balance sheet materially with underlying cash flow of $10.1 million and a closing cash balance of $40.5 million, giving us the flexibility to invest in future growth. This slide highlights the structural nature of the improvement over time. We have seen a consistent increase in our margin profile since FY '23 as the group prioritized improving margins and restoring profit. We have reduced operating expenses every year since FY '23 with OpEx falling from a peak of $129 million to $85 million this year, a 34% reduction. This has been achieved while continuing to invest in growth, including building Dashery from Roundup and acquiring Frankly Wearing. Together, margin expansion and sustained cost discipline have driven the turnaround in EBIT you can see on this slide. 2026 was the first year Articore generated positive EBIT outside of the pandemic spike in FY '21. The significant turnaround to profitability compared to all those years in the past. This reflects a sustainable and structural change in our business in our margins and cost structure. We are confident that we can build on this momentum to ultimately deliver profitable revenue growth with strong cash generation. Before turning to the details behind these results, I'd like to provide an overview of the business today. Articore today owns and operates 2 established high-margin capital-light digital marketplaces, Redbubble and TeePublic along, say, 2 high-growth businesses, Dashery and Frankly Wearing. The flywheel remains central to our investment thesis, [ treaters ] upload designs to our marketplaces customers purchased products in an on-demand by third-party popular, and we charge service fees to provide tools and support for creators. Because creators only earn when they sell, the group benefits from an asset-light A-rate business model, greater volume, right, fulfillment scale, efficiencies that lower unit costs and expand margins and stronger margins allow us to reinvest in customer acquisition and further accelerate the flywheel. When this flywheel gains momentum, it generates compounding benefits for creators, customers and shareholders alike. Building and sustaining that momentum towards profitable growth remains our core priority. Supporting flywheel are 4 structural competitive advantages. First, scale of content, over 75 million designs with more than 10,000 at a daily, creating 1 of the largest and most dynamic catalogs of unique user-generated content in the world. Second, fulfillment scale, a diversified global network of third-party sites, allowing us to flex volume, optimize costs and maintain efficient delivery for over 20 million new units shipped in FY '26. Third, network effects. We have more than 3 million creators selling across the group as more creators and customers participate. The platform becomes increasingly attractive to both sides. And fourth, operational leverage. A global team of around 200 people generating approximately $1.8 million in revenue per employee. Together, these advantages make the model defensible scalable and increasingly efficient as volume grows within a global print on demand market that itself is growing quickly from around USD 11 billion in 2025, we have projected USD 58 billion by 2033. A 23.6% compound annual growth rate. Looking across our 2 established marketplaces, what delivered structural margin gains this year. TeePublic remains a strong contributor to the group with consistent growth since it was acquired in 2018. The trend continued this year, TeePublic grew marketplace revenue 2.8% in constant currency with gross profit up 10.9% in constant currency, driven by pricing and promotional optimization and ongoing supply chain efficiencies. This included more favorable costs on plants, a shift towards more cost-effective third-party fulfillers and onboarding a new shipping carrier, which increased competition to offset rising U.S. shipping costs. Redbubble's improvements to unit economics largely offset softer market-based revenue. The business delivered a record 55.2% quarterly gross profit margin in the fourth quarter reflecting the new orders account structure and continued supply chain efficiencies. Turning now to our high-growth businesses, starting with Frankly Wearing. In May 2026, we completed the acquisition of Frankly Wearing, an Indian-based print-on-demand marketplace. This acquisition advances our technology consolidation and establishes a global capability center to drive operating efficiencies across the group. The acquisition opens access to the Indian print and demand market worth more than USD 1 billion and growing around 25% annually. Since we acquired it just a few months ago, Frankly Wearing has delivered year-on-year triple-digit marketplace revenue growth. Integration is progressing well. India-based teams are all providing engineering and other functional support across the group, and we are targeting adding more than 30 employees by the end of FY '27. Dashery is an emerging storefront platform for creators who want to monetize their existing audiences. FY '26 marked Dashery's first full financial year, and the early signs are encouraging. The platform generated $4 million of GPS gross processed sales, $2.4 million of NPR at a GPAPA margin of 36.5%, significantly above our established market basis as creators bring their own demand. What excites us most is that a number of creators have already passed $100,000 in gross sales in the first year alone, a strong signal of much higher lifetime value potential. Our current target customer profile is created with 100,000 to 1 million followers, a segment we estimated around 4 million. We are currently working with Shopify to launch an integrated offering specifically broadened the target market to creators the new news of followers who have existing Shopify store fronts. AI is now embedded across the Articore. and we are continuing to expand into new use cases. On the creative side, our approval workflows are 100% AI-powered, which reduces -- review and improve both speed and consistency. On the customer side, our services for 100% by AI gross, combining vector search and machine learning ranking to improve relevance, discovery and conversion. AI also underpins our marketing from content creation through to campaign optimization and across operations, AI is helping the business run more efficiently, with approximately 80% of customer contacts touched by AI-powered chat, speeding upgrade resolution. We have also taken a significant step into AI powers, launching an early advertising initiative with OpenAI's, chatGPT for TeePublic. By behavior is shifting from searching to asking and we were already seeing revenue growth from air sources, including chatGPT, Gemini, Cloud and other risk, even Leporte launch. We see this becoming a growing revenue stream for the group. Our vision is to be the leading destination for customers to discover and buy unique design first products driven by a global creator ecosystem, will return passion into profits. We've pursued us through 3 growth drivers, which focus on customers, creators and high-growth businesses. For customers, we will strengthen our competitive moat through content differentiation, will high-impact customer acquisition and attention engines and elevate the customer experience through the ad-driven discovery and personalization. For creators, we are focused on generating higher value outcomes through incremental monetization opportunities. and we will continue to invest in our new high-growth businesses, including Nastran frankly wearing, leveraging our strategic assets and existing capabilities. Underpinning all 3 growth drivers is a single unified platform. This slide sets up the specific initiatives we are prioritizing in FY '27 to unlock each of these key growth drivers. For customers, we are focused on 3 areas: acquiring and elevating pop culture license and fan content, improving search, discovery and merchandising across both marketplaces and building personalization opportunities that let customers express their identity and fund them. For Creators, we are looking to increase teetearnings and incentivize value-adding behavior, simplify the player experience, including enabling designs to be applauded once and use across multiple platforms. and continuing to refine the Articore account fee structure. For our high-growth businesses, we are expanding new revenue streams such as on-site advertising, adding new features and integrations to Dashery, including Shopify, and leveraging group expertise and capabilities to accelerate Frankly Wearing growth. We have already made good progress working towards operating on a single platform, which we built on in F '27. We are leveraging unified marketing technology across the group, integrating order management and fulfillment systems and consolidating our content of loader. Together, these initiatives are designed to build on the structural gains we made in FY '26 and support the group's return to profitable growth. I'll now hand it over to Derek to take you through the numbers in more details.

Thanks, Vivek, and hello to everyone joining us today. FY '26 was a strong year of execution. We expanded margins, kept a tight rein on costs and meaningfully strengthen the balance sheet. Starting with the P&L. As Vivek highlighted, the group delivered record margins this year, both gross profit and gross profit after paid acquisition grew in absolute value, offsetting a decline in NPR. Fulfillment pricing was a key driver of our record margin improvement this year. We negotiated pricing based on combined volume from Redbubble and TeePublic and directed more volume to fulfillers offer better pricing. Operating expenses declined 6.9% to $85 million, reflecting continued discipline across the cost base, including a reduction in employment, web hosting and software costs. Depreciation and amortization declined 57.8% year-on-year following the streamlined capitalization approach we introduced towards the end of FY '25, which better aligns reported EBIT with underlying cash flow. All this flows through EBIT of $10.3 million for the year, up from a loss of $9.8 million in FY '25. It's worth noting that the U.S. dollar declined 4.8% against Australian dollar year-on-year, but this had limited impact to the EBIT level as 72% of the group's revenue and 75% of its costs a denominator in USD, providing an embedded operational hedge. Vivek has taken you through a substantial improvement in margins across both marketplaces. What's clear from the results is a divergence in top line performance. TeePublic's marketplace revenue continued to grow, up 2.8% in constant currency, while RedBubble's marketplace revenue declined 11.1% in constant currency, those substantial margin expansion largely offset the softer top line. Returning group NPR to profitable growth remains a key priority. Vivek outlined the key initiatives we're investing in drive that outcome center around the 3 pillars: customers, creators and high-growth businesses. Our cash position and balance sheet improved significantly this year, providing financial flexibility. Underlying cash flow improved from $0.6 million in FY '25, and to $10.1 million this year, and our closing cash balance grew 42% to $40.5 million, up from $28.4 million. We achieved this while returning capital to shareholders, buying back more than 2 million shares during the year and without compromising investment in Dashery or the frankly wearing acquisition. One clear sign that the financial improvement shows up in returns on shareholder capital. The return on equity turned from negative 22.8% in FY '25 to positive 21.8% in FY '26. The group enters FY '27 in a strong position to return to profitable growth. Its core marketplace business is profitable and generating cash as renew focus on cost discipline and it is investing in 2 high-growth businesses Dashery and Frankly Wearing. For FY '27, the group expects to build on the structural change to its performance delivered in FY '26. We're guiding to a G Popper margin of 27% to 30%, a further step down in operating expenses to $79 million to $85 million and an operating EBITDA of $17 million to $23 million. Thank you for joining us today. We will now open up the webcast to questions. If you have a question, please add it in the chat box and Virginia will relay it on your behalf.

Thanks, Derek and Vivek. We've received a number of questions from Wei-Weng Chen from RBC. I'll start with Wei-Weng's first question. Now that you have proved out the economics of your business model, how will you avoid the common growth versus earning trade-off of e-commerce companies? It seems like a lot of companies can only achieve 1 or the other, but not voice concurrently.

I take that. Thank you, Wei-Weng, for your question. And you're absolutely right. It is a critical balance that companies have to strike between profitability and growth. and that is why we are squarely focused on profitable revenue growth for FY '27 and FY '26 as well. And I would add to that, that structurally, our business has certain inherent advantages we have a flywheel that works. We have a business model where -- which is asset light and have working capital advantages. So we don't need a lot of investment upfront. So after that, we have we have shown we have very strong discipline on our operating costs as well as we have already achieved record margins in FY '26. We continue to remain disciplined in those 2 areas as well as the our marketing engine, which is very efficient. So if you combine all the advantages of the business model, the discipline and the performance that we have shown in FY '26, we intend to continue to build on that in FY '27 and beyond and drive profitable revenue growth for the business, which we have already started to make significant progress towards. Next question, please.

Sorry about that. The next question is, where will year-on-year OpEx savings come from?

I can take that one. So 4 main areas, all of which are a continuation from efforts that started in fiscal '26. So first would be continued leverage of AI in all areas of the company. And Rebecca has shared some of the successes that we've had already, especially around customer service. The second area is our continued effort for technology platform consolidation. In FY '26, that effort yielded $3 million in savings year-on-year, and we expect that we'll continue to bear fruit in FY '27. Third is getting cost leverage from building out our India operations with the global capability center. So that started in FY '26, and we'll scale quite significantly more as Vivek talked about in the new year. And then lastly, we expect that we'll continue to have a strong culture of cost discipline and look to continue to reduce overhead costs in things like facilities and leases and so on.

Wei-Weng's third question is, can you speak to any advanced cultural points in time during the year, we saw sales spikes? How nimble is your ability to market and capture these demand events?

I take that one. It's a great question. And all our marketplaces get significant revenue from social, political or cultural events happening around us, every single day. And despite that we saw this year were centered around towards a World Cup, the Soccer World Cup that was happening, and it was really fascinating to see how the trends change as different players and different teams are progressing to the demand. NBA, the basketball was another key moment for the group, where New York Next, won the Championship after 53 years, and we saw a lot of activity around that just this week, just a couple of days back, we had the unfortunate sad news of [indiscernible] passing, and we are seeing some sales activity around that on our content as well. So -- just to give you a few examples of how quickly the marketplaces respond to things that are happening in the social cultural, political space. And our marketing is quite nimble on marketing in real time adapts and activates the content that we see on our platform. So there is -- we have fine-tuned our marketing engine and the environments in a way that the content very quickly goes to all the platforms where we are operating, whether it's Meda or Google or others and start to really create that flywheel effect of getting more and more sales on these key trends. So definitely something that we want to continue amplifying in F 27 and beyond.

And the final question for Waing is, how should we think about the first half, second half EBITDA.

Great question, and thank you for that. I'll take that one. So we -- our business is seasonal, given the super majority of our sales is U.S.-centric, and we expect to be continued seasonal. So first half has been and will continue to be a greater share of the profit and EBITDA generation. So fiscal '26 is more extreme example of that where the first half operating EBITDA was predominantly almost entire year's operating EBITDA. But our second half operating was profitable. So that is a milestone. As we grow again, we do expect that skewing to become less of less out of bounds and getting more into balance, and we expect that to happen in FY '27.

The next question we proceed from a shareholder is, do you envisage paying dividends in the future? And if so, when?

We look at the board looks at it from multiple different angles and capital allocation is definitely a key consideration for the Board. We look at it every 6 months in terms of whether the right use of the group's capital and big dividends on other users. The board has decided that right now that are -- we continue with the 1 market buyback as well as investing in the growth for the group, and that's a better use of the capital that we have at the moment.

The next question we received is from a shareholder. Given the current market valuation, returning to a solid growth trajectory is top of mind for investors. What are the core pillars of Articore long-term growth plan? And what specific near-term milestone should shareholders be watching for proof of execution?

Thank you for the question. And -- as outlined in our prepared remarks, we have made great progress this year undergoing the group towards growth trajectory. The group has moderated revenue declines to low single digits. -- this year versus declines of 12% that the group saw over the last preceding 2 years. We are focused on bringing the group to profitable NPR growth, and we are confident that we can build on this momentum. Our long-term growth plan is focused on the 6 growth pillars that was outlined in the presentation centered around customers, creators and our high-growth businesses. What I would also add is what's new in FX 7 is our engineering capability in India, giving us the capacity to accelerate our tech road map and unlock these drivers more quickly. And to answer your second part of the question for FY '27, the milestones that you should track are the ones in our guidance, GPAPA margins, OpEx and operating EBITDA.

The next question we received from a shareholder is can you please provide the revenue and estimated cash burn for both Dashery Dasari and Frankly Wearing?

Yes, I can take that one. So we're excited about our businesses, which are Dashery and Frankly Wearing. And you can see they are still rather small -- and so while they're growing over triple digits year-on-year, still not a significant portion of the business as of now. So we're not disclosing specifically kind of what the revenue targets are other than we're continuing to see the progress that we expect, and we'll invest in those. For Dashery, in particular, last year, we invested about $3.5 million in Dashery. We expect that investment to continue into FY '27 above the same level. The EBITDA loss on a Dashery will decrease because the business is growing and generating good GPAPA margin. So it will be less from that perspective, and over our investment will be consistent. Frankly Wearing at the time of acquisition, it was a profitable business. And we are doing a lot, as you've heard just in the kind of the first few months of acquisition to get more elaboration of the group to help that business and it's working well. And we are targeting a relative breakeven year for that business even with high growth.

The next question we've received is from Owen Humphries at Canaccord. For FY '27, OpEx for FY '27 OpEx to further step down, what's your plan investing in the Indian tech hub, Will there be increased capitalized product development as H2 product development CapEx seems to be higher already.

Yes, I can take that as well. So a great question. Thank you for the question, Owen. Absolutely, as I mentioned earlier in the prepared remarks, the GCC Global Capability Center is an important component of our operating expense plan. There are actually 2 sides to that, though. That's both on which are important. One is what you're commenting on asking about relative to the cost leverage. Just as important, I would say, is our ability to actually invest in more engineering capacity for us to be able to do the enhancement to make more progress on technology consolidation that will provide the overall leverage across the entire group that there be paid in terms of operation and growth drivers. And then on the second half of your question around the capitalized product development yes, because of the increased capacity of engineering and also because of the type of initiatives that we're investing into with technology we do expect more of those efforts and just more in general in absolute terms of amount to be capitalized. It's not significantly more than this past year. I'd say roughly 15% to 20% higher than what we saw in FY '26, but it will be higher.

The next question we've received is from a shareholder. It looks like the share count is about 301 million shares. What is the fully diluted share count?

The 300 million sounds a bit high to me. I think the fully diluted share count at FY 6 reports a 295 million correct, but we can follow up on that based on that question, maybe share that someone seeing some of it or not.

The next question we received is, these are great results. The only concern we are seeing so far is the drop in NPR. You expect an increase in NPL for Dashery and Frankly Wearing, but what about for Redbubble and TeePublic.

I take that one. you for the question. Absolutely. I think the key focus for the group remains profitable revenue growth. And as you can see, we have already made great strides in getting the revenue growth -- or revenue model would decline to low single digits for the full year versus negative 12% for the 2 years preceding the last couple of quarters were in the negative 1% to 2% rate, so almost flat to last year. And this is for the entire group. Of course, the Redbubble and TeePublic are the established market bases on the key main [indiscernible] values for the group. So we've got you to work towards getting the group back to profitable revenue drop focusing on the strategy that we have laid out, centered around creators, customers and our high-growth businesses. And just to add, the shop incentive for the KMPs this year has an MBR growth component as well, which, again, is a strong signal of how much focus we as a company are on generating profit.

The next question we've received is from a shareholder. What is the cash net of Dashery?

We don't have to meet that on the balance sheet. So our cash balance net of debt would be our cash balance, $4.5 million.

The next question we've received from our shareholders is, are you expecting overall growth in sales for FY '27.

We are not specifically guiding towards an NPR number in our guidance. But as Derek and I have mentioned previously in the earlier questions, we are absolutely focused on NPR profitable growth for FY '27 and beyond.