Playboy, Inc. (PLBY) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to PLBY Group's Second Quarter 2023 question-and-answer session. Hosting today's call are Ben Kohn, Chief Executive Officer; and Marc Crossman, Chief Financial Officer and Chief Operating Officer. [Operator Instructions]. While we wait for the Q to fill, we remind everyone that the information discussed today is qualified in its entirety by the Form 8-K that has been filed today by PLBY Group, Inc., which may be accessed on the SEC's website and PLBY Group's website. Today's call is also being webcast, and a replay will be posted on PLBY Group's Investor Relations website. Please note that statements made during this call, including financial projections or other statements that are not historical in nature may constitute forward-looking statements. Such statements are made on the basis of PLBY Group's views and assumptions regarding future events and business performance at the time they are made, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to risks, which could cause PLBY Group's actual results to differ from its historical results and forecasts, including those risks set forth in PLBY Group's filings with the SEC, and you should refer to and carefully consider those for more information. This cautionary statement applies to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call, PLBY Group may refer to non-GAAP financial measures. Such non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release PLBY Group filed with its Form 8-K today. Ben, do you have any comments before we take the first question?

Thank you, operator, and good afternoon, everyone. We have changed our earnings call format that starting this quarter, we not no longer hold prepared remarks. Instead, we will go right into the Q&A dialogue. We see other companies doing this, and we feel it's a better use of time, and it also leads into an open or more open dialogue instead of taking half the conference call to regurgitate which should be in an earnings release. Also in our release, we will lead with a business update from me, and we anticipate sticking with this format going forward. With that, we will now begin our Q&A session. Operator?

Our first question comes from the line of Andrew Uerkwitz with Jefferies.

I appreciate the new format. Just 2 questions. The first one, I think on the last earnings call you mentioned reviewing the strategic value of Honey Birdette. Can you just give an update on that? It seems like a great asset, but it is facing some macro headwinds according to the press release. So just curious where you stand on that particular asset?

Thanks, Andrew. I'll take that and Marc, please, pipe in. We have limited resources internally, and we have been spending a lot of time focused on selling levers. That business has now been moved to our discontinued ops in the financial statement. We had multiple offers for that business. We are under exclusivity with a party. And at the same time, we are working on putting materials together for Honey Birdette for our financial adviser. And based on market conditions, specifically the M&A market. And when we conclude the leverage process, we will then evaluate the timing to start the Honey Birdette process.

Got it. That's helpful. And then switching over to the creator platform. I guess, like 2 half questions here. The first is you made several changes in the quarter that seem to have a very positive outcome. Can you just remind us what your road map is on adding features and other updates to the platform? And then secondarily, AI has been all the rage. How are you guys thinking about leveraging AI and maybe discovery and other areas?

Sure. Look, we are constantly updating the platform, and we're using data to help us do that. So the biggest change that we undertook during the quarter was actually changing our onboarding process. And there were certain things that the consumer or the user does not see that we had to put in place and expand, for example, our moderation tools, making sure that we create a safe platform not only for the company, for our creators, but also that complies with our credit card companies. And so historically, we were onboarding creators in a very manual way. People would apply, but the process to actually onboard a creator was all manual. And so we look at actually some of the dating sites as how do users on board there, what are the best ones out there like Bumble, et cetera. And we completely reworked the back end of the system to put in the right IV checks with state databases, et cetera, coupled with the right AI tools for moderation. And then we work the whole entire process to onboard graders. And the data for that is extremely encouraging. So if you look at what happened, we increased our creator count at the end of July to almost 4,000 -- about -- earning creators in July. About 1,400 of those earned for the first time in July. The bulk of that team in the second half and the trends have continued in August. What this allows us to do is now really focus on on-platform marketing versus what I would say is individual creative recruitment. And at the same time, when you look at the concentration of where our revenue is coming from and how many creators, what's most encouraging to me is we have decreased the percentage of weekly GMV that are top 10 creators contribute to the platform by over 20% -- or sorry, they decreased by over -- they decreased by over half, really -- more than half, but it's 20 percentage points they've decreased. And so what that talks -- that tells me is that our revenue mix is becoming much more diverse, and it speaks to the health of the platform that we have a lot more earning creators. We look to continue that moving forward. Other changes we made, we greatly enhanced and rebuilt our live product. There's a lot more coming with that in the future, including a one-on-one live feature. We also did something that others don't have, which is either an entry fee or pay per minute. And then we also changed where credit cards are put in the system. And so when does a consumer put a credit card in, we just recently did that a few weeks ago, and we see a 3x increase in the number of credit cards that consumers are entering versus before. What's coming up? And lastly, we started to test what I would say, legacy content in the system. So we took 12 former playmates of the company, and we created a profile distinguished from other active creator profiles in the system. This is all part of a much larger play that we'll get into as we go into the fall. How do we integrate the various pieces of this company into one hero product, which is our creator platform. And then really, how does that integrate into the Playboy lifestyle. Those are the highlights of the changes. There's a lot more coming and there's a lot more that was done that users might not see that goes into setting up where we're moving throughout the fall and into next year with the product.

Our next question comes from the line of Jason Tilchen with Canaccord Genuity.

Great. Going back to the creator platform for a second. Could you please remind us maybe update us on the level of investment in that platform that's being made on sort of a quarterly basis? And how you sort of view a target level of GMV to get that creator platform to sort of breakeven or so? And then I have a follow-up after that.

Yes. So the level of investment we're seeing in the creator platform right now is mainly coming out of OpEx. So it's not -- it's roughly in line with where we were last quarter. And what was the second part of your question?

Sort of if you have like a target level of GMV that you're looking towards a sort of a breakeven point before that starts to be a positive contributor towards overall profitability.

Yes. I think if we continue to run at the rate we're at, we'll be able to get there by year-end, but we'd have to see a little bit of growth. I think that number is probably around $50 million to $55 million of GMV.

Yes. So $50 million to $55 million of GMV, the business turns cash flow positive for the year. And right now, we continue to see the growth that we've outlined in the previous calls. So if you annualized our weekly GMV right now, we would be in excess of $35 million. We took a little bit of pause during the second quarter on onboarding creators as we reworked in the process. It just wasn't a good use to prove human capital. And so the acceleration we saw at the end of the July, and that's continued through August, especially when we look at the number of applications and now really turning to the platform marketing is very encouraging for us moving forward.

That's really helpful. And then just on the $8.5 million of cost savings that you called out in the press release, can you just talk about where those are coming from and sort of support a specific level that we've already taken out in Q2 versus sort of the time line for when the rest of that we should expect to be coming out of the business.

Yes. So a lot of the -- this is Marc. A lot of the costs that we're seeing coming out over the course of this -- that we're -- the $8.5 million that we announced is, I would say, a mix between headcount and basic operating expense for systems that we're using throughout the company. The original headcount or the original cost cut that we had talked about in the first quarter, a lot of that was coming out of our IT and our supply chain costs. As I said, that will play out over the course of the next 2 to 3 quarters.

And specifically with the $8.5 million, that -- although we've achieved some of that in the month of July in the second quarter, there's very little, if any, of that in the second quarter. So we -- as we talked about previously, are we building the business line item by line in them. And so a huge example and a big part of that is actually repricing all of our insurance of the country. We've seen multiple millions of dollars of savings just through insurance, and we're in a much better market today than we were 2 years ago as well for insurance.

[Operator Instructions] Our next question comes from the line of Alex Fuhrman with Craig-Hallum.

Wondering if you can talk about the outsourcing of the Playboy e-commerce business. Can you give us a sense of how profitable that business has been historically? Are you going to have any ongoing expenses related to that business to offset the 15% licensing fee you're going to receive? And then can you just talk about maybe what your licensee there might be able to do in terms of growing the brand or expanding to new types of items?

Yes, this is Marc. So we had pretty heavy losses from that business in the past when I came in. And part of it was we wanted to turn those losses to profits. We didn't have the infrastructure in place to make the product ourselves. So we had very low margins on it, sub-50% starting margins. And so we license it out. And right now, the agreement, we don't have any cost that we have to bear. So that 15% hits pretty much straight to the bottom line. So from our perspective, it will be profitable day 1. And I think as minimum guarantees right now started about $5 million a year, so that's about $750 million to the bottom line to us just in year 1. And the overall goal is in the course of the next 3 years to grow that to be a $20 million business, if not more.

Yes. Alex, it's Ben. I'll just chime in. In the second quarter, we had 7 figures of losses still related to playboy.com, the e-commerce store. And so if you look at our adjusted EBITDA, when we talk about actually being positive without those losses because we have now closed that deal and outsourced it. EBITDA would have been positive in the second quarter if it weren't for those losses and some costs related to the China -- onetime costs related to the China JV. And so the partner was actually in the office yesterday. Very encouraged by their early work and actually some of the collaborations they're working on for Playboy merchandise going forward.

Our next question comes from the line of Jim Duffy with Stifel.

Guys, typically, you filed the 10-Q coincident with earnings. Should we expect that tonight?

Yes, you should. It should be forthcoming.

Okay. Great. And then considering your comments, is it fair to say you expect monetization of both levers and the art collection before year-end?

Jim, it's Ben. Look, I can't predict buyers in M&A and sale processes. What I can say to you is we see multiple offers on levers. We are under exclusivity with a party. And that, coupled with where we are, our finance team and accounting team decided that it warranted moving out to discontinued ops. And so when you look at our revenue that we reported, you have to add both discontinued ops and continuing ops together for an apples-to-apples for the quarter. As far as the art collection, we are in multiple conversations and down the road with multiple parties on selling it either in one or multiple auctions. Some of those will happen before the end of the year. And we are going beyond just the art collection. And I think there's some stuff from our archives, that's very interesting. And then we still have a lot of remnants with furniture from mansion, et cetera, that we plan on selling.

Helpful. And then with respect to Honey Birdette, I'm curious, is the brand growing outside of Australia? And then within Australia, it seems like you're ripping the band-aid off of a promotional dependence. How long do you think it could be before that Australia business can rebase?

Yes. So the Australia business is decline is -- outpacing the decline that we're seeing in the U.S. and Europe. But I make no bones about it is the brand is declining in both the U.S. and in Europe. Now what we saw is there are kind of 2 things, the consumer right now is really pushing towards services and essentials. And we're not necessarily an essentials product, but we see when we have a sale, the stuff flies off the shelf. And so we actually saw extremely high positive comp sales in both all 3 regions when we had just a 7-day sale over Memorial Day weekend. So May comped up by tremendously. And then, of course, you have the typical hangover in June from the big sales. So what we're seeing right now is conversion, traffic is there. The conversion moves up and down with whether we're on sale or not. And to your point, we were on sale last year, I think, is about 118 days during the year. And this year, we're coming up on September. September, we are on sale almost for the entire month. We'll run a Labor Day sale. We'll be in, we'll be out. And I think that's the goal is to really push towards profitability and not push towards revenue growth.

[Operator Instructions] Our next question comes from the line of J.P. Wollam with ROTH MKM.

If we could maybe start just in terms of the licensing business and the joint venture, you made a call out just about kind of some of the geopolitical situation. I'm curious if there's been any kind of changes to what the JV looks like and/or is going to be able to achieve relative to when you first got into that?

J.P., it's Ben Kohn. We just had a call with our partners last night. I think that the business plan that we set out with them and really crafted last year was to create and take back these flagship stores on Tmall, Douyin and the platforms so that we could control the sale process, obviously, not controlling inventory or manufacturing, but really control the sale process with the consumer. It's something that the platforms wanted and the business models in China have changed. The specific issues in China and Chris Riley or JC and myself were just there 2 weeks ago, really related to macroeconomic issues. So the economy is very, very poor in China outside of the luxury consumer, it's knocked down the ground there. And then on top of that, moving money out of China right now, it's just a much more levers process than it was historically, where banks sometimes are rejecting wires going out because they are leaving the mainland, even moving money to Hong Kong at times can be challenging. And so the overall opportunity and what the business plan has not changed. It's just that the timing of things, you have to be flexible with what's going on on the ground there. I think that it's been reported by others. It's not us. That -- the economic rebound people were expecting in China post the 3 years of lockdown they had. It did not happen. And I think the consumer over there is wary right now. And so it actually helps us to some extent as we're talking and negotiating with our partners to take back some of these stores, and that's what we're focused on.

Great. Really appreciate the color there. And then one more, if I could just follow up. In terms of gross margin, obviously, kind of a lot of moving parts in the P&L this quarter with the move to discontinued ops. But just curious now that we kind of have a lot of high-margin, licensing rev and then kind of also Honey Birdette as a big contributor. Is 2Q's gross margin somewhat indicative of kind of the base business going forward of how that should look? Or is there anything just to point out that would mislead us about Q2?

Yes, this is Marc. It did tick up a little bit from the high-margin businesses. Yes, that's true. The one thing I would look at is the licensing business that you'll probably see that tick down a little bit because we did have a pickup from a reversal of a -- sorry, commission that we had in there. So licensing will come down a little bit. But to your point, you will see HB start to lift. And so I think if you net the 2 together, they should be roughly about the same.

Our next question comes from the line of Greg Pendy with Chardan.

Just, Ben, I think earlier you kind of gave us the revenue dependence of the top 10 performers on [ Central Falls ]. Just kind of wondering, could you share any color on how many of those performers are exclusive to the platform and kind of how you're kind of thinking about that dependence going forward?

Sure. Thanks, Greg. So we don't have exclusivity with any of our creators. Our creators are free to do way after they want. And I think that's consistent with the creator economy, right? They want to be able to monetize where they want to monetize. But what I would say, and again, largely, once a creator has an audience on the platform, that audience tends to stay with that creator on the platform. And I don't see most of our creators on other platforms. We've actually been successful during the quarter actually with creators that have wanted to leave other platforms, starting to move their -- move over to us and those revenues continue to build. When I look at the concentration risk, what's encouraging to me is -- our GMV is -- if you annualize for a weekly basis, is now in excess of $35 million. And when I look at what our top 10 creators contribute versus where they were a few months ago as a percentage, that number continues to come down because we've added so many other creators now that they're earning. And so from a diversification point where -- when we first started, you might have revenue concentration issues today, amongst -- on that platform now in the company as a whole. Today, you really don't have that. And so what it leads to is a much more consistent daily growth on the platform than if one of the creators historically was on vacation or sick or something, you're going to see more daily or hourly variability than what you're seeing today. And so this to me is what we've been focused on, which is really building out that middle of the platform and health on it. And I'm encouraged. We made this change in the beginning of July. It's something that was month from the making and very encouraged by the results. It also allows us to reprioritize the human capital internally, really now starting to focus on platform marketing. Again, we haven't spent the dollar so far really of [ TAC ] against us. All of the customers have come through the creators. But it allows us to think more about the Playboy lifestyle and marketing very smart ways to the platform versus what I would say is a very labor-intensive individual creator recruitment, just given how we were set up internally from a tech perspective.

There are no further questions in the queue. I'd like to hand the call back to Ben Kohn for closing remarks.

Thank you, operator. I appreciate everyone joining, and we look forward to talking to you on our next quarterly earnings call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.