SAN ANSELMO, Calif.--(BUSINESS WIRE)--Osmium Partners today issued Letter #2 to Articore shareholders.
Dear Fellow Shareholder:
Why are we asking for your vote on October 24th? Osmium believes that Articore's board has neither the right strategy to deliver profitable growth nor demonstrated meaningful progress in managing this business to generate anything near “at scale” margins. In our opinion, nothing highlights Articore's shortcomings and potential more than since 2016 the company has a cumulative EBITDA loss despite generating $3 billion in revenue. As a perspective, if the company had operated anywhere near its “at scale” targeted adjusted EBITDA margins of 13-18% since 2016, Articore could have generated roughly $500 million in EBITDA. We simply believe having a fresh set of eyes and ideas, with a high sense of urgency and experience to work constructively with this board, employees, and management is needed to maximize shareholder value.
Osmium’s 4-Step Plan
We believe that our team brings the right set of tools to best position the company to maximize shareholder value as well as the experience to unlock shareholder value. Several years ago, Osmium led an activist campaign at Leaf Group which at the time was the #2 competitor to Redbubble and Teepublic. Our efforts ultimately resulted in a $323 million cash acquisition by Graham Holdings and nearly a 100% appreciation from when we started our campaign to unlock shareholder value.
We believe our plan gives investors the best chance of maximizing value through a thorough and strategic plan.
Step 1: DIAGNOSE
Diagnose: Our diagnostic step would be from October to December. We will initially work with the idea that everything is essential until proven otherwise. During this step, we will examine operating costs as nice to have or essential life/death operating expenses that impact key parts of the value creation flywheel.
We believe it is important to understand why Articore might be duplicating efforts. We believe three CEOs and two companies have largely redundant roles at two very similar companies. Do we really need two of the exact same roles in the same businesses? What is the economic point of having two totally separate companies that roll up into parent Articore? Could creating synergies here bring about “at scale” targeted margins more rapidly without damaging the businesses?
Step 2: RESTORE
Restore: Our restore changes would take place in January and February. Our restore thesis is that we think Articore should run at steady state adjusted EBITDA margins of at least 7%, which on the current sell side estimates of $437 million in sales would be roughly $25-30 million in adjusted EBITDA. We believe if this is achieved that Articore would likely be revalued at 10x Adjusted EBITDA + net cash or $1.00 per share.
Business Model: We think of Articore as effectively a utility technology that manages a flywheel of millions of touchpoints and transactions. Articore is a digital marketplace with a take rate model that is like other take rate models such as Etsy or Uber. Given that we believe this type of business can function properly with a small headcount – we believe Articore can do more and needs to do more, with less people. We believe essential skill sets are in technology/platform development, marketing, and administration/support.
An Unbalanced Business Model? Articore pays employees $70 million, artists $70 million, and Articore owners are forecasted to take home $7 million in free cash flow for 2025, according to sell-side analysts. We believe Articore is spending nearly 100% of the enterprise value on employee salaries, or $70 million a year in salaries vs. a current enterprise value of slightly over $70 million. How many digital marketplaces are valued at the same valuation as what the company pays its employees base in annual compensation?
What does restoring value look like? In FY21, Articore’s valuation exceeded 15 times the current market cap or $1.6 billion when the company achieved efficiency with revenue per employee of $2 million and GPAPA (gross profit after paid acquisition) of approximately $550,000 per employee. We think Articore can return to FY21 operating expense efficiencies if it reduces headcount by slightly more than 20% then the company would achieve $550,000 in GPAPA per employee. It is important to also note that the peak Articore $1.6 billion market cap was also a function of high revenue growth at the time, which is currently not the case.
Step 3: PROFITABLE GROWTH
Profitable Growth: In early 2025, we would explore the following ideas that we believe have the potential to accelerate growth with strong economics that fundamentally improve the business model.
- Explore expanding to new countries.
- Explore launching paid digital ads for artists to buy, including links and other high-value spots on Teepublic and Redbubble to promote their work to consumers. We would also look at all marketing channels where our customers are to make sure we are getting the best ROIs on our marketing dollars.
- Explore creating a new licensing revenue stream and vetting licensing Articore’s Direct Order Routing System (DORS).
- Explore a range of “subscription” services, such as a very low-cost paid monthly newsletter on how to become a best-selling artist on Articore platforms to maximize artist earnings power.
- Explore a wide range of strategic partnerships to accelerate growth with lower risks and strong margins.
- Explore lowering technology development costs by potentially outsourcing some R&D initiatives.
- Explore customer loyalty programs, bulk buying, and pricing strategies.
- Explore an accelerated new product rollout.
- Explore all ideas and options to lower costs and accelerate revenue that makes our platform more valuable in delighting artists and consumers.
In conclusion, we would explore a wide range of ideas to drive value with a fresh set of eyes. We believe that these ideas should meet the test of low start up cost/high margins, executable, and fill a missing need to improve the results for all stakeholders.
Step 4: EXPLORE VALUE MAXIMIZATION
Explore Value Maximization: We believe as we work through our first three steps: diagnose, restore, and profitable growth, once these steps have been successfully completed, we believe Articore could be in the $1+ range provided we can achieve $25-30 million in adjusted EBITDA. From this point, we believe it would be best to price test what Articore would be worth to a strategic buyer. While there is no obligation to sell, we think the company would be on stronger footing to maximize value from a higher base than where we currently are at .36 cents.
Unlocking and Maximizing Shareholder Value? First, a wide valuation gap exists between Articore and strategic buyers, as Articore is currently valued at 0.17x EV/Sales vs. an average of 5x sales (see below). Second, in our opinion, Articore holds significant earnings power given the operating model, which an acquirer would find attractive; specifically, if Articore hit the high end of “at scale” targeted margins of 17% the company would be valued at 1x EV/EBITDA. Third, we believe a strategic buyer could immediately unlock considerable synergies with Articore’s business model to significantly increase revenue growth rates and materially expand EBITDA margins (See Etsy example below). Fourth, we believe Articore has the potential to unlock substantial shareholder value if a buyer were to pay 1x EV/Sales multiple for Articore, which we believe would likely be revalued at 3x or higher multiple with Articore as a subsidiary of a larger global public company. Finally, in our opinion, Articore matters and could move the needle for a number of companies starved for growth as Articore brings two leading digital marketplaces with over $500 million in GMV.
We believe that a number of strategic buyers could bring considerable synergies to drive material growth. For instance, we think Etsy has about 14x the buyer base and 12x the artist base of Articore. We also believe that Etsy is starved for growth, with 2% to 3% revenue growth and an activist shareholder on their board. We think that if Etsy, as a NASDAQ listed company, acquired Articore, Articore inside of Etsy might be worth 3x+ sales given the strategic synergies. Therefore, if Etsy paid 1x sales + cash, that would be roughly $1.70 per share vs. the current 36 cents (Note: Etsy paid 8 to 23x sales for Reverb/Depop several years ago; these companies were fast growers). While we have no idea if Etsy would be the right potential buyer, this is just a representative of the case of 20+ potential buyers.
We believe the following 15 companies could be potential acquirers:
- Adevinta: A $14 billion public company valued at 7x sales which owns 25+ digital marketplaces including eBay Classifieds.
- Shopify: A $105 billion public company valued at 12x sales which has roughly 5.5 million live stores on the platform.
- Etsy: An $8 billion company valued at 2.5x sales and acquired digital marketplaces like Depop 8x sales and Reverb 23x sales.
- Softbank: A $90 billion public company with a history of investing in digital marketplaces.
- Printful: European print-on-demand unicorn with over 1,600 employees (acquired US-based Snow Commerce).
- Printify: print-on-demand company with over 600 employees and 10 million users.
- Cimpress: A $3.6 billion public company valued at 1x sales and owner of Vistaprint and other print-on-demand companies.
- Walmart: A $715 billion public company valued at 1x sales with e-commerce-focused and active M&A strategy, including Bonobos, Vizio, and FlipKart.
- Wix: A $10 billion public company valued at 5x sales that operates a cloud-based web development platform for creators and owns the art marketplace DeviantArt.
- NAVER: A $20 billion Korean public company valued at 2x sales; acquired digital marketplace Poshmark in 2022.
- Mercari: A $3 billion public company valued at 2.5x sales and is a digital Japanese-based market serving 23 million users.
- Adobe: A $221 billion public company valued at 10x sales that provides digital tools for creators.
- Schibsted: A $7 billion public company in Norway valued at 7.3x sales that manages digital classified marketplaces.
- Prosus: A $100 billion public company in Germany valued at 16x sales that covers digital classified and marketplaces.
- Godaddy: A $23 billion public company valued at 5.8x sales that allows creators to design and develop cloud-based products with roughly 22 million customers.
The Outlier: Articore: A $0.07 billion public enterprise value valued at 0.2x sales, the owner of two leading digital marketplaces.
We believe that Articore could sell under the right circumstances in the 1-2x sales range, but this would require successfully executing this 4-step game plan and improving results. We believe we would be a constructive force in seeing this through.
In addition, we believe there is a robust list of potential financial buyers, including various venture capital firms that invest in digital marketplaces.
On October 24, please vote for the Osmium slate - John H. Lewis (Resolution 4), Adam Hoydysh (Resolution 10), Daeyoung Choi (Resolution 11), and Oliver Richner (Resolution 12).
Also, we urge shareholders to vote "AGAINST" Resolution #1 Remuneration Report on the proxy card to hold the board accountable and protect your investment and the company's future.
Visit www.unlockshareholdervalue.com to learn more about the Osmium activist campaign.
Sincerely,
John H. Lewis
Founder and CEO
Osmium Partners
DISCLAIMER:
Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information.
The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any materials herein. Actual results may vary materially from the estimates and projected results contained herein. Osmium Partners disclaims any obligation to update this letter. We also reserve the right to add, hold, or sell our position at any time without updating this site.
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