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Thank you for standing by, and welcome to the Redbubble Limited Investor and Analyst Conference Call Q3 FY 2020 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Gordon, Company Secretary. Please go ahead.
Good morning, everyone, here in Australia, and good afternoon to our U.S. investors. I'm Paul Gordon, Company Secretary for Redbubble Group. Welcome to this investor call in relation to Redbubble Group's third quarter FY 2020 business update. With me on the line, I have Redbubble Group interim CEO, Martin Hosking; and CFO, Emma Clark. The key information for today's update is in the ASX announcement and supporting slides released to the market this morning.Please note that the financial information in the release documents and in the upcoming call from internal management reports and have not been subject to audit. Martin and Emma will now speak, and then we will open up the floor for questions. This session is also being recorded.Now before we start, I would like to call your attention to the safe harbor statement regarding forward-looking information in our ASX release. That safe harbor statement also applies to this investor call.Now I will pass on to Martin.
Thank you, Paul. Hello, again, everyone, and I hope you're all staying healthy and well. Across all 4 offices, our employees have continued to work from home. I want to thank each of them for their dedication and commitment during this time. I also want to thank our artists and the incredible talent and creativity that they are sharing. They are making a meaningful contribution to our society during this challenging period of human history. Thanks also to our many partners in licensing, fulfillment and shipping who are going above and beyond.I'm pleased to say that the Group's business operations and supply chain continues to operate normally. This is a testament to the robustness of the supply model and the diversification benefits flowing from localization. We are watching the external situation closely and contingencies have been reinforced to ensure continuity of supply.Amidst the uncertainties of COVID-19, I'm pleased that we are able to deliver top line growth for the group of 25% year-to-date. The third quarter started strongly, and then we saw the impact of the coronavirus on consumer sentiment. Towards the end of March, sales were rebounding at Redbubble and TeePublic, along with much of online retail. The net of all of this was a good result of 20% topline growth in the third quarter.We have seen external positive trends continue into the month of April. Both marketplaces have shown as consumers have moved more online -- shown strength as consumers have moved more online. RB Group employees have demonstrated that they can work effectively from home and deliver against important strategic and tactical priorities. The group's generally low price point and differentiated offering is proving to be attractive to consumers. This is so during the COVID-19 crisis and also positions us well for the likely recession. Emma will discuss the trading performance in more depth and will also talk about the initiatives that we undertook within the business to ensure we are responding to current consumer behavior and capturing opportunities.While we are relatively well positioned for the immediate situation, it's also important we continue to invest to emerge strongly. In particularly, we're adapting learnings from TeePublic to Redbubble. We are seeing impact in a range of areas, including user acquisition and SEO. Learnings in paid marketing are also being shared across the group, with both marketplaces experiencing improved marketing efficiency. Redbubble's strong presence in Europe and supply chain optimization is being leveraged by both marketplaces.The business is recommitting to the artists as the prime instigators in the marketplace. Both marketplaces have always recognized the centrality of the artists to creating value and we're now moving towards making this a shared group activity. This involves leveraging the expertise and systems found in TeePublic as well as proprietary technology built in Redbubble, in particular, the IP Protect tool. We want to ensure as a group that we identify the artists who are creating legitimate and sellable content and serving them with relentless determination. This orientation is expected to drive immediate returns and long-term impact. It is foundational to good consumer marketing, search engine optimization and brand building.For the next few months, establishing solid systems for artist acquisition, retention activation will be a key priority. In addition, the group will be progressing work in user acquisition and improving the customer experience. All these activities have an impact on short-term growth and position us well in a recessionary environment and beyond.We, of course, also need to resource activities with medium- and longer-term impact as they are critical to maintaining and extending global leadership. The RB Group will expand the product range, which delivers both immediate and longer term benefits. We will continue to grow our content partnerships and license fan art segment. This is increasingly a group activity with strong longer-term potential. In addition to our work to improve customer loyalty and develop solid brand propositions is underway. This activity is a strong counterpart to work on transactional customer improvements. A good first experience is the foundation for good second and later experiences. In certain segments, e.g. U.S. college campuses, Redbubble has a good customer brand proposition. We're committed to finding more such segments and building brand loyalty for both marketplaces.Finally, I'd like to welcome Ben Heap as a new independent nonexecutive director to the Redbubble Board. Ben is an experienced and professional director with a portfolio of roles including at The Star Entertainment Group and Colonial First State Investments. He brings to Redbubble extensive expertise and experience in a range of sectors including retail, technology, asset management and venture capital. We are pleased to have such a high caliber appointment to the Board.And now over to Emma.
Thank you, Martin, and good morning or afternoon to everyone. Whilst the external environment continues to shift and evolve, Redbubble Group has demonstrated robustness in a very volatile situation. As we highlighted in our last business update, up until the emergence of COVID-19 in mid-March, Redbubble Group's third quarter had been strong, with top line growth trending around 25%, noting that in the third quarter TeePublic was fully included in both the current and prior period numbers for the first when measuring year-on-year growth rates.From the second week of March and coinciding with the spread of COVID-19 globally, we began to see changes in demand driven by immediate consumer reactions. This negatively impacted our growth rates for a couple of weeks before we saw a rebound in sales along with general online retail activity. The combination of these factors resulted in a third quarter top line growth rate of 20%. This is a good result, and we are proud that the group continues to deliver growth in the current environment.We have also maintained overall financial discipline with gross margin strengthening to 38.5% for the quarter as a result of reduced promotional activity, combined with continuing efficiencies within our fulfillment network. Paid marketing sat at the higher end of our range at 12.6%, which was part of our deliberate strategy to swing Redbubble dollars away from promotions and into paid marketing. This is expected to trend lower in the coming quarter. Operating expenses grew at 29%, which is a high headline number, but is somewhat impacted by the weakened Australian dollar as constant currency OpEx growth was only 21% in the third quarter. The remaining growth is largely related to TeePublic, in line with our previous statements around the need to continue to invest in their high-growing marketplace. As Martin mentioned earlier, the positive trends that emerged near the end of March have continued. In April, the group has seen significantly stronger sales growth. However, it's too early within the quarter to give a number which can be relied upon for an indicative trend, particularly given the volatility of current circumstances.The group also continues to enjoy currency tailwinds. We have also recently seen improvements in the efficiency of our paid marketing spend as our competitors withdraw from some online advertising channels. In light of these recent sales trends, we have deferred the move to a 4-day week for Redbubble employees. All other previously announced cost control measures have taken effect in the coming quarter and will reduce the current operating expense base by approximately $2 million on an annualized basis.Over the past month, the business is demonstrating that it can respond swiftly to emerging trends in consumer activity and online shopping to capture sales. We have undertaken co-promotions with fulfillers to drive win-win outcomes for the marketplace as well as supported artists who were no longer able to sell on competitor sites, as Merch by Amazon and Teespring closed or minimized their U.S. operations. In addition, face masks have been launched on the TeePublic marketplace today and will be available on the Redbubble marketplace within the next week.The group's recent sales uplift is most prominent in product categories such as wall art and home decor. From a geographical perspective, we are seeing strong performance from the U.S., Canada, Australia and also in the United Kingdom. We will continue to closely watch how the situation is changing in our core geographies and monitoring any changes to overall consumer demand. Given ongoing uncertainty around COVID-19, it is worth reiterating that the group will not be providing forward-looking guidance.We remain confident that we have a solid financial position. There are a number of levers that the business can utilize to respond to changes in macro conditions, and there is sufficient balance sheet strength to meet ongoing business needs. The business remains focused on both short-term execution consistency and delivering on long-term growth investments. Whilst isolation and lockdown measures remain in place across many parts of the globe, the group expects to continue benefiting from consumer reliance on online platforms and the uniqueness of our differentiated offering. However, we do recognize that the situation is fluid and evolving and ultimately unpredictable, so there may be further variability in business performance. Thus far, the Redbubble Group has been responding to and managing the situation in agile and pragmatic way, and we are cautiously optimistic about our position within the current set of circumstances.Thank you. And we will now open up the line for questions.
[Operator Instructions] Your first question comes from Grace Fulton with Goldman Sachs.
First, I was just hoping to dig a bit further into your comments on April so far. So appreciate your comment that it's still quite early in the quarter. Just what you said that you've continued to benefit from increased online activity with stronger sales growth. That stronger sales growth comment, is that relative to the third quarter as a whole or relative to where you exited the third quarter? And is it consistent across both marketplaces.
Thanks, Grace. So we're not giving an April growth number as I said. In terms of the exit rate, as we had said both today and also in the last business update, we saw sales start to rebound in the last week of March. We have seen that continue into April and through April to date. So that is the rate at which sales are currently growing, which is in excess of both the year-to-date growth rate and the quarter 3 growth rate.
And I think also you asked about both marketplaces. Yes, we are seeing it across both marketplaces.
Okay. And just in terms of the third quarter, can you give what the marketplace revenue was for Redbubble and TeePublic separately and what the constant currency growth rates were?
We have decided to -- as we've -- once again, as we've said previously, we're going to be producing consolidated results going forward rather than giving by brand marketplace breakdown. We gave the by brand marketplace breakdowns for the first year to make sure that the market understood what we had purchased and what it was doing. That being said, we're managing it much more as a consolidated entity now. And so we think providing consolidated growth rates is more appropriate.What I will say is that the growth rates of both brands as they exited Q2 in terms of the impacts that the quarter had on both brands, those impacts were consistent to both brands. So there hasn't been a divergence in the performance of them.
Okay. And just could you maybe go into a bit more detail on the supply chain? When I was looking at the 2 websites earlier in the week, I thought there were some comments about some shipment delays in the U.S. and some of the fulfillers being impacted by stay-in-place-ordinances. Could you maybe just comment on that, if there's any sort of gross margin pressure or from some fulfillers not being to operate for a period of time?
Yes, sure. I mean I think the supply chain, the level of management and oversight that we've had to do with that through the quarter and right even through to today has been, as you can imagine, quite extreme. We're very, very proud of how well it's held up. There has been periods of time within March where shelter-in-place meant that a particular fulfillment location maybe had to close down for a couple of days but then was back up and running. Most of them were able to continue running under the essential provision of goods, provisions within those shelter in place ordered in various locations. So at all time through the quarter, we had no more than 1 fulfillment location out of 32 down at any point in time. So we were pretty much almost 100% up and running the entire quarter.The delays that you referenced in terms of looking at our site is, we are seeing in some of our geographies that there are some shipping delays. We're making sure that with our customers, when they purchase on our site, the expected delivery dates that we're putting on-site are reflective of those changes, which are occurring daily so that the customer expectation continues to be matched with the actual experience that they get. We have found that, that has not impacted in any adverse way the volume of our sales.
Yes. And clearly, the localization of supply means that the -- in general, those shipping delays are as minimal as can be because we're not shipping much between continents or between countries. We do have some product lines, which we do. In which case, there will be longer delays. But in general, the local fulfillment is helping to moderate that impact of that.
Okay. And just sort of in terms of the partner program, just wondering, given the current disruption, how the pipeline is looking for that. Are you still able to engage in discussions with those right holders at the moment? Or is everyone sort of holding steady for the moment and will be a little bit later with those discussions with you?
Yes. I think you've captured that fairly well. The conversations and negotiations which had started prior are continuing. But there is a slowing down of the rate of engagement with the partners. It's not -- it doesn't have a material impact on the forecast revenue from that because it wasn't, in the immediate period, a material part of our revenue stream anyway. So we are seeing material gains in sales in a number of other really important initiatives. So yes, it has slowed, but it's not a material impact.
Your next question comes from Ivor Ries with Morgans Financial Limited.
Just 3 questions if I may. First, I wonder if you could share with us the average order value for the quarter. Second question is, if you could share with us the mix between paid and organic as a share of the revenue? And also if you could share with us what the app contribution to growth was in the quarter?
Sorry, I was on mute. So yes, in terms of paid/unpaid for the third quarter, noting that this is on a last clip basis, we've had previous conversations about attribution model. Unpaid was 62%. Paid was 38%. That's across the entire group. The app continues to roll along and grow. We're quite happy with how the app is going. We're effectively finding -- it's obviously the amount of traffic that it represents on a daily basis does move around a little bit. But it is continuing to grow in line with the rate of growth that it had over the last couple of quarters.And then the third question, sorry, Ivor?
It was average order value.
Average order value, so average order value does continue to grow as well, though, some of that -- on a floating basis, some of that is obviously being impacted by the currency tailwind there. I'm just trying to actually find the number on my sheet.
While we're doing that, as a group -- because TeePublic doesn't have an app. When we talk about the app contribution, it will, I mean, start reporting numbers in the group. We'll see that is less over time because TeePublic doesn't have an app.
Yes. Am I correct in saying that you would have had some contribution this period from having an Android app? Is that right? You rolled out Android app in this period.
It was rolled out in the prior period. And yes, yes. So our average order value, Ivor, just giving you that last piece of data, is currently tracking around the AUD 44 mark.
Your next question comes from Owen Humphries with Canaccord.
Just given the amount of people that have been stood down, can you just talk through the engagement you've seen from your artists? Are you seeing a pickup in amount of art or content on your website? Or just -- and then the net present value from -- progress in content partnerships in a very short time period? But just I was thinking about how your content aspirates through this period?
Yes. I think the answer is, absolutely, Owen, we are seeing highly engaged artists. I think just to give you a little bit more flavor to the comment and when I was talking about strategy, our work with the artists is to make sure that a lot of that learnings which have come in TeePublic about developing a more sales-related relationship with the artist, actually having them into a sales and marketing platform is seen as critical to engagement with the artists but also to help them to sell more. So TeePublic had developed very strong systems there, and we're elevating those to leverage them across the group.One measure of the engagement of the artist is that we -- TeePublic launched, as Emma mentioned, face masks today. We're launching them later in the week. In the case of Redbubble, we had a new template for the face mask. TeePublic did disclose it differently. But we had, had within the first few days of launching that new template over 20,000 artists have created for that template.Going forward, we want to differentiate between more clearly with you the artists which really matter and contribute because it's a relatively small number of the total artist group, which make the most contribution. And our work is around identifying those people earlier in the pipeline. We will be reporting more numbers on those artists who make the most material contributions rather than the total group of artists and total group of content. So I can defer answering the specific question on the number of artists this quarter, but we will be providing more detail on that at the end of the year and half year with the results.
Yes. I would simply just add to that, Owen, that felt like the amount of selling artists is still growing very strongly. So we have -- we definitely are not seeing any negative impact of the current situation on artists uploading and selling. We also more recently, and won't necessarily appear till the current coming quarter numbers, but as I mentioned, which you know, Merch by Amazon withdrawing from the U.S. and Teespring minimizing some of its U.S. operations. We've proactively reached out to those artist communities who aren't onboard with us already as an acquisition strategy to bring them onboard and be able to support them through these times.
Okay. Good one. And the last question is just around the cost base at both above and below the line, excluding marketing. So you've deferred the implementation of the move to 4 days, which must mean that growth is strong, and you guys have liked that. But maybe are we expecting that like -- that number to either normalize here -- obviously, you said $2 million annualized cost reductions coming through. But are we on a hiring freeze now? Are we flat line growth? And are we expecting that number to be 0 growth for the next 6 to 12 months instead of negative?
Well, obviously, like it's incredibly volatile situation, so I certainly, wouldn't want to commit to the next 6 to 12 months because we really don't quite know exactly what that's going to look like, Owen. But what I would say is, all the other previously announced cost measures did include hiring freezes, and they're all currently in place. So we, at the moment, would be holding our expense base as largely flat, and we would have the benefit of the $2 million in savings off the current cost base annualized, which start to kicking in the coming quarter -- will -- actually will kick in, in the coming quarter because we actioned them all effectively from April.
Yes, Owen. And the strategy, which we're announcing, and while it sounded like it was a lot in it, is actually a lot more focused than previously, and it's really about leveraging between the 2 marketplaces. So we are expecting, as a consequence of that, to be able to hold operating costs quite steady.
[Operator Instructions] Your next question comes from Tim Piper with RBC.
I just had a question on the marketing. Sorry if I missed any comments around this. But just over the past month or so in the month of April, just around marketing efficiency, just sort of heard some companies talking about the lesser Google AdWords competition and things like that. How has that sort of skewed your paid versus unpaid traffic? And what has it done to your sort of marketing efficiency levels through the month of April?
Yes. So I did mention that in part of my speaking notes. So for the quarter, the third quarter, it was 12.6%, which is higher than what we would normally do, as we swung more into paid marketing, particularly when coronavirus was first starting to appear. That being said, we are seeing increased marketing efficiency. So from the last week of March, we saw a lot of things shifting our business, and one of them was that margin efficiency started to improve. And we are seeing less competitions for online auctions. We're seeing both strength in organic and in paid. So we're seeing it across both areas of our business. But once again, it's a big but around current trends holding for the quarter. But at the moment, we are definitely seeing that we're very efficient, and we're spending less to get a better outcome.
Okay. Sure. Got it. And just secondly, around your gross profit margin pre acquisition costs, that's a nice move higher you talked about less promo activity and scale. Can you kind of talk through the difference between those 2 factors in that uplift? How much is that being driven by your scale benefit versus the shift -- slight shift away to marketing compared to promo?
It's probably more weighted towards promo. So I say promo -- lack of promo activity would probably be -- is the #1 reason for the shift upwards. And we're still getting the tailwind of our localization strategy and our diversified fulfillment network and our ever-increasing volume. That's obviously the second factor. But I would say it's probably -- it'll be roughly a 2/3-1/3 split in favor of promotional activities.
[Operator Instructions] Apologies, I will now hand back to Mr. Hosking for closing remarks.
Okay. Well, thank you, everyone. I look forward to speaking to you at the end of the year, and please keep well and keep safe.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.