Earnings Transcript for RBL.AX - Q2 Fiscal Year 2023

Operator: Thank you for standing by and welcome to the Redbubble 1H FY 2023 Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Virginia Spring, Vice President, Investor Relations. Please go ahead.

Virginia Spring: Good morning to our Australian participants, and good afternoon and evening for those joining us from the Northern Hemisphere. My name is Virginia Spring and I am responsible for Investor Relations at the Redbubble Group. With me today, I have the Redbubble Group CEO, Michael Ilczynski; and Interim CFO, Mark Hall. Mark will provide an overview shortly and we'll then open up the line for questions. The key information for today's call is contained in the ASX announcement and investor presentation released to the market this morning. I would like to call your attention to the safe harbor statement regarding forward-looking information in our ASX release. That safe harbor statement also applies to this investor call. This session is being recorded, and a transcript will be released to the ASX. I will now pass over to Michael.

Michael Ilczynski: Thank you, Virginia, and welcome to everyone joining us. I'd like to start with an overview of our results. In January, we released our preliminary, unaudited results. These have not changed. The group delivered marketplace revenue of $289.3 million for the half, which was in line with the prior corresponding period. We saw marketplace revenue accelerate over the half and particularly in the second quarter, with the second quarter 3% higher than the same quarter last year. This growth was driven by TeePublic, which had its largest quarter to date, surpassing its previous high at the peak of the COVID-19 pandemic in late 2020. We also saw continued strong demand for our largest product category, apparel across both marketplaces. As we highlighted in January, customers appear to be particularly value-driven during the half, which drove strong promotional intensity throughout the holiday season. In this environment, we adjusted our promotional activities to attract customers and deliver revenue growth. This included lifting our number of promotional days and experimenting with a number of new promotional offers. These initiatives enabled us to compete to win the customer and helped deliver revenue growth. However, when combined, the impact to our margins of some of these initiatives was not commensurate with the total uplift generated. And as such, we are refining the use of these initiatives to better manage our margins going forward to ensure we are maximizing our GPAPA dollars or our contribution dollars. In January, we announced that we've begun to implement a cost reduction program to reduce our operating expenditure. This was primarily in response to what we saw ahead for the group. We expect the consumer landscape to be challenging in calendar year '23, and we want to ensure our business has an appropriate cost position for this environment. We have also refined our near-term priorities to focus on what will have maximal impact on the key elements of our flywheel, content, customers and margin in order to accelerate our return to cash flow positive, which we are aiming to achieve by the end of the calendar year. Moving to Slide 4; I wanted to start this section by touching on the macro tailwinds, which we have discussed before and have contributed to the group's growth. We believe that these trends will continue to benefit our business over the long term and that the potential of the group remains enormous. Over the past decade, we have seen a steady increase in the penetration of online shopping, which was accelerated by the COVID-19 pandemic, with many individuals trying online shopping for the first time. I, like many others expected to see a plateau in online demand following this acceleration. Instead, in many categories, we have seen a pullback and that impacted our ability to generate enough of a return from the investments we've made over the past two years. However, buying goods online has become a more accepted practice among a much broader cohort of society, and we expect e-commerce penetration will normalize at a higher level than before the pandemic in the near future. The group is also a beneficiary of evolving consumer preferences. Today's customers are often looking for products which express their individuality, personality and passion. Rather than wanting mass-produced products, they are seeking out items, which mean something to them. Across our marketplaces, individuals can choose from tens of millions of designs on more than 100 products to create something truly unique that expresses who they are. Customers are also increasingly aware of the impact of their decisions on the planet and are wanting to make environmentally responsible choices. Since its inception, Redbubble has sought to deliver social good and maintain a small environmental footprint. Print on-demand manufacturing has a relatively low environmental impact by limiting inputs and reducing waste and therefore, is strongly aligned with the Gen Z and Gen Y purchasing preferences. Moving to Slide 5. The group has benefited from these tailwinds since its inception 16 years ago. From humble beginnings in Melbourne, Australia, the group has now grown to be a truly global business. This half, the group shipped 5.8 million orders to customers in almost every country of the world. In 2018, we acquired TeePublic, which really transformed the group. The marketplaces are similar in their offerings, but have some notable differences, which has been a positive for the group. TeePublic's target consumer market is a bit different to Redbubble, primarily Gen Y who were 26 to 40 and their revenue is much more concentrated around apparel sales to U.S. consumers. Redbubble's target market is Gen Z households, so 12 to 25 year olds and their parents. Revenue is spread across a range of products, including apparel, homewares and accessories, and more than 50% of the Redbubble Marketplaces revenue is generated outside the U.S. Having the two marketplaces has proved beneficial for the group in recent years in a changing consumer landscape as each marketplace is at a period where it has outperformed the other. During the COVID-19 pandemic, there was strong demand for homewares, which benefited Redbubble. More recently, we have seen demand for apparel in the U.S. remains strong, benefiting TeePublic. Their relative performance provides valuable insight for the group and increasingly, we're implementing successful initiatives from one marketplace onto the other. On Slide 6, both marketplaces operate a flywheel, where improving one element creates a positive impact on another. The content that artists sell attracts customers and as customers purchase that enables the fulfillment network to scale, lowering costs and attracting additional customers. This increase in customers attract small artists, encouraging -- sorry, creates more artist revenue, encouraging new artists to the platform. They add more content and thus more customers and the cycle continues. For many years, we have spoken about the benefit of the flywheel. We continue to believe that ensuring the flywheel is operating efficiently will enable us to deliver long-term growth. We have narrowed our focus for this calendar year on the areas we believe will have the most impact and generate a significant return in the short term, so across content, customers and margin. More specifically, we are focused on

Mark Hall: Thank you, Michael, and hello all. I'll start on Slide 16, and I'll start with an overview of the group's profit and loss statement for the first half as well as the second quarter. Marketplace revenue was flat for the half, largely due to a softer performance in the first quarter. As Michael mentioned, we adjusted our promotional activities during the half in response to increased competition. And as a result, we saw revenue accelerate. Pleasingly, in the second quarter, revenue was 3% higher than the prior corresponding period. The increase in promotions did have an impact on our gross profit, which decreased 6% this half compared to the prior corresponding period. Our GPAPA result was also impacted by higher promotional activity as well as an increase in paid marketing. Importantly, as Michael mentioned, we have refined our use of promotional activities to better protect our margins even if this comes at the expense of revenue growth. Ultimately, we are very focused on GPAPA dollars to accelerate our return to cash flow sustainability. Our January results are encouraging in this regard. In line with the group's guidance provided in August, operating expenditure increased this half. However, since then, market conditions have changed, and as a result, we have decided to significantly reduce our cost base, once again, consistent with our aim of accelerating our return to cash flow sustainability. Moving to Slide 17 on the product split. We provide a breakdown of gross transaction value by product category. Having a broad mix of categories enables artists to maximize their selling opportunities as consumer preferences and needs have changed over the last two years. We are pleased to see double-digit growth in the apparel category this half. This was the largest category for the group and has grown over the last five years. This was offset by some weakness in more discretionary categories like artwork and homewares. We have highlighted the accessories category in this chart. This category includes face masks, which experienced a surge in demand during the COVID-19 pandemic. The benefit from these sales is now almost completely cycled and accessories have returned to a more normalized level. Over the last few periods, we have been breaking out contribution from face masks to help investors understand the group's underlying performance. We have provided this information in the appendix, but as those masks are now fully cycled, we don't anticipate providing this breakdown again. Moving on to market split, Slide 18. We have provided an overview of revenue by market. North America remains our largest market, contributing 72% of gross transaction value. Pleasingly, this market remained resilient during the half, growing 4%. Turning to Slide 19, cost reduction initiatives. In January, we announced that we're reducing our cost base by between $20 million to $25 million on an annualized basis. To achieve this, we have implemented three initiatives to accelerate our aim to return to cash flow sustainability. First, after taking a detailed review of our organization, ensuring we did not remove roles, which would have a material impact on our ability to deliver our near-term priorities, we made the difficult decision to reduce the Redbubble Marketplace workforce by approximately 20% or 54 roles. This represents around 14% of the group's total workforce. This did not take into account a number of vacant roles, which we had initially paused in the first half and now canceled. Combined, this represents approximately $12 million in savings compared to initial expectations in August. This restructure is now complete and the cost reduction is locked in. Our group headcount as at 31 January was 325, combined across both marketplaces. Second, we suspended the brand awareness project. We are pleased with the initial results of this investment, and we continue to think in the long term, investing in brand is an important course of action. However, we do not think that this project will generate commensurate return until the consumer landscape improves. Therefore, we could not justify our ongoing investment in this project in the near term. Again, investment has ceased and savings locked in. Third, we are reducing our expenditure, including travel, consultancy, software subscriptions and other incidental overheads tied to the lower staff numbers. We are already seeing the benefit of our cost-saving initiatives and accordingly, we reduced our operating expenditure guidance by $10 million to between $125 million and $135 million. The full benefit is expected to be realized from the beginning of FY '24. As I move in to cash Slide 20. As I have said, we are very focused on accelerating our return to sustainable free cash flow, and we'll continue to implement a number of initiatives and levers to achieve this. At the end of the half, our closing cash balance was $97 million. Due to seasonality of cash flows associated with high holiday sales, the cash balance reduced over January to $44 million as we made payments to other marketplace participants. As per our normal seasonal trends and given our profit profile, we expect our cash balance to gradually decline until the first quarter of FY '24 before stabilizing. Our aim is to return the group to cash flow positive by the end of this calendar year. And what we mean by this is that we aim to increase our operating EBITDA to a level to sustain our ongoing free cash flow. Thank you, and I'm going to now hand back to Michael.

Michael Ilczynski: Thanks, Mark. Moving to Slide 22. As Mark discussed, we've adjusted our priorities to accelerate our return to cash flow positive with the aim to achieve this by the end of the calendar year. To do this, we needed to reduce our operational expenditure and now increase marketplace revenue and improve the group's GPAPA margin and absolute GPAPA dollars. As Mark highlighted, the initiatives we announced in January to reduce operating expenditure have largely been completed. Our focus now is continuing to maintain cost discipline while increasing revenue and importantly, driving margin improvement across both businesses. On Slide 23, for calendar year '23, we are highly focused on a specific set of priorities that can increase marketplace revenue and improve our gross profit after paid acquisition. For TeePublic, we're looking to build on its strong performance during the first half. As I touched on earlier in my presentation, TeePublic's revenue was concentrated in T-shirt sales in the U.S. and we see real opportunity to diversify its revenue into other apparel categories. The marketplace is also focused on increasing repeat purchases and improving margins by optimizing pricing and promotions. Across both marketplaces, improving search and discovery is a focus as getting relevant content in front of customers is so important to drive engagement and revenue growth. While using AI could have a huge positive impact on the Redbubble marketplace, we also see real benefits for TeePublic in applying this type of technology across their content library also. Within Redbubble, we are also focused on improving the on-site experience to increase transactions which means we will make the purchasing experience easier and more engaging. And importantly, we are very focused on introducing new monetization opportunities to Redbubble that better balance the incentives and distribution of value between artists, the customers and the marketplace. This is an area of significant opportunity and we'll have much more to say about this in the coming months. Finally, before opening up to questions, our guidance for this financial year. In January 2023, the group revised its FY '23 guidance given the Redbubble Marketplace's performance in the second quarter of FY '23 as well as initial January trading. In this environment, we have remained focused on optimizing our price, promotional activity and paid marketing to maximize GPAPA and our GPAPA margin improved significantly in January as a result. Going forward, we will continue to focus on maximizing GPAPA. Due to this approach, in addition to continued softness in demand, particularly in our largest market, the U.S. and U.K., we now expect the group's FY '23 marketplace revenue to be slightly below FY '22. Our FY '23 GPAPA guidance is unchanged, and we continue to expect the group's FY '23 GPAPA margin to be higher than the first half of FY '23, but below FY '22 GPAPA margin. In August 22, we forecast the group's FY '23 operating expenditure to be between $135 million and $145 million. Due to the cost reduction initiatives announced in January, which are now largely implemented, we expect FY '23 operating expenditure to be between $125 million and $135 million. This does not include one-off restructuring costs of approximately $2.1 million in the third quarter of FY '23 related to these initiatives. Thanks very much. I'm now happy to open up the lines for questions.

Operator: [Operator Instructions] Your first question comes from Sophie Carran with Goldman Sachs. Please go ahead.

Sophie Carran: Just first, just on that guidance and the change to the guidance for this year. Can you give a little bit more color around what you've seen since the last update that's seen that top line guidance revised down. And then I guess, reconciling that with your comments around the second quarter being a bit of a step up versus the first quarter, please?

Michael Ilczynski: Yes. Thanks, Sophie. Michael. Here. Look, 2 things on the change in guidance. Number one, this really important to emphasize is that the focus now for the group has really been -- is really on maximizing our gross profit after paid acquisition dollars. And so what that means is we've adjusted our promotional strategy, adjusting our paid marketing to make sure that we are absolutely maximizing gross profit after paid acquisition, which can come at a bit of a cost of revenue. As we talked about in the first half, we're very focused on making sure that we would win the customer. And sometimes that meant that your paid marketing, your promotional initiatives moved past the point of profit maximization. We've adjusted that. And so with our focus over the last five weeks -- with that new focus implemented, that has meant that as we're focusing on our GPAPA, it has some impact to our actual top line results, but we think that's absolutely the right call. And in addition, though, we've had an extra four weeks of trading, just to be able to see that softness that we alluded to in the market coming out of holidays, particularly in our largest market of the U.S. and the U.K. So when we combine those two factors, that's really -- they're the two things that are driving that change in guidance.

Sophie Carran: And then, I guess, on the outlook slide and just on the calendar '23 priorities. With that -- in that context, I mean, how do you reconcile the marketplace revenue growth with also then the cost cuts and then that focus on GPAPA margin. And then, I guess, your thinking around sort of a more medium-term pathway to scaling the business with this new cost base.

Michael Ilczynski: Yes. Thanks, Sophie. Look, as I said, our focus across both businesses is on maximizing those GPAPA dollars. And the two ways is we can grow marketplace revenue and/or grow the margin that we're achieving that revenue. The initiatives that we've got across both businesses are split and focused on doing those 2 things. . So we do have some specific initiatives that are absolutely focused on how do we grow that top line marketplace revenue. And then secondly, we have a number of initiatives focused on how do we do that at an improved margin. So when we talk about our guidance moving forward, it's a combination of one, the focus on absolute GPAPA dollars; two, the impact that we're going to -- we think that we're going to get from those initiatives. But then third, putting that into the context of the consumer environment that we're in together. So when we combine those things, that gets us to our guidance and our forecast for the rest of the financial year.

Sophie Carran: Great. And then just 1 final question from me around the return to cash flow positive. Can you talk around what you're assuming on the top line and the demand environment that are required to return to that cash flow positive position? And then what other levers do you have to pull if you see a further deterioration in trading conditions?

Michael Ilczynski: Yes. Thanks. So we're not going to talk about exact sort of financial year '24 forecast. Obviously, we've made that forecast -- we've made that aim that we've got within the current environment that we're seeing. So that -- we're not assuming a massive increase in consumer demand over the 12 months ahead. But importantly, we're also not assuming a significant deterioration from what we're currently seeing. So I think that's the important first context is that we're assuming a relatively consistent level of demand from what we're seeing at this point. And then secondly, though, it's the right question. We do have a number of levers at our -- in our hands if we need to have talked about and we've shown and ability to move on cost if we need to. We've also shown an ability to adjust our pricing and promotional mix, et cetera, to adjust on revenue or margins. So we do believe that we've got a number of levers at our disposal, if need be.

Operator: Your next question comes from Wilson Wong with Jarden. Please go ahead.

Wilson Wong: Can you just provide more details just around what's driving the reduced demand in the U.S. and U.K.?

Michael Ilczynski: Thanks, Wilson. What would be saying it's just -- it's very -- it's consistent with what we saw coming out of Christmas, but it's really maintained over the -- we're having those extra four weeks has allowed us to see those trends a little bit more. What I'd say is, it's there's an overall a bit lower in terms of search volume and the ability to -- for customers it's really consistent again with the product categories that we've seen. So it's nothing -- I mean, it's hard to put into specifics. There's no one thing that's particularly changed. It's just an overall slightly lower macro environment that we're experiencing. And it is different across markets. For example, we're seeing Australia actually perform pretty well through January. Countries like Germany actually performed pretty well also. But the U.S. and U.K. combined are our 2 largest markets.

Wilson Wong: Sure. My next question is around the GPAPA margin in January. Any indication you can provide, so where it sits, whether it's lower or upper end of that 18%, 22% guidance range?

Michael Ilczynski: Look, we don't want to talk to specifics, but we did think it was important to highlight that the focus of our strategy on maximizing our GPAPA dollars and improving our GPAPA margin, particularly with an adjustment to paid marketing mix and our promotional activities had a significant impact on our GPAPA margin in January across the group, particularly in Redbubble. So that's probably as much as we want to say on that.

Wilson Wong: Sure. And just on the longer-term marketplace revenue target, previously pointed out, where does it now sit just with the updated guidance?

Michael Ilczynski: Yes. Look, thanks, Wilson. We still believe in the medium-term aspirations that we put forward. We believe that the market size is there, the opportunity for the business. And importantly, the ability to scale and produce the sort of margin profile that we put forward in our medium-term aspirations. We absolutely remain committed to them as our aspiration that we want to achieve over the medium term.

Wilson Wong: Sure. And just my last question, perhaps for Mark, just around liquidity. With the $44 million net cash currently in the balance sheet. So how much runway and how much of a buffer you sort of say over the next 12 months or so?

Mark Hall: Yes. Look, I won't go into specifics about buffers, but a couple of comments I will make. One is our working capital cycle is quite favorable. So when we look at the month-to-month working capital, we get a cash upfront basically and the outgoing follow the month or two after that. That's an observation we have a natural positive cash flow cycle. And also, if you look at our liabilities where the immediate cash flows are coming out, there's about -- and that $15 million of those that aren't payable in the foreseeable future. They extend out beyond time. So we feel our liquidity because of that. And also we've got our focus on cost. So we've made some pretty substantial steps on that front to address that.

Operator: Your next question comes from Aryan Norozi with Barrenjoey. Please go ahead.

Aryan Norozi: Just a few questions for me. First one, can you just please reconfirm what you mean by cash flow positive. So is it EBITDA less -- is it operating cash flow less CapEx? is it post the pre-CapEx? Can you just give us a like-for-like number relative to what you've reported in the first half, so we just know what you're exactly referring to, please?

Mark Hall: Maybe I'll address that one. As I said in my section, we clearly iron out working capital movements. We have massive working capital movements during the holiday season post holiday season. And we certainly have seasonality in our yearly cycle of sales. So the way we're looking at it is we need to get our operating EBITDA down to a level that will sustain free cash flow going forward. So operating EBITDA is our focus. Clearly, when we look at the bigger picture, we need to -- beyond that, address capitalize development, et cetera. But the easier way to portray that is it's the operating EBITDA. So we've got our eyes firmly on the levers we tend to pull to get that down to a level that will sustain our free cash flow going forward. And the aim is to achieve that by the end of this calendar year.

Aryan Norozi: Okay. So there's $16 million of annualized capitalized costs. When you're saying positive cash flow, you're not including those costs, you're just looking at operating EBITDA as a proxy...

Mark Hall: No, no, we include all elements. We need to generate operating EBITDA sufficient to cover our capitalized development. But we look at all levers to achieve that.

Aryan Norozi: Sorry, just to confirm, what you're referring to is as free cash positive is after EBITDA minus your capitalized costs, which are annualizing $16 million. So after you've paid all that, you will be free cash breakeven or positive. Is that right?

Mark Hall: That's correct. But don't assume it will be $16.9 million going forward. We've addressed all elements of our cash flow and P&L.

Aryan Norozi: Yes. So that was my other question. So capitalize costs, how do we think about the number moving forward? Is it -- I think historically, it's been a percentage of the fixed cost base, which has been sort of [ 12%, 13% ] of your costs in your own business. How do we think about that number, please? .

Michael Ilczynski: Yes. Thanks, Aryan. So we don't want to give an exact percentage, especially forward into the next financial year. We haven't given any specific forecast. What I would say is, obviously, the major element of our capitalization is the capitalization of product development, which is driven by the size of our product development teams across the two businesses. And as we've talked about, we've made some pretty significant workforce changes over the past month, which will therefore have a pretty significant impact on that number.

Aryan Norozi: Perfect. And just around the revised guidance. So you've downgraded the revenue guidance to reflect partly the macro but also because you're focusing on optimization of profits and GPAPA. But the range that you've given has been the same, hasn't changed. So should we read into that since January, you last updated us that your GPAPA margin is actually tracking better than what you thought back then? What I'm at trying to get at is what we can see from the outside is basically you cut revenue guidance by a few percent. But has anything changed around the GPAPA margin since Jan as well? Maybe you're tracking towards the higher end of that range? Or can you just give us some color on that, please?

Michael Ilczynski: Yes, sure. Look, I don't want to add to the guidance that we've given. I think what we would say is, as we did say, I should say, as we did say is that we saw our GPAPA public margin, particularly in the Redbubble business improved significantly in January. And then secondly, the changes that we've made in optimizing towards GPAPA dollars as opposed to pure top line. While that does have an impact on our top line number, we don't believe that has a significant impact on our absolute level of GPAPA and therefore, absolute level of EBITDA or otherwise, it wouldn't be the right right decision to make. So I think you're reading into it the correct way, but I don't want to add any more specificity to the guidance that we gave.

Aryan Norozi: Okay. So basically, if you -- because you might have cut your revenue guidance, but given the strategy you're employing, the aim is to be sort of indifferent from GPAPA pure dollar perspective at least?

Michael Ilczynski: That's absolutely the aim. But I would just caution that we haven't provided any -- we've provided consistent GPAPA margin guidance.

Aryan Norozi: I'm sorry to hold the question. Just very last one. Just to confirm because it is an important point. If you make -- or if you spend hypothetically, $15 million of capitalized intangibles in next year, in FY '24, so your guidance basically implies an operating EBITDA of $14 million as well for the same number. Is that a fair comment hypothetically I'm talking about?

Michael Ilczynski: One, I don't want to comment on the hypothetical numbers. But what I do think is really important to focus on is that we have not said, just to be crystal clear, we have not said that we're going to be cash flow positive over the entire next calendar year -- sorry, over the entire financial year. What we've said is that we aim to be sustainably cash flow positive by the end of this calendar year, moving into calendar year '24. So I just want to be really, really clear on what we -- what our timing is. Our timing is, as we move through November, December, January, February, March, when we normalize for our working capital movements, we want those months and then moving forward month-on-month to be at a cash flow positive position. That's what we're aiming for, as Mark talked about. First step is to get our operating EBITDA to a position where it's enough to sustain our free cash flow position. And we are aiming to do that on a -- normalized there's working capital movements that happened a lot over that period, but that's what we're aiming for.

Aryan Norozi: But given your CapEx spend is so large on an annualized basis, even if it's a cut, it still implies a pretty large positive EBITDA number to just get you there without working capital movements, just operating EBITDA less CapEx to be breakeven, it needs to be a pretty relatively larger sort of swing in terms of positive EBITDA. I'm just wondering if I'm missing anything or am I misinterpreting your comment because what basically my understanding is your guidance is operating EBITDA minus CapEx is cash flow breakeven for you guys. So that -- am I missing something?

Michael Ilczynski: No, no, that's correct. As I said, just portion that we're talking about that from a -- on a month-on-month basis moving into next calendar year as opposed to looking towards all of FY '24. We haven't given FY '24 guidance. We're talking about what our aim is. And our aim is to make sure that as a group, we're in a sustainable cash flow position from the end of this year moving forward.

Operator: Your next question comes from Owen Humphries with Canaccord.

Owen Humphries: Just a quick question. Just following on from the softness in revenue in Jan. Have you guys thought about new revenue initiatives to the group, like in the past, we've talked about leveraging the fulfillment network to third parties. We've also talked about or potentially have you thought about monetizing the supply side of the marketplace, the artists. Just talking through other ways that you could drive gross profit growth.

Michael Ilczynski: Thanks, Owen, for the question. What I'd point to is the last point on the slide where we talked about our focus in CY 23. So in addition to the initiatives that we've got underway to drive what I would consider our current marketplace revenue in GPAPA, we are also focused on new monetization opportunities for the marketplaces. . And so that's very much focused on how can we add additional monetization options to the marketplace that, one, provide better incentives to all the participants but also potentially provide a better distribution of value across the participants. So I'm not going to flag exactly what we're doing there. It's too early for us to say the exact initiatives, and these are what's coming out. But what I would point to is, when you look at a number of other similar marketplaces to us, you would see that those marketplaces generally have an additional set of monetization opportunities. So things like listing fees, things like participation in on and off-site marketing, things like premium placements for artists, et cetera. We don't have any of those on our marketplace. And there are obviously things that we're looking at, which we think would better balance incentives but also provide monetization opportunities. They are right things that we're [indiscernible]. And listing fees as an example, that both marketplaces have had a very much a 0 cost, 0 risk strategy for artists, which has been fantastic for driving scale. It's exactly what you should do when you need to reach scale. But now that we're at scale, particularly on Redbubble, most marketplaces would then look to focus on only having additional content that's really of high value. And using something like listing fees, which encourages is to only upload content that is really additive is a normal mechanism. It's something that we don't have. So you can imagine that that's an example of the things that we're looking at, without saying that that's something that we're going to be launching. But there's a number of those sort of opportunities that you can look to other marketplaces that the time is probably right, particularly on the Redbubble marketplace to be pushing hard on some of those opportunities during this calendar year.

Owen Humphries: Good one. And I guess the last question is, obviously, you're talking about the implementing some of the AI technology into the platform. I know the history here myself any way, we get lost in the content on the platform. Better tagging measures will improve the ability to find the relevant content to certain people. Can you just talk through some of the testing, whether conversion rates or anything that we can put a hat on around how this is impacting -- could impact the marketplace?

Michael Ilczynski: Yes. Look, thanks, Owen. And it is something that we're particularly excited about. It is a new technology. It's just come on leaps and bounds in the ability for third parties like us to effectively tap into these open source, large models and apply them. Look, we are particularly excited about the opportunity. We -- just to be crystal clear, we have not yet tested this on our platforms yet to out to consumers. So I'm not going to point you towards specific metric uplift yet. That is the exact step we're moving into literally over the next few weeks. What we have done, though, is we have applied this technology not just to a small corp but across the whole marketplace. So we know it can be done, as we've done it. We've also human reviewed samples of this test for accuracy. We have very confident in the accuracy and really what it can add, particularly in terms of increased relevancy and reduced irrelevancy which we know is a real bugbear for customers, for artists et cetera. So we're very excited about it. I'm sorry that I can't point you to a specific uplift yet. That's the testing and the learning that we've got to do over the weeks and months ahead of us. But this isn't something that we throw out on slide because it might be nice to do in Q4. This is something that we're already well, well into.

Operator: Your next question comes from Tim Piper with UBS.

Tim Piper: Just a couple of quick ones. Just sort of shipping and sort of to take your point around the free shipping trials offered, et cetera. But you guys haven't sort of increased your shipping charges [indiscernible] think I mean Redbubble used to make a margin and shipping like what's it like now do you effectively lose money on shipping? Or is it that profit now just disappeared and it's netted out? Where does that kind of sit?

Michael Ilczynski: Yes. Look, thanks, Tim. So sorry for the slightly long answer here. So we have been clear that we do -- we have traditionally made a margin on shipping. And when we are not applying discounts, we do make a margin on shipping. And we've talked about how over time we want to reduce that margin to make sure that our shipping is competitive for customers. By offering the free shipping the threshold, that substantially reduced our shipping margin. And I think back in our Q1 update in October last year, we talked about the substantial reduction free shipping had had on our shipping margin. And then when we saw that play through in the second quarter because we introduced free shipping into the U.S. as well, it actually really aid into our shipping margin and really add into our gross profit. We didn't get the commensurate uplift at the top line to make that dollar accretive. So it really did have a substantial impact. We've adjusted those settings since mid-December. And that's been one of the things that have contributed to our rebound in GPAPA margin. So we still do make a margin on shipping, and we believe we will make a margin on shipping moving forward. We've been clearing our intention to reduce that margin over time. We think that's the right way to compete and to make sure that we can compete to win customers in the environment we're in. However, we'll be taking a pretty, steady incremental approach so that we don't have these big swings in margin that we experienced in the second quarter.

Tim Piper: Yes. I'm just trying to understand outside of the free shipping offer. You're indicating you still do make a margin. I mean the U.S. in particular, like last mile deliveries, FedEx and all those kinds of players have been putting through pricing of I think at least for the high single digits per the year over the last few years through COVID. I assume the margin [indiscernible] come down through pricing increasing alone.

Michael Ilczynski: Yes, look, that's fair. We haven't passed on all of the increases in logistics charges that have come through the carriers. And so therefore, you can -- we imagine that one of our big areas of focus is really optimizing both our relationships with the carriers but also in our water routing, that's a big area where we've got focus moving forward on which fulfil an order gets manufactured by to not only minimize the cost of manufacturing, but also to minimize the ship cost is a key area where both businesses looking at how we apply technology to really focus on that because it is an area where you do see carrier charges go up and it's a key consideration of what aspect of that we pass on to consumers. .

Tim Piper: Got it. Just 1 last one. In this preso, there's obviously a lot going on at the moment through content, AI, operational technology. So you're obviously very active. I'm just curious on the content side of things in that slide, and you're chatting about reducing that low-quality content. You sort of said that there's going to be steps put in place that makes the uploading process a bit, I don't remember the word, you said a little bit harder effectively. Just looking through sort of content and seller reviews of marketplace, obviously, the uploading process is a key part of being active on the platform. Are you confident that through these processes of cutting out that content that you're not going to impact effectively the activity of the good content creators.

Michael Ilczynski: Yes. Look, thanks for the question, Tim. But we have a really good engagement with some of our more established top-tier artists to make sure that we're engaging with them and we understand their concerns that absolutely it's a balance. But what I'd say at the moment, on Redbubble platform has over 60 million designs, right, and we know that we're not optimizing the value that we're helping artists create from that very, very large content library. So right now, the driver is not for more scale. Right now, the drive is to make sure that we are absolutely optimizing the return that artists getting on their content, and we can get the right content in front of the right customers. So if we're hearing on any side where we want to err on at the moment is optimizing what is already, by far, the largest set of designs available for manufacturing on products in the world by far. So yes, absolutely, it's a key area of balance. We think we're actually getting that balance right. We've had really positive feedback from a number of our more established artists about these changes. So yes, it's a key thing we're watched on -- we're focused on. But right now, we've got a lot more value that we can help create on the library that we already have access to.

Operator: There are no further questions at this time. I'll now hand back to Mr. Michael Ilczynski, for closing remarks.

Michael Ilczynski: Look, thanks very much. I really appreciate everyone listening in this morning, and thanks for the engagement with your questions, and we look forward to speaking to you all soon.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.