Redbubble : Trading Update Conference Call Transcript

Trading Update Conference Call Transcript

Melbourne, Australia; 22 April 2022: Redbubble Limited (ASX: RBL)

The transcript of the Trading Update conference call on 21 April 2022 is attached.

For further information, please contact:

Louise Lambeth

Head of Investor [e-mail]

This announcement was authorised for release to the ASX by the Redbubble Limited Board Chair.

Level 12, 697 Collins Street, Docklands VIC 3008

PO Box 274, Flinders Lane VIC 8009

Redbubble Limited

ABN 11 119 200 592

Operator: Thank you for standing by, and welcome to the Redbubble Limited 3Q Trading Update. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad.

I would now like to hand the conference over to Ms Louise Lambeth, Head of Investor Relations. Please go ahead.

Louise Lambeth: Thank you, Operator.

Good morning, everyone here in Australia, and good afternoon, evening, to our European investors. This is Louise Lambeth, Head of Investor Relations for Redbubble Group. Welcome to this investor call following the release of our FY22 third quarter trading update provided earlier today.

With me on the line I have Redbubble CEO, Michael Ilczynski, and CFO, Emma Clark. The information for today's update is contained in the ASX announcement and the Company slides that were released to the market.

The financial and operational metrics are from internal management reports and have not been subject to audit. Michael and Emma will speak shortly, and we will then open up the lines for questions. This session is also being recorded.

Before we start, I would like to draw your attention to the Safe Harbour statement regarded forward-looking information in our ASX rules. That Safe Harbour statement also applies to this investor call.

I will now pass on to Mike.

Michael Ilczynski: Thank you, Louise. Hello, everyone. Thank you for joining us today. We will go through the Redbubble Group third quarter and year-to-date trading update. I will be speaking briefly, before passing to Emma to walk through the financials.

At a high level, the Redbubble Group delivered third quarter marketplace revenue of A$96 million, which was largely in line with our expectations for the quarter. Gross margins for the quarter were consistent with year-to-date, at 37.5%, and we continue to see elevating customer acquisition costs impacting our GPAPA margin.

OpEx was slightly below budget, driven by slightly lower staffing expenses. These factors resulted in operating EBITDA loss for the quarter of A$6 million.

Given the year-to-date results, we are reiterating our FY22 outlook statements provided in February. We have a significant cash balance on hand, having ended the quarter with a cash balance of A$94 million, which continues to give us the ability and the confidence to invest for our future growth.

As I said at the start of the year, the team and I have our sights firmly focused on driving sustainable growth for the medium and long term. During the quarter, we continued with the investments we are making across the business to build our capabilitiesand expand our capacities, which has included by hiring more than 100 new staff into the Redbubble business since July 2021. This has really boosted our capacity, particularly within the product and engineering teams in the Redbubble.com business.

As we have stated, these teams are focused on improving our technical foundations, but we are also starting to see staff improvements in the off site experience. To give you a few examples, we recently launched our first add to cart recommendations on the Redbubble site. So, when a customer adds a product to their cart, a carousel of recommendations, based on that product, now appears. We've added list functionality to both of our Redbubble mobile apps, so we see a lot of user behaviour, particularly amongst our target audience around creating and sharing lists of products and designs. Adding this feature to our apps has been our number one feature request, so it was great to have that added this quarter.

We've been experimenting in our search results to boost newly onboarded artists to improve their ability to get discovered, while not degrading overall conversion results. This experiment has shown good promise.

We also remain on track to launch our pets category in the Redbubble business later this year.

Additionally, we remain really focused on driving retention and repeat across both businesses. Through Q3, a record high 47% of our marketplace revenue for the Group is generated from repeat customers.

We also shared in this release some initial cohort data. This was looking at new customers, who first purchased on Redbubble in the second half of calendar year 2020, so this was the real COVID-impacted cohort. We compared that with new customers from the same time a year earlier, in 2019, pre-COVID.

What the analysis demonstrated was that the H2 2020 new customer cohort was some 64% larger than the 2019 cohort. Despite being so much larger, the 2020 cohort's 12-month repeat rate is very similar to the 2019's rate, 20.3% versus 21.7% over 12 months. This is really encouraging for us, as it demonstrated an ability to retain those COVID-impacted customers at virtually the same rate, even though the 2020 cohort had the reopening phase during 2021, in their following 12 months, in the US, in particular, which should have had a negative impact on repeat online behaviour, as offline stores reopened.

We also believe it demonstrates that the Redbubble value proposition does appeal to a broad mass consumer segment. That we can build loyalty at scale, and it's why our focus is equally on improving retention and building our brand, so that we can drive increasing numbers of new customers over time. As such, both businesses are continuing with a number of experiments this year to drive retention, and those experiments are across all aspects of the customer journey, from different marketing channels to shipping experiments to physical product experience changes, as well as looking at how we start to build our brand over the periods ahead.

We don't normally provide this level of operational detail in our quarterly trading updates; however, given the investments that are happening across the business, I thought it was important to take the opportunity to demonstrate some of the tangible examples of the work that we're able to undertake with additional talent and resourcing coming into the business.

We're also making progress with our platform work that we need to undertake in order to unlock future value. So, during the remainder of calendar year '22, we will continue to build up this foundational work required for the next phase, as well as working on some of these opportunities to deliver earnings growth in the shorter term.

We're all immensely excited about the incredible opportunity that lies ahead of us. Within the business, there are multiple, high-potential growth leaders that can enable us to achieve a meaningful step-up in scale. I remain highly confident that Redbubble, the Redbubble Group, is a compelling investment opportunity that can deliver long-term value to all stakeholders.

That being the case, we do not believe that our current share price reflects the fundamentals and prospects of Redbubble and our strategy. As such, the Board and management has and continue to actively investigate value-enhancing options on behalf of all stakeholders. These include organic and inorganic opportunities that could assist in the acceleration of shareholder value, as part of our usual considerations for the Board and the company

Before I wrap up, I want to spend a moment to discuss our Redbubble Group, as well as to support people of Ukraine. Over the past few weeks, our team has been coordinating to offer Redbubble support of humanitarian relief efforts for Ukraine. This is including looking at ways we can support the Redbubble Ukrainian art, and amplify the efforts of artists on Redbubble, from across the world, who have been moved to create artwork in support of the Ukrainian people.

Already, we have facilitated sales of several hundreds of thousands of dollars of art supplies, and we are donating - as we are donating our profits from these sales, this means the Redbubble Group will be donating over A$70,000 to GlobalGiving and International Rescue Committee, two charitable organisations who are working to mobilise resources, to save lives in Ukraine and assist refugees. I'm very proud of the meaningful way that our team has worked together to show support with the people of Ukraine, and I'm truly grateful for the wonderful response that we have seen from both the artist and customer communities, to drive that caring initiative.

I'll now pass over to Emma.

Emma Clark: Thanks, Mike. I would like to echo your comments and thank all of our communities for their ongoing support of Ukraine.

Let's now turn to the year-to-date and third quarter financial performance, and our outlook. Please be aware that unless otherwise stated, the financial results discussed are on a delivered basis and have not been subject to audit.

On a year-to-date basis, marketplace revenue was A$384 million, down 16% year-on-year on a floating basis, and down 17% on a constant currency basis. However this is up 56% on a two-year view. Of this, A$96 million was delivered in the third quarter, down 7% on a floating basis and 12% of a constant currency basis. This is largely in line with our expectations.

On an underlying basis, for the year-to-date, which is effectively on a paid basis excluding masks, marketplace revenue was A$376 million, down 4% year-on-year on a floating basis, and 5% on a constant currency basis.

Year-to-date, Redbubble has generated gross profit of A$144 million, down 22% on both a floating basis and constant currency basis. Gross margins were 37.5% in the third quarter, once again in line with our expectations, noting that gross margins carrysmall seasonal headwinds in the third quarter, as customer returns and refunds from the holiday season in the prior quarter are processed. On a year-to-date basis, gross margins were also 37.5%.

Gross profit after paid acquisitions for the year-to-date was A$84.1 million, of which the third quarter contributed A$20.6 million. Paid acquisition as a percentage of marketplace revenue was 15.6% for the year-to-date and 16.1% for the third quarter

As Mike shared earlier, repeat customer spend remains strong; however, new customer acquisition costs remained elevated in the quarter, due to a combination of high levels of competition in the digital channel, with what appears to be some general weakness in consumer demand.

Operating expenses during the third quarter were A$26.7 million, which was down 10% on the second quarter's results of A$29.6 million. As discussed in previous quarters, the second quarter expenses always contain seasonal uptick to support the peak sales period in November and December. Third quarter operating expenses, however, were up 27% on the prior year. Mike talked earlier about the investment in people capacity, with over a hundred new Bubblers joining the Group this financial year, and this is the main driver of the year-on-year increase in expenses. Even so, we are still running below our internal headcount expectations, and therefore this expense line was lower than we had anticipated, offsetting much of the paid acquisition cost increase.

The variance between operating EBITDA and EBITDA for the quarter was impacted by unrealised net foreign exchange losses, being a A$2.7 million loss in the quarter, as the AUD strengthened from A$0.70 to A$0.75 during this period.

The other item in other expenses are share-based compensation payments.

The year-to-date EBITDA loss is A$2.3 million. Redbubble's closing cash balance as at 31 March 2022 was A$94 million. For those of you who are familiar with the business, you will remember that seasonality in the business always results in a net cash outflow in the third quarter, after payments for holiday sales are made to all our market-based participants. The business operates through a retail cycle, and therefore is seasonal in nature.

The first half of the financial year is always larger than the second half, and this is reflected all the way down the P&L, as well as through the cash flow and across the balance sheet. As such, our financial metrics should be viewed over a full financial year period.

At the half year results, Redbubble reiterated its outlook statement, and our year-to-date performance gives us confidence that these will be met. Redbubble still expects financial year 2022 marketplace revenue to be slightly below financial year 2021 underlying marketplace's revenue of A$497 million.

We remain a much larger business than pre-COVID, and our cash balance will continue to allow us to invest to achieve our medium-term aspirations. We are confident and excited about making some longer-term opportunities to grow strongly and extend Redbubble's global market leadership. As such, we will be continuing to invest into the business and funding these investments out of our existing cash reserves.