Redbubble Ltd

ASX:RBL

Earnings Call Transcript 2018-Q3

[Paul Gordon, Regional Counsel & Company Secretary]

Good morning, all. This is Paul Gordon, Company Secretary for Redbubble. Welcome to this teleconference for our third quarter results for financial year 2018. With me, I have Redbubble's CEO, Martin Hosking; CFO, Chris Nunn; Chief Operating Officer, Barry Newstead; and GM, Finance, Zoe Myers. We released our third quarter results Appendix 4C to the market in an ASX announcement earlier this morning. Martin, Chris and Barry will present before we open up the floor to questions. This presentation and Q&A session are being recorded.Before I start, I would like to call your attention to the safe harbor statement regarding forward-looking information in the ASX release accompanying our results. That safe harbor statement also applies to this call and Q&A. Over to you, Martin.

[Martin Hosking, Co]

Thank you, Paul. Good morning, all. I'm Martin Hosking, Redbubble's CEO. This morning we released Redbubble's quarterly announcement, the Appendix 4C for the third quarter, i.e. March quarter, of FY 2018. With me are Redbubble's CFO, Chris Nunn, who will be speaking about our financial results; and our COO, Barry Newstead, who will be providing a strategic update and commenting on the operational performance of the company. The quarter that was just gone was strong for Redbubble. Each year, the March quarter has some seasonal features, which mean reporting on it is harder than the other 3 quarters. In particular, there is the overhang from the December strong sales, which generally depresses margins, and it's also the start of our new operating year, which means there is often less impact from initiatives that have just begun. Chris will give you a bit more color on the quarter's metrics.In summary, we have a solid quarter. I will note in particular that the top line GTV growth of 28% has kept us on track to achieve greater than 30% growth for the year as a whole. Growth was accelerating during the quarter. This has been achieved with continued low customer acquisition costs with total marketing expenses as a percentage of revenue falling compared to the first half of the year. Margins are improving, and we'll continue to invest in growth and managing to profitability.The net result is we are focusing -- forecasting operating EBITDA profitability for Redbubble next year. This is a confirmation of what we have previously indicated. I'm particularly pleased that the growth continues against the backdrop of healthy marketplace dimensions on all 3 sides: artists, customers and fulfillers. Our investment in the fundamentals of the marketplace will ensure we are best positioned to take advantage of the strong wave of on-demand commerce.We are continuing to demonstrate that Redbubble has a highly disruptive retail model with long-term growth potential on low customer acquisition cost and a positive cash cycle with neither the inventory or warehousing requirements. As we grow, we are developing a global network of interconnected facilities.I'll now pass to Chris to provide more financial commentary on the quarter. After Chris, Barry will talk about the initiatives we are pursuing and provide further details on our strategic priorities and our investment in innovation and growth as we look towards longer term.

[Christopher P. Nunn, Chief Financial Officer]

Thank you, Martin. As often seems to be the case at this time of the year, I have a sore throat. So I will start, but if my voice gives out before I complete, Zoe Myers, Redbubble's GM Finance, will take over. My apologies if you don't hear me so well.I'm pleased to report third quarter and year-to-date unaudited results that demonstrate Redbubble's continued success in building a business of enduring value. Our strategic investment in growth is made through both the income statement and the balance sheet. We're committed to balancing our efforts in growing the business for the longer term while demonstrating operating leverage, thus prudently managing to profitability. Barry will explain a little more on the growth initiatives.Again, Redbubble has demonstrated an ability to drive sustained GTV growth despite typically more restrained consumer behavior in the third quarter post the strong trading performance of the holiday season. Third quarter gross transaction value was $48.9 million, up 28% against prior corresponding period, up 27.8% on a constant currency basis. I note that quarter 3 FY 2017, the previous corresponding period, benefited from high levels of political activity in the United States and the resulting means we sold relatively heavily as much as 3% of all sales in that quarter last year. Year-to-date, GTV is $178.7 million, up 30.6% against the same period last year, up 31.6% on a constant currency basis.Pleasingly, the European markets again demonstrated their ability to deliver high growth rates evident since we launched our 3 new language sites in 2016. Germany's third quarter GTV was up 83%; France, 65%; and Spain, up 88%, all before the added beneficial effect of a stronger euro.The mobile iOS app has also demonstrated a promising uptick in its contribution to GTV with a 4% contribution in March, 3.6% for the quarter. Monthly active users on the app is now about 212,000.Third quarter revenue growth was low relative to GTV for 3 reasons. I've mentioned before the increasing contribution to sales from Redbubble's European markets with their higher sales tax regimes. But we've also noticed a slight increase in artist margin most likely related to product mix changes. However, the biggest contributor to the low relative growth was actually because the prior corresponding period benefited from receiving a significant sales tax refund, which adds to revenue just as the sales taxes we collect and payout reduces revenue.Year-to-date, revenue is $141.2 million, up 28.3%, up 29.8% on a constant currency basis. The third quarter gross profit margin was slightly improved over the same period last year but was nevertheless softer than we had anticipated.Our January result was adversely affected by a couple of factors: seasonally high rates of refund, which are typically larger than the rest of the year due to December-related returns, and increased shipping costs. Those were in part as a result of higher-than-expected levels of growth in Europe over the holiday season, for example, over 100% in Germany, compounded by shipping disruptions caused by severe weather conditions in the region. Importantly, neither of these factors are systemic in nature, and we saw the strong rebound we had expected materialize in February and March as negotiated fulfiller discounts also kicked in.Moving down to the gross profit after paid acquisition line. We are very pleased with how this is performing. The third quarter demonstrated further improvement in the cost of customer acquisition and retention. Organic unpaid traffic demonstrated strong momentum in this quarter, growing 32.8% year-on-year in the third quarter, following 32.4% in the second quarter.Total paid acquisition costs for the third quarter were 8.3% of revenue versus 9.4% of revenue in the first half. The year-to-date cost is 9.1% of revenue, up a little from the 8.7% for FY 2017. The pleasing underlying growth in unpaid GTV has contributed to improved overall profitability on customer acquisition.Our paid GTV is both profitable and additive to the unpaid growth. We measure the efficiency of our paid marketing by reference to its cost as a percentage of the paid GTV it generates. Third quarter paid marketing efficiency was approximately 16.4%, and it is running at approximately 16.2% year-to-date compared with 16.4% last year. The year-to-date efficiency represents an immediate gross profit return of 1.7x the initial investment.I should point out that we can only finalize the exact paid versus unpaid split about 30 days after the end of each period when attribution is confirmed. We expect the improving gross margins and the continued low cost of customer acquisition to result in future GPAPA growth rates aligning more closely with growth in revenue.To operating expenses. Redbubble is focused on maintaining meaningful investment growth while prudently managing to profitability. We have always charged a significant proportion of our growth led investments to the income statement. However, our third quarter 2018 and year-to-date investment in the recently announced Content Partnerships business has been particularly significant, and I want to call that out.There is $945,000 in the operating expenses line year-to-date, and $550,000 in the third quarter related to this exciting opportunity. But it's important to understand that the investment will have a different return profile than our other growth initiatives with expectations for strong revenues in 2 to 3 years out. The emergence of operating leverage has therefore slowed a little this quarter, with the investments in Content Partnerships a key factor.Operating expenses have increased by 15% on a year-to-date basis, but this will be only 12.1% if investment in establishing the Content Partnerships were excluded. This and the revenue impact mentioned before, which affected 2017, are the key reason for third quarter '18 not improving on the same period.Redbubble moves into the final quarter of the year with confidence. GTV is well on track to achieve constant currency growth rates for the remainder of FY '18, consistent with those achieved year-to-date and in line with previous guidance. Importantly, gross profit margins are expected to lift above 36% for the last quarter, taking the full year margin to around 35% and setting us up well for next year. The average cost of customer acquisition is forecast to remain at a similar level to that achieved year-to-date, and we expect operating expense growth for FY 2018 as a whole to be in the range of 17% to 19% compared to FY 2017. Operating EBITDA for the full 2018 year is therefore expected to show significant improvement from FY 2017.Briefly looking forward to 2019, we can see operating EBITDA profitability on the basis of the current trends in the core business metrics.Before I wrap up, I want to mention the change to Redbubble's financial statements that will be brought about by the new AASB 15 accounting standard, which comes into effect from the 1st of July. It will result in change to how we recognize revenue. After a detailed and lengthy process of interpretation and understanding, we've been advised by technical experts at EY, our auditors, that the artists margins received by us and passed onto artists but currently not included in our revenue will, from the 1st of July, need to be so included. The exact presentation of this change is still being discussed, but it would likely have the effect of grossing up revenue and expenses, specifically cost of sales, by the same amount.I should stress, there is no impact on the business model on cash flows or on growth rates. There is also no impact on gross profit, GPAPA, EBITDA nor ultimately NPAT, although their reported gross profit margins will be affected because of grossing up of both the numerator and denominator in that equation.Thank you. I'll now hand over to Barry.

[Barry Newstead, Chief Operating Officer]

Thank you, Chris. Hello, everyone. I'm Barry Newstead, Redbubble's COO. Redbubble continues to make good progress in building a business of enduring value. Our strategic investments seek to accelerate the marketplace flywheel that drive Redbubble's growth and scale. In so doing, we delivered ever improving user experiences for artists and customers and achieve economies of scale. I'd like to underscore this. It is a key attribute of Redbubble's marketplace flywheel that growth enables user experience improvements, providing leverage for our capital-efficient growth investments.We see Redbubble's market potential expanding as we innovate to provide customers with a superior value proposition that incorporates unique content and enjoyable discovery experience, quality products, timely delivery and competitive prices. Redbubble's business model is just starting to have a real disruptive impact in global consumer retail. We feel like we're in the early stages of realizing the potential of Redbubble's marketplace flywheel.In the past quarter, we have continued investing around 4 themes: find your thing, global acquisition, scalability and deeper relationships. Rather than walk you through each, I'd like to briefly touch on a few key highlights.First, as Chris mentioned, our GTV growth from unpaid sources has accelerated. There are a number of investments that support this, but the #1 being all things mobile. Our mobile web experience is consistently improving, thanks to mobile-focused discovery improvements, including this week's rollout of type ahead search suggestions, which saves keystrokes and minimizes errors on mobile. Our iOS app has been adding users and generating more GTV with the introduction of push notifications. As Chris mentioned, we had over 200,000 monthly active users of the app in March.Second, again, echoing Chris, our volume gains are allowing for continued discussions with fulfillers about product costs. We saw reductions in key parts during Q3 and continue to seek opportunity to reduce product costs. That said, we have balanced price negotiations with discussions focused on holiday capacity and localization of supply. The relationship with fulfillment partners involved building their confidence to invest in advance of the upcoming holiday season while sharing the benefits of economies of scale with the Redbubble market.Third, we have talked for a while about our foundational investments in the member experience for customers with the objective of getting to personalized content discovery for each member. During Q3, we experimented with personalized -- with a personalized content experience for members on the web and saw very promising results in terms of engagement. We expanded favoriting on search pages for members with similar positive results. Both features, along with the performance of similar features in the iOS app, are good validation of the potential of our work to deepen customer relationships and build lifetime value.Fourth, I'm really pleased with the artist engagement -- with our artist engagement work. Similar to member work, we are looking at ways to further deepen artist loyalty to drive more quality content on Redbubble. The new phase of work is in the early stages, but we've seen tremendous artist engagement from a relatively small start as we introduced the beta version of the artist dashboard. We have made progress also on content partnerships with 5 beta deals signed and a solid pipeline of additional ones. This area remains in the early stages with expectations for strong revenues 2 to 3 years out.Finally, our re-platforming work continues at pace. We are making significant investments right now to increase capacity for the holidays, reduce risk of downtime and ultimately lower platform costs while increasing our agility. During the quarter, we achieved a number of milestones, including the initial rollout of a new platform to power our search service, a core part of Redbubble's infrastructure. We continue to expand the use of our new faster platform across more of the user experience. And we have an area of work underway to reduce the investment cost of adding new fulfillers and products onto the marketplace.All told, the work we are doing is focused on the medium to long term. More than 50% of our development resources are focused on growth-related projects with a greater than 12-month time horizon. We are delivering value regularly in each area while making development choices that will serve us over time. We are actively avoiding expediency.An area we do not -- an area we do not discuss a lot, although it is fundamental to our success, is our investment in people. During Q3, we launched a new leadership program for our managers. As of today, 48 people in Melbourne and San Francisco have completed this 2-day training. And of these, 33 have also completed a course in diversity and inclusion. Our #1 source of long-term value has been and will be our people. We are investing in them and in our culture.As we head towards the Northern Hemisphere spring season, the back to school and holidays, I will reiterate that we are investing around the Redbubble marketplace flywheel. This allows us to deliver improved user experience for artists and customers, particularly members, alongside scalable fulfillment and platforms to drive our economic model and long-term growth potential. We are confident that our strategic direction enables us to grow and scale to generate impact for artists, customers, staff, partners and shareholders for many years to come.With that, I'll now hand back to Martin to wrap up.

[Martin Hosking, Co]

Thank you, Chris and Barry. As outlined, Redbubble is a leading global marketplace in a disruptive consumer sector with fundamental innovation at the heart of what we do. We are building a company of enduring value and prudently managing to profitability. We invest to drive growth through both the income statement and balance sheet, and this has resulted in a business scaling rapidly on the back of strong fundamentals, underpinned by, firstly, the shift in consumer preferences; secondly, the evolution of on-demand technology; and finally, the rise of the sharing economy of the Internet.We remain focused on sustaining strong growth through execution and delivering strategic initiatives. Some of these require commitment with foundational work in order to generate benefits in the longer term, whilst others have immediate value. Striking a balance between those is important to short-term momentum and long-term sustainability.Our success to date has meant Redbubble is an ever more meaningful and distinctive shopping destination for global consumers looking for new ways to distinguish themselves. It is an essential platform for many thousands of artists. For fulfillers, it is often key to their future growth, enabling them to employ more people. For our investors, Redbubble will continue to be an opportunity to hold a stake in the global business with long-term profitable growth based on fundamentals, scaling operations and focused execution.Thank you. We'll now be pleased to take questions.

[Operator]

[Operator Instructions] Our first question comes from Ivor Ries from Morgans Financial.

[Ivor Ries, Senior Analyst]

If I can ask 2 questions back to back, that will be nice. The first question is about the conversion rate, a bit of a tailing off of the conversion rate. I would have thought that given the improvements in your mobile user experience, your conversion rate would have gone up in that quarter rather than going down. If you can give us some feel for why you think that might have happened. And also, average order value, obviously, currency is no longer a serious impact there. Can you give us some flavor as to why average order value is still going down?

[Christopher P. Nunn, Chief Financial Officer]

Sure. I'll try and take those and Barry can supplement anything I don't get quite right, Ivor. Thanks for your questions. Mobile conversion rate actually went up 10%, Ivor, and of course, [ which led ] that problem that mobile is only -- is a smaller part -- this one is a bigger part of our business compared to desktop. So despite mobile increasing substantially, and bear in mind, actually increasing avenue for which customers come to Redbubble. So we're pretty pleased with 10% increase there. It just gets weighed out by the desktop. It's slightly -- more specifically though, it's likely related to our improved -- the improved organic ranking you heard me and Barry mention we improved organic unpaid income. The more -- the better organic ranking, the more traffic we get. The more traffic we get, you tend to get less conversion. So we're caught in that sort of trap a little bit. Well, not trap, I suppose. But a dichotomy is the way to explain it, increase in visits -- so you really look at the 2 combined, Ivor, I would, rather than just conversion rates alone. Part of the reason why we point you away from Google Trends as being a necessary and absolute guide. I should say that conversion -- the app is now starting to make some level of meaningful contribution. We talked about 4% conversion on the app is double conversion on the mobile. So around about 2.6% conversion on the app in the quarter, 2.7% as opposed to 1.32% for the mobile, which in itself is always less than desktop. Also, I think the speed of the site has improved markedly. And therefore, mobile -- we're getting more visits on the mobile channel because mobile converts lower, and that has an effect. So all in all, I think most important message is mobile is the increasing use for our platform. That has a lower conversion rate and that has increased 10%. So I summarized it there. Barry, can you add anything to that?

[Barry Newstead, Chief Operating Officer]

Yes, I think you've covered it. It is also worth noting that the -- when the unpaid business tends -- Chris has alluded to this around search rankings and whatnot. Unpaid business tends to get more visits for lower conversion than paid. So in a sense, there's more positive in that change than there is -- there's really nothing negative actually in that change. I think the second question was about AOV.

[Christopher P. Nunn, Chief Financial Officer]

The next question was about AOV. As we have alluded to in previous quarters, Ivor, it's just down to product mix, an increase in percentage of our business is in the stationary category, which, let's say, does have a higher profit -- gross profit margin. So we're not overly -- we're never overly concerned about AOV and we remain unconcerned.

[Operator]

Our next question comes from Chris Bainbridge from P-I-E.

[Chris Bainbridge, Senior Investment Analyst and Portfolio Manager]

Just 2 from me. I mean, you mentioned that the exit run rate for revenue during the quarter was accelerating. So it's all run rate during -- revenue during the quarter that's accelerating. So what was the exit run rate?

[Christopher P. Nunn, Chief Financial Officer]

What was the run rate in March? I'm not quite sure I understand that.

[Martin Hosking, Co]

I understood your question. So we've indicated it's going above the 30%, which we expected for the year. I don't think we can give a stronger indication at this point. But I think the average for the quarter was above the -- in order to get to that 28% was above the 30% as we went through the end of the quarter.

[Chris Bainbridge, Senior Investment Analyst and Portfolio Manager]

Right. And traditionally, you've talked to that 2 for 1 ratio. Does that still hold?

[Christopher P. Nunn, Chief Financial Officer]

As an objective, yes.

[Martin Hosking, Co]

We're expecting operating expenditure growth to moderate, as we've indicated, over the next period. The operating expenditure growth, I think, is clearly in our control.

[Chris Bainbridge, Senior Investment Analyst and Portfolio Manager]

Yes. And would it be fair to say that to some extent, the improvement in your customer cost of acquisition, was that to any extent driven by less investment in paid, which then brought down the revenue? Or is that just via an improvement in sort of unpaid conversion?

[Martin Hosking, Co]

I think Barry -- I'll let Barry take that one.

[Barry Newstead, Chief Operating Officer]

Yes, I mean, I think it's actually the acceleration -- it's mostly in the acceleration of the unpaid space. And I think it will go back a few quarters. You'll start to see that the -- our GTV from unpaid sources. The growth rate has been increasing for us pretty significantly by quarter. So that's the main story there. I think that we continue to view paid in the way that we always have, which is we have profit thresholds we're trying to meet and we spend to those thresholds and we generate the growth from that. And in general, there's been no meaningful change in that. I think it's moderated a little bit, but I don't think it's any meaningful means at this time. So I hope that addresses your question.

[Chris Bainbridge, Senior Investment Analyst and Portfolio Manager]

Last one from me. You did mention in the statements that you don't know the exact split between sort of unpaid and paid GTV 30 days after. But would it be fair to say that I think it was sort of 54-46 unpaid-paid previously. Do you expect much diversion from that? Or give us sort of ballpark figure.

[Christopher P. Nunn, Chief Financial Officer]

I'd say I'm not -- we're not talking about much -- 30 days is only 1/3 of the quarter anyway. So it's not like it's going to have a major effect. I'd say they're going to be a little bit better than that in the quarter.

[Operator]

Our next question comes from [ Stella Wang ], private investor.

[Unknown Attendee]

I've got 2 questions. The first one is, could you repeat the app conversion rate and mobile conversion rate you mentioned before?

[Christopher P. Nunn, Chief Financial Officer]

Yes, [ Stella ]. Chris here, yes, we can. The app conversion rate for the quarter was 2.65%. And for mobile, it was 1.32%.

[Unknown Attendee]

Okay, cool. My second question is...

[Barry Newstead, Chief Operating Officer]

I'm sorry. Can I just make one comment briefly just on how to think about app conversion rate. The app conversion rate is high, but it's not completely comparable to web conversion rate because people tend to, what do you call it, snack on the mobile. So they'll come back and visit the mobile typically more frequently than they will on a web experience. So it's just worth noting there's a difference there, but it's likely that difference is actually larger than the numbers will show you in terms of value.

[Unknown Attendee]

Okay. My second question is about the content licensing initiatives. Could you help us understand better what's going to happen in the next 1, 2, 3 years? What we should expect happening in that area that will eventualize in substantial revenue contribution? And how should we see the OpEx related to that going up?

[Martin Hosking, Co]

Yes. I think I might -- I'll hand it over to Barry. I'll give you just a brief context. We see the Content partnerships develop as part of our overall objective of delivering a strong consumer experience aligned with the artist. And so in particular, the Content Partnerships are about enabling rights holders to be able to interact with the artists themselves in creating new content for the new consumers. So it is about genuine partnerships in which the artist who use Redbubble would have the ability to interact with the rights holders, the property which the rights holders own, to create new content. Chris -- Barry will give more context.

[Barry Newstead, Chief Operating Officer]

So I think that said, what I would just say in the sort of market context is that the traditional retail -- licensed merchandise business is undergoing a significant change. And that's -- if you go back in the sort of traditional model, what you would have is you would have a company. You can pick your favorite brand, a pop culture brand, and that company would generate a set of designs that they would then distribute through retail shops, right. Then you can go down the corner and see those in place. Those designs were very limited in number, and they were largely a reflection of what the brand thought their consumers wanted. That is changing radically, and that's really a reflection of the trends that Martin talked about earlier about -- around changes in consumer preference in particular. Consumers now want a much wider range of ways in which they can engage with the brands that they're interested in as fans. They don't want to all be wearing the exact, same branded T-shirt. They want to be wearing their own special version of that T-shirt. And that's really where the Redbubble artists come into the partnership with the Content Partnerships. Our vision is that our artists will be granted licenses from content partners, and then they will create possibly thousands and thousands of designs that are inspired by that content and then make that much more unique offer available to customers through the Redbubble marketplace. And that's really the basis for which we see the flourishing of a business. It is really, really built on the core principle of what Redbubble is, which is really about art from -- art created by independent artists, massive amount of choice on great products for consumers. And the rights holders and brands really have the opportunity to really participate in that market with us. So that's the vision, where we are now is that everybody is coming to grips with the changes in the environment. And so we're working with a small group of brands that really demonstrate the potential of this for them. In general, the conversations are getting more and more engaged. But as with any business where you're really making significant change and you're working with large companies, the sort of -- the gestation period is longer than when you're in a sort of simple, straightforward B2C, business-to-consumer proposition.

[Unknown Attendee]

Okay. If I understood it right, so between now, and say, 2 years in the future, with all the efforts in signing up big brands and content owners and market [ both ] to your artist base and create popular products on those content license, so could we expect any announcement out sometime when you guys do sign up big brand names?

[Barry Newstead, Chief Operating Officer]

We -- I think we will progressively. I will say that we don't want to get ahead of ourselves. And so I think what we've been wanting to do is really build the foundations and fundamentals of this. And actually, we want to work with players in the industry in a way which we can be experimenting and learning together as we go. So I think we're going to be reasonably conservative in making announcements about partnerships because frankly, I don't want -- we don't want to get ahead of ourselves. But as these things start to come in, we have been, I think, mentioning it in the various quarters and I think we will continue to mention it to keep investors and others informed about how this is developing.

[Unknown Attendee]

Would you expect...

[Barry Newstead, Chief Operating Officer]

Sorry, I will just add. I mean, my hope is that it will be self-evident also that -- in terms of the kind of content that gets into Redbubble and some of the marketing around that as these partnerships come to fruition.

[Unknown Attendee]

Okay. And just lastly, would we -- how much more OpEx step-up should we expect from this initiative? Because this quarter, there was a substantial sort of incremental to what you had expected.

[Barry Newstead, Chief Operating Officer]

I think -- I'm not going to go to all the -- I think in the last period of time, I think we've been really putting some key team foundations in place. And of course, that requires a step change. I think our thinking on it is that we've got a core team in place, and we've been building some of the core technology to support it. And I think future growth -- it's likely that the future growth in OpEx is going to be really timed with -- probably somewhat advanced but timed with our view of the revenue potential of these deals. First, actually getting the deals signed and launched and then really valuing the revenue potential. So I wouldn't expect we're going to have large step changes, though we might have some increases in the -- as sort of people that came on in the third quarter that might be more visible in the fourth quarter. But we're not looking at big, big step changes coming.

[Christopher P. Nunn, Chief Financial Officer]

There's no such thing. We're not seeking to carve that out from the commitment related to the ratio either at this point. We drew it to attention of investors in this call because it was a reason, but that is not changing the overall objective of the ratio between top line growth and expenses.

[Operator]

Our next question comes from the line of Ivor Ries from Morgan Stanley (sic) [ Morgan Financial ].

[Ivor Ries, Senior Analyst]

First, for Chris. Just obviously between December and March quarter, there's a big movement in working capital, which affected the operating cash flows. The fourth quarter, would we expect a positive or a negative contribution from movement in working capital to your operating cash flows? And also in previous statements, you have indicated that the company should be trading at or about an EBITDA breakeven or a small profit at the end of FY '18. You seem to have withdrawn that now. So it seems like you've essentially downgraded by a couple of million dollars.

[Christopher P. Nunn, Chief Financial Officer]

I don't think that's actually right. Let me answer your first question first, Ivor, which slipped my mind, first question about...

[Martin Hosking, Co]

Working cap.

[Christopher P. Nunn, Chief Financial Officer]

Working cap, yes, the answer -- look, the measure of it on a quarter is we're looking at each quarter revenue. So I would say the fourth quarter is a fairly normal quarter. So you would expect a working capital improvement based on incremental sales versus the previous fourth quarter. So yes, working capital will be a positive contributor to cash flow as it is throughout the year in total. On the subject of guidance, we are now saying quite clearly that operating profit -- operating EBITDA in 2019 will be positive. I think it's what we're alluding to before, Ivor. So I don't think we downgraded. We have given you fairly explicit guidance in relation to '18 that for you to put into your models. And then you can determine whether it is a downgrade in relation to '18. What we do say is it's a considerable improvement on what we experienced the same -- for same -- for FY '17.

[Ivor Ries, Senior Analyst]

Yes. And if I can just ask another question for Barry. In terms of the speed project, increasing the page, download speeds, how far are we progressed through that project now? Are we up to 70%? Or we've still got a long way to go?

[Barry Newstead, Chief Operating Officer]

So I can't give you a percentage. But I would say that we're well progressed and we continue to do -- we continue to make improvements on that. I do think we've got some way to go on some specific page areas. But we feel like we're well progressed. And as I said, the new client of us is rolling out the new parts of the site. So our new artist [indiscernible] and personalized experience. Remember, those are all being built on a new platform. So I would say we're well advanced, but I think we're still working significantly in that area. And also, we find opportunities to speed up the site on a regular basis that are actually sort of related to but not directly part of the core speed work. So for example, with the type ahead work, we've also done some caching work with the highly trafficked search pages that actually significantly speed those pages up in the last 2 weeks. So ongoing effort. We feel like we're ahead of the market in general, and we want to continue to be aiming towards being well ahead of the market in terms of the speed -- the performance and speed of our site.

[Ivor Ries, Senior Analyst]

I just did -- last week did some test pages on the mobile, and I was getting T-shirt page download sort of around 4 to 5 seconds. Is that sort of the average you're running at, at the moment?

[Barry Newstead, Chief Operating Officer]

I mean, it's hard to give you sort of a general average, but I would say that I think your experience is probably reasonably -- which is pretty close to what we are seeing as our benchmark, under 5 seconds, which is worth noting that we -- the prior experience was probably more like 10 to 15 seconds, number one. And number two is under 5 seconds is really competitive with the best e-commerce and consumer websites in the world.

[Operator]

Our next question comes from the line of [ Weiming Xia ] from [ MS Capital ].

[Unknown Analyst]

Two questions on the Content Partnership. The first one is your current commercial model, you pay 20% [indiscernible] to the artists. Under that Content Partnership, does that total payment go up? Because I guess you need to start paying the content owner as well, right? And the second question is, does that mean that you would not have any litigation from those IP infringement in the future?

[Barry Newstead, Chief Operating Officer]

Can you just repeat the second part, if you don't mind?

[Unknown Analyst]

Just in the future, would you just not have those litigation about your artist using other people's content?

[Barry Newstead, Chief Operating Officer]

Yes, okay. I'll take both of those. So in terms of the economic relationships, we've all -- we would be introducing some payment licensing fees for the rights holders. We see that as likely multiple ways in which that is going to -- could play out. Our preferred way is that we believe that this content will actually generate -- have the ability to generate the slightly premium pricing in the market. So what we hope is it will be passed through to consumers. That said, the second approach is really that the artists and the rights holders will share in the artist margin. So those are the 2 ways in which we're looking at it at the moment or some blend of those 2. We're not seeing -- we're not viewing it as likely to interrupt Redbubble's [ take ] as we see it going forward. And the conversations we've had to this point with the rights holders indicate that we're -- indicate that those assumptions are reasonable. In terms of the effect of the Content Partnerships on what I think you're referring to as content moderation and takedown, indeed, we expect that over time, we will be able to -- we are changing the relationship we have with some of these content providers. We may not leave the same content up, but the whole idea here is that where there's interest in certain pop culture names or brands and whatnot, we'll have -- we'll continue -- we'll have content that is really relevant for users. And it will be a situation where rights holders, artists, Redbubble are all kind of aligned around the -- our interest in the sustainability of that content.

[Unknown Analyst]

On the last question, just a follow-up. So the commercial model, would that be percentage based on how much you actually sell out? Would that also involve like a fixed fee type percentage? Which one would that be?

[Barry Newstead, Chief Operating Officer]

So the core model will be related to percentage of sales. That said, we are likely to enter some minimum guarantee agreements with some brands. So with the idea being obviously that we would have to commit upfront. But we're clearly being thoughtful and conservative about the kind of commitments that we make on the front end.

[Operator]

[Operator Instructions]

[Martin Hosking, Co]

Thank you, everyone. I think we might wrap it up then.

[Operator]

There are no questions, please go ahead.

[Martin Hosking, Co]

Thank you. That's a wrap. See you all next quarter.