Playboy, Inc. (PLBY) Q4 2022 Earnings Call Transcript

Greetings and welcome to PLBY Group’s Fourth quarter and Full Year 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your Ashley DeSimone with ICR. Thank you. You may begin.

Good afternoon everyone and welcome to PLBY Group’s fourth quarter and full year 2022 earnings conference call. I’m Ashley DeSimone from ICR. Hosting today’s call are Ben Kohn, Chief Executive Officer; and Lance Barton, Chief Financial Officer. After our prepared remarks, we will open up the call for questions when we'll be joined by Ashley Kechter, President of Global Consumer Business. The information discussed today is qualified in its entirety by the Form 8-K that has been filed today by PLBY Group, which may be accessed on the SEC’s website and PLBY Group’s website. Today’s call is also being webcast and a replay will be posted to PLBY Group’s Investor Relations website. Please note that statements made during this call, including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. Such statements are made on the basis of PLBY’s views and assumptions regarding future events and business performance at the time they are made and we do not undertake any obligation to update these statements. Forward-looking statements are subject to risks which could cause PLBY’s actual results to differ from its historical results and forecast, including those risks set forth in PLBY’s filings with the SEC and you should refer to and carefully consider those for more information. These cautionary statements apply to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call PLBY will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release PLBY filed with its Form 8-K today. I will now open the call to Ben Kohn. Ben, please go ahead.

Thank you, Ashley, and good afternoon everyone. So much has changed with the company since we last spoke in November that we want to level set where we were, where we are, and where we are going. We are one of the most valuable brands in the world, Playboy. This is a brand that drives billions of dollars in consumer spend and has almost 100% global awareness. Our business is now on solid financial footing post our $70 million debt paydown. We also have additional levers we can still pull internally to build additional cash reserves or paydown more debt should we choose to, without raising more equity at today's prices. To maintain our current financial flexibility, we are changing our business model and moving to a capital-light model with a singular focus on Playboy and Honey Birdette. Our new model gives us a combination of strong cash flow from our licensing segment, high growth potential through our creator platform in Honey Birdette, and less operational complexity by eliminating non-profitable business units and non-core assets. Within Playboy, we are focusing on two things. First, our licensing and strategic partnerships business. The business has a lower risk profile, with $346 million of future royalty guarantee payments through 2031, high-quality recurring cash flows, and the opportunity to be much larger than it is today. We intend to scale this business through a joint venture approach to supplement licensing's current high cash flow generation and to optimize it globally. In 2022, the licensing business produced approximately $61 million of revenue, and we believe through the right partnerships, we can more than double this business over the next few years. Second, our creator platform. This is our hero Playboy product moving forward, and it returns the company to its roots as the place for creators to be seen and discovered. The business is growing at over a 9% weekly CAGR since relaunch in mid-September 2022, with pro forma annualized weekly GMV already in excess of $15 million. We are approaching monthly cash flow breakeven with our fixed costs under $500,000 a month. At Honey Birdette, we are excited about the future and believe there is a huge opportunity for growth in the U.S. and Europe. In 2022, our U.S. stores generated 38% four-wall EBITDA margins, not including the incremental e-commerce they drive in their local geographies, and we see a total market opportunity of at least 100 stores domestically. Given our capital-light model, we are engaging an adviser to raise growth capital at the Honey Birdette level to accelerate the execution of our growth strategy. This new focus on these three units is the right direction moving forward. And one, I am confident we will be able to execute. When we went public in 2021, our investor base and expectations were different and the capital markets were happy to accommodate different growth-focused business models. The world today is different, and we believe our new business plan aligns well with what we have heard from our current investor base, which is capital-light, higher margin, simplicity of execution, and making sure we have sufficient runway to execute on business priorities with less financial leverage. The first step to transform the business model was to deal with the debt burden and ensure we have more than a sufficient runway to execute on this transition. Management and our Board are aligned with our shareholders and believe in our business model moving forward. It's why I invested over $1.2 million and why Rizvi invested almost $30 million in the rights offering. We paid down $70 million of debt over the past three months, which in turn significantly reduces our interest expense moving forward. Now that our balance sheet and liquidity are more secure, I want to discuss what we won't be doing. First, on the cost side, we eliminated $18 million of annualized costs last year and identified a minimum of $15 million of additional annualized cost cuts. $10 million of which we implemented this week. The rest will be accomplished as we continue to simplify the business. In addition to the $15 million, we expect additional direct cost reductions related to the sale of business units. Second, we are very close to selling Yandy and expect the deal to close in the coming weeks. Third, we have also done a strategic review of our Lovers business, which we bought for approximately $25 million or roughly five times EBITDA at the time. Lovers is still producing roughly the same cash flow as when we bought it, and we will be reviewing strategic alternatives for Lovers future as part of the PLBY Group in the coming months. Lastly, we have grown Playboy e-commerce from basically zero in 2020 to $22 million of revenue in 2022. But given the cost to build the team, develop private label products, and acquire customers, the business still lost in excess of $7 million in 2022. Given the losses in operational complexity, we are exploring alternatives to significantly reduce or eliminate those losses altogether. One alternative would be to convert the business to a joint venture or a licensing deal. The second would be to shrink the revenue and SKU count and significantly reduce paid marketing. In both scenarios, the products will still be available on our website, and our customers will not experience any change. We will use our creator platform as the primary way to market the products. After such a restructuring is complete, we would expect to have a much simpler business model, one that allows us to have laser focus on our core licensing business, our creator platform, and Honey Birdette. Assuming the intended restructuring is completed, all of our business units are projected to become profitable. We have posted a new investor deck to our investor website that outlines our focus moving forward, as well as pro forma revenue and costs for what the business would have looked like last year had the restructuring occurred. Lance will give you more details in a few minutes. As I said earlier, our focus moving forward is in three core areas. First, our creator platform, which is the most strategic and high-growth potential business we could have invested in over the past year. And it is truly differentiated from the competition given our brand and what that means to creators. So why is this so strategic? First, it returns companies to its roots as the place to be and be seen for creators, and it brings heat to everything we do in the future. Second, it creates a flywheel for the rest of the business because those creators bring their audiences to Playboy, allowing us to sell those audiences other products, whether they are our own or from our licensing partners. And third, the business scales very quickly, and the long-term cash flow dynamics are superb. We have limited fixed costs and our revenue is 20% of GMV generated by the creator. We believe over time, there are other value-added services we can offer to increase that percentage. I'm excited to share some early numbers since the September relaunch at single the platform's progress. We have registered about 1.4 million users to the platform with no marketing spend. If you annualize our weekly GMV today, assuming no growth, we would do over $15 million in GMV this year. And that's with only about 1,500 active creators. However, our weekly growth in GMV since relaunch has been over 9%, with that growth rate accelerating over the past four weeks to over 18% weekly as the network effect starts to take hold and we have increased the number of new creators joining. There have been 40 million messages sent through the platform. Users are coming to interact with and message creators. Our average earning creator is on track to generate over $12,000 in GMV per year, and our top creators are on track to generate GMV well into the millions. The vast majority of our creators earn money via connecting with their fans through safe-for-work content and conversations. Based on reported data, our understanding is that Playboy creators are earning multiples of what average creators earn on competitive paywall platforms. We've achieved this progress for three key reasons. First and foremost, as I talked about in our last earnings call, we now have a world-class product and technology team. Our product today is on par with our competitors from a feature and functionality perspective, and has been built with the capacity to scale and innovate much faster. Just last Friday, we rolled out new profile designs to further enhance the creator and user experience. We also improved our search functionality to support our creators and expand their Playboy fan bases. The second driver of our recent progress has been quickening the pace of accepting creators onto the platform from our waitlist. Tens of thousands of prospective creators have now applied. With the recent migration of the platform to playboy.com and expanded grassroots promotion, we are hearing incredible excitement within the creator community that Playboy is their top choice platform. Something important to note here is that we hear from our creator community how excited they are to be part of an elevated and exclusive platform, one that does not allow the explicit content that our biggest competitor does. And most importantly, they want to be part of a platform that they are proud to show off. Being accepted to become a Playboy creator is now something that creators are so excited to promote across our social media platforms. This point of pride is something that no one else can replicate. And third, our in-house creator team has been hard at work building out creator success tools to support those creators we accept onto the platform. We've seen an enormous desire from our creator community to participate in the full Playboy lifestyle. And we've gone testing perks for top performers, such as the opportunity to model in Playboy fashion shows, attend Playboy events, and more. As you may have seen, we just announced the return of the ultimate perk for creators, the chance to be featured in Playboy Magazine. Unlike so many creator-led platforms trying to scale, we have a formidable and valuable tool, the magazine. We will be bringing back the magazine in a digital-first format to serve as a huge promotional platform for our top creators as well as to continue working with celebrities across Playboy covers and editorial features to drive significant traffic numbers into the platform. We are thrilled to tease the new magazine experience with the release of the Playboy cover featuring one of our top creators, October 2011 playmate Amanda Cerny. Amanda can also pay for special access to behind-the-scenes content on her own Playboy channel. Here is what to expect from here. First, we will continuously improve the product experience for our creators and their fans. For creators, we are focused on making it as easy as possible to make money and to grow your fan base to make even more money. For fans, we're focused on making it as seamless as possible to find your favorite creators to follow and support. We have begun exploring how AI tools can optimize the creator and fan experience. Second, we are always working to enhance our value propositions, greater, and this is where the digital magazine comes in. We will be rolling out more editorial-like features for top creators for the chance to truly feel like they've made the cover of Playboy. In addition, creators will soon have expanded opportunities to become Playboy fashion affiliates across Playboy and Honey Birdette. Our goal is to continue to scale our creator base, ensuring we maintain Playboy's high standards of representing our brand. By year-end, I would like to get to 10,000 creators earning money on the platform. And lastly, across all areas of our organization, including licensing and Honey Birdette, we are working to leverage our creator community as a built-in organic marketing machine. We expect creators will make more money on Playboy than on any other platform, becoming affiliates and being paid for selling products. Our Playboy creators deliver significant brand buzz and drive meaningful monetization from the audiences they attract. Further, they are the embodiment of the aspirational lifestyle that both Playboy and Honey Birdette represent in the world. Our second core area of focus is our licensing and strategic partnership business. We made significant progress on a number of fronts during 2022 on our strategic partnerships and licensing business. I recently returned from Hong Kong after not traveling there since COVID-19 started and met with our largest licensing partners. Three years ago, we began setting the stage to transform our business in China from an outsourced licensing business with limited sales and distribution visibility to a joint venture operating model that gives us more control of the brand and brings us closer to the end consumer. As part of this evolution, we met with the Fung Group three years ago. And while it took longer than anticipated, given the impact of the global pandemic and China's zero COVID policy, we are now pleased to report that we have partnered with the Fung Group retail brand management unit for China. The goal of the Playboy China JV is threefold. First, partner with trusted operating teams in China with experience across apparel, supply chain, product design, retail execution, brand marketing, trademark enforcement, and above all, strong relationships with the online sales platforms in China. It is not our intent to directly operate a retail or e-commerce business or take on the financial burden associated with inventory and operational complexity. Our goal is creating a best-in-class in-country team who truly understands the China market and has the right experience and relationships to hold our licensees accountable and replace them should the need arise. Two weeks ago, we began the process of establishing new ground rules with our licensees for how and where Playboy branded products are sold to ensure greater consistency and control across the market. This includes potentially restructuring our agreements so that from a financial perspective, the JV will manage the flagship e-commerce stores to track online sales and ensure quality control and design across all Playboy branded products. In essence, our licensees still supply approved products and keep inventory, but the JV will control the gateway to the consumer and the overall brand experience. The JV will enable us to work together with the e-commerce platforms to control how Playboy is sold and ensure that we are capturing online sales data and enforcing shutdowns on counterfeiters and unauthorized stores. Second, we will have stronger relationships and broader reach to take advantage of emerging product categories that Playboy has not entered, to expand our lifestyle offerings and accelerate growth. In just a few weeks, our new JV partner has developed the strongest and most diverse new business pipeline we have seen in years for China. Third, reduce the operational burden by transferring management product approval and legal complexity of operating in China to a highly experienced partner in the local market. Finally, the China JV structure has allowed us to significantly reduce the amount we pay our licensing agent on a cash basis and enables our new partner, the Fung Retailing Group, to earn up to 15% ownership of the China business at a $250 million valuation. We believe the JV we have established in China is a good model for other parts of our licensing business, especially as we think about when our contract expires in 2028 with our global licensing agent, for whom we were paying approximately $9 million annually. We have over 180 licensees, and trying to manage them from California is no easy task. Operationally, the JV model allows us to do less at corporate while gaining region or product-specific expertise for business growth and management. We are currently looking to take this JV model to other parts of the world or product categories where we see huge growth potential. Another JV we established was with our Spirits partner. In addition to the $13 million they previously raised, they have commitments for up to another $20 million of additional investment. We own 20% of the operating Spirits business on a fully diluted basis, plus we generate an annual license fee. To date, Playboy Spirits has launched limited edition collector items in the bourbon, tequila, and cognac categories. What we are most excited for is the launch of ready-to-drink cocktails later this year. Again, we are partnering with a management team that has domain expertise and operational expertise, leveraging their organizations to build businesses that not only pay us a licensing fee, but also provide us with the equity upside. Lastly, our Playboy Pleasure line of products is off to a great start at Lovers stores, generating on average $100,000 in weekly sales only at Lovers. We set this up as a licensing deal and plan to aggressively expand that product line and distribution with our partner. We have already secured over 1,000 third-party retail locations to carry the product starting this week. Let's talk in more detail about Honey Birdette, our third core area of focus, because I continue to believe that business is a $1 billion opportunity based on the current revenue and EBITDA growth profile. When we bought Honey Birdette in 2021, the business was doing approximately $73 million in revenue on a trailing 12-month basis and grew to $84 million in 2022. Although 2022 was a very tough year with significant inflation that we believe affected demand, inventory over-buy, supply chain issues, as well as competitors discounting, the brand remains extremely strong. In the first three quarters of 2022, we had to discount our inventory more than the business had historically given the macroeconomic environment and excessive inventory purchases prior to the acquisition of Honey Birdette. Starting in Q4, we made the decision to limit promotional activity moving forward and to focus on brand health. It was a tough decision from a financial perspective because even at discounted prices, it is still a high-margin business, but it's the right long-term brand decision. The stores we have opened in the U.S. over the past year are off to a great start. Our average store in the U.S. is producing over $1 million annually, which is double the average store in Australia, with our best store doing $1.8 million. In the U.S., we are averaging a 38% four-wall EBITDA margin compared to 34% in Australia. Average order volume, or AOV, in the U.S. is $230 compared to $135 in Australia. The U.S. now represents 38% of the total revenue and Australia 49%. Given the attractive economics, we believe there is a long-term opportunity to open more than 100 stores in the U.S. We hope to open four to six new stores this year. It takes time to find the right mall locations, especially given our small footprint of 800 to 1,000 square feet. Before I turn it over to Lance, I want to set the record straight on some misperceptions and reiterate why I am excited for the future. First, I and the named executive officers have never sold a share of stock for personal gain. The company does not net settle equity grants as other companies do as the payment of employee taxes would be a drain on balance sheet cash and hence forces the employee to sell shares of settled grants to pay the taxes. The only stock we have sold is to pay the taxes required with the exercise of options or settlement of other grants as is legally required. In fact, I have personally bought stock three different times since we went public. The last time is part of the rights offering where I invested over $1.2 million and Rizvi invested almost $30 million. Second, I want to clarify how stock-based compensation is accounted for in the financial statements. All equity grants are initially valued based on the value of the underlying stock on the date of grant, applying different valuation models to different kinds of grants. Expense for equity grants is accounted for both as of the date of grant and each quarter thereafter for the remaining life of the grant, in each case based on the grant date valuation regardless of subsequent changes in market value of the underlying stock. Thus, even in quarters without equity grants, the company is required to show expense for existing prior grants based on their initial valuations. The quarterly stock-based compensation expense is not compensation of an award holder divided by the then-current share price. Further, such quarterly expense does not mean there is any new or additional compensation to existing grant holders nor any additional dilution related to the quarterly expense. The last time our executive officers received any grants was in April 2022, and quarterly expense for the life of those grants will be based on the valuation as of April 2022. Moving forward, we will have a much simpler, less capital-intensive business with the right combination of cash flow from our licensing business, coupled with potentially significant growth in cash flow from our creator platform and Honey Birdette. We have a manageable amount of debt, a substantial amount of cash on our balance sheet, and the ability to generate extra liquidity via the sale of non-core assets, including our extensive art collection. In my opinion, our current valuation is very dislocated from the immense value of the sum of the parts represents, including our lucrative brand, Playboy, our approximately $300 million of federal net operating losses, our extensive art and archive collection, the present value of our forward booked licensing revenue, and the value of Honey Birdette. We believe in our business plan, but should it not materialize in the way we believe it will, we will explore appropriate strategic options to maximize shareholder value. Lastly, before I turn the call over to Lance, I want to thank him for his partnership and hard work over the past two years. Lance will be departing the company in Q2 and will work with us to ensure a seamless transition. Lance helped lead us through a period of growth and transformation as a newly public company, and we wish him the best in his future endeavors.

Thank you for the kind words, Ben. It has been a privilege to be part of such an iconic brand, and I'm grateful to the entire organization for all that we've accomplished. I continue to believe in the potential value of this company, and I'm excited for the team to execute on this new strategy. Given our restructuring plan, I will briefly touch on certain Q4 results and then discuss what the business looks like pro forma taking into consideration all of the planned changes. In the financial slides of the presentation that we've posted to our investor site, we've provided more granularity on full year revenue by brand within each of our reporting segments. We've also provided total company annual costs on an as-reported basis, a non-GAAP adjusted basis on a pro forma basis after stripping out the costs related to the businesses that we no longer intend to operate. Fourth quarter results were impacted by a number of factors. One, we didn't execute as well as planned on our IT system implementations last year, which disrupted fulfillment operations and resulted in increased costs to remedy. Two, we pulled back aggressively on performance marketing due to both continued softness in efficiency and the aforementioned fulfillment challenges. Three, macro headwinds persisted impacting consumers and partners alike, along with $1.6 million of lost revenue due to foreign currency exchange rates. And four, reduced promotional activity at Honey Birdette led to lower sales, while increased promotional activity to liquidate inventory at Playboy and Yandy led to lower product margins. Total Q4 revenue was $68.5 million, a decrease of $27 million year-over-year. Of the total revenue decrease, $13.4 million came from the direct-to-consumer segment, $1.7 million from licensing primarily due to a reduction in overages received and $11.4 million from digital, reflecting no NFT revenue in the fourth quarter of 2022. Now turning to the restructuring. Our investor presentation shows both revenue and cost on a pro forma basis for what the business would have looked like in 2022 had the restructuring been done at the beginning of last year. Overall revenue would have been $212 million, less the $73 million cost of sales and $113 million of selling and administrative expenses would have resulted in just over $25 million of pro forma EBITDA. This pro forma assumes no revenue or cost related to Yandy or Playboy direct-to-consumer. It also assumes that the additional $15 million of cost savings we have identified are removed, along with $3.5 million of creator platform upfront launch costs that were onetime in nature. The pro forma selling and administrative costs do not remove any other incremental costs related to the creator platform, which were roughly $8 million in 2022. There is also no annualization of revenue or cost for the Honey Birdette stores we opened at various points during the year. For 2023, we are not giving specific guidance at this point given the restructuring is ongoing and some of the timing related to the sale of assets is a moving target. The primary differences between 2022 on a pro forma basis and 2023 relate to four areas. First, we plan on opening four to six new Honey Birdette stores, mostly in Q4. Second, we are going to continue to protect the Honey Birdette brand and will not be discounting merchandise outside of our normal pre-COVID sale periods, which will make the first three quarters of 2023 a tough year-over-year comparison from a revenue perspective. Third, we are seeing signs that our creator platform is beginning to scale and believe it will be cash flow neutral to positive for the year. And lastly, it is related to the timing of when certain cost reductions or exits of businesses occur, as we won't get a full year benefit of some of these actions. With the successful completion of the rights offering, we have reduced total leverage, eliminated our minimum cash covenants entirely and eliminated leverage covenants to the second quarter of next year. In the last three months, we've paid down $70 million of debt in addition to the quarterly amortization payments and currently have $157 million of total debt outstanding with approximately $35 million of cash and equivalents on the balance sheet today. We have no exposure to Silicon Valley Bank or Signature Bank, and our cash has held between top-tier financial institutions in the U.S., U.K., and Australia. Our debt service for the year is expected to be approximately $19 million. We believe that our current balance sheet covenant waivers through the second quarter of 2024 and our focus on managing the business for cash flow gives us ample runway and liquidity to continue executing on our plans for Playboy and Honey Birdette. With that, I'll ask the operator to please open the line for questions.

Thank you. Ladies and gentlemen, at this time we will begin doing your question-and-answer session. Our first question comes from the line of Alex Fuhrman with Craig-Hallum. If everyone could please limit themselves to one question and one follow-up, so we may get to everyone's questions. Alex, please proceed with your question.

Hey, guys. Thanks very much for taking my question. I'm trying to understand a little bit better the pieces of the business and how much they might be worth, especially now that it sounds like you're going to be focusing just on Playboy and Honey Birdette. I think Honey Birdette is, I guess, an easy enough business to understand, but the Playboy brand shows up across different categories and regions and business models. Can you give us a little bit more color to help us size up the value of those different pieces? I think you had recently said there was a third-party valuation of $250 million put on the China licensing JV, of which you own a majority of that. But how can we think about the value of the Playboy licensing business outside of China as well as centerfold some of the legacy Playboy TV and Plus assets as well as just the option to enter new categories and regions where you're not currently in?

Hey, Alex, it's Ben Kohn. Thanks for the question. Look, there's multiple different ways to value Playboy. Playboy is one of the largest brands in the world and basically has 100% unneeded global awareness. When I think about the components myself and what led me to write another check into the company, I think about the present value of our licensing business. That is a business that is underexploited today in a lot of the parts of the world. So, I think as we mentioned in the beginning, we have roughly $346 million of forward book cash flow. Those are only minimum guarantees. That doesn't include overages and other things, and then what would be the terminal value on that. We've talked about our art collection historically. There are our Playboy TV and our Playboy business, which are legacy businesses that still generate cash flow. When you think about the value of the creator platform that we're building, and it's off to a good start, if you annualized your weekly GMV today, you would get in excess of $15 million. And if you look at that growth rate, it's growing at 9% weekly CAGR. And so, when you look at the cash flow that generates, we talked about the $500,000 of monthly fixed costs, and that we take 20% of what our creator makes. And so that business starts to scale very quickly when that business begins to scale.

The last point I want to mention is Honey Birdette. As you may recall, we purchased it for approximately $300 million, which was during a different period. However, we have seen revenue growth since the acquisition, and the EBITDA margins for that business are quite strong. Therefore, it would be reasonable to assign a value to it, and I believe you could obtain a good return on Honey Birdette.

Okay. That's really helpful. Thank you both. And then Lance, if I could drill down more on the pro forma calculations that you put out in your deck and kind of sketching to that $25 million of pro forma EBITDA. Can you help us unpack that a little bit more? I mean, you mentioned a few things this year that are going to be different between that kind of hypothetical pro forma number and the reality of 2023, some comparisons on Honey Birdette and changes in centerfold. And it sounds like I'm hearing those correctly. I mean, it sounds like some of those differences are going to net to an improvement versus the pro forma results. I imagine the majority of those changes, specifically the fact that it's going to take some time to realize the cost reductions probably mean we're not going to see that full $25 million this year. But can you just help to size that up a little bit? I mean if you kind of straight-line the cost savings that you outlined, do we kind of get to that $25 million at some point early next year on a run rate basis? How should we think about what you're actually going to go through this year versus that $25 million number?

Sure. Yeah. There are a few different ways to think about it. But you're absolutely right. Part of this is a little bit timing, right? We're now sitting here mid-March. We've implemented some of these cost-saving measures. We haven't fully exited Yandy yet. We haven't completed kind of what we need to do on Playboy direct-to-consumer. But the way I think about it is really when you look at it on a go-forward basis or a, call it, future 12-month or next 12-month basis, your baseline is kind of that $25 million once you've implemented all of these changes. And then the other things that aren't really contemplated in that would be you're still being burdened with that $25 million, you're still being burdened by $8 million of losses in the 2022 pro forma from the creator platform. So, if you're able to get that to breakeven, that puts you closer to $33 million on a go-forward basis to the extent you're able to get incremental revenue and EBITDA from opening, like we said, four to five new Honey Birdette stores. Those are north of 30% for while EBITDA margins you'd have to factor that in. The one thing you would net out a little bit on Honey Birdette would be the drag for the first three quarters this year as we take out promotions. But yes, I would say net-net, when you think about this, a very clean structure on a go-forward basis, you're looking at kind of a baseline level of EBITDA well into the 30s, and hopefully, we can optimize it even further from there.

Yes, Alex, this is Ben. On the cost front, we've identified $15 million today. We believe there are additional costs we can eliminate. This is something I've done for 25 years in private equity when we engage with businesses. We're restructuring this business line item by line item. Out of the $15 million, we've accomplished $10 million this week. We won't see the full annual benefit this year since it's already March 15th, but we've cut $10 million as of this week, with the remaining $5 million to come soon as we continue to streamline the business. I hope there are further cost reductions we can pursue as we simplify the company, focusing less on personnel, which we've addressed this week, and more on our vendor contracts moving forward. I see examples from other companies in the market during these economic times, leading me to believe we can achieve significant savings. We're getting down to the details at Honey Birdette. For instance, in our warehouse operations, considering how we ship products, switching from boxes to polybags can result in hundreds of thousands of dollars in savings, and we're essentially rebuilding everything from the ground up.

Okay. That's really helpful. Thank you very much.

Our next question comes from the line of Mike Hickey with The Benchmark Company. Please proceed with your question.

Thank you, Ben, Lance, Ashley, and Ashley, for taking my question. First, Ben, regarding your creator platform, you seem very enthusiastic about some early success. It still feels like we are in the early stages, but it appears we are surpassing your expectations, and I would like to know if that is the case. Also, can you provide more detail on the GMV and what it translates to in terms of revenue generation? I have a follow-up question as well.

Sure. I believe we have something that sets us apart from our competitors. When considering the Playboy brand, the constant feedback from creators has been their desire to be featured in Playboy. Recently, we have made significant improvements, much of which involves behind-the-scenes technology that may not be visible to the consumer yet. Since we relaunched in mid-September, we have experienced a weekly compound annual growth rate of 9%, which has recently increased to 18% over the past four weeks. If we annualize our current weekly gross merchandise volume without expecting any further growth, we would exceed $15 million. If we factor in the 9% growth rate and it continues, we could potentially reach around $135 million for the year in gross merchandise volume. From that, we take 20%. Our fixed costs for the business are approximately $500,000 a month. Depending on the year-end gross merchandise volume, we anticipate that the business will either break even or generate positive cash flow and continue to grow. We have many product developments in the pipeline. When we decided to replatform the business last year, our aim was to ensure our technology measured up to competitors. I believe that over time, our technology platform will surpass theirs thanks to our team's capabilities and future innovations. Additionally, reintroducing the digital magazine could significantly drive traffic to our platform, similar to how it historically attracted visitors when featuring mainstream celebrities. We have already registered 1.4 million users on the creator platform without spending on marketing, in contrast to the consumer products business, which incurs customer acquisition costs. As the year progresses, our creators will also begin promoting the consumer product lines for both Playboy and Honey Birdette.

Thank you, Ben. Best of luck to you. It's really exciting, and congratulations on the growth so far. I understand you're exiting, which is unfortunate. Good luck moving forward. Regarding 2023, I know you’re not providing guidance, but we can calculate the $25 million and 12% margin. As you observe the momentum in your business and consider it across the segments you plan to retain, do you have a target EBITDA margin in mind for the medium to long term? One last question about Lance leaving: what process will you follow to find a replacement? Are you considering internal or external candidates? Thank you.

Sure. I’ll discuss the EBITDA aspect. I would approach it on a segment-by-segment basis. In direct-to-consumer, the Yandy business has been a burden, while we are working to establish the Playboy business. If we exclude Yandy and focus on Lovers and Honey Birdette, that segment could achieve around a 20% margin. If we eliminated Lovers and solely concentrated on Honey Birdette, the EBITDA margin would likely be even higher. The Licensing segment shows exceptionally high EBITDA margins, exceeding 70% to 75%. For the Digital segment, as Ben mentioned, the creator platform is expected to reach breakeven this year. We also have two other businesses in the Digital segment, TV and Plus, which generated about $18 million last year. Although they are in decline, their EBITDA margins are above 40% to 50%. These businesses are high-margin as well. Looking at the long-term digital outlook, the main question is what the creator platform margins might look like. Historically, we’ve seen significant margins when we launched the NFT project, which generated $11 million in revenue in the fourth quarter of 2021. We believe that could become a highly profitable business in the future. However, for the next 12 months, I see the creator platform as more of a breakeven situation, alongside the contributions from TV and Plus.

Yeah. I think when there's the largest competitor in the space, the numbers are out there publicly, and I think you can look to those margins for what the platform could generate. And so what we talked about on the creator platform is the $500,000 of fixed costs. There are some variable costs with credit card fees, et cetera. But if the business were to continue its growth at 9% and do $135 million in GMV or roughly $27 million to us. I can tell you flat out, it's very profitable, right? And the margins are extremely high because your fixed costs don't really scale. And then as far as Lance, it's something the Board is working on. And we're obviously looking moving forward for the best CFO we can hire at the business.

Thanks guys.

Our next question comes from the line of Jason Tilchen with Cannacord. Please proceed with your question.

Thank you everyone for joining the call. I would like to ask about the financial impact of transferring the China licensing business to the joint venture over the next two quarters. Will there be any changes? Additionally, you mentioned that there are other markets that have been underpenetrated in the licensing area. Could you provide more details about which countries you are referring to and how soon those opportunities might materialize? Thank you.

For China this year, I do not anticipate any financial impact from transitioning to our new direction. The deal is structured to allow our partner to earn equity based on their performance, valued at $250 million. I believe this arrangement will help grow the business, especially since we have significant opportunities in women’s fashion and accessories. Moving beyond China, we realize that our current joint venture model may not be the most effective due to legacy issues with the global agent. In Southeast Asia, we're optimistic about our presence in Vietnam and Thailand, as well as in Japan and Korea where our brand remains strong. After the pandemic, we are also focusing on opportunities in India and see potential for growth in Europe where we are still relatively small.

That's very helpful. I have a couple of quick follow-ups on the creator platform. You mentioned it's digital first but not digital only regarding the magazine relaunch. Should we interpret that as a possibility for limited print opportunities? Also, the user growth driven by your marketing spending is impressive. Are there plans to intensify marketing efforts now that you’re rebranding under the Playboy name?

So, regarding marketing, I prefer not to discuss it in detail right now. We're experiencing significant success with creators directing their audiences to Playboy. There was some press coverage this week about the magazine, and the number of inquiries from creators wishing to be involved has greatly increased. I want to be clear about the Digital First magazine – we are intentional with our wording. Our focus isn't on selling magazine copies, as that’s not a direction we wish to pursue. However, if a magazine can play a role in a broader strategy related to Playboy membership, that could be a viable approach for us.

Great. That's very helpful. Thanks a lot.

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

Thank you. Good afternoon. Much appreciate the details in the presentation. Thank you for that. Great additional disclosure. I wanted to start by digging in on the economics of the creator platform. Your $15 million GMV run rate, fixed cost around $6 million, you get about 20% revenue attribution. What are the other variable costs? And how much above that $30 million GMV run rate would you need to get to breakeven on that business?

So thanks, Jim. It's Ben. When you look at the business, we take 20% of what the creator makes. We've discussed our fixed costs. Currently, the run rate, assuming no growth, is $15 million, with a 9% weekly compound annual growth rate that we are experiencing. The fixed costs are approximately $6 million for the year. The variable costs for that business primarily depend on your credit card processing fees.

And hosting.

But that doesn't really increase substantially based on the deals we have. So, it really comes down to credit card fees that we believe that we're in the process of reducing. And so, if you get to, call it, a high single digits, very low double-digits business, you were breaking even.

I'm sorry. I understand the high single digits to low double-digits. That's the margin...

$8 million. If your fixed costs are $6 million, I won't go into all the specifics of the credit card fees. However, once you reach the high single-digit millions, with $6 million in fixed costs, you can apply a variable cost to that, which brings you to the upper end of that.

You're saying not GMV in the high single digits, you're saying revenue contribution. So, you'd be doing 5x the revenue contribution in GMV.

Correct. So, if you're doing $15 million of GMV today with no growth moving forward, that generates $3 million of revenue. And so the business is growing at 9% weekly CAGR since September, 18% over the last four weeks. And so, when you start to extrapolate that out from a growth perspective moving forward, if you grew at 9%, you would do $135 million of GMV or $27 million of revenue for us, right? Then the business is very, very profitable. If you were doing $50 million of GMV, that's $10 million of revenue to us. We are making money.

Okay, I understand. What additional areas are we looking to invest in for that business this year? For example, what will it cost to relaunch the magazine? Are there other platform expenses we should consider as part of our cost structure?

No. Our costs are mostly fixed at this stage. The primary expenses consist of our internal team and the engineers we have brought on board. Beyond that, I don't anticipate any additional costs. I prefer not to disclose specifics about our product roadmap since technology roadmaps are always subject to change. Any details I provide could lead to disappointment for some and give an advantage to our competitors. However, I can share that we have a comprehensive product roadmap aimed at enhancing the experience for both creators and users. We recently launched a new profile that has been well received by creators, and we have reintroduced an improved discovery feature, which I consider just the beginning, with much more to come. Additionally, we plan to consolidate several of our older standalone products into a unified ecosystem going forward. Importantly, our fixed costs will not rise as a result of these developments.

Okay. And then my next question, I wanted to ask about the business model change for Playboy D2C. What's the timeframe in which you'd expect to execute on that? Understand a number of different options.

We are currently focusing on managing our costs effectively. This week, we have successfully removed $10 million in costs. Our priority is to concentrate on aspects we can control. Decisions regarding whether to proceed with a reduced revenue and SKU count or a joint venture are being evaluated in real time, and we aim to finalize this in the near future. We are dedicated to maximizing EBITDA from the company. As mentioned by Lance, we have established a solid baseline and want to ensure all our business units are profitable. Our licensing business is generating strong cash flow and high margins, and we have a rapidly growing digital business in the creator platform that is expected to yield high cash flow and margin as well. Additionally, Honey Birdette is seeing significant growth in the United States, achieving an average of 38% four-wall EBITDA margins. With the corporate overhead reduced and the business simplified, we remain focused on operating the company to be cash flow positive after accounting for debt service, cash taxes—including $300 million of net operating losses in certain foreign jurisdictions—and capital expenditures. Our goal is to continue building cash while decreasing the company's debt.

And this is Ashley. I'll briefly add to what Ben pointed out. As he mentioned today, we made some difficult decisions internally to realign our personnel structure for Playboy.com. We began this process aggressively in the fourth quarter, particularly in the last month or two, significantly cutting our paid media expenditure on Playboy. This substantial reduction is already underway and will undoubtedly have a significant impact on our top line, but it will ultimately help us achieve much smaller losses compared to what we experienced last year. This effort is ongoing and will persist as we define our future operating model.

We have time for one last question. The last question comes from George Kelly with Roth Capital Partners. Please proceed with your question.

Hi, thanks for taking my questions. So, first one is just another question on the creator platform. I just want to make sure I understand all the math and everything around it. So, I thought I heard you say in your prepared remarks that you expect it to be sort of a neutral impact to cash flow this year breakeven. And so, am I doing the math right, if I take that to mean that you expect an average run rate GMV during the year of around $50 million.

It's slightly less than that, but a fair assessment would be that when we consider our current position at 15 with no growth and where we anticipate being, that's our expectation.

Okay, that's helpful. My second question is about Honey Birdette. You mentioned changing the pricing strategy in the fourth quarter. Could you provide more details on what the revenue was in that quarter and the year-over-year growth rate?

Yeah. And George, the one thing I'll say, just when you go back to the pro forma, and I'll let Lance answer the HB. But when you go back to the pro forma, remember that $25 million of pro forma EBITDA is still being burdened with $8 million of cost for the creator platform. So, if the business is cash flow breakeven, it's the $25 million plus to $8 million, that gets you to $33 million that Lance was talking about.

So, it was around $18 million in revenue in the fourth quarter. For the full year, the U.S. saw a 22% increase, while Australia experienced a slight decline.

Yeah. And I'll jump in quickly. This is Ashley again. I'll just jump in on the promotion shifts that were made and the actions that started taking place in Q4. As Ben spoke to the first three quarters of the year, we added two incremental promotions. Those promotions happened in March and September. With the September promo that was leading into Q4, whereas as we hit in the Q4 period, we had 60% less breadth of product on promotion and we reduced the depth of discount. So, there was a timing shift in September that ended up pulling forward some sales. The way I'm looking at this and how I've normalized it is I've combined Q3 and Q4 because we essentially reduced promo starting in Q4, which is going to continue into this year through the Q3 period. But when you combine those periods, if you look at it on a constant currency basis, we're up roughly 2% when you add in that kind of Q3, Q4, which accounts for the timing shift. We are going to pull out for this year the March promotion. So, we are, obviously, in March right now, we are in the process, it's happening. Now we've pulled it out. And we will also reduce the September promotion, we will not do it. And so, we will only offer the June and the November sale, which is consistent with our kind of pre-COVID period and then the Boxing Day. And so, we're anticipating the revenue impact of that, but that's going to bring us to a much healthier business and position us for longer-term health.

George, we cut back our inventory by substantially. And so, therefore, the inventory that had been bought prior to our purchase that we had to work through last year, especially with the macro climate and Australia specifically because we've been started managing our inventory early last year, and we have about a nine-month lead time on inventory. We don't have that. And what we want to put forward more than anything is the brand health of Honey Birdette, which is extremely strong as a luxury brand and making sure that, that customer does not get conditioned to buying things on sale, especially given the high margins we have at full price.

That does conclude our question-and-answer session. This does conclude our call. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.